How Hedge Funds Could Crush the Banking Cartel and Keep Original Buyers in Foreclosures

Loan modifications are no longer a borrower's only option to stay in their home. Hedge funds can buy up properties, rent it to the former owners, and offer to resell it back to them when they qualify for a loan. The hedge funds win, the buyers win, and the lenders lose. Perfect.

Irvine Home Address … 7 ROANNE Cir Irvine, CA 92604

Resale Home Price …… $750,000

Party time, going down

you better not mess us around

the stakes are rich, take a hit or stay

the price is high, someone's gonna pay

Looking for trouble, now you've found it

you're a drum and we're gonna pound it

Last one standing wins the fight

hear us scream and shout all night

down on the floor and eat the grit

this is gonna hurt a little bit

Megadeth — Crush 'em

The banking cartel has tied up most of the inventory in California. A third to half of homeowners are now underwater and unable to sell without lender approval. Many more borrowers are facing foreclosure as about 15% of homeowners are not paying their mortgages. The lenders already own many properties. Between what they own and what they control, lenders have withheld inventory and kept much of the air in the real estate bubble.

I think this is shameful. I want to see the lending cartel crushed. Californian's have too much of their incomes going to debt service so Goldman Sachs' investors can make a few more pennies.

I have a better idea.

Short Sellers are reviled

Many people have a negative view of short sellers. They feel that short-selling is profiting at the expense of others. The people who really hate short sellers are owners of overpriced assets.

Short sellers borrow assets and sell them only to buy them back later at a lower price and profit from the difference. Short selling has a very valuable place in financial markets. Without the activity of short-sellers, assets become hopelessly inflated in price, and money that should be freed up for more productive uses is tied up in unproductive assets. For money to be released, the assets must be sold. Short sellers actively sell when no other sellers are motivated, and in selling, they re-balance market prices.

Real estate markets are very inefficient, and part of the reason is a lack of short sellers. Nobody, including the banking cartel, is anxious to sell real estate right now. That simply maintains an overly inflated valuation in the market. The activity of owners buying and renting has not been significant, and that only puts people in a "flat" financial position. What the market needs is short sellers — true short sellers. Until now, nobody has known how to be short real estate. Today, I am going to explain how it can be done.

Hedge Fund Basics

Hedge funds are investment pools formed as a company and managed with a specific investment plan. Hedge funds are generally private capital limited to sophisticated investors. Joe Six Pack is not permitted to invest in hedge funds. There are as many hedge funds as their are investment strategies capable of raising money. Some are very successful, most are not.

Since hedge funds are private investment pools made up of sophisticated investors, they are free to invest in whatever they want within the constraints of law. Many hedge funds invest in real estate, and many are forming now to clean up the debris from the Great Housing Bubble.

Real Estate Hedge Fund Investments

Today we are going to discuss the investment strategy of a mythical company, Cartel Crusher, LLC. Limited Liability Companies are a favored form of many hedge funds because they provide limited risk and all gains or losses are passed through to the individual investors.

Cartel Crusher LLC is real estate investment fund that buys rental properties at auction and keeps them in portfolio to obtain the cashflow from rentals. Last week, in the post, Buying a Rental at Trustee Sale, I outlined the math and analysis required to obtain a rental property at foreclosure auction.

In areas where the subprime foreclosures are common, pricing is 50% or more below the peak, and cap rates range from 6% to 8%. For an investment company like Cartel Crusher LLC, this return is sufficient to bring in outside capital to buy foreclosures. A typical deal would be like the Corona property below going to auction on 3 May 2010.

A property like this one could increase returns and free up capital for more acquisitions by applying 15-year debt at a payment with positive cashflow.

This is the type of long-term hold acquisition that is the ultimate goal of Cartel Crusher LLC.

From Cartel Crusher LLC's perspective, it doesn't matter who the renter is as long as they pay the rent reliably and don't trash the place. The landlord's dream is to find a renter that cares for the place as if it were their own and doesn't want to move out. That is difficult to find, but in the aftermath of the housing crash, a special opportunity exists to find that special renter — the former owner.

Making owners a better deal

Cartel Crusher LLC would very much like to keep the former owner in the property. Note some of the key numbers from page 2 above that are improved by this arrangement:

  1. Real Estate Improvements.
  2. Tenant move-out allowance.
  3. Gross Rent
  4. Vacancy and Collection loss

All four of those numbers improve by keeping the owner in place. There are no real estate improvements, and no tenant move out allowance when the owner stays in place. Vacancy and collection loss is also eliminated because the owner will stay for the duration (more on that later). Gross rents are also higher and more predictable. These benefits to Cartel Crusher LLC are great if the owner can be persuaded to stay in the property.

Why would an owner do this? Why not get a loan modification?

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

The deal being offered to an owner by Cartel Crusher LLC will give them peace-of-mind on their cost of housing, and if they buy the property back later, the debt will be reduced significantly. Basically, Cartel Crusher LLC is offering owners a much better deal.

Owner stays on as a renter

After the foreclosure, no lender will give the newly foreclosed a loan. There is a mandatory waiting period — recently reduced to two years — when former owners must be renters. When most face foreclosure and walk through this valley of death, they have no idea when, where, or if they will be owners again. Very scary.

Cartel Crusher LLC makes these worries go away. Cartel Crusher LLC will go to auction to acquire the property and rent it back to them, and it will give them an option to buy the property back at a later date at a pre-negotiated price.

For this feeling of ownership continuity, the renting former owner will pay a 5% premium on area rents, plus they will agree to an automatic 2% yearly rental increase. Since this rental payment will be much less than the mortgage payment, the lower cost of housing will be a major financial benefit. If they can't afford the rent, then they are hopeless and need to move on.

Owner gets right to repurchase

Cartel Crusher LLC will establish a baseline value from comparable resales on the date of the sale. The price increases 4% per year. After 10 years, if an owner still has not purchased, the deal expires.

There is one very important condition, the price actually paid for the property is the greater of the number in the chart below and appraised value at the time of sale. If California inflates another housing bubble, this right-to-repurchase can't be exercised like an option to a third party to profit from the difference. If the borrower is unable to get their act together to qualify for a loan and resale values are higher than the numbers above, the benefit of the irrational market exuberance comes back to Cartel Crusher LLC. If values never come back, the owner is certainly no worse off by renting.

Consider the resale value chart above compared to the deal the owner gets from the government or their lender if they get a loan modification. In the Corona property, the debt today is $704,000. If it were an owner-occupied property, the owner would not be above water until 2023. Cartel Crusher LLC would sell it to him for less than his current debt for the next 13 years. And in doing so, Cartel Crusher LLC would make a great return on its investment through rent and appreciation while keeping an owner in their home.

The government can't do that.

The lenders won't do that.

Cartel Crusher LLC will do that.

Busting the cartel through strategic default

The private sector hedge funds have the answer. Any fund operating like Cartel Crusher LLC will be able to keep owners in their properties until they can own again. Since this offer is so enticing to underwater homeowners whose payments exceed rent, waves of strategic default will inundate the land. Owners who strategically default and rent from Cartel Crusher LLC will be short real estate. They will be ditching their mortgage and their higher tax basis and buying the same house back later for a lower price. By selling short, stategic defaulters will rebalance pricing at cashflow levels.

The only thing the owner has to do is stop paying their mortgage. The lender cannot evict an owner from a property for being in default. The only option available to a lender to compel payment is foreclosure, and as we have all seen, they are choosing not to foreclose and allowing squatters to live all over the nation. That's fine. The owner is still living in the property, and they are never going to give the bank another dime. From the owner's perspective, this state of affairs can go on forever.

When the lender finally gets around to foreclosing, Cartel Crusher LLC will be at the auction to buy the property. And since Cartel Crusher LLC has established a higher rental rate and knows there will be no improvement costs, holding costs, cash-for-keys and the like, Cartel Crusher LLC will be able to bid higher than others who will be facing those costs.

There are no guarantees at auction, and Cartel Crusher LLC may not be the high bidder, and the property owner may still have to move out, but with the lower cost structure, Cartel Crusher LLC will bid higher than the rational professionals, and most often that will be a successful acquisition.

The banks could defeat this fund by failing to drop bids. If the bank bought every property at auction, the bank could go out of its way to boot the strategic defaulters out. If lenders go that route, there will be millions and millions of REO properties.

Everyone benefits except the banks

The only party who suffers in this process is the lender, and perhaps the US taxpayer who is paying their losses. The aggrieved party in this instance is the one most deserving of pain, the irresponsible lenders who ruined the housing market and the economy. Screw them. Crush them.

What is best in life?

To crush the banks, see them driven into oblivion, and to hear the lamentation of their bondholders.

Will owners really strategically default in large numbers?

The picture above is taken near Canyon View Elementary School in Irvine. There are two closely-spaced signs that say "no parking any time." They are conspicuous and obvious. Whenever I drive by this location, cars are parked in the street, sometimes two or three of them because this parking spot is adjacent to a daycare center. The illegal parking place is 40 feet from the door. The proper alternative is to drive up the street, turn right, and enter a parking lot about 200 feet away.

Here is what happens: A few parents reason that they are not going to be very long, and it is inconvenient to park in the proper location, so they brazenly park between the two signs. Other parents driving by to get their own children see the lawbreakers obtaining the advantage of their disobedience, so they too decide to park on the street in the no parking area.

After enough parents do this, there is a critical mass where everyone ignores the law and does what is convenient for them, park on the street. At that point, nobody really cares about the law. In fact, those that do the right thing (like stupid me) are playing the fool. Those who follow the law are missing out on the benefit obtained by all those breaking the law.

This is the phenomenon lenders fear most. Once people start to strategically default, and others in the same circumstances see how much the defaulters benefit for their actions, many others will join them. After a time, the stigma disappears, and the final holdouts realize they are foolish not to join the default party and obtain the benefits for themselves.

Once strategic default clears out the debt in one community, the substitution effect will lower prices in nearby communities putting more homeowners in position to benefit from strategic default. Like small outbreaks of lender virus, the spread of strategic default will cleanse the land of its excess debt and put prices at cashflow levels everywhere. Houses will be affordable, borrowers will have manageable debt-service payments, and the California economy will benefit from a citizenry with more disposable income — the real kind, not borrowed money.

Driving the message home

Cartel Crusher LLC will extol the benefits to every underwater homeowner facing foreclosure with high payments. It's a simple message:

Are you facing foreclosure? Do you owe more on your home that it is currently worth? Can you rent a similar home for much less? Do you want to stay in your home, reduce your monthly payments, and cut your debt in half? Cartel Crusher LLC is here to help.

Cartel Crusher LLC will send that message to every house in neighborhoods like the one in Corona where a Notice of Default has been filed. It will get a response. After a few of these deals go through, the floodgates will open up and the inflated property debt will be washed away through strategic default. I will feel good about it.

The Lending Cartel is on notice

This is coming, and there isn't much the lending cartel can do about it. Cartel Crusher LLC has arrived, and it's hungry.

Dogs of war and men of hate

With no cause, we don't discriminate

Discovery is to be disowned

Our currency is flesh and bone

Hell opened up and put on sale

Gather 'round and haggle

For hard cash, we will lie and deceive

Even our masters don't know the webs we weave

One world, it's a battleground

One world, and we will smash it down

One world … One world

Invisible transfers, long distance calls,

Hollow laughter in marble halls

Steps have been taken, a silent uproar

Has unleashed the dogs of war

You can't stop what has begun

Signed, sealed, they deliver oblivion

We all have a dark side, to say the least

And dealing in death is the nature of the beast

One world, it's a battleground

One world, and we will smash it down

One world … One world

The dogs of war don't negotiate

The dogs of war won't capitulate,

They will take and you will give,

And you must die so that they may live

Isn't Cartel Crusher LLC helping out HELOC abusing squatters?

Yes, it is.

The nefarious characters of the housing bubble all deserve to suffer. But I have argued that lenders are more culpable than borrowers in creating this mess. If bailing out a few HELOC abusing squatters is necessary to crush the banking cartel, so be it.

  • I can't tell what is happening with this property from the available records, but I do see a purchase for $615,000 on 11/3/2004. The owners used a $492,000 first mortgage and a $123,000 down payment.
  • Exactly two months later (the required waiting period), the owners obtained a $123,000 HELOC and got their money out.
  • On 7/15/2005 they obtained a $253,000 HELOC.
  • On 8/31/2006 they obtained a $300,000 HELOC. Since these are all HELOCs after the first, there is no way to know if the borrower took out the money. But why would borrowers keep enlarging it if they weren't spending it?
  • Total property debt is $792,000.
  • Total mortgage equity withdrawal is $300,000.

Foreclosure Record

Recording Date: 04/07/2010

Document Type: Notice of Rescission

Foreclosure Record

Recording Date: 02/24/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 11/17/2009

Document Type: Notice of Default

This appears to have been sold short on 25 March 2010, but Redfin shows it as still being for sale.

Cartel Crusher LLC isn't soft on the borrowers

Some investors may feel that the investment plan for Cartel Crusher LLC is not balanced because it hurts only the banks and rewards the borrowers. Perhaps some of the proceeds from crushing the banks could be reinvested in foreclosed second mortgages and other zombie debt to even the score with HELOC abusing squatters. Sounds like a winning combination.

Irvine Home Address … 7 ROANNE Cir Irvine, CA 92604

Resale Home Price … $750,000

Home Purchase Price … $615,000

Home Purchase Date …. 11/3/2004

Net Gain (Loss) ………. $90,000

Percent Change ………. 22.0%

Annual Appreciation … 3.6%

Cost of Ownership


$750,000 ………. Asking Price

$150,000 ………. 20% Down Conventional

5.16% …………… Mortgage Interest Rate

$600,000 ………. 30-Year Mortgage

$158,136 ………. Income Requirement

$3,280 ………. Monthly Mortgage Payment

$650 ………. Property Tax

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

$63 ………. Homeowners Insurance

$0 ………. Homeowners Association Fees


$3,992 ………. Monthly Cash Outlays

-$808 ………. Tax Savings (% of Interest and Property Tax)

-$700 ………. Equity Hidden in Payment

$305 ………. Lost Income to Down Payment (net of taxes)

$94 ………. Maintenance and Replacement Reserves


$2,884 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$7,500 ………. Furnishing and Move In @1%

$7,500 ………. Closing Costs @1%

$6,000 ………… Interest Points @1% of Loan

$150,000 ………. Down Payment


$171,000 ………. Total Cash Costs

$44,200 ………… Emergency Cash Reserves


$215,200 ………. Total Savings Needed

Property Details for 7 ROANNE Cir Irvine, CA 92604


Beds: 4

Baths: 2 full 1 part baths

Home size: 2,225 sq ft

($337 / sq ft)

Lot Size: 7,705 sq ft

Year Built: 1971

Days on Market: 148

MLS Number: S597813

Property Type: Single Family, Residential

Community: El Camino Real

Tract: Rc


According to the listing agent, this listing may be a pre-foreclosure or short sale.

This property is in backup or contingent offer status.

Fantastic end of cul-de-sac 4 bedroom pool home. Move-in ready! Close to park on cul-de-sac in desirable Ranch/El Camino neighborhood. Award winning school district. Major interior upgrades and remodeling. Granite counter kitchen with center island, Newer double pane windows. Living room with fire place, formal dining room, family room set-up as theater, master with walk-in closet. Tiled remodeled bathrooms, tiled and wood flooring, carpeting in bedrooms. Ceiling fans, Attached 3-car garage, Gas forced-air heating/AC. cable ready. Easy access to 3 major freeways. Must see to appreciate! No HOA, Low tax rate with NO Mello Roos. Home is highlighted by a large Family room and four bedrooms, all on this quiet street. Custom window coverings, wood floor, crown molding, home also has newer pool equipment and much more.


59 thoughts on “How Hedge Funds Could Crush the Banking Cartel and Keep Original Buyers in Foreclosures

  1. wheresthebeef

    If the featured house sells for 750K, looks like it is back at 2005 level pricing (near peak bubble). After reading all the posts yesterday, it sounded like many people have thrown in the towel waiting for lower prices.

    I could hear a booming voice in my head saying the following…this is Irvine, prices will never go down, buy now or be priced out forever…followed by a long Jabba the Hut style laugh. If this is true, I guess any future generations can forget about living in Irvine (haha). When people convince themselves that the price of something can not go down no matter what the fundamentals, this is usually the tipping point. I’m no buyer yet.

    1. HydroCabron

      No matter how many markets of which it is said, it is never “different this time.”

    2. Chris

      “it sounded like many people have thrown in the towel waiting for lower prices.”

      Perhaps you may want to remind this to the folks in 92618 and 92606.

      As far as I can tell (as of now), there are not that many towels in those 2 zips that I am actively looking at.

  2. Geotpf

    Amusing that you give that Corona house (4 beds, 3 baths, 3,333 sq ft) a value almost exactly the same as the price on the 1 bed, 1 bath, 822 sq ft Irvine condo you highlighted yesterday.

    1. IrvineRenter

      That shows just how ridiculous pricing is in Irvine. The substitution effect will take hold with these inexpensive properties over the mountain.

  3. Planet Reality

    This is one of the more absurd post I’ve seen here. Hedge funds were built to take down the banks, but they didn’t special thanks to AIG and the tax payer.

    1. IrvineRenter

      Is there something in particular that you find absurd that I can respond to, or is it that this post contains a very uncomfortable truth you don’t want to acknowledge?

    2. Planet Reality

      There is only one change that can break up the banking cartel and that is revising mark to market rules back to what precipitated the crash. Good luck with that.

      I don’t understand how you miss the simple logic that the “cartel” has nothing to do with true cartel behavior and everything to do with survival, avoiding FDIC take over. The trickle of foreclosures won’t change unless mark to market rules are revised.

      1. IrvineRenter

        I contend you are missing the simple fact that the banking cartel will crumble if all the underwater homeowners stopped paying their mortgages. Either lenders will be supporting squatters in every house in subprime land — something homeowners would not mind — or they will be forced to foreclose and bring properties to the market. The fact that some people are continuing to pay their underwater mortgages is what sustains the cartel.

        1. Planet Reality

          What difference does it make as long as you survive and are able to create money out of thin air via 0% rates. It’s all a BS game.

      2. Planet Reality

        Take it one step further and consider what happens when a bank is taken over by the FDIC. The system is designed to keep the banks in control of asset values tied to their survival.

        1. IrvineRenter

          When a bank is taken over by the FDIC, it is essentially nationalized, which is what should have happened to begin with. Like the RTC after the S&L fiasco, the FDIC is actively disposing of the assets it has. It is not holding them back like the lenders are. The more FDIC assets we have, the quicker this will resolve.

          If enough banks go under, the FDIC will petition the government for a bailout. The FDIC is a private insurance company with premiums paid by the banks. If the government bails out the FDIC, it will be a loan — assuming the banks don’t totally own the government — and banks will have to pay back the bailout funds out of their insurance premiums.

          An FDIC bailout would distribute the losses among the member banks.

          And, in the bigger picture, why would a hedge fund give a crap about what happens to the banks and the FDIC.

          Over the last few weeks, I have read many of your diatribes about how everyone needs to game the system in order to make money in our casino economy. Well, Cartel Crusher LLC is working within the system, doing nothing illegal, and encouraging underwater homeowners to game the rotten system for a mutual advantage. The fact that this crushes the banks is not the problem of either the strategically defaulting homeowners or Cartel Crusher LLC.

          1. newbie2008

            “—assuming the banks don’t totally own the government—”

            But they do.

            Currently banks are govt backed to make a profit with the bailout. Some hedge funds have been backed by the govt. to not lose money. If they make money great. If they lose, the govt steps in, e.g., 1990’s hedge funds on Mexico. Too bad mutual funds didn’t have that fall back protection.

      3. Chris

        “There is only one change that can break up the banking cartel and that is revising mark to market rules back to what precipitated the crash. Good luck with that.”

        This I have to agree. FASB is now the main culprit behind banks refusal to release the losses (no need….those houses are current priced 10% above ’06 prices). That’s what you get when you have “mark-to-utopia” accounting.

    3. Walter

      I am sad and frustrated to admit it, but for once I agree with Plant on this one.

      As long as we have mark to fantasy, 0% rates, HAMP, HAFA and other making home more expensive programs, the politicians dragging GS through the mud for a situation that is more a result of failure of government, etc., etc., etc. — the banks are running the show and can trickle out the properties.

      I have relatives, and regardless of my warning in 2004 – 2005, bought. None of them have defaulted. They will do whatever they can to send in a check. One property in the Inland Empire lost, I would say 60%. So disgusted with the situation, family scraped together every penny and PAID OFF THE LOAN. Now they need to borrow if they need something, and that is not so easy these days.

      Believe me IR, I wish you were right on this one, but from what I have seen, it will be an up hill battle with the current state of affairs.

      1. Perspective

        I share Walter’s concerns, and he left-out the fact that the 0% Fed Funds Rate (allowing the banks to print cash) will be with us for some time. It won’t increase until the unemployment rate shows some type of sustained improvement (mid-2011?), and then only at a slow, deliberate, and moderate pace. That’s what – 3-5 years for the banks to rebuild their balance sheets?

        And I think the consensus here is that the unspoken truth is the US is doing whatever possible to get to “healthy” inflation (3%+?). That factor can’t be discounted.

        1. Walter

          “And I think the consensus here is that the unspoken truth is the US is doing whatever possible to get to “healthy” inflation (3%+?). That factor can’t be discounted.”

          I think you are right here. But like lighting a fire in your living room because it is really, really cold outside and the heater is broken — be careful when playing with fire.

      2. Chris

        “So disgusted with the situation, family scraped together every penny and PAID OFF THE LOAN.”

        Guess what? There are more folks like this than some of the permabears would like to admit on this blog, especially in Irvine (I’m afraid).

        Now those folks would have only prop tax, maintenance, insurance or HOA (if any) to worry about.

  4. Mark

    Man, I could think of a lot of cool stuff to do with $300,000 in cold cash! I’m going to Dizz Knee Land!

    Seriously, is it still possible to go to the bank right now in SoCal and get HELOCs like this?
    And who’s coming with me?

  5. winstongator

    What would your concern be with the ‘owner’ not paying you the way they had been not paying the bank?

    If this sort of deal is profitable, then you’ll have other participants enter and bid up the prices.

    I think things similar to this, minus the keeping the existing tenant in place are happening a lot in SoFla because prices have fallen so far.

    I’ve looked at some condos in my parents hometown. The ones I’m looking at today sold in the 200-250k range in 2006. They were most likely apartment-to-condo conversions. I saw one REO sale for $38k now listed for $90k, and some other more recent REO’s in the 40k-60k range.

    One listing at $70k sold for $275k in ’06, not foreclosed yet… It’s been on the market for 652 days! Probably an unapproved short sale? OK, scrap that unit. Just sold at auction 3/10 for $55k, but not cleared off MLS yet.

    It doesn’t take much rent to cover a $55k sale.

    This is a mess though. I see one unit on MLS for $67k. Find a final judgement for FC announcing an auction 2/10/10. Ownership hasn’t appeared to change though. First Lis Pendens filed September 2008. 95% financing through Pinnacle financial, a part of Impac that went down in early ’08. Interest-only and prepayment penalty riders.

    You’ll earn your 6% fee finding these, sorting through the details and winning the auctions.

    1. IrvineRenter

      “What would your concern be with the ‘owner’ not paying you the way they had been not paying the bank?”

      Not at all. First, the payment is now affordable, and second, the former owner is now a renter, and if they don’t pay Cartel Crusher LLC, they can and will be evicted, something lenders cannot do.

      “If this sort of deal is profitable, then you’ll have other participants enter and bid up the prices.”

      Sure, and that is a good thing. There is trillions of dollars in real estate that needs to go through foreclosure. There are not enough hedge funds to clean this mess up. The more players in the game the better.

      1. JK

        The only thing you may have to worry about IR is that some of these “owners” have been so accustomed to squatting these days that they will think it’s their inalienable right (entitlement) to continue living where they are and not pay anything even if it is affordable.
        Are these the people you really want in there renting? They will milk it and challenge it in court and you will be out another 3-5, 6 months rent..who knows.

    2. Geotpf

      The flippers have found a way to make money on cheaper properties. The number of buyers for a cheap property in poor condition at X is sometimes smaller than that same property in good condition at 2X-or more.

      Here’s an example of what I mean:

      This is a small (876 sq ft), old (built in 1910) house in a bad part of Riverside. It appears to be a 3 bed/1 bath, with a second, unpermitted bathroom in the detached garage. It sold for $285k in 2005 (totally insane), was foreclosed in 2008, and initially listed as an REO at $104,900 on Sept 17th, 2008. TWELVE price cuts later, it finally sold for $40k on April 30th, 2009.

      Then the flipper fixed it up (to a point-it has no air conditioning, for example), and sold it for $100k! Even factoring in the costs of repairs and other things, the flipper made tens of thousands of dollars on a minimal investment.

      1. SanJoseRenter

        The reason that flippers can do only moderate
        renovation but get 2x price is that they are
        financing the reno.

        If the average buyer paid the 1x price, usually
        they would need a HELOC to do the reno, but
        those are scarce these days.

        So once again, housing loans inflate prices to 2x
        what they should be if people self-financed them.

        (In San Jose typically the flipper is asking for
        a 50% premium.)

  6. Anonymous

    Who cares if it is called a bank or a hedge fund?
    If it is too big to fail (aka future bailout) – what’s the difference?

    If it talks like a duck
    walks like a duck
    lends like a duck
    gets bailed out like a duck
    what’s the difference?

  7. Kelja

    Thought I was being smart by staying out of it when the bubble was inflating – boy, was I a chump! If I had it all over to do again – had my time machine turned back to the year 2000 – I’d buy and heloc the hell of the property and I’d be sitting now in a nice McMansion not having paid any rent for two years. Yes, a chump I was.

    If there’s a way to profit from this Frankenstein monster the government has created, count me in.

    Here one possibility you might have missed, IrvineRenter: Cartel Crusher is actually created by Big Bank to profit from both sides of the debacle. Shades of Goldman Sachs?

    1. IrvineRenter

      I was hoping someone would notice that. This is exactly the kind of action Goldman Sachs would be involved with. In fact, it would take a large investment bank like Goldman Sachs to do this on a grand scale.

  8. IrvineRenter

    Residential Real Estate Investment Makes a Comeback

    (April 29) — The number of buyers paying 100 percent of a home’s list price was up 50 percent in the first quarter for Manhattan real estate law firm Edward A. Mermelstein & Associates. The properties ranged from a $3.1 million multifamily investment on the Upper West Side to a $17 million Upper East Side town home.

    In Berkeley, Calif., three out of four March deals landed by Ira Serkes at Pacific Union Real Estate were all cash buyers, largely from the area’s high-tech community.

    And in Sunnyvale, Calif., Julie and Eric Ziemelis sold their triplex investment after only six days on the market to a buyer offering $30,000 more than the $799,000 asking price, because the buyer came to the table with 70 percent cash down.

    A new survey says interest in residential real estate investment has more than tripled in the past year, thanks in part to record-low interest rates and home prices.

    Residential real estate’s big spenders are back.

    While some experts predict the full housing recovery is still nearly a generation away, a growing number of deep-pocket investors are buying as if happy days are already here again.

    1. anon

      This is, of course, exactly what we want: deep pocketed “investors” signing up to be bagholders to take the losses so that the banks do not.

      As a happy renter with more than enough cash to buy, I view this as a good thing. They are not pricing me out, they are signing up to take the losses in the coming years. It would be a problem

      Am I the only one who sees it this way?

      1. anon

        Add: It would only be a problem if that bubble never crashed. But, as we all know, no tree grows to the sky…

      2. Kelja

        I too am a renter happy to rent right now. Too much uncertainty exists in the marketplace thanks to our bubbling government. I don’t want to sign up for future losses.

  9. awgee

    “Most people prefer to believe their leaders are just and fair even in the face of evidence to the contrary, because most people do not want to admit they do not have the courage to do anything about it. Most propaganda is not designed to fool the critical thinker, but only to give moral cowards an excuse not to think at all”
    – Michael Rivero

  10. jb

    awgee…that’s ASTUTE!

    We see that quite often ourselves. It does take some courage to try to do something about a wrong that’s occurring…and much more courage to watch seemingly rational people cower when it all starts to hit. It doesn’t matter if it’s regarding a violent kid on a Little League baseball team who happens to also be the inept coaches’ son, or a Pope who looks the other way, or a Goldman exec with incentive issues.

    Some of us do try to fight the good fight, however (such troublemakers we are!).

  11. DarthFerret

    As with a previous article, assigning comp rents remains a very difficult and risky part of the math on these investment properties, such as the 4BR/3BR property in Corona above.

    There are comps nearby advertising rents for $3200-3300/mo, but there are also comparable 4-BR properties in the same tract with more square footage than this property that are renting for $2500/mo:



    Unless there are differences in the properties that I have been unable to discern, this is an enormous swing in potential rental income and it makes for an eye-popping swing in target sale price for a cashflow investor.

    Unless I could buy this property so that it would cashflow at the $2,500/mo price range, I’d pass on it as too risky.


    1. Geotpf

      Even Corona strikes me as somewhat risky on a cashflow investment basis. However, Riverside itself (and further east) seems to pencil out more consistantly. Plus, the initial investment would be less. You could start with $150k or maybe less.

      However, the big money seems to be in flipping (with repairs) as opposed to renting out places. Find a place that needs significant cosmetic repairs but is structually sound, paint and carpet and granite and stainless that mofo, and print money.

  12. avobserver

    It’s a foregone conclusion that Lenders’ losses have been and will be socialized. Creating more losses does not punish lenders as these losses will simply be passed onto the rest of us (taxpayers) in one way or another. As long as (1) the “mark to fantasy” accounting rule is intact and (2) banks are allowed to borrow at 0% from Benny Boy and make risk free profits buying Treasury at 3%, they will stay “solvent” even as more home debtors decide to strategically default on their loans. It’s not a punishment. At best it will create a little more “inconvenience” for banks as it may take longer for them to “earn” their way back into solvency. Just look at Japan – the zombie banks laden with NPL can survive and even prosper for a long, long time if central bank and the gov’t conspire to make that happen.

    The only hope for some real justice is a Pecora style prosecution of large banks for criminal conduct during housing bubble and its ensuing collapse, i.e., the GS civil trial may actually signify something more substantial to come. I am not going to hold my breath but hey, miracle does happen sometimes.

    The sad truth is no matter how horrific banks’ transgression was during the great housing bubble, their existence is vital to our economy. If the Gov’t did not nationalize insolvent banks back in late 2008/early 2009 when the timing was perfect, fat chance they will do it anytime now or in near future.

    Hedge Fund’s “short selling” on RE would not crush banks. If this does happen they will make a handsome profit at banks’ expense but banks’ loss will again be shared by all of us – renters, savers, the responsible.

  13. HydroCabron

    I wonder about all the references to Japan in these comments. The Japanese are certainly an example of how insolvent banks can be propped up for decades by the policies of an enabling government.

    That is true. Also true, yet not always acknowledged here, is that real estate prices in Japan declined for two decades under these conditions, with the average time on the market often approaching 18 months.

    1. Art Student in Atlanta

      Good point HydroCarbon.

      Our policy makers have chosen a long and dull pain to a sharp and sudden crash.

      I think there are a number of factors that are pushing investors here. The current Greek (PIIGS) fiasco is forcing investors away from Europe, the rapidly inflating China bubble, and a number of other trends are making people want to try a whirl on the US real estate market roulette table.

      I think once this very temporary Bear Rally ends, values will sink again until they reach a point of slow and steady deflationary calm for quite a while. These loses will take time to resolve and the shattered investment/banking industry will take time to rebuild itself and its reputation.

      Until then, people will be angrily fighting and bartering with each other to get back what they lost. I believe that economies are like people, because they are really based on human behavior through exchange transactions.

      Denial -> Bargaining -> Anger -> Depression -> Acceptance

      I believe we are still in the first 3 phases to varying degrees. Some people have already hit the 4th phase.

    2. IrvineRenter

      I found a great article referencing Japan:

      The economic roadmap for the U.S.: Japan

      Bears & Bulls
      David Nielsen

      There is a good deal of confusion today about how the U.S. is going to come out of this recession. What will the economy look like, especially after the government has poured so much money into the system to save banks and other key industries from failing?

      How will the FED deal with all of this massive debt that has built up? Who will buy all of these U.S. government bonds that will need to be sold over the coming years? How will the states and local municipalities deal with reduced revenues and massive amounts of foreclosed homes? And as for the banks, how profitable will they be when all of the “medication” the FED put into the economy is taken away?

      We do have a model, a roadmap that we can use to answer these questions, because almost the exact same thing happened 20 years ago in Japan.

      Back in the late 1980s, Japan’s economy was the envy of the world. Its stock market was making new all-time highs on a daily basis, the “just-in-time” inventory system invented in Japan was a global model, its banks were the strongest in the world and it had a massive real estate bubble ready to pop – when during its peak, Tokyo land was selling for $93,000 a square foot.

      In December 1989, the Japanese stock market stood at 38,957. Most of the rise over that last year had nothing to do with the economic cycle and had everything to do with the movement in bond yields.

      After the bubble burst, the positive correlation between bond yields and equities broke down, resulting in the unwinding of unrealistic, market-wide long-term-earnings expectations that were far too optimistic for a low inflation world, and a rise in the risk premium, as volatility returned with a vengeance.

      Our markets today also chose to ignore economic realities and instead move solely based on our zero-interest-rate policy, and our volatility is approaching four-year lows. This is very similar to conditions in Japan.

      After the bubble burst, the Japanese stock market plunged in a similar fashion to our 2008 drop. For years after the initial drop, Japan had some very impressive stock rallies. Numerous 50 percent-plus rallies occurred and all shared a similar trait, as they all were in reaction to new government policy or stimulus attempting to boost the ailing economy.

      The key to making any money in the Japanese market was to exit stocks as the economic cycle started to top out. After the bubble, economic cycles in Japan always topped out before the stock market. The Japanese stock averages – which topped out at 38,957 in 1989, despite four 50 percent-rallies or more over the last 20 years – today stands at 11,000, a 71 percent drop from the 1989 highs.

      The “lost decade” for Japanese investors lasted 20 years and even today, the averages are a third of what they were in 1989 despite massive government intervention to “save” the economy and the stock market.

      A large number of the problems we are experiencing now were also present at that time in Japan during the aftermath of the bubble breaking. Banks in Japan, prior to the real estate bubble bursting, were doing the same things our banks did. Loans were made with very little effort and paperwork and interest rates were held down artificially by the central bank.

      As real estate and risk investments soared in value, banks continually granted more and more increasingly risky loans. As the bubble burst, and the “post-bubble ice age” began to take hold, the government poured trillions of yen into the Japanese economy and banking system. It then started nationalizing banks and put so many restrictions on them that they ceased conducting any type of normal business and the financial press labeled them “zombie banks,” as they resembled the walking dead.

      Many economists feared all of this debt and all of this money put into the Japanese economic system would result in massive inflation therefore increasing bond yields, a view held today by many economists in regard to the U.S. bond supply.


      1. Art Student in Atlanta

        Great article IR. It summarizes just about everything that is happening now. People are looking for those large gains and they are just not there.

        I think our policy makers are currently opting for the convenient “kick the can down the road” option.

        The only think I see different is that (right now in the very short term present) there are no really attractive options outside of the US. China/India is overinflated and facing burnout, Europe is looking even more like Japan, Africa is emerging but problems and war abound, Russia is a post-communistic jack-in-the-box (who knows what will pop out at any turn… censorship, assassination, terrorism, mob violence, corruption, or mineral/resource rich opportunities and an educated workforce), the middle east is filled with tensions, turmoil with an added nuclear component and facing deflated global markets, and australia/canada look about the same as the US with credit crunches and sky high home values (for a real fun time google a game called “Crackhouse or Mansion” it makes California’s Real Estate market look sane)

        The question: If you had millions of dollars to invest in a country which would it be, IR?

    3. avobserver

      You are correct. Both Japanese RE and stock market suffered a >75% decline over the last two decades. Bailing out zombie banks did not save the housing price or economy. The only thing it produced is a ballooning public debt that is now twice the size of Japanese annual GDP. Keeping NPL on banks’ book would always suffocate the real economy because it (1) perpetuates misallocation of capital; (2) depresses lending to real economy; and (3) kills or crowds out healthy competitors because of covert gov’t subsidies to the sickly. The net outcome is a prolonged economic stagnation and non-stoppable deflationary pressure. Japanese economy was able to muddle thru OK primarily due to two factors –
      (A) a docile population willing to finance 94% of gov’t deficit spending at <2% rate, and (B) a strong export sector that generated enough surplus (thanks to a relatively healthy global market in 90s) to offset anemic domestic consumption. But Japan’s luck is about to run out. Demographic change of an aging population is making it increasingly harder for Japanese gov’t to finance its debt in domestic market as more retirees begin to cash out (pension funds are loaded with gov’t bonds).

      Over the last few years US policy makers have taken every page from Japanese playbook in handling our own financial crisis, but we face a different set of circumstances. What’s supporting the US gov’t debt market is the plain fact that our problem is probably not the worst! Look around at other major economies in the world –

      Eurozone – only if PIIGS can fly
      Japan – see above
      China – can you see that precarious RE bubble?

      Looking for investment opportunity in today’s global marketplace is like rummaging thru a garbage dumpster in search for something less junky. Every time someone blows a gasket, we (US$ and treasury) are still the “safe haven”, aren’t we?? If less bad is the new “good”, it may be premature to assume a high inflation/high interest/weak USD environment is just around the corner as many have predicted. On the contrary, if China continues to accelerate business investment in a world awash excess capacity, and the western world continues to pile on more debt in one form or another, plus banks saddled with tons of NPL now clogging the pipe – the future seems far more deflationary for all asset class (Irvine RE market included). Be prepared for a decade long “death- by- a- thousand- cuts” RE market decline in OC and the rest of the country.

      1. Art Student in Atlanta

        I agree.

        I love the phrase “less bad is the new good”. That should be America’s new sales line.

        Mish had an article listing which currencies went up and which went down. The Yen, USD and Gold were pretty much the only ones going up.

        Instead of a dumpster, I tend to think of it more like the discount $1 movie bin at Wal-Mart. You have no idea what is in that thing. I once found 15 copies of Purple Rain in one of them and a few Steven Seagal movies. Prince is cool, but why does a Wal-Mart in the middle of nowhere need 15 copies of Purple Rain.

        So avobserver if you had millions of dollars, where would you invest?

  14. Shevy

    Those that have tried to get a loan lately will likely get a kick out of this…

    Part of rebuilding New Orleans caused residents often to be challenged with the task of tracing home titles back potentially hundreds of years. With a community rich with history stretching back over two centuries, houses have been passed along through generations of family, sometimes making it quite difficult to establish ownership. Here’s a great letter an attorney wrote to the FHA on behalf of a client:

    You have to love this lawyer……..

    A New Orleans lawyer sought an FHA loan for a client. He was told the loan would be granted if he could prove satisfactory title to a parcel of property being offered as collateral. The title to the property dated back to 1803, which took the lawyer three months to track down. After sending the information to the FHA, he received the following reply.

    (Actual reply from FHA):

    “Upon review of your letter adjoining your client’s loan application, we note that the request is supported by an Abstract of Title. While we compliment the able manner in which you have prepared and presented the application, we must point out that you have only cleared title to the proposed collateral property back to 1803. Before final approval can be accorded, it will be necessary to clear the title back to its origin.”

    Annoyed, the lawyer responded as follows:

    (Actual response):

    “Your letter regarding title in Case No.189156 has been received. I note that you wish to have title extended further than the 206 years covered by the present application. I was unaware that any educated person in this country, particularly those working in the property area, would not know that Louisiana was purchased by the United States from France in 1803, the year of origin identified in our application. For the edification of uninformed FHA bureaucrats, the title to the land prior to U.S. ownership was obtained from France, which had acquired it by Right of Conquest from Spain. The land came into the possession of Spain by Right of Discovery made in the year 1492 by a sea captain named Christopher Columbus, who had been granted the privilege of seeking a new route to India by the Spanish monarch, Queen Isabella. The good Queen Isabella, being a pious woman and almost as careful about titles as the FHA, took the precaution of securing the blessing of the Pope before she sold her jewels to finance Columbus’s expedition. Now the Pope, as I’m sure you may know, is the emissary of Jesus Christ, the Son

    of God, and God, it is commonly accepted, created this world. Therefore, I believe it is safe to presume that God also made that part of the world called Louisiana . God, therefore, would be the owner of origin and His origins date back to before the beginning of time, the world as we know it, and the FHA. I hope you find God’s original claim to be satisfactory. Now, may we have our damn loan?”

    The loan was immediately approved


    1. Chris

      “Now, may we have our damn loan?””

      Actual response? I guess the FHA took that sentence lightly 🙂

  15. Ernasty

    I’m confused about mortgage ownership. Who is doing (or not doing) the foreclosing? If all the firsts were bundled into CDOs, are the mortgage docs now returning to the investors in the security? How would that work? What about grandpa’s pension fund?

    Of is when BofA says they’re massively increasing foreclosures, that they are just acting as an agent for the security? Or do they have a bunch of their own loans that never made to the derivatives market?  Anyone know if and how the securities are being unwound?


    1. Ernasty

      Also, who are all these buyers of short sales / auctions? Is it American Joe speculator, Chinese nationals, Russian oligarchs, Cartel Buster LLC, or is it Lloyd Blankfein himself? Can banks themselves go into the REIT business?

    2. taxee

      How dare you think this through! The money they legally stole from grandpa is in the hedge funds and is for buying property at fire sale prices from their pals at the banks. The same banks your taxes payed to bail out so that you and your children can only rent for the rest of your lives thanks to inflated property values while the CEO at the bank gets another huge bonus. Granpa’s pension fund ‘managers’ made lots of money, but only for themselves, purchasing ‘synthetic’ investments that unfortunately aren’t backed by actual deeds and end up getting ‘extinguished’ when the dumb asses that bid against each other for over priced homes stop making their payments. It was all a scam to fleece the oldsters and enslave the next generation and make sure they never actually own jack. Now do you understand?

  16. TheLastGoodIdea

    The hedge funds win, the buyers win, and the lenders lose.

    Not exactly, the 30% of this nation who rents their home gets the shaft too, as they will remain priced out of the market.

    The fools who bid up the home prices to unsustainable levels get to keep their homes and maintain unsustainable prices.

  17. Dave

    Maybe just letting market forces take it’s toll- AS SIMPLE AS IT SOUNDS- is the BEST alternative to correct this mess. No more decade long lending schemes, govt prop ups and band aids or new “ideas” are needed. Thank you.

    1. taxee

      Putting the crooks in jail and taking all their assets, al la bernie madoff, and making the unproductive parasitic financial whizzes clean toilets or something else that benefits society is a necessary part of any solution.

  18. mannfm11

    Prices are going a lot lower and this gig is why. In the game of investing, this is what is known as catching a knife. Risk becomes concentrated like it is in this situation, it is generally a recipe for disaster. The bubble was created in the first place because of the leverage game that hedge funds were a part of. Maybe this one just deals with real estate, but should they need cash in other matters, housing is a very non-liquid security. It appears the number of people that can pay the type of payments mentioned is going down, not up. So much of the last 20 years prosperity came from extraction of home equity. I fully expect a sizable number of these partnerships to be liquidated in bankruptcy, throwing massive numbers of homes on the market.

  19. Louis C

    Lots of great responses. I enjoyed reading this thread.

    The next wave is coming and that is the commercial crash. Fortunately there are still a few lenders out there who can help property owners who are having a hard time getting financing.

    We represent a private equity fund that is doing loans that most banks will not. We also do commercial loan modifications (debt restructuring) SBA loans, medical and dental practice loans. We also buy commercial short sale properties.

    Let us know if you know anyone in need of commercial financing.

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