Monthly Archives: April 2010

The National Association of realtors Latest Scare Tactic: Rising Interest Rates

Higher mortgage interest rates will cause loan balances to shrink and prices to decline; although, realtors would prefer to you believe it means you will be priced out forever.

Today's featured property is another equity surfer hoping to sell out with a few dollars before the auction.

Irvine Home Address … 7 West RAVENNA Irvine, CA 92614

Resale Home Price …… $939,000

{book1}

I see the bad moon arising.

I see trouble on the way.

I see earthquakes and lightnin'.

I see bad times today.

Don't go around tonight,

Well, it's bound to take your life,

There's a bad moon on the rise.

Creedence Clearwater Revival — Bad Moon Rising

Rising interest rates are a bad omen for the housing market. When the market is composed only of first-time buyers and renting former owners, no move-up market exists. Very few offers on properties have been submitted over the last few years where the buyer is contingent on selling a home. Without home equity to create a move-up market, pricing is established at the limit of available savings and loan balances. In short, it is set almost entirely by first-time buyers.

When first-time buyers face rising interest rates, their ability to borrow is curtailed. If there were no distressed sales, such an occurrence would cause a drop in volume followed by a drop in prices. When distressed sales are abundant, prices quickly drop to a new clearing price established by current loan terms. In our current market environment, higher interest rates will result in lower prices.

In January of 2010, I wrote about realtor ways in the post Urgency Versus Reality: realtors Win, Buyers Lose. I had just attended a realtor sales meeting where the interest rate gambit first surfaced:

realtor Reason Du Jour

The marketing presentation I attended had many examples of how to manipulate the current situation to create urgency when none exists. One of these pertains to the inevitability of rising interest rates, and it goes something like this:

If a buyer is looking at a $400,000 home, very low interest rates make the payment affordable, but when interest rates go up, it will be harder and harder to finance that $400,000 home. In fact, if interest rates go up a full point, a buyer might lose as much as $100,000 in buying power; therefore, you should buy before interest rates go up.

Hmmm… I nearly raised my hand to ask a follow up question but then I contemplated who my audience was and what they understand about real estate markets and finance, I decided against it. I ask the question here:

OK, if I buy today, the buyer who wants to purchase the house from me in the future when I am ready to move may not be able to borrow as much money. Won't that make my house harder to sell, and might I have to lower the price — a great deal — like the $100,000 mentioned in the example? Isn't the fact that my take-out buyer is going to be much less leveraged working against me?

We all know the answer to those questions (Your Buyer’s Loan Terms), and that was when I had an epiphany: the realtor mind is unconcerned with reality, it is only concerned with urgency, and if urgency conflicts with reality, urgency wins, and buyers lose. Buyers are supposed to believe the realtor cares and that they are looking out for the buyer's best interest; beliefs wholly incompatible with a realtor Mind®™ that places urgency over honesty.

Now that the troops in the field are all trained in how to make the interest rate argument, the NAr is stepping up its faux news stories to scare the masses.

Homebuyers scramble as mortgage rates rise

Higher payments could price many would-be buyers out of the market

By ADRIAN SAINZ and ALAN ZIBEL

WASHINGTON – The era of record-low mortgage rates is over.

The average rate on a 30-year loan has jumped from about 5 percent to more than 5.3 percent in just the past week. As mortgages get more expensive, more would-be homeowners are priced out of the market — a threat to the fragile recovery in the housing market.

Buy now or be priced out forever. They never get tired of that nonsense, do they?

In an environment where sellers do not have to sell, and there is very little inventory, sellers can hold their prices and affordability drops; however, when must-sell inventory hits the market, prices drop to the level of affordability necessary to clear the supply. Because we have more must-sell inventory on the way, higher intersest rates will translate to lower prices.

And if you wanted to refinance at a super-low rate, you may have missed your chance. Mortgages under 4 percent are still available, but only for loans that reset in five or seven years, probably to higher rates.

Rates are going up because of the improving economy and the end of a government push to make mortgages cheaper.

Yes, that is exactly why interest rates are going up.

Right now, investors have few good choices. The Federal Reserve has lowered interest rates to zero to push money out of savings accounts. The next best investment is longer term Government Treasuries, but the Federal Reserve has lowered the returns on those to historic lows to push money out of those as well. With few viable alternatives, money seeking a higher return will gravitate toward government-backed mortgage loans because they are basically as safe as Treasuries because they have explicit government backing.

Government insured mortgage finance is the next rung up the debt ladder from 10-year Treasuries. The only thing preventing an exodus of capital from the mortgage market is lack of a better place to go. The recent stock market reflation rally owns much of its strength to money finding a better return. As new opportunities arise — which is the sign of an economic recovery — money flows from safe assets to riskier assets yielding better returns.

When money leaves a market — as it will with mortgages — yields must rise in that market to attract capital. If yields must be raised to attract capital to residential mortgages, then mortgage interest rates must move higher.

For people putting their homes on the market this spring, rising rates may actually be a good thing. Buyers are racing to complete their purchases and lock in something decent before rates go even higher.

"We are seeing some panic among potential buyers who have not found houses yet," said Craig Strent, co-founder of Apex Home Loans in Bethesda, Md. "They're saying: Man, I should have found a house three weeks ago or last month when rates are lower."

And realtors and mortgage brokers everywhere will stoke that fear to set the market on fire. Scare the crap out of buyers, and they will bid whatever sellers want to obtain the property. When the properties decline in value, they will feel no guilt over their fear mongering.

Decline in purchasing power

It's all about affordability. For every 1 percentage point rise in rates, 300,000 to 400,000 would-be buyers are priced out of the market in a given year, according to the National Association of Realtors.

The rule of thumb is that every 1 percentage point increase in mortgage rates reduces a buyer's purchasing power by about 10 percent.

For example, taking out a 30-year mortgage for $300,000 at a rate of 5 percent will cost you about $1,600 a month, not including taxes and insurance. But the same monthly payment at a rate of 6 percent will only get you a loan of $270,000.

Eureka! Someone finally did the math properly. This "news" story is a NAr press release disguised as news. Do you think any would-be buyers who read it stopped and wondered, "Wouldn't that make a $300,000 home fall to $270,000?" I hope they are asking that question because the answer is yes.

Good economic news is the first reason rates are rising: U.S. government debt, a safe haven during the recession, is losing its appeal as investors turn to stocks and riskier corporate bonds.

Lower demand for debt means the government has to offer a better interest rate to sell its bonds. The yield on the 10-year Treasury note, which is closely tracked by mortgage rates, has hovered around 4 percent all week, the highest since June.

The second reason is the Federal Reserve. Last week, the Fed ended its program to push mortgage rates down by buying up mortgage-backed securities. When demand from the central bank was high, rates plummeted to about 4.7 percent for much of last year. And business boomed for mortgage lenders as homeowners raced to refinance out of adjustable-rate mortgages and into fixed loans.

As of Wednesday, the Mortgage Bankers Association put the national average for a 30-year fixed-rate mortgage at 5.31 percent. One week ago, it was 5.04 percent.

6 percent rates likely

Many analysts forecast rates will rise as high as 6 percent by early next year. If they go much higher, the already shaky housing recovery could stall. And that could slow the broader economic rebound.

Not really. The reason interest rates will go up is because the economy is doing better. All higher mortgage interest rates will do is make home prices go down. That will have little or no impact on what happens in the broader economy; although, it will keep residential investment in check.

In a normal market, with home prices steadily rising, a jump in rates doesn't cause a big dip in demand. That's because people know their homes will eventually rise in value, and are willing to accept a higher mortgage payment.

Yes, some buyers are stupid. With cajoling from the NAr and the belief prices will go to the moon, borrowers often over extend themselves to capture appreciation and live the HELOC good life.

But now home prices are flat nationally and still falling in some places. Potential buyers are nervous about jumping in.

"In this environment, any rise in mortgage rates does significant damage because people don't think they're going to get their money back" if prices fall, said Mark Zandi, chief economist at Moody's Analytics.

That is because they won't get their money back. People are wise to sit on the fence and see how this plays out.

For people who bought their first home in the 1980s, when rates stayed over 10 percent for several years, paying 6 percent for a home loan may seem like a steal. But it's coming as a shock to many first-time homebuyers this spring.

Rising interest rates is also going to put a cramp on HELOC borrowing. That is going to come as a shock to everyone buying their personal ATM machines.

In Overland Park, Kan., Sirena Barlow checks mortgage rates online once a day. She's been shopping for a something around $130,000 and wants to sign a contract this month, to take advantage of a tax credit for first-time homebuyers.

Barlow, a legal assistant, has already told her landlord she's moving, so her stress level is high. Her real estate agent, Michael Maher, has been doing his best to calm Barlow and other clients, but rising rates are making them anxious.

"It's like giving hyperactive kids ice cream," he said. "It has really taken the ones who are focused on buying and amped them up a little bit."

Perhaps that characterization is correct, and this realtor is a Realtor and really is calming his clients. I rather doubt it. realtors for the most part are using any tool they can to motivate buyers including trying to scare them with the spectre of higher interest rates and lower affordability.

Spending themselves out of house and home

Since there is no shortage of wretched HELOC abuse among Irvine's elite, I thought we might look at yet another. Owners like these are the rule rather than the exception. From what I have observed, many loan owners were taking out their equity and spending it in a measured way to consume some significant portion of their appreciation income. Many borrowers overspent their home-price appreciation even when it accrued at the dizzying rates of the housing bubble rally. Those that were more restrained — perhaps they only spent 50% to 70% of their imagined gains — those borrowers are the ones to surfed the equity wave and departed peacefully on shore no better or worse for the journey but with memories of the good times.

I still have difficulty getting my mind around the idea that home-price appreciation is income. California borrowers freely access and spend this money as a gift from the housing market gods. Many borrowers set up plans where they routinely go to the housing ATM as a yearly bonus or housing stipend. These same borrowers are eagerly awaiting the return of widespread appreciation so they can resume cashing out of the housing ATM. Are the banks really going to do that again so soon?

  • This property was purchased on 11/18/2002 for $655,000. The owners used a $530,000 first mortgage, a $66,750 second mortgage, and a $58,250 down payment.

  • On 2/2/2004 the first mortgage was refinanced for $605,000.

  • On 5/12/2005 the first mortgage was refinanced for $620,000.

  • On 6/20/2007 the first mortgage was refinanced for $745,000.

  • Total mortgage equity withdrawal is $148,250, a fairly typical Irvine take on the last half of the bubble.

These people were very ordinary in their HELOC spending — conservative you could argue. This is what passes as sophisticated financial management in California.

Foreclosure Record

Recording Date: 11/16/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 08/07/2009

Document Type: Notice of Default

Irvine Home Address … 7 West RAVENNA Irvine, CA 92614

Resale Home Price … $939,000

Home Purchase Price … $655,000

Home Purchase Date …. 11/18/2002

Net Gain (Loss) ………. $227,660

Percent Change ………. 43.4%

Annual Appreciation … 4.6%

Cost of Ownership

————————————————-

$939,000 ………. Asking Price

$187,800 ………. 20% Down Conventional

5.24% …………… Mortgage Interest Rate

$751,200 ………. 30-Year Mortgage

$199,776 ………. Income Requirement

$4,144 ………. Monthly Mortgage Payment

$814 ………. Property Tax

$67 ………. Special Taxes and Levies (Mello Roos)

$78 ………. Homeowners Insurance

$36 ………. Homeowners Association Fees

============================================

$5,138 ………. Monthly Cash Outlays

-$1024 ………. Tax Savings (% of Interest and Property Tax)

-$863 ………. Equity Hidden in Payment

$390 ………. Lost Income to Down Payment (net of taxes)

$117 ………. Maintenance and Replacement Reserves

============================================

$3,759 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$9,390 ………. Furnishing and Move In @1%

$9,390 ………. Closing Costs @1%

$7,512 ………… Interest Points @1% of Loan

$187,800 ………. Down Payment

============================================

$214,092 ………. Total Cash Costs

$57,600 ………… Emergency Cash Reserves

============================================

$271,692 ………. Total Savings Needed

Property Details for 7 West RAVENNA Irvine, CA 92614

——————————————————————————

Beds:: 4

Baths:: 0003

Sq. Ft.:: 2528

$0,371

Lot Size:: 6,500 Sq. Ft.

Property Type:: Residential, Single Family

Style:: Two Level, Contemporary

Community:: Westpark

County:: Orange

MLS#:: S594539

Source:: SoCalMLS

——————————————————————————

XLENT QUIET INSIDE TRACK LOCATION, WITH NEW HARDWOOD FLOORING, DESIGNER PAINTS, WITH PROFESSIONAL LANDSCAPING AND BEAUTIFUL POOL, SPA. LARGE CUL-DE-SAC LOT, VERY DESIRABLE FLOOR PLAN AND AWARDS WINNING SCHOOLS.

I hope you have enjoyed this week, and thank you for reading the Irvine Housing Blog: astutely observing the Irvine home market and combating California Kool-Aid since 2006.

Have a great weekend,

Irvine Renter

Housing Bubble as Political Rugby

Keeping the truth straight is difficult with good information, but once policitians and political operatives get involved with the flow of data, truth can be obscured and elusive.

Today's featured property belongs to a family that skimmed the appreciation and sold just in time to avoid a short sale.

Irvine Home Address … 34 CAPOBELLA Irvine, CA 92614

Resale Home Price …… $745,000

{book1}

Wouldn't it be nice if we were older

Then we wouldn't have to wait so long

And wouldn't it be nice to live together

In the kind of world where we belong

Maybe if we think and wish and hope and pray it might come true (run, run, run)

Baby then there wouldn't be a single thing we couldn't do

Beach Boys — Wouldn't It Be Nice

Wouldn't it be nice if houses really could provide lifelong income? California is truly a remarkable place. People here actually believe permanent, life-sustaining home-price appreciation happens. It does occasionally, and people build a life around it.

Wouldn't it be nice if politicians used real information to make substantive decisions? Instead we get and endless barrage of lies and manipulations. Politicians make realtors look honest.

Housing Bubble as Political Rugby

The housing bubble was a bipartisan failure. Both sides of the political spectrum have tried to blame the other for the housing bubble. It is all nonsense.

The political Right has touted the "Barney Frank inflated the housing bubble" about as far as it can go. The Right likes to forget that Barney Frank was in the impotent minority in the House from 1994-2006. He was a loudmouth who wasn't responsible for anything; although, he was effective as an annoying loudmouth. Personally, I think Barney Frank is a tool, and I wished he were not as powerful as he is today, but the characterizations from the Right about his involvement in the bubble are silly.

The latest evolving narrative on the Left is a populist appeal to blame the evil banks and get that bailout money back home to Main Street where we can bail out some victimized homeowners. That is nonsense too.

Resident Evil: Are Struggling Homeowners as Immoral as the Big Banks?

Richard (RJ) Eskow, a consultant and writer, is a Senior Fellow with the Campaign for America's Future. This post was produced as part of the Curbing Wall Street project. Richard blogs at:

Do homeowners who are underwater on their mortgages deserve to lose their homes? That's what finance commentator Barry Ritholtz says, in a post called "More Foreclosures, Please." Ritholtz must have been channeling his inner Rick Santelli when he wrote that "the boom and bust saw irresponsible and reckless behavior by lenders and home buyers alike," adding that mortgage relief programs for homeowners reward those who were "reckless, speculative, and foolish" while punishing those who are not.

It's not reasonable to put Barry Ritholtz in the same category as Santelli, of course. Ritholtz is a highly informative, widely quoted writer on economic issues. Santelli's the frat-boy trader turned CNBC host whose rant about "rewarding the losers" got a cheer out of some morons on the Chicago Mercantile Exchange (and started the Tea Party movement). But Ritholtz puts financially beleaguered homeowners in the same "moral hazard" dumping ground as the banks who wrote their mortgages, suggesting that both of them "overused leverage, disregarded risk, (and) ignored history." Is that really fair?

Yes, It is.

After all, what kind of information was available to the average home buyer during the last decade? How would the average reasonable person have decided whether to buy a home or what kind of mortgage to use — in, say, 2004?

They probably read articles like the one published in February of 2004 in USA Today ("America's newspaper") with the headline "Greenspan says ARMs might be better deal." "Overall, the household sector seems to be in good shape," said Greenspan, who added that adjustable-rate mortgages might be the right choice for many homeowners. Greenspan enthusiastically promoted the new-style mortgages that later played a big role in the meltdown: "American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage," he said.

Greenspan wasn't just Chairman of the Federal Reserve at the time. He was the man the press kept touting as a genius, the one they called "Maestro." Were homeowners guilty of a "moral hazard" for listening to him? Should they face foreclosure because they weren't reading Nouriel Roubini or Paul Krugman or Joseph Stieglitz?

This just underscores the depth of Greenspan's failure. He was market cheerleader and irresponsible Federal Reserve chairperson largely responsible for unregulated derivatives that inflated the housing bubble. This guy's argument also ignores the more important role of the National Association of realtors. Nobody buying a house during the bubble paid any attention to Alan Greenspan; they were paying careful attention to their realtor telling them house prices were going up. They were also paying attention to their mortgage broker who was telling them they could borrow and spend that money as soon as it appeared from thin air.

Ignorance of the law is no defense, but ignorance of contrarian economic thought circa 2005 should be. If Greenspan and Geithner and Paulson and all the talking heads on CNBC and the other networks couldn't see the bubble, how could the average home buyer?

I can't believe he is making that argument. Ignorance is ignorance, and if it costs someone money, too bad. He is setting up ignorance as some reason people should be given a bailout. That is ignorant.

The truth is, most people buy homes because they need a place to live — and because for generations they've been told that buying a home is preferable to renting. Our tax code is structured to encourage home ownership, and the ownership message is reinforced in everything from news reporting to popular culture. (Think Miracle on 34th Street.)

BULLSHIT!!! (pardon the realtorspeak) People bought during the bubble because they wanted to get the appreciation and spend it. Very few people bought because they needed a place to live during the bubble. It was always a speculative investment they could also live in.

And generalizations about irresponsible, speculative borrowing overlook the fact that the nation's housing problems vary widely by geography. Some areas aren't having a housing bust:

Is a homeowner in Glens Falls, NY any more "reckless, speculative, and foolish" than one a couple of hours down the road in Poughkeepsie? Poughkeepsie experienced a boom in prices followed by a bust, while high-performing Glens Falls experienced a boom with no bust. West of Glens Falls, my home town of Utica did pretty well too, as this chart illustrates:

It probably helps that Utica experienced its financial collapse a long time ago, so housing prices were already unusually low.

Above is a fine example of the intentional use of confusing and misleading data. If you can't dazzle them with brilliance, you can baffle them with bullshit. Obfuscation is helpful when there is no point to be made. The fact that the housing bubble varied by region was caused by many variables, and irresponsible borrowing and speculation are chief among them. This author is throwing up a mud screen of meaningless and confusing data to dupe you into thinking he must be some kind of special expert who understands these things. He is an idiot with an agenda.

Here's something interesting: The areas with stable housing prices had a much lower percentage of nonprime loans than the country as a whole. As the report's authors mention, the explanation for that probably "runs in both directions–an increase in nonprime lending led to more significant home price appreciation, and more rapid home price appreciation led to a rise in nonprime lending."

In other words, it was a cycle: Risky loans drove housing prices up, and climbing housing prices led to greater availability (and selling) of risky loans. That's not a borrower problem — it's a pattern of lender behavior. It's a sign of banks driving a speculative frenzy as a "get rich quick" scheme, then leaving the borrowers with the wreckage.

It takes two to tango. This is clearly a lender problem, and I have argued that Lenders Are More Culpable than Borrowers, but the endless stream of HELOC abusers and squatters I find right here in our affluent community of Irvine, California, show how widespread borrower malfeasance was. Hard-working honest borrowers are not the ones in trouble right now. Speculators and foolishly over-extended borrowers are the ones who are asking for bailouts.

Ritholtz makes some excellent points about the weakness of HAMP (the Home Affordable Modification Program), and its tendency to reward banks for their very real "moral hazard." The biggest problem with the revised HAMP program isn't that it's too generous to troubled homeowners. It's that it's a "pretty please" program that only requires lenders to consider lowering the principal on home loans (or, in the Orwellian language of the program's Fact Sheet, "servicers will be required to consider an alternative Modification approach" – "required to consider" being one of those self-contradicting phrases George Carlin used to rattle off, like "jumbo shrimp.")

But the idea of principal reduction — whether it comes from HAMP or individual lenders like Bank of America — is a reasonable one. Most reductions in principal will still leave homeowners owing more than their house is worth, which should give them their just portion of punishment for any "moral hazard."

The idea of principal reduction is not a reasonable one. It is a really, really stupid idea. They have received no punishment at all for their behavior, and that is exactly why moral hazard is a problem. The only people who think it is a good idea are the people whom might personally benefit from principal reduction. Of course, the author knows this. He is pandering to those people in hopes that they will support him. This is part of the evolving left-wing narrative and populist appeal.

"More foreclosures, please" is exactly what we don't want. Ritholtz is understandably concerned about the unfairness of "rewarding" homeowners who got in trouble in a way that keeps prices higher for those who behaved responsibly. But he paints an overly rosy scenario of bad actors being driven from their homes like poltergeists, so that new and vibrant families can move in — families that can afford the mortgage and have money left over to spend in the local economy. The real solution is going to look less like a ghost story and more like Tim Burton's Beetlejuice, where the ghosts and the living learn to live together happily.

More bullshit. Barry is exactly right, and this guy is exactly wrong.

The millions of homeowners who got in over their heads have already suffered a lot. Let's get them some help. And let's keep the focus on the people who caused this problem: The bankers who got rich off these schemes, and the politicians and regulators who let them do it.

I actually agree with his conclusion that we should focus our efforts on regulating banks and stopping the huge bankster ripoffs. However, the millions of fools who got themselves in trouble deserve not one penny of our tax money in bailouts. Not one penny.

I don't care about party affiliation, and I don't identify with labels of Progressive or Conservative. Any politician who supports bailing out anybody has lost my confidence. This shouldn't be a battle between the side the supports the lenders and the side the supports the common man. Both sides of that argument are wrong. Where is a good Libertarian when you need one….

Calculated HELOC use?

Occasionally someone will defend HELOC abuse as ordinary HELOC use, as if it is okay to spend home equity and use a house like a credit card. If there were no government bailouts, I might be more persuaded, but since we are all paying for the abuses, the line between "use" and "abuse" gets pushed much closer to zero use.

  • This property was purchased ages ago on 6/22/1993 for $334,000. The original loan information is not present, but we can assume they used a $267,200 first mortgage (80%) and a $66,800 down payment.

  • On 10/26/1999 they refinanced into a $307,500 first mortgage.

  • On 1/7/2000 they opened a HELOC for $60,000.

  • On 3/17/2003 they refinanced with a $424,000 first mortgage.

  • On 9/14/2004 they refinanced into a $540,000 option ARM. It appears to have blown up 5 years later.

  • On 12/22/2004 they opened a $116,000 HELOC.

  • Total property debt is $656,000 plus negative amortization.

  • Total mortgage equity withdrawal is $388,800.

Foreclosure Record

Recording Date: 02/23/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 01/04/2010

Document Type: Notice of Default

Foreclosure Record

Recording Date: 11/20/2009

Document Type: Notice of Default

This property is scheduled for auction on 20 April 2010. Do you think the sale will close in time or will this go REO?

The borrowers who are about to sell today's featured property obviously grew their mortgage to obtain and spend their equity. They avoided a short sale; although, they spent most of their equity, and their credit is trashed. What lesson have they learned? Why won't they do this again on their next property?

The lesson this family learned is that they could spend their home equity the moment it appeared, and there is no real consequence. Of course, they could be leaving home with several hundred thousand dollars more in a closing check, but they wouldn't have had all the fun with their HELOCs. Do you think this behavior is wise? They do.

Renting with housing income

There is another way to look at this transaction. It may help explain why California homes are so desirable.

Lets say someone rented this home for 10 years with an average rent of about $2,500. It may rent for more now, but it probably rented for less in 2000. A renter would have spent $300,000 on housing during a ten-year period ($2,500 X 12 X 10 = $300,000).

These owners started their HELOC frenzy around the millennium, so they probably paid more in cost of ownership than they would have spent in a rental, so their total cost of ownership would have been closer to $360,000 during the same ten-year period ($3,000 X 12 X 10 = $360,000). At first glance, it would appear that owning was not a big advantage; however, If you factor in the mortgage equity withdrawal of $388,800, their net cost of ownership was less than zero. The house paid for itself.

That's why everyone in California wants a house.

When this family moves out, they are no better or worse off than a renter. They will leave with no equity. But the renter would have endured a housing cost whereas this owner endured none.

Irvine Home Address … 34 CAPOBELLA Irvine, CA 92614

Resale Home Price … $745,000

Home Purchase Price … $334,000

Home Purchase Date …. 6/22/1993

Net Gain (Loss) ………. $366,300

Percent Change ………. 123.1%

Annual Appreciation … 4.8%

Cost of Ownership

————————————————-

$745,000 ………. Asking Price

$149,000 ………. 20% Down Conventional

5.23% …………… Mortgage Interest Rate

$596,000 ………. 30-Year Mortgage

$158,324 ………. Income Requirement

$3,284 ………. Monthly Mortgage Payment

$646 ………. Property Tax

$67 ………. Special Taxes and Levies (Mello Roos)

$62 ………. Homeowners Insurance

$41 ………. Homeowners Association Fees

============================================

$4,099 ………. Monthly Cash Outlays

-$811 ………. Tax Savings (% of Interest and Property Tax)

-$686 ………. Equity Hidden in Payment

$309 ………. Lost Income to Down Payment (net of taxes)

$93 ………. Maintenance and Replacement Reserves

============================================

$3,004 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$7,450 ………. Furnishing and Move In @1%

$7,450 ………. Closing Costs @1%

$5,960 ………… Interest Points @1% of Loan

$149,000 ………. Down Payment

============================================

$169,860 ………. Total Cash Costs

$46,000 ………… Emergency Cash Reserves

============================================

$215,860 ………. Total Savings Needed

Property Details for 34 CAPOBELLA Irvine, CA 92614

——————————————————————————

Beds:: 3

Baths:: 3

Sq. Ft.:: 2325

Lot Size:: 4,695 Sq. Ft.

Property Type:: Residential, Single Family

Style:: Two Level, Other

Community:: Westpark

County:: Orange

MLS#:: S606385

Source:: SoCalMLS

——————————————————————————

Spectacular Westpark location with 3 spacious bedrooms and a loft. Extremely private with property angled so neighbors cannot see in. Property is light and bright with cathedral ceilings and recessed lighting. The family room features a fireplace and the kitchen has GE Profile stainless steel appliances with dual convection ovens. The home has an in-ground spa and will be perfect for entertaining.

The Debt Star Has Cleared the Planet

I would like to thank Soylent Green Is People for writing today's post. If you are unfamiliar with his style, or if you are a big Star Wars fan, you are in for a treat.

As a lender he sees what is coming. Today we get his analysis of how our enormous delinquency problem is going to be resolved.

53 Carver Irvine, CA 92620 inside

Irvine Home Address … 53 CARVER Irvine, CA 92620

Resale Home Price …… $699,000

The Debt Star has cleared the planet…..

For now fellow IHB readers we’re going to a galaxy far, far away. Circling planet Overborrow_ 92620 are the giant Star Destroyers, each packed with dastardly bankers and fearsome asset managers.

The Armada, comprised mainly of BofA, Wells Fargo, Citi, and Chase, has tried their best to level the planet and reclaim it’s wealth. For now, Rebel forces have held off the Imperials believing the longer they stand and fight, the sooner will come some measure of rebel victory.

Thwarting the will of the Emperor so far has been pretty easy. As anyone knows, Imperial Storm Troopers have to be the worst fighting force in the galaxy. They can’t shoot worth a damn. They fold like a cheap suit when Teddy Bears throw rocks at them. Add to it, they’re easily fooled by Jedi mind tricks.

BofA Stormtrooper: Let me see your modification request.

Obi-Wan, Jedi Loan Mod Attorney: (with a small wave of his hand) You don’t need to see his modification request.

BofA Stormtrooper: Uhh… We don’t need to see their modification request.

Obi-Wan: This isn’t our borrowers fault…

BofA Stormtrooper: This isn’t their fault.

Obi-Wan: They can continue living in the property without making a payment.

BofA Stormtrooper: You can live in the property.

Obi-Wan: Extend and pretend…

BofA Stormtrooper: Yes, we’ll extend and pretend.

Eventually the Empire wised up. Relief has gotten tougher and tougher to get. The Emperor resisted helping reduce loan balances or modify loans. “It’s bad for our investors… and trade federations”.. As the situation got worse, help from the Jedi order arrived. Mace Windu has tried his best to save the Overborrowers, You know, Mace Windu, badass Jedi with a purple lightsaber…

He’s took on the banks with every ounce of Jedi power known – HOPE, HAMP, HARP, Life Day Moratoriums, and other pseudo-relief schemes. Eventually he was forced to take on the Emperor’s banks single handedly. We all know how that worked out… The banks got their bailout.

With no new hope to come, Life is going to become pretty grim for planet Overborrow_92620.

Loan modification, the extend and pretend process we’ve seen adopted with HAMP, remains an undeniable failure. Post mod average 59% debt to income ratios and a 60% post modification re-default pattern is a pretty low success rate even by government standards.

59.8% Debt-to-Income = Success!

We know how we got to this point. Most of the nations distressed homes are located in the “Failure 5” – Arizona, California, Florida, Michigan, and Nevada, with California dwarfing all other states. Seven years of zero underwriting standards, excessive – in my opinion manufactured – appreciation, and unchecked greed allowed unsustainable levels of debt to be accumulated.

As vast numbers these engorged home debtors morphed into a weaponized entitlement class, curative foreclosures have been delayed, postponed, and in many cases ignored completely as a way to resolve this problem. Banks have done what the Government has asked them to do – reach out, negotiate, problem solve, suggest… don’t you love these gentle sounding action items… The banks are done ewok’ing around and have reached for the big guns to clear the decks – accelerated short sale process and a relentless increase in foreclosures. This is housings Death Star.

What will this future look like? First, let’s examine 92620 zip code as a microcosm of our county wide problem. There are currently between 150 to 160 open listings with only 20 being considered distressed in this zip code. A pretty healthy market by most standards. That’s the 30,000 foot overview most Realtors want you to focus on.

NOD’s in the area have spiked, but is likely due to borrowers attempting to lower their debt load through various mod programs. Loan servicers require evidence of financial hardship in order to qualify for modification. What better way to demonstrate that condition by skipping a payment or two?

Foreclosure Radar’s take on the 92620 market is a bit different. Their data tells us there are an additional 100 properties either at the auction stage or in “pre-foreclosure”. Of those 100 homes only 3 overlap in MLS data.

160 listings +/-. 100 non listed foreclosure ready properties

Pre-foreclosure inventory is approaching parity with MLS inventory (not to mention the shadow inventory with record delinquencies), yet why aren’t these homes on the market? Delaying tactics have kept many homedebtors in their property, but time has run out for overborrowers in this zip code..

(Geeze George Lucas is a crappy writer, using “suddenly” twice in the same line of dialogue…)

The HAMP mod process will be winding down over the next few months. Assume that of the 170,000 active trial modifications in California, at least 30% may be approved for a permanent modification of their loan terms. – the best case scenario today. The remaining denied or failed trial mods – about 119,000 – will be moved into the HAFA program. HAFA, short for Home Affordable Foreclosure Alternatives program, is the Treasury departments best effort to streamline the short sale process. From the NAR’s webpage:

HAFA Provisions

• Complements HAMP by providing a viable alternative for borrowers (the current homeowners) who are HAMP eligible but nevertheless unable to keep their home.

• Uses borrower financial and hardship information already collected in connection with consideration of a loan modification.

• Allows borrowers to receive pre-approved short sales terms before listing the property (including the minimum acceptable net proceeds).

• Requires borrowers to be fully released from future liability for the first mortgage debt (no cash contribution, promissory note, or deficiency judgment is allowed).

• Uses standard processes, documents, and timeframes/deadlines.

• Provides the following financial incentives:

• $3,000 for borrower relocation assistance;

• $1,500 for servicers to cover administrative and processing costs;

• Up to $2,000 for investors who allow a total of up to $6,000 in short sale proceeds to be distributed to subordinate lien holders, on a one-for-three matching basis.

• Requires all servicers participating in HAMP to implement HAFA in accordance with their own written policy, consistent with investor guidelines. The policy may include factors such as the severity of the potential loss, local markets, timing of pending foreclosure actions, and borrower motivation and cooperation.

HAMP…HAFA… it’s a TARP… Err… TRAP!

HAFA “complements” HAMP. HAFA is for borrowers who were “HAMP eligible, but nevertheless unable to keep their home…” I like how gentle and nurturing this program sounds, don’t you? HAMP was merely a staging area for HAFA. Considering the redefault rate baked into the modded loans averaging 59% debt to income levels, the Feds had to draw up some kind of exit strategy.

Overborrowers also get pre-dictated…er pre-arranged short sale terms before listing the home. Nothing mentioned about the 800 pound Hutt in the room – how many HAMP participants are upside down on their home. Failed HAMP mods will soon become failed HAFA candidates. What then?

LA / Orange MSA is roughly 35,000 of the 119k HAFA transactions to come. Even if we split those new short sales on a 70/30 basis with Los Angeles County, that’s 10,000-ish new short sales expected in OC. Can the Orange County market absorb 833 new short sales per month in a years time?

Add to this groundswell of new inventory the expected increase in Bank of America foreclosures. What about Wells, Citi, Chase? Freddie Mac announced plans to dump REOs. Lenders will be forced to dump their inventory as prices soften. While we’re at it, lets consider the increasing number of strategic defaulters adding to present inventory. “Shame, plus fear of this battle station, will be used to hold home debtors in the system from mailing keys back to the bank…” HA!

Now, strategic default is celebrated. “It’s just business” to run away from your contractual debts in today’s ethically clouded environment. This growing source of new inventory will smother property values even further. It is the Ouroboros effect, exacerbated by well intentioned useful idiots who comprise our current regime. Orange Counties artificially supported median price levels run a credible risk of collapse. A new race to the bottom will start as failed mods come out of the shadows, strategic defaulters bail out while they can, and all the rest of the poorly stashed inventory banks have been withholding in hopes for better days bubbles onto the MLS.

The question is asked all the time: “Where do you think prices are going? What about shadow inventory?” I simply envision the banks, headed by the reckless Emperor himself cackling: Now witness the firepower of this fully armed and operational battle station! Fire at will Commander! Once that HAFA beam is unleashed, the resulting carnage will be epic. That’s my .02c. SGIP

Is Soylent Green Is People right? I think he is, and so does Diana Olick from Realty Check. As far as I am concerned, I think Pat Benetar said it well:

Hit Me With Your Best Shot!

Why Don't You Hit Me With Your Best Shot!

Hit Me With Your Best Shot!

Fire Away!

HELOC Abuse

  • This property was purchased for $800,000 on 9/14/2004 (which is amazing to me). The owners used a $640,000 first mortgage and a $160,000 down payment.

  • On 11/18/2005 they refinanced with a $714,750 first mortgage and a $142,950 stand-alone second.

  • The total property debt is $857,700 plus accumulated missed payments.

  • Total mortgage equity withdrawal is $57,700 plus three years of free rent worth approximately $90,000.

Three full years of squatting with no end in sight

There is a reason we have a foreclosure process: when people stop paying, we need to get them out of the property and recycle it to someone who will pay for it. Today's featured property was first profiled last August. Now, after over three years, she is still there.

Foreclosure Record

Recording Date: 10/15/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 07/09/2009

Document Type: Notice of Default

Document #: 2009000364972

Foreclosure Record

Recording Date: 11/12/2008

Document Type: Notice of Rescission

Document #: 2008000530065

Foreclosure Record

Recording Date: 01/04/2008

Document Type: Notice of Sale

Document #: 2008000006033

Foreclosure Record

Recording Date: 10/01/2007

Document Type: Notice of Rescission

Document #: 2007000592079

Foreclosure Record

Recording Date: 09/27/2007

Document Type: Notice of Default

Document #: 2007000586776

Foreclosure Record

Recording Date: 05/23/2007

Document Type: Notice of Default

Document #: 2007000334839

Here’s an owner with a loan that has been modded, re-defaulted, and off to auction shortly. Can she chase the market down low enough to escape the Death Star’s HAFA ray?

53 Carver Irvine, CA 92620 inside

Irvine Home Address … 53 CARVER Irvine, CA 92620

Resale Home Price … $699,000

Home Purchase Price … $644,739

Home Purchase Date …. 1/19/2010

Net Gain (Loss) ………. $12,321

Percent Change ………. 8.4%

Annual Appreciation … 32.8%

Cost of Ownership

————————————————-

$699,000 ………. Asking Price

$139,800 ………. 20% Down Conventional

5.11% …………… Mortgage Interest Rate

$559,200 ………. 30-Year Mortgage

$146,553 ………. Income Requirement

$3,040 ………. Monthly Mortgage Payment

$606 ………. Property Tax

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

$58 ………. Homeowners Insurance

$0 ………. Homeowners Association Fees

============================================

$3,704 ………. Monthly Cash Outlays

-$747 ………. Tax Savings (% of Interest and Property Tax)

-$658 ………. Equity Hidden in Payment

$280 ………. Lost Income to Down Payment (net of taxes)

$87 ………. Maintenance and Replacement Reserves

============================================

$2,666 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$6,990 ………. Furnishing and Move In @1%

$6,990 ………. Closing Costs @1%

$5,592 ………… Interest Points @1% of Loan

$139,800 ………. Down Payment

============================================

$159,372 ………. Total Cash Costs

$40,800 ………… Emergency Cash Reserves

============================================

$200,172 ………. Total Savings Needed

Property Details for 53 CARVER Irvine, CA 92620

——————————————————————————

Beds: 7

Baths: 3 full 1 part baths

Home size: 2,770 sq ft

($252 / sq ft)

Lot Size: 4,750 sq ft

Year Built: 1979

Days on Market: 243

MLS Number: S584525

Property Type: Single Family, Residential

Community: Northwood

Tract: Sr

——————————————————————————

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

Perfect Home For Large Family Within The Best Area Of Irvine. Modified Plan With Up To 7 Bedrooms. Built In Outdoor Spa. Close To Shopping And Schools. . . 2 Bedrooms downstairs and 5 Bedrooms Upstairs. Agents Read Remarks First. Beat The Bank To This Large Home.

I didn't foresee this

Back in 2004-2006 as I observed the housing bubble go from OMG to WTF, I foresaw the credit crunch, the end of serial refinancing, and the array of conditions leading to epic delinquency rates. From there, I reasoned we would have an orderly foreclosure process that would bring must-sell inventory to the market and lower prices. It never occurred to me that lenders would simply not foreclose on people and allow borrowers to squat. It didn't seem possible.

I am not terribly surprised by what lenders have done, but I don't see how it solved their problem. Perhaps they hope to buy time to get more bailouts. I don't know. Eventually, borrowers will need to be brought current or removed from their properties. Right now, lenders are standing around wondering what to do hoping the problem will go away. I suppose if you paint yourself into a corner, you can always wait for the paint to dry before walking away.

Can you tell Star Wars from Star Trek?

Foreclosures Will Drive the National Economic Recovery

Barry Ritholtz is leading the chorus demanding that lenders get on with the foreclosure process and get the economy moving again.

Today's featured property may have the Irvine record for HELOC abuse. We are up over $1,000,000!!!

Irvine Home Address … 58 CEZANNE Irvine, CA 92603

Resale Home Price …… $1,600,000

{book1}

Tell it like it is

Don't be ashamed to let your conscience be your guide

Life is too short to have sorrow

You may be here today and gone tomorrow

You might as well get what you want

So go on and live, baby go on and live

Aaron Neville — Tell It Like It Is

I like people who tell it like it is, and I try to do the same. I think "balanced" reporting is one of the reasons for the death of newspapers. Most issues in life are shades of gray, and presenting both sides of an argument can be helpful for people to decide for themselves what they believe is right and what is wrong. However, there are many issues that fall much more to the extreme of black or white, wise or foolish, good or bad, right or wrong. When these issues are presented in a balanced way, it distorts the truth.

I think the various bailouts for both lenders and borrowers are wrong — 100% wrong. There is no balanced middle where some moral hazard is acceptable. Taxpayer funded bailouts are state-sanctioned theft, not in the general sense of government compelling us to pay taxes, in the specific detail of my tax dollars going to support foolish and greedy lenders and borrowers who will inflate another housing bubble and take my money again. It is 100% wrong, and no amount of balanced coverage is going to change that fact.

Barry Ritholtz is one of my favorite writers concerning the real estate bubble because he sees the issue so clearly, and when he writes about it, he does not sugar-coat what he sees.

More Foreclosures, Please . . .

By Barry Ritholtz – March 25th, 2010, 7:15AM

I have been dismayed about the latest actions out of Washington and Wall Street. The banks are now pushing all manner of mortgage mods and foreclosure abatements. These are little more than “extend & pretend” measures, designed to put off the day of reckoning. They are not only ineffective, they are counter-productive. They reward the reckless and punish the responsible, and create a moral hazard. Worse yet, they penalize middle America for the sake of giant Wall Street banks.

It may sound counter-intuitive, but the best thing for the nation (but not necessarily the banks) is to allow the foreclosure process to proceed unimpeded. We need more, not less foreclosures.

How did we get to this bizarre place in history? A brief recap of our story so far:

It started with the ultra-low rates of 2001-04. It was aided and abetted by an abdication of traditional lending standards, at first by non-bank lenders, but eventually, by nearly all. The Lend-to-Sell-to-Securitizer NonBanks pushed lending standards ever lower to the point of non-existence. This increased the pool of potential mortgage buyers, credit worthiness be damned.

The net result of all this was a credit bubble. I estimate that making mortgage requirements disappear brought between 10 and 20 million marginal new home buyers into the real estate market during the 2,000s decade. This drove prices to unsustainable levels, leading to a huge boom and eventual bust cycle in housing.

Prices have fallen about 30% nationally from the 2005-06 housing peak. As the artificial demand created by free money and an accompanying gold rush mentality disappeared, the housing market collapsed.

Despite this, even down 30% or so, prices still remain elevated by historical metrics. The net result has been 5 million foreclosures and counting. One in four “Home-owers” are underwater — meaning, they owe more on their mortgages than their houses are worth. There are another 3-5 million likely foreclosures coming over the next 5+ years.

The net results of the credit bubble are as follows:

1) An enormous number of families living in homes they cannot afford.

2) Bank balance sheets laden with current bad loans and lots of potential future defaulting loans.

3) Real Estate Sales, despite being propped up with historic low mortgage rates and tax purchase credits, are continuing to slide.

4) A weak overall economy with a very slow, soft recovery.

Whether a function of populist politics or bad economics, the proposals so far appear to address items one and three. But upon closer examination, they do nothing of the kind. In fact, they are actually gaming the system to help issue two — the bad loans the banks are carrying.

Even worse, they are making issue #4 — the economy — increasingly problematic.

We should allow the real estate market to experience a healthy price normalization process. Even though home prices have fallen dramatically, they have yet to reach their historical means relative to income or the cost of renting. This is to say nothing of the usual careening past the median towards under-valuation that typically follows a massive mis-allocation of capital.

We own a home, and have a vacation property. Rooting for falling prices is “talking against my own book.”

Why is it so beneficial to allow foreclosures to proceed unimpeded? Consider the following benefits of foreclosure:

• Increasing Economic Activity: The areas of the country with the greatest foreclosure rates have seen the biggest increase in real estate activity. Look at California and Florida — they have seen enormous upticks in sales versus the lower foreclosure states.

The process moves real estate holdings from weak hands to stronger ones. When someone purchases a home they actually can afford, they end up spending quite a bit of money on additional goods and services. They do renovations, hire contractors, make durable goods purchases, buy cars. They do lawn work, plant gardens, paint and repair. They even hire baby sitters, go out to diner and movies, they spend money in the local community.

The people who are hanging on by their fingernails, however, do almost none of these things. They pay a vastly disproportionate amount of their incomes to service their mortgages. This is not productive economic activity.

• Helping Families: Foreclosures, wrenching thought hey may be, move over-stretched families into housing they can afford. They avoid a steady stream of all manner of excess fees. The banks squeeze whatever they can from delinquent homeowners, who end up futilely tossing $1000s of dollars down the drain.

Worse, the HAMP programs have been totally ineffective in keeping families in their homes. The vast majority ultimately default anyway. More fees paid, more debt accrued, for nothing. The last thing these families need is a banking fee orgy, before they ultimate lose the house anyway.

The HAMP programs have been an enormous taxpayer subsidized boondoggle for the banks, however.

• Punishing the Prudent: The boom and bust saw irresponsible and reckless behavior by lenders and home buyers alike. They overused leverage, disregarded risk, ignored history. Having the taxpayers subsidize this behavior presents a moral hazard.

Worse than that, it punishes the people who behaved prudent and responsibly. Those who refused to buy a home they could not afford, chose not to over-extend themselves, and have been saving for a down payment are the net losers in this.

By working so feverishly to artificially reduce foreclosures and prop up home prices, we punish the first time home buyer, the newlyweds, the savers who want to buy a house they can actually afford.

The net result of all these programs and subsidies for recklessness is that we prevent home prices from normalizing. The people who are punished the most are the group that was not reckless, speculative or foolish.

• Rewarding Bad Banks: Despite the helping families rhetoric, it is not what these mods are about. The various foreclosure abatements, mortgage mods and capital write-downs are little more than a game of kick the can down the road. All of these programs are part of a broad “Extend & Pretend” mind set. They are an extension of the FASB 157 rule changes that allows banks to hide their bad loans.

The entire set of proposals can be described as “What's good for the banks is good for America.” Only they are not. The various foreclosure programs are essentially a way the banks don’t have to take their write offs now. Avoid the hangover, have another shot of tequila, push the pain of into the future, regardless of economic cost.

Were the banks required to report their mortgages accurately and/or write them down, they would be revealed as insolvent.

~~~

Now we get to the ugly Truth: The mortgage mods and foreclosure abatement programs are really all about propping up insolvent banking institutions on the taxpayer dollar and at the expense of the middle class. These programs are another losing round of helping Wall Street at the expense of Main Street. It is the worst kind of trickle down economics.

Herbert Spencer wrote, “The ultimate result of shielding men from the effects of folly is to fill the world with fools.” We have done precisely that.

Barry has a clear understanding of the situation, and he is one of the few who openly tells it like it is.

Good Stoploss Management

The Ponzi Scheme in California went on for too long. There are adults whose entire financial life is an illusion sustained only by lender greed and stupidity. Many California borrowers believe a money-rentership position in real estate can provide them sustainable productive income they can extract through mortgage equity withdrawal.

To them, periodic trips to the housing ATM is simply good cash management. It's like getting a paycheck. But is also serves one other useful purpose; by periodically extracting all the equity available in real estate, borrowers can shift any risk of loss to lenders and maximize their gains.

One of the most perplexing issues with trading is management of exits and getting back into cash. If you don't take profits as they accrue, you risk losing them when prices reverse; however, if you sell and take profits, you miss the remainder of the upward price move. Fortunately, lenders make it very easy to manage cash exits with HELOCs.

By periodically removing all profits through mortgage equity withdrawal, very little potential cash profit is left to the market. Also, since this is a loan and not the reduction in an equity position like selling part of a stock holding, the borrower gets to obtain the full cash advantage of owning real estate while prices were rising.

Of course, the best part of the system is getting to pass all losses on to the lender. When prices go south, the lender is holding the bag.

So far the only potential downside is a negative credit report and the potential for a lender to go after other assets. This is probably not a big concern for sophisticated borrowers because the spendthrifts no longer have any assets, and the clever ones probably figured out some tax shelter to hide them.

Lenders are going to get crushed again after the next housing bubble. I hope taxpayers don't have to backstop that one as well.

Today's featured HELOC abusing squatter

Now that I am watching the trustee sale market more closely, I am seeing the turds float by that bypassed the MLS. Very few properties scheduled for auction appear on the MLS. When they do, they are like today's.

  • This property was purchased for $1,262,500 on 4/9/2004. The owner used a $883,557 first mortgage and a $378,943 down payment.

  • On 8/8/2005 he refinanced with a $1,260,000 first mortgage and obtained a $180,000 HELOC. So far so good. There is no evidence he used the HELOC.

  • On 5/26/2006 he obtained a $500,000 HELOC.

  • On 11/21/2006 he refinanced with a $1,750,000 first mortgage and another $500,000 HELOC.

  • Here is where it starts to get fishy: On 3/9/2007 he sells the house to a couple for an undisclosed amount, then on 12/17/2007 it is deeded back to the original owner. This appears to be in preparation for default.

  • On 5/6/2008 the lender files a notice of default

  • On 6/4/2008, the owner transfers ownership to an entity he formed. My guess is he did this to try to shield himself from liability to the lender. Good luck with that.

  • Total property debt is $2,250,000.

  • Total mortgage equity withdrawal is $1,366,443, including his down payment. That may be a new Irvine record!

Foreclosure Record

Recording Date: 03/23/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 08/12/2008

Document Type: Notice of Sale

This owner has not made a payment since late 2007, perhaps early 2008. He is scheduled for auction, but do you think a lender is ready to absorb the loss on this one? They will lose $750,000 or more.

Irvine Home Address … 58 CEZANNE Irvine, CA 92603

Resale Home Price … $1,600,000

Home Purchase Price … $1,262,500

Home Purchase Date …. 4/9/2004

Net Gain (Loss) ………. $241,500

Percent Change ………. 26.7%

Annual Appreciation … 4.0%

Cost of Ownership

————————————————-

$1,600,000 ………. Asking Price

$320,000 ………. 20% Down Conventional

5.23% …………… Mortgage Interest Rate

$1,280,000 ………. 30-Year Mortgage

$340,024 ………. Income Requirement

$7,052 ………. Monthly Mortgage Payment

$1387 ………. Property Tax

$400 ………. Special Taxes and Levies (Mello Roos)

$133 ………. Homeowners Insurance

$398 ………. Homeowners Association Fees

============================================

$9,370 ………. Monthly Cash Outlays

-$1609 ………. Tax Savings (% of Interest and Property Tax)

-$1474 ………. Equity Hidden in Payment

$663 ………. Lost Income to Down Payment (net of taxes)

$200 ………. Maintenance and Replacement Reserves

============================================

$7,151 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$16,000 ………. Furnishing and Move In @1%

$16,000 ………. Closing Costs @1%

$12,800 ………… Interest Points @1% of Loan

$320,000 ………. Down Payment

============================================

$364,800 ………. Total Cash Costs

$109,600 ………… Emergency Cash Reserves

============================================

$474,400 ………. Total Savings Needed

Property Details for 58 CEZANNE Irvine, CA 92603

——————————————————————————

Beds:: 4

Baths:: 3

Sq. Ft.:: 3200

$0,500

Lot Size:: 0.28 Acres

Year Built:: 2004

Days on Market: 654 days

MLS#:: P643120

Property Type:: Residential, Single Family

Community:: Turtle Ridge

Style:: One Level, Other

——————————————————————————

Rare single story home with upgrades, large lot. desirable entertainment backyard with gazebo.

Desire for Mortgage Equity Withdrawal Inflated the Housing Bubble

The immediate access to home price appreciation through mortgage equity withdrawal motivated borrowers to take on crazy loans and inflate a massive Ponzi Scheme.

Are HELOC riches right around the corner? Today's featured property owner has already drained the equity. Do you want to pay off her bills?

Irvine Home Address … 2 MORNING SUN Irvine, CA 92603

Resale Home Price …… $875,000

{book1}

the bubble's are not reality but it's inside your mind,

making you forget where you're from and what's behind.

isn't it suspicious how the world is now your friend,

getting in return 1.000 more than what you could ever send.

oh yeah

we live in a bubble baby.

a bubble's not reality.

you gotta have a look outside.

nothing in a bubble, is the way it's supposed to be,

and when it blows you'll hit the ground.

Eiffel 65 — Living in a Bubble

We are all living in our own bubbles. Each of us has a tenuous grasp on reality, and with the steady flow of bullshit and propaganda that implants gross lies into our collective consciousness, our perception of reality becomes ever more distorted. It is a difficult and often time-consuming task to find Truth and Reality buried beneath obtuse writing and intentional obfuscation.

Bubble thinking is rampant, and the primary reason for its persistence is that people want the free spending money houses provide. The huge financial reward each bubble participant received as they went to the housing ATM gave a spender's high like no other. Absent another housing bubble, most bubble participants will never have access to that kind of money again.

The real estate lottery

When you reflect on it, mortgage equity withdrawal is similar to state run lotteries that sell hope to the poor at a major cost. If you are a worker who doesn't save money, you have no chance to acquire wealth. Lotteries give those who have no other opportunity for wealth a chance — slim though it may be.

If many people participate in the lottery, the payouts become enormous, and others become drawn to the action which further increases the payouts. This continues like a Ponzi Scheme until a big winner empties the lottery pool, and the game starts over.

Buying real estate is like buying a lottery ticket with important differences. When people participate in the real estate lottery, they are a guaranteed winner — for a while. Every participant gets to withdraw and spend their winnings as long as the pot grows. This makes the real estate lottery like no other, and it makes it much, much more desirable.

At some point, the real estate Ponzi Scheme collapses, the pool of equity "winnings" is emptied, and the game starts all over again. The big difference between the California lottery and the California real estate market is what happens to the losers. People who play the lottery are limited in their losses to the amount of money they invested. People who gamble in the real estate lottery have no limit to their losses; in fact, their losses may easily exceed their net worth resulting in bankruptcy. Most real estate losers also give up their homes.

The threat of foreclosure and bankruptcy doesn't deter people from playing the game, particularly the poor who have nothing to lose anyway. Most people take the free money and don't worry about the consequences because through either personal abdication of responsibility or a massive government bailout people will not face the consequences. Moral Hazard now rules the California real estate market.

A bubble here a bubble there

When I wrote The Great Housing Bubble, I scoured the academic journals for some insight as to why some markets bubbled and some did not. Some economists, like Paul Krugman, contend that growth restrictions that constrain supply are causal factors because the housing bubble was concentrated in coastal regions where development is more restricted than inland areas. There is some truth to the constrained supply argument; it can serve to precipitate the initial price movement that excites bubble thinking, but beyond that point, it's pure kool aid intoxication.

The growth restriction argument does not explain the housing bubble in Florida. I have worked in the land development industry in both Florida and California, and I can tell you California's process is much more restrictive of suburban sprawl. There was no shortage of supply in Florida as the glut of empty homes in South Florida attests to.

The growth restriction argument may explain why some some markets are more bubble prone because the restrictions are akin to lighting a match in a gas-filled cavern. The sparks may or may not cause a bigger explosion; it is merely a catalyst.

Show me the money

The real culprit in a housing bubble is expanding home mortgage balances — people take on more debt and bid up prices. The real question is, "why do people do it?" The short answer is to capture appreciation: kool aid intoxication. But the truth is more nuanced.

In order for home price appreciation to motivate people to pay stupid prices and inflate housing bubbles, they need a way to access this appreciation. The more immediate and plentiful this access to money, the more motivated buyers are to borrow and cash out. Mortgage equity withdrawal is the doorway to appreciation; it makes houses very desirable and very valuable.

Texas shows the way

To test this premise, we need to find a market with limited access to mortgage equity withdrawal and compare the home prices there to a market like California's where there are no restrictions at all. There is such a place: Texas.

I know Texas. I spent two and one-half years living in College Station studying real estate. Texas, along with California, was a big player in the Savings and Loan disaster. They inflated a commercial real estate bubble of epic standards, and even its residential real estate was volatile during that period. Texans are certainly not immune to the temptation to take free money from lenders. However, the delivery mechanism of the Savings and Loan disaster was through commercial lending whereas the delivery mechanism during the Great Housing Bubble was residential lending. Texas has different laws governing residential lending, and these laws prevented a housing bubble there.

The Lone Star Secret

How Texas avoided the worst of the real estate meltdown.

Posted Tuesday, March 30, 2010 – 4:01pm

It’s one of the great mysteries of the mortgage crisis: Why did Texas—Texas, of all places!—escape the real estate bust? Only a dozen states have lower mortgage foreclosure and default rates, and all of them are rural places like Montana and South Dakota, where they couldn’t have a real estate boom if they tried.

No, Texas’ 3.1 million mortgage borrowers are a breed of their own among big states with big cities. Just less than 6 percent of them are in or near foreclosure, according to the Mortgage Bankers Association; the national average is nearly 10 percent. Texas might look to outsiders an awful lot like Sunbelt sisters Arizona (13 percent) or Nevada (19)—flat and generous in letting real estate developers sprawl where they will. Texas was even the home base of two of the nation’s biggest bubble-era homebuilders, Centex and DR Horton (DHI).

Texas subprime borrowers do especially well compared with counterparts elsewhere. The foreclosure rate among subprime borrowers there, at less than 19 percent, is the lowest of any state except Alaska. Part of the state’s performance is due to the fact that Texas saw nothing like the stratospheric home-price run-ups other states experienced. On average, the 20 metro areas in the Case-Shiller Home Price Index saw their home-resale prices peak in 2006 after more than doubling since 2000. In Dallas, one of the 20, they went up just 25 percent, gradually, and have barely declined.

But there is a broader secret to Texas’s success, and Washington reformers ought to be paying very close attention. If there’s one single thing that Congress can do now to help protect borrowers from the worst lending excesses that fueled the mortgage and financial crises, it’s to follow the Lone Star State’s lead and put the brakes on “cash-out” refinancing and home-equity lending.

A cash-out refinance is a mortgage taken out for a higher balance than the one on an existing loan, net of fees. Across the nation, cash-outs became ubiquitous during the mortgage boom, as skyrocketing house prices made it possible for homeowners, even those with bad credit, to use their home equity like an ATM. But not in Texas. There, cash-outs and home-equity loans can’t total more than 80 percent of a home’s appraised value. There’s a 12-day cooling-off period after an application, during which the borrower can pull out. And when a borrower refinances a mortgage, it’s illegal to get even $1 back. Texas really means it: All these protections, and more, are in the state constitution. The Texas restrictions on mortgage borrowing date back to the first days of statehood in 1845, when the constitution banned home loans entirely.

“Delinquency and foreclosure rates are significantly lower in Texas,” boasts Scott Norman, the president of the Texas Mortgage Bankers Association. “The 80 percent loan-to-value limit—that’s the catalyst for a lot of this.”

In the Great Housing Bubble, one of the regulatory reforms I proposed is very similar: "The combined-loan-to-value of mortgage indebtedness cannot exceed 90% of the appraised value of the property or the purchase price, whichever value is smaller except in specially sanctioned government programs."

The incentive for people to spend their homes and remove their equity cushion must be removed. It makes HELOCs too desirable.

Research from the Federal Reserve Bank of Dallas backs Norman up. Texas’ low-ish unemployment rate, 8.6 percent, is a help. But so is the fact that fewer Texans took cash out of their home equity than did borrowers in any other state—and took out less when they did. The more prevalent cash-out refinances are in a state, the more likely it is that mortgage borrowers there will run into trouble. For every 1 percentage point increase in its share of subprime mortgages that are cash-out refinances, the likelihood of foreclosure in that state goes up by one-third of a percent.

During the boom, cash-out refinancings were the unofficial currency of bubble states from Florida to California, beloved by mortgage brokers as a way to persuade existing homeowners to take out new loans repeatedly. As home values surged, the sales pitch was a slam-dunk: Borrowers could refinance their homes at extremely low interest rates, and based on newly reappraised property values get more cash in their hands than they might earn in a year. Sure, these were teaser rates that would adjust upward after two years, but brokers routinely assured borrowers they could just refinance again before that happened.

Subprime cash-out refinancings became a standard way for borrowers drowning in credit card debt to pay it off, boost their credit scores so they could qualify in a few months to refinance into a lower-rate prime mortgage, and get a big tax deduction in the bargain. Ex-New York Times Federal Reserve reporter Edmund L. Andrews recounts in his underappreciated book Busted how he conjured $50,000 this way via a mortgage from Fremont Lending & Investment.

It is not news to readers here that there are bad incentives in the system. Free money was being given out, and people took it.

Homeowners and mortgage brokers weren’t alone in their addiction to the cash that flowed from homes-as-ATMs. The entire U.S. economy was right there with them. One of Alan Greenspan’s lesser-known contributions to the annals of the credit crisis was a pair of studies he co-authored for the Fed, sizing up exactly how much Americans borrowed against their home equity in the bubble and what it was they were spending their newfound (phantom) wealth on. Greenspan estimated that four-fifths of the trifold increase in American households’ mortgage debt between 1990 and 2006 resulted from “discretionary extraction of home equity.” Only one-fifth resulted from the purchase of new homes. In 2005 alone, U.S. homeowners extracted a half-trillion-plus dollars from their real estate via home-equity loans and cash-out refinances. Some $263 billion of the proceeds went to consumer spending and to pay off other debts.

I have written about our HELOC economy. Calculated Risk has been updating mortgage equity withdrawal as it has fallen off a cliff:

As home prices skyrocketed in many markets, cash-out refinancings became standard, even in the relatively sober world of Fannie Mae and Freddie Mac. By 2006, Freddie Mac reported that 88 percent of refinance mortgages that it purchased were for amounts at least 5 percent higher than borrowers’ previous loan balances. Subprime, in insane pursuit of risk, piled on with cash-out refinances for high-risk borrowers, often approaching the entire appraised value of the home.

But not in Texas. A borrower there can secure a home-equity line of credit from a bank. And she can refinance her mortgage or take out a home-equity loan. But the total amount of debt on a home cannot exceed 80 percent of its appraised value, and any proceeds cannot be used to pay off other debts.

… Not everyone loves the state’s rules. Financial services companies have periodically lobbied to scale back the restrictions on home-equity borrowing, noting that the costs of compliance increase borrowers’ interest rates. But another reason the loans are more costly is that the Texas rules are unique in the nation, giving borrowers less opportunity to shop around.

… Despite these advantages, Texas-style brakes on home-equity withdrawals are not likely to get a welcome reception in Washington. For starters, they’re out of bounds for the proposed consumer agency now under consideration on the Hill. Both the House and Senate versions of the financial reform bill follow a ground rule straight out of the Obama administration’s financial reform blueprint: The agency can only take action on a product or practice when it determines that the harm the practice causes to consumers isn’t outweighed by benefits to consumers “or to competition.” This narrow lens allows lenders to argue, credibly, that their home-equity loans are a boon to consumers, who benefit from ready access to home equity. It’s only in the long term, and the big picture, that the terrible tradeoffs become clear.

Lenders dislike laws that restrict lending, no matter the obvious public good. Their lobbying efforts are maddening but not surprising. They want to continue putting borrowers into profitable loans irrespective of whether or not the borrower benefits. Now that the government is backstopping their foolishness, they don't have to be constrained by the threat of bad loans.

Lenders will make any loan if they believe someone else has the risk. During the bubble lenders thought this risk was disbursed through derivative trades, but now we know the US taxpayer is assuming all the risk, so responsible lending is no more. Given our current state of affairs, we should see some really looney loan products once the economy picks up again.

Economists at the Fed and Treasury are no more likely than Congress to entertain cutting off the tap that until now has kept consumer spending flowing, just when the economy desperately needs that jolt. But the truth is that plummeting home prices have sucked the mortgage equity withdrawal well dry. Mimicking Texas would be the perfect opportunity to get our home-equity debt addiction under control and learn to live as an 80 percent nation.

An 80% nation? California borrowers must be aghast at the idea. How will we live without the free money from our houses? The owners of today's featured property will need to adjust their lifestyles significantly.

HELOC Abuse

Today's sordid story is another where a woman spent her home after a divorce. You must admit, withdrawing money from the housing ATM is much easier than working. Why slave away to earn an income when the house can provide? Particularly if you are a divorcee and you have become accustomed to certain entitlements from the marriage. The temptation to sustain the entitled lifestyle would be great, especially when all the friends are doing the same. It sets up a nasty fall from entitlement.

  • This property was purchased for $420,000 in 1990. The couple got divorced in 2003, and probably as part of the settlement to pay off the husband, the wife took out a first mortgage of $543,750 and a second mortgage of $36,250. It is possible that she simply wanted the money and this was her first infusion of cash. There is no way to know.

  • Two months later on 8/20/2003, she opened a $25,000 HELOC.

  • On 12/2/2004 she opened a $19,750 HELOC and a $44,000 HELOC.

  • On 12/7/2004 she refinanced her first mortgage for $656,250. This sequence of loans looks suspicious to me. The HELOCs are at a different bank than the first mortgage. I looks as if she ran the applications in parallel so the loans would not show up on the underwriting. It doesn't matter though because she made things worse later.

  • On 2/15/2006 she refinanced her first mortgage for $750,000.

  • On 3/9/2006 she opened a $130,000 HELOC

  • Total property debt is $880,000.

  • Total mortgage equity withdrawal from just the x-wife is $300,000.

She pulled out $100,000 a year for three years. Who wouldn't want some of that action?

How desirable are HELOCs?

In the post California Personal Finance: Ponzi Style I discussed the reason HELOCs are so helpful to a family's income statement:

HELOC

Examine the graphic above. The first column shows a graphical breakdown of the income of a typical homeowner. Total home related debt (including taxes, insurance, HOA and other monthly expenses) is limited to 28% of gross income. Consumer debt including all other debt service payments is limited to 8%. Taxes take up about 24% (depending on income and tax bracket), and the remaining 40% is disposable income to cover the other expenses of daily life.

The second column shows what happens as people start to stretch to buy a home in a financial mania. The increasing home debt reduces the tax burden a little, but the increased consumer spending and home debt takes a big chunk out of disposable income. The recession of the early 90s lingered for so long here in California because the people who bought in the frenzy of the late 1980s found themselves with crushing debts and greatly reduced disposable income. Prior to the increase in housing debt, this disposable income would have been spent in the local economy; instead, this money was sent out of state to the creditor who made the loan.

The big financial innovation—if you want to call it that—of the Great Housing Bubble was the nearly unrestricted use of cash-out refinancing and HELOCs to tap into home price appreciation. The third column shows the impact this new source of credit had on personal income statements. HELOC money allowed people to pay off their consumer debt while only modestly increasing their home debt. Since this income was untaxed (borrowed money is not truly income), the extracted money was entirely converted to disposable income. This incredible influx of disposable income caused our economy to explode.

Unfortunately, as is documented in the post Our HELOC Economy, the loss of this HELOC income is having devastating effects on local tax revenues and our economy. When you examine the personal income statements of borrowers in column four, you see that home debt and consumer debt have now become so burdensome that there is no longer enough disposable income to cover life’s basic needs; borrowers are insolvent.

Think about the system here in California; imagine an isolated neighborhood of 20 homes similar today's featured property. Imagine they were new builds and purchased at the same time for $100,000.

It is five years later, and someone buys a house in the neighborhood for $130,000. The home value of the other 19 houses is now $130,000. This gives each homeowner in the neighborhood $30,000 they can withdraw from their housing ATM and spend. As we have witnessed repeatedly here at the IHB, many of those neighbors will do just that.

Since everyone knows that established owners obtain this monetary benefit of ownership, houses become very, very desirable. Lenders then eliminated all barriers to acquiring real estate including the down payment which essentially makes the house free. Who wouldn't want a free ATM machine capable of churning out hundreds of thousands of dollars?

Once prices start going up, comparable sales values justifies ever-larger mortgages, and with loan qualification standards eliminated through liar loans, there was no practical limit to loan balances. The resulting frenzy is a housing bubble.

Do we want to stop the music?

I see no movement in either State or Federal government to change this system. I have no doubt that if California limited mortgage equity withdrawal to an 80% LTV or even a 90% LTV we would no longer have severe housing bubbles. What surprises me is that everyone seems to want housing bubbles!

Housing bubbles encourage spending and investment that otherwise would not have occurred. We built many houses in Riverside County and the High Desert that never should have been built. We employed many people and enriched many others while building unnecessary housing. The people who benefited from this activity have no desire to see it curtailed. Besides most of those fools don't realize the bubble was abnormal; they think that is the way things are supposed to be.

We created our own monster, and we have the power to slay it. I simply don't see the desire.

Irvine Home Address … 2 MORNING SUN Irvine, CA 92603

Resale Home Price … $875,000

Home Purchase Price … $420,000

Home Purchase Date …. 6/24/1990

Net Gain (Loss) ………. $402,500

Percent Change ………. 108.3%

Annual Appreciation … 3.7%

Cost of Ownership

————————————————-

$875,000 ………. Asking Price

$175,000 ………. 20% Down Conventional

5.11% …………… Mortgage Interest Rate

$700,000 ………. 30-Year Mortgage

$183,453 ………. Income Requirement

$3,805 ………. Monthly Mortgage Payment

$758 ………. Property Tax

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

$73 ………. Homeowners Insurance

$376 ………. Homeowners Association Fees

============================================

$5,012 ………. Monthly Cash Outlays

-$935 ………. Tax Savings (% of Interest and Property Tax)

-$824 ………. Equity Hidden in Payment

$351 ………. Lost Income to Down Payment (net of taxes)

$109 ………. Maintenance and Replacement Reserves

============================================

$3,714 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$8,750 ………. Furnishing and Move In @1%

$8,750 ………. Closing Costs @1%

$7,000 ………… Interest Points @1% of Loan

$175,000 ………. Down Payment

============================================

$199,500 ………. Total Cash Costs

$56,900 ………… Emergency Cash Reserves

============================================

$256,400 ………. Total Savings Needed

Property Details for 2 MORNING SUN Irvine, CA 92603

——————————————————————————

Beds: 2

Baths: 2 full 1 part baths

Home size: 2,022 sq ft

($433 / sq ft)

Lot Size: 5,000 sq ft

Year Built: 1979

Days on Market: 86

MLS Number: S600812

Property Type: Single Family, Residential

Community: Turtle Rock

Tract: Rp

——————————————————————————

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

2 Morning Sun has a wonderful view of Shady Canyon and Stawberry Farms Golf Course. This beautifully upgraded home also sides to a spacious greenbelt giving the owner a very private yet open feeling. The kitchen has been remodeled with custom cabinets, slab granite counters and stainless appliances. The beautifully done wood floors lead from the entry into the dining room and kitchen. Sit or dine on your cobblestone patio as you take in the views beyond. Ridgeview is a small, private community of only 86 single family attached homes. The ownership is unique in that you own the land, have the ability to remodel, with HOA approval. The Association also maintains the landscaping including the irrigation,the roofs and paints, to mention only a few of the many benefits. This is a home not to be missed.