Monthly Archives: May 2010

Nearly 500 Properties Are Currently Scheduled for Foreclosure Auction In Irvine

The MLS inventory is growing. The pre-foreclosure inventory is growing. And shadow inventory is growing. Will our spring rally fizzle out?

Irvine Home Address … 24 ROSE TRELLIS Irvine, CA 92603

Resale Home Price …… $1,900,000

{book1}

Give me no restrictions on what I do or say

Don't speak of tomorrow when it's still today

Leave me to my selfish ways, I'm well enough alone

That is what I tell myself as I stumble home

Derelict across the street in the garbage bin

Looks like he's found something neat judging by his grin

Such a long long way to go, hope I get there soon

Men At Work — No Restrictions

With the restricted inventory condition engineered by the banks, our market is not going to clear any time soon. They may be successful at holding up prices to some degree, but it will take a very long time to work off the overhanging inventory of distressed properties. As this process drags on, more Ponzis will flame out, and the distressed inventory will continue to grow. The housing bust is not over.

Only 650 on the MLS

About 650 homes are for sale on the MLS, and there very few properties in the foreclosure process currently for sale. Many of the short sales are in pre-foreclosure, but most of those in the foreclosure pipeline have already given up. They are squatting and waiting. The number of properties tied up in the foreclosure process exceeds our steadily increasing MLS inventory.

Pre-Foreclosure and Auction inventory continues to rise

According to ForeclosureRadar.com, visible inventory is as follows:

342 Pre-Foreclosure (NOD has been filed)

484 Auction (NOT has been filed)

826 Total Pre-foreclosure and Auction Properties.

Is 826 a big number?

In the last 30 days, the postponements have far exceeded the number of sales. There were 36 properties sold back to the bank, and 9 properties that were sold to third parties. That is 45 properties sold in one month out of an inventory of 826. At that rate of sales, it will take 18 months to clear the inventory.

Foreclosure inventory isn't like MLS inventory that needs three to six months supply available to make a market. Foreclosure inventory should be near zero. The total months to clear foreclosure inventory is usually less than one. The fact that we have over 800 properties in this visible inventory is troubling.

The homebuilders like the Irvine Company are taking advantage of the restricted inventory to sell new homes. As someone whose livelihood depends on the homebuilding industry, I think its great that sales are doing so well. As a consumer, I find it irritating that the reason homebuilding is coming back is because the inventory that should be available on the MLS is tied up by lenders who are allowing everyone to squat. It's really bad in Las Vegas where more than 1,000 new homes were built in a city with 9,000 empty ones.

At least 2,700 in Irvine shadow inventory

Bear in mind that none of these numbers capture the shadow inventory of those who are not paying their mortgage but the banks have not begun the foreclosure process. The latest report is that 8.4% of Orange County mortgage holders are delinquent on their payments. There are about 75,000 homes in Irvine and about 45,000 mortgages. If only 6% of those are delinquent, that amounts to 2,700 homes. If Irvine matches the 8.4% rate of Orange County, then 3,780 homeowners are delinquent The ratio of three to four houses in shadow inventory for each house in pre-foreclosure is about the same as national figures.

At the rate of distressed inventory sales of 45 per month, it will take 60 months to work off this inventory — and that is if we stopped adding to it today.

Eighteen months for visible inventory and sixty months for shadow inventory doesn't sound as bad as it really is because more properties will become distressed as this inventory is worked off. Many more borrowers that currently are not delinquent simply can't afford their homes. Large numbers of Ponzi borrowers are continuing to build their Ponzi debts. Most are resorting to credit cards right now waiting for the HELOC money to come back. It isn't going to. The long term ramifications of shutting down the home ATM is going to be more distressed properties and foreclosures as the Ponzis implode.

In the interim, we sit and wait.

Washington Mutual's Garbage

Below is a sample of one defunct lender's toxic waste. The first two properties account for over $10,000,000 in bad loans. Do you see why they are in no hurry to foreclose?

89 CANYON CRK 5/26/2010 $ 5,200,000 WASHINGTON MUTUAL BK FA
41 GOLDEN EAGLE 6/7/2010 $ 4,860,000 WASHINGTON MUTUAL BK FA
27 STARVIEW 7/7/2010 $ 2,240,000 WASHINGTON MUTUAL BK FA
8144 SCHOLARSHIP 6/2/2010 $ 1,674,282 WASHINGTON MUTUAL BK FA
11 GAVIOTA 5/27/2010 $ 1,260,000 WASHINGTON MUTUAL BK FA
3131 MICHELSON DR 1702 6/3/2010 $ 1,226,600 WASHINGTON MUTUAL BK FA
3141 MICHELSON DR 1402 5/27/2010 $ 1,000,000 WASHINGTON MUTUAL BK FA
28 CRIMSON ROSE 5/27/2010 $ 1,000,000 WASHINGTON MUTUAL BK FA
10 FIGARO 6/2/2010 $ 880,000 WASHINGTON MUTUAL BK FA
55 MIDNIGHT SKY 6/21/2010 $ 867,000 WASHINGTON MUTUAL BK FA
78 DOVECREST 5/28/2010 $ 815,000 WASHINGTON MUTUAL BK FA
61 DOVECREEK 6/28/2010 $ 760,000 WASHINGTON MUTUAL BK FA
26 DINUBA 6/10/2010 $ 744,000 WASHINGTON MUTUAL BK FA
89 LAMPLIGHTER 7/7/2010 $ 737,112 WASHINGTON MUTUAL BK FA
37 LAKEVIEW 54 5/21/2010 $ 682,500 WASHINGTON MUTUAL BK FA
6 CEDARSPRING 7/2/2010 $ 650,000 WASHINGTON MUTUAL BK FA
16 ARBORSIDE 5/25/2010 $ 643,700 WASHINGTON MUTUAL BK FA
2251 WATERMARKE PL 5/26/2010 $ 639,000 WASHINGTON MUTUAL BK FA
4911 KAREN ANN LN 6/2/2010 $ 638,250 WASHINGTON MUTUAL BK FA
196 WILD LILAC 6/14/2010 $ 608,000 WASHINGTON MUTUAL BK FA
4082 GERMAINDER WAY 6/18/2010 $ 594,000 WASHINGTON MUTUAL BK FA
14 SHENANDOAH 6/3/2010 $ 560,000 WASHINGTON MUTUAL BK FA
4056 WILLIWAW DR 6/3/2010 $ 550,000 WASHINGTON MUTUAL BK FA
17 MONTE CARLO 5/26/2010 $ 548,000 WASHINGTON MUTUAL BK FA
62 FRINGE TREE 6/17/2010 $ 536,750 WASHINGTON MUTUAL BK FA
35 WONDERLAND 5/26/2010 $ 534,000 WASHINGTON MUTUAL BK FA
4092 ESCUDERO DR 5/28/2010 $ 487,500 WASHINGTON MUTUAL BK FA
14 BLUEBELL 6/10/2010 $ 486,500 WASHINGTON MUTUAL BK FA
5 FASANO 6/7/2010 $ 420,000 WASHINGTON MUTUAL BK FA
4391 BERMUDA CIR 5/27/2010 $ 417,000 WASHINGTON MUTUAL BK FA
42 GILLMAN ST 6/7/2010 $ 416,500 WASHINGTON MUTUAL BK FA
14601 LOFTY ST 5/24/2010 $ 398,000 WASHINGTON MUTUAL BK FA
212 GREENMOOR 94 6/14/2010 $ 397,500 WASHINGTON MUTUAL BK FA
396 MONROE 190 5/24/2010 $ 390,000 WASHINGTON MUTUAL BK FA
132 OVAL RD 2 6/11/2010 $ 384,000 WASHINGTON MUTUAL BK FA
17 LAKEPINES 5/24/2010 $ 365,600 WASHINGTON MUTUAL BK FA
437 RIDGEWAY 5/24/2010 $ 315,000 WASHINGTON MUTUAL BK FA
10 LAKEPINES 5/20/2010 $ 286,780 WASHINGTON MUTUAL BK FA
87 ROCKWOOD 47 6/29/2010 $ 272,000 WASHINGTON MUTUAL BK FA
4 MAGELLAN AISLE 5/25/2010 $ 260,000 WASHINGTON MUTUAL BK FA
147 STREAMWOOD 6/21/2010 $ 200,240 WASHINGTON MUTUAL BK FA
406 ORANGE BLOSSOM 121 6/10/2010 $ 182,500 WASHINGTON MUTUAL BK FA

If any of you thought Irvine was immune, think again. All the households in the list above are squatters. Are any of your neighbors in there?

Prime mortgages going bust at an alarming rate

By KEVIN G. HALL

Aftershocks from the nation's financial crisis continue rumbling through the housing sector as fixed-rate mortgages held by the safest borrowers accounted for nearly 37 percent of new foreclosures during the first three months of this year, the Mortgage Bankers Association reported Wednesday.

Additionally, more than one in 10 homeowners were behind on their mortgage payments in the first quarter – a record, the association said. That's up from 9.47 percent in the last three months of 2009.

Prime loans, those made to the safest borrowers with the highest credit scores, account for almost 66 percent of outstanding U.S. mortgages, so their rising foreclosure numbers are troubling.

"People with higher scores are defaulting at rates we have not seen in the past," said Jay Brinkmann, the chief economist for the trade group.

I always get a kick out of industry insiders that act surprised. We have all known this problem was going to wipe out the alt-a and prime borrowers. It is only a matter of time.

If you have been paying attention to the news on delinquencies, for the last 3 years, this number has gotten worse month after month, and it shows no signs of peaking. Yet while the delinquency rates continues to climb, we get reports about declining default notices or declining foreclosure rates. Those rates become rather meaningless as long as the delinquency rate keeps climbing. The differential just adds to shadow inventory.

It is becoming obvious that shadow inventory is the only answer lenders have to the problem. They screw around with foreclosure statistics, and they allow a great deal of squatting. The result of their amend-pretend-extend is a restricted inventory condition supporting current pricing. I believe this is a cartel arrangement doomed to collapse. We will see.

The slide into foreclosure of the strongest borrowers is partly a function of the nation's unemployment rate, which is now 9.9 percent. The Great Recession has mowed down white-collar and blue-collar workers alike.

I would like to caution people against making a strong correlation between unemployment and delinquency. Unemployment is certainly making matters worse, but most of these people would have defaulted anyway in time. Unemployment simply accelerates the process.

The danger in this correlation is the false belief that an improvement in employment will bring about an improvement in the delinquency rate. It won't. Most delinquent borrowers couldn't afford their mortgages when they were fully employed. If they go back to full employment, they still won't be able to afford the mortgage.

In the first quarter, almost 21 percent of foreclosure starts were for adjustable-rate mortgages held by credit-worthy borrowers. Fixed and adjustable-rate prime mortgages combined accounted for more than 57 percent of all new foreclosures.

The MBA's data also showed that more than 6 percent of fixed-rated prime mortgages were delinquent from January to March and more than 13 percent of all homeowners with adjustable-rate prime mortgages were behind on payments.

California – the most populous state, which accounts for more than 13 percent of all U.S. mortgages – seems to have turned a corner in housing problems. It held 21 percent of all foreclosure starts during the first quarter of 2009 but only 14.5 percent in the first quarter of 2010.

Before we celebrate the improvement, consider what this statistic measures: the delinquency market share. California delinquencies are still rising, but other states are rising even faster. Our loss of delinquency market share isn't because borrowers here stopped going delinquent.

…One potentially troubling trend emerged: foreclosure starts rising in states that aren't commonly viewed as housing-bubble states. Washington state posted the largest increase in foreclosure starts overall in 2010's first quarter versus a year earlier, followed by Maryland, Oregon and Georgia. Washington state also posted the largest rise in foreclosure starts that involved prime and subprime adjustable-rate mortgages.

In another troubling trend, 42 states and the District of Colombia saw increased foreclosure starts for homes that were carrying FHA loans, which are considered among the safest. Only nine states, including Alaska and Idaho, saw foreclosure starts for FHA loans fall.

The rise in prime-mortgage foreclosures is important in the context of the sweeping revamp of financial regulation that's moving through Congress. Big financial institutions are trying to defeat a provision that would require them to retain 5 percent of the mortgages that they underwrite or sell into a secondary market to be packaged into mortgage bonds. They argue that they shouldn't have to do this for prime fixed-rate loans, but the latest data show that these loans aren't immune to delinquency and foreclosure.

Why would lenders resist a regulation to keep 5% of their mortgages in their portfolio unless they wanted to underwrite bad loans? The whole point of having a secondary market was to allow free movement of capital, not to allow banks to become origination machines with no responsibility, which seems to be what they want.

The data also suggest that the Obama administration's efforts to reverse the rate of delinquencies and foreclosures haven't been effective. The Treasury Department reported Monday that lenders or loan servicers had permanently modified only 68,000 mortgages in April, while more than 277,000 modification offers were canceled and presumed to be back on foreclosure tracks.

"It is jolting to see the persistence of the foreclosure epidemic," Michael Calhoun, the president of the Durham, N.C.-based Center for Responsible Lending, said in a statement.

It's only jolting to those who didn't expect this to go on so long. I have consistently maintained that loan modification programs have no chance of success other than to give borrowers false hope and get them to make a few more payments. The amend-pretend-extend policy has caused this crisis to drag on much longer than it should have.

HELOCs are a girl's best friend

Sometimes, I really wish I would have lied and levered myself into a $1,000,000+ home. The banks are not foreclosing on anyone over the conforming limit. Of the 36 properties that went back to the bank in Irvine over the last 30 days, only one of them was over $800,000 (it was a penthouse in the North Korea Towers). Of the nine properties that were sold to third parties, the most expensive was $700,000. The banks know there is no market outside of the GSEs and the FHA, so everyone who has defaulted on a jumbo loan is being allowed to squat.

The owner of today's featured property is like many other high-end Ponzis. She has taken enough money out of the walls to support an opulent lifestyle, and now she is squatting.

  • This property was purchased on 12/16/2004 for $1,293,000. The owner used a $969,650 first mortgage and a $323,350 down payment.
  • On 1/19/2005 she got a $129,000 HELOC.
  • On 7/19/2005 she refinanced with a $1,200,000 first mortgage.
  • On 9/28/2005 she opened a $195,000 HELOC.
  • On 5/1/2006 she obtained a $282,800 stand-alone second.
  • Then on 7/14/2006 she refinanced with a $1,499,900 Option ARM with a 1.85% teaser rate and a $189,000 HELOC.
  • Total property debt is $1,688,900.
  • Total mortgage equity withdrawal is $719,250.
  • Total squatting is at least 15 months.

Foreclosure Record

Recording Date: 08/31/2009

Document Type: Notice of Sale (aka Notice of Trustee's Sale)

Click here to get Foreclosure Report.

Foreclosure Record

Recording Date: 05/21/2009

Document Type: Notice of Default

You have to admire the thinking of these Ponzis. After extracting nearly three-quarters of a million dollars and squatting for more than a year, she lists the house at a WTF asking price hoping someone will step up and pay off her debts.

Any takers?

Irvine Home Address … 24 ROSE TRELLIS Irvine, CA 92603

Resale Home Price … $1,900,000

Home Purchase Price … $1,293,000

Home Purchase Date …. 12/16/2004

Net Gain (Loss) ………. $493,000

Percent Change ………. 46.9%

Annual Appreciation … 7.1%

Cost of Ownership

————————————————-

$1,900,000 ………. Asking Price

$380,000 ………. 20% Down Conventional

4.94% …………… Mortgage Interest Rate

$1,520,000 ………. 30-Year Mortgage

$390,731 ………. Income Requirement

$8,104 ………. Monthly Mortgage Payment

$1647 ………. Property Tax

$375 ………. Special Taxes and Levies (Mello Roos)

$158 ………. Homeowners Insurance

$410 ………. Homeowners Association Fees

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

$10,694 ………. Monthly Cash Outlays

-$1614 ………. Tax Savings (% of Interest and Property Tax)

-$1847 ………. Equity Hidden in Payment

$726 ………. Lost Income to Down Payment (net of taxes)

$238 ………. Maintenance and Replacement Reserves

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

$8,197 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$19,000 ………. Furnishing and Move In @1%

$19,000 ………. Closing Costs @1%

$15,200 ………… Interest Points @1% of Loan

$380,000 ………. Down Payment

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

$433,200 ………. Total Cash Costs

$125,600 ………… Emergency Cash Reserves

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

$558,800 ………. Total Savings Needed

Property Details for 24 ROSE TRELLIS Irvine, CA 92603

——————————————————————————

Beds: 3

Baths: 3 full 1 part baths

Home size: 2,650 sq ft

($717 / sq ft)

Lot Size: 6,139 sq ft

Year Built: 2004

Days on Market: 6

Listing Updated: 40316

MLS Number: S617693

Property Type: Single Family, Residential

Tract: Ledg

——————————————————————————

This home features a unique Casita with it's own entrance and it's own full bathroom. Custom Goumet kitchen along with custom hardscape and salt water pool.

The realtor couldn't spell gourmet properly….

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

Elitist Bank Economists Blame Housing Bubble on Subprime Borrower's Poor Math Skills

Bankers are trying to blame borrowers for the deflation of the housing bubble. The geniuses who came up with the toxic Option ARM are lecturing the rest of us on the need for math proficiency.

Irvine Home Address … 4 MONTGOMERY Irvine, CA 92604

Resale Home Price …… $280,000

{book1}

I got six.

That's all there is.

Six time one is six, one times six

He got six.

I put mine with his and we got twelve

Six time two is twelve, two times six

I got six, you got six,

She got six.

We got eighteen altogether.

If we can get 'em all together.

Six time three is eighteen, three times six

Multiplication Rock — I Got Six

Did you like word problems in math class? Many students didn't. If you didn't do well in math class, the children who did math well may have mocked you for being inferior. Those kids grew up to be bankers, and now they are still mocking you.

The fear of all sums

The role of mathematics in America’s housing bust

May 13th 2010 | From The Economist print edition

IN HINDSIGHT one of the worst things about America’s subprime housing bust is how predictable it was. Subprime borrowers were by definition people of limited means with poor credit histories. Yet economists who have looked at the pattern of payments on subprime mortgages point out that even when house prices topped out and then began to fall, not all subprime borrowers defaulted. Only a minority of borrowers abruptly ceased to make payments, as someone choosing to default would.

I think the ones who defaulted early are the ones who had superior math skills. The math does not favor staying in an underwater home when rents are much cheaper than payments.

More typically, payments went from being regular to being erratic: borrowers fell behind, then became current again, only to fall behind once more. Those patterns are indicative of people trying, but struggling, to keep up with their payments.

I am amazed at how many subprime borrowers even tried to keep up. All subprime borrowers were screwed by their lenders with the primary culprit being the 2/28 loan. Subprime borrowers were qualified under a teaser interest rate for two years with an interest-only payment, and once the two years were up, the payment became fully amortized over the remaining 28 years with a market interest rate which was generally 2% or 3% higher than the teaser rate. Basically, there was no way the subprime borrowers were ever going to survive the payment shock.

Subprime borrowers have been maligned and punished far in excess of their wrongdoing. First, since their loans were set to blow up after only two years, they defaulted first. And since the housing bust began with their defaults, lenders followed their pre-bubble loan loss mitigation procedures and foreclosed on them. Subprime borrowers got kicked to the curb. Contrast that to what has happened to the alt-A and prime borrowers whose loans were just as toxic as subprime loans; they have been allowed to squat. More than a third of all delinquent homeowners have been squatting for more than a year.

What's worse is that the entire housing bust has been erroneously blamed on subprime borrowers because their defaults and foreclosures came first. The narrative being spun today is that the alt-A and prime borrowers would have been fine if not for the subprime fiasco. That is nonsense. The only difference between the groups was the timing of their loan resets and the response of the lenders. Subprime loans reset first, and lenders foreclosed. Alt-A and prime loans reset last, and they are being allowed to squat.

A trio of economists set out to find out what differentiated those borrowers who did not keep up with their payments from the rest. Their answer, according to a new working paper from the Federal Reserve Bank of Atlanta, is simple: numeracy.

This is the worst kind of elitist bullshit. What about the math skills of the brilliant bankers who underwrote loans designed to implode? Perhaps their math is better, but their financial literacy is certainly lacking. The Federal Reserve Bank of Atlanta is trying to blame borrowers bad math skills for the failure of banker's. The banks failed because they underwrote stupid loans. It had nothing to do with their borrower's math skills.

Think of the nerve it takes to conceive and undertake this study. Imagine the conversation:

Bank President, "Why did subprime borrowers default in such large numbers."

Research Head, "Because we gave them loans nobody could repay under the terms as written. Subprime was always supposed to be fee-laden bridge financing that made us rich and screwed the borrower."

Bank President, "I can't tell people that. The truth implicates us. Isn't there something we can identify that blames the borrowers?"

Research Head, "I need something tangible that separates subprime borrowers from others besides their FICO scores."

Bank President, "These borrowers were generally poor minorities, right?"

Research Head, "That might get us off the hook, but it would be too racist and inflammatory."

Bank President, "They were all stupid enough to believe we knew what we were doing." [laughs out loud]

Research Head, "Perhaps we could correlate defaults with their lack of education."

Bank President, "That is too general. Can we be more specific?"

Research Head, "Well, they obviously didn't understand the math, or they would have realized how bad we were screwing them." [giggles at the harsh truth]

Bank President, "That's true. Go collect data on their poor math skills. That should exonerate us."

Research Head, "Great idea! We can make them look stupid, make us look smart, and reflect blame for this disaster on our victims. The subprime borrowers will look like the people who caused all this. Brilliant!"

Bank President, "That's why they pay me the big bucks." [laughs at the gullible masses]

The cynic in me wonders if the bankers truly believe that they are blameless and stupid subprime borrowers sunk the ship. I suspect they know the truth and are looking for a scapegoat, but you can never be sure with these guys.

The economists tracked down a large number of subprime borrowers in New England on whom they already had detailed information, including the terms of their mortgages and their repayment histories. These borrowers were then subjected to a series of questions that required simple calculations about percentages and interest rates*.

Even accounting for a host of differences between people—including attitudes to risk, income levels and credit scores—those who fell behind on their mortgages were noticeably less numerate than those who kept up with their payments in the same overall circumstances. The least numerate fell behind about 25% of the time. For those who did best on the test, the number of payments they missed was almost 12%. A fifth of the least numerate group had been in foreclosure, but only 7% of those who were more numerically adept had.

Surprisingly, the least numerate were not making loan choices that differed much from their peers. They were about as likely to have a fixed-rate mortgage as the more numerically able. They did not borrow a larger share of their income. And loans were about the same fraction of the house’s value.

Why would that be surprising? Everyone involved relied on the supposed experts who were selling them snake oil.

Stephan Meier, one of the study’s authors, reckons that the innumerate may be worse at managing their daily finances, leaving them with little room for manoeuvre when things get difficult. Those better at sums might, for instance, have put a bit more aside in more plentiful times. Normally, such differences might not matter much. But in bleaker circumstances, a small pot of savings may be all that stands between homeownership and foreclosure.

I love the leap the author made without any data: better math equals more savings? Bullshit. Nothing in this study measured or correlated savings with default, or savings with math skills. In fact, only in these dubious conclusions is savings mentioned at all. And why is that? Because this study was never intended to find the answer to anything. It is merely a public relations ploy to deflect the blame for the subprime meltdown away from lenders.

This study is offensive. It provides no useful or actionable information. What are we supposed to do, start giving borrowers math tests? It was clearly undertaken to support an agenda and disguise the truth — the opposite of what academic pursuits are supposed to do. Everyone involved should be embarrassed.

Duetsche Bank kicks them to the curb

These borrowers purchased a big loser, but they were smart enough to refinance out $43,100 while there was still a few dollars in the equity piggy bank.

  • The property was purchased on 7/12/2004 for $370,000. The owners used a $296,000 first mortgage, a $74,000 second mortgage, and a $0 down payment.
  • On 2/28/2007 they refinanced with a $413,100 Option ARM with a 1.47% teaser rate.

Foreclosure Record

Recording Date: 07/02/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 03/31/2009

Document Type: Notice of Default

Deutsche Bank National Trust bought the property at auction on 10/6/2009 for $372,182.

Now tell me, where did the kitchen go? The owners probably salvaged $3,000 to $5,000 in used materials and appliances from this kitchen, but it will ultimately cost the bank an extra $20,000 to $50,000 depending on repair costs or loss of real estate value. Since this is a recourse loan, the bank can sue the previous owners for the losses — not that they can collect — but the owner are liable for the loss on the property.

Stripping out the kitchen was theft. It created what the owners know will be an uncollectible debt.

This creates an interesting question: If these people strategically defaulted in the best interest of their families, isn't stealing a few thousand extra by stripping the property also acceptable since they needed the money?

Of course not. Theft is theft. The permanently attached cabinets and counters were part of the real property. Taking personal property like appliances is expected, but dismantling real property is destruction of collateral, and this is not a contractual right of the borrower without paying damages. Just because a defaulting owner has the right to default, it doesn't give them the right to deliberately reduce the value of the real property held as collateral. That contingency is not part of the contract.

Irvine Home Address … 4 MONTGOMERY Irvine, CA 92604

Resale Home Price … $280,000

Home Purchase Price … $370,000

Home Purchase Date …. 6/12/2004

Net Gain (Loss) ………. $(106,800)

Percent Change ………. -24.3%

Annual Appreciation … -4.5%

Cost of Ownership

————————————————-

$280,000 ………. Asking Price

$9,800 ………. 3.5% Down FHA Financing

5.01% …………… Mortgage Interest Rate

$270,200 ………. 30-Year Mortgage

$58,043 ………. Income Requirement

$1,452 ………. Monthly Mortgage Payment

$243 ………. Property Tax

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

$23 ………. Homeowners Insurance

$175 ………. Homeowners Association Fees

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

$1,893 ………. Monthly Cash Outlays

-$137 ………. Tax Savings (% of Interest and Property Tax)

-$324 ………. Equity Hidden in Payment

$19 ………. Lost Income to Down Payment (net of taxes)

$35 ………. Maintenance and Replacement Reserves

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

$1,486 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$2,800 ………. Furnishing and Move In @1%

$2,800 ………. Closing Costs @1%

$2,702 ………… Interest Points @1% of Loan

$9,800 ………. Down Payment

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

$18,102 ………. Total Cash Costs

$22,700 ………… Emergency Cash Reserves

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

$40,802 ………. Total Savings Needed

Property Details for 4 MONTGOMERY Irvine, CA 92604

——————————————————————————

Beds: 2

Baths: 1 full 1 part baths

Home size: 1,011 sq ft

($277 / sq ft)

Lot Size: n/a

Year Built: 1977

Days on Market: 38

Listing Updated: 40278

MLS Number: P730030

Property Type: Condominium, Townhouse, Residential

Tract: Hp

——————————————————————————

According to the listing agent, this listing is a bank owned (foreclosed) property.

Spacious two story condo (Townhome Style) in the popular Heritage Park development. No Kitchen in this unit so no financing unless it is a 203K loan. Nice tile flooring, spacious patio, great location. Hurry on this one!

How Gaming Interests Could Save the Las Vegas Housing Market, and Why They Should

Today, I am going to show in great detail how gaming interests in Las Vegas can save their local housing market and why they should do it.

Irvine Home Address … 5 LA SERENA #21 Irvine, CA 92612

Resale Home Price …… $439,900

{book1}

I'm standing in the middle of the desert

Waiting for my ship to come in

But now no joker, no jack, no king

Can take this loser hand

And make it win

I'm Leaving Las Vegas

Lights so bright

Palm sweat, blackjack

On a Saturday night

Leaving Las Vegas

Leaving for good, for good

I'm leaving for good

I'm leaving for good

Sheryl Crow — Leaving Las Vegas

I love Las Vegas. I have family there. It makes me sad to see what lenders did to the people there. I want to do something about it.

I want to save Las Vegas.

Attention Las Vegas Homeowners,

I will save your home. I have assembled a team of real estate super heroes. We are Superfund.

The market statistics are pretty grim. Your house is probably worth less than half of its peak value, and it will not be going up any time soon. What's worse, you can probably rent the house across the street for half of your mortgage payment. You are going to be underwater forever, and you are paying out hundreds or even thousands of dollars each month and getting little in return.

I suspect like most homeowners, you keep paying the mortgage, even when it is very painful, because you don't want to lose your home. My friends and I with Superfund are coming to town, and we want to save your home and clean up the mess that lenders made of your life.

Take a careful look at the chart above. Notice how stable house prices were in your market prior to the false financial innovations of the housing bubble. House prices did not go up for any fundamental reason, and the crash that has taken prices back down below the long-term support line is a direct result of lender's financial folly.

That $150,000 house you live in was never really worth $400,000. Lenders developed toxic loans like the Option ARM that gave borrowers like you the ability to borrow $400,000 with a payment that services a $150,000 loan. Borrowers took out these loans and temporarily inflated house prices. You and all your neighbors refinanced this equity from the inflated home values, and many of you spent it. Now, nearly everyone in town owes more money on their homes than they are worth, and very few of you can afford the payment on the huge debt.

Lenders created this mess, and now they want you to believe you have some moral obligation to pay back the loan they never should have given you — even if it harms your family in the process. This is wrong! You have a greater moral obligation to your family. The interest you pay each month over and above the cost of a comparable rental is money wasted — money that could have been spent to support your family. Lenders are asking you to pay for their mistakes, and if you say no, they have the audacity to try to make you feel guilty about it. Forget them. We have a better answer.

Cancel your mortgage contract

Did you know that you could cancel your mortgage contract? You can. It is a process called strategic default. You stop paying, and the lender gets to sell your house at auction for the repayment of the debt. There are consequences. Your credit will be harmed, and you may need to declare bankruptcy to fully extinguish the debt. Lenders will be hesitant to loan you money for a while, but if your work with Superfund, we may be able to keep you in your home.

Have any of you cancelled a cell phone contract? When you signed the contract for the service, your carrier sold you a phone for less than its actual cost, and they knew that you might cancel your contract before the two years was up. In the contract, the cell phone service provider spells out the costs and fees associated with paying off the phone and provisions for lost profits if you cancel early. In short, when you break your cell phone contract, you pay a fee, and then its over. You are not immoral if you cancel a cell phone contract, you are merely exercising a contractual right.

Similarly, when your lender gave you a loan, they knew you might not be able to pay them back. They made you sign a mortgage agreement that allows them to force the sale of your home at auction to get their money back. They estimated the costs of recovering the home and reselling it on the open market when they extended you the loan, and they only loaned you the amount they believed they could recover if you chose to cancel your contract. You are not immoral if you strategically default on a mortgage contract, you are merely exercising a contractual right.

Guilt and paying the mortgage

Have you ever wondered why people feel guilty about strategic default? Why do you feel guilty? Is it because you would be breaking your promise? What about the promises you made to your family? What necessities and small indulgences are you denying your family in order to pay that bloated mortgage? What is your duty to yourself and your family? Proverbs 22:7 "The rich rules over the poor, and the borrower is the slave of the lender." Have you sold your family into slavery?

Should you feel guilty about breaking a cell phone contract? If you examine the terms in the promissory note and mortgage arrangement, the lender is making a loan, and as a contingency in the event an borrower does not repay the loan, the lender has the right to force a public auction to resell the property to obtain their money. It's a contract, nothing more. The arrangement differs in no material way from breaking a cell phone contract.

Prior to the housing bubble, borrowers lost their homes if they didn't repay the debt. A borrower who was capable of making the payment but didn't was causing their family to lose their home. Losing the family home is arguably an immoral act, particularly if the borrower could keep the home and afford the payments. However, when the home is worth far less than the mortgage, and when comparable properties are for rent for far less than the mortgage payment, the painful alternative of losing the family home is better than a lifetime of crushing debt.

The morality of paying the mortgage to keep the family home is superceded by the greater moral imperative to provide a financial future for the family — a future free of debt.

The morality of the borrowers is not what should be questioned, it is the morality of the lenders. The Option ARM and other loan products put people into homes under terms they could not sustain. Lenders caused this pain. When lenders made these loans, they were being immoral. Strategic default balances the scales of justice and metes punishment to the lenders who deserve it.

Strategic default also serves an important purpose in the housing market. It is part of the checks and balances that ensure prices remain stable and affordable. if lenders did not fear strategic default, they would loan people very large sums of money, far in excess of their ability to repay. Whenever lenders loan more money than rent from the property could sustain, they greatly reduce affordability for potential homebuyers everywhere and inflate massive housing bubbles.

Without strategic default, lenders will inflate one massive housing bubble after another. They will continue to ruin lives everywhere. Strategic default is both moral and a market imperative.

Walk away from your mortgage now!

Discarding mortgage debt is actually quite easy: stop paying. Once you stop paying, your lender will contact you and try to get you to repay. If you play along, you can extend the process for a long time and stay in your home with no rent and no mortgage payment.

There are services devoted to helping people through the strategic default process. The service I recommend is YouWalkAway.com. They are not a scam like loan modification companies. At YouWalkAway.com when you sign up for their service, they will send you a package that takes you through the strategic default process with all the details of mortgage laws in your state. What you are really signing up for is the personal service of YouWalkAway.com's staff who will be there to explain your options, answer your questions, and find you the specialized help you need.

Wouldn't you like to have your own expert to guide you through the process? YouWalkAway.com is there to help.

Why not get a loan modification?

In the short term, if you go get a loan modification, you may be able to lower the payment enough to be competitive with a rental. However, loan modifications are a temporary fix, and the debt on the property is still double what it should be. The only way you are 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.

Why modify a $400,000 loan when you can wipe it out and buy the house back in a few years with a much smaller mortgage?

Superfund is the answer

If you strategically default it will adversely effect your FICO score which will make borrowing more expensive for a while, and after the foreclosure, you will need to wait two years before getting a new government insured loan to purchase a house. During that two years, you will need to start saving for a down payment as those are now required. These consequences will follow your decision to strategically default, and they cannot be avoided.

However, there is one particular consequence that Superfund may be able to remove: you may be able to stay in your house.

There are no guarantees. Superfund is not going to pay more than fair market value, and no more than what earns Superfund a solid return on investment. If you work with Superfund, we still may not be the high bidder. You may still have to move out. However with the lower cost structure and greater projected rent, Superfund will bid higher than the rational professionals, and most often that will be a successful acquisition. The real worry should not be other foreclosure auction bidders, the real concern is the behavior of your lender.

Lenders may opt for what is known as a vindictive foreclosure bid — lenders often bid above market value simply to punish borrowers. If your lender wants to, they can bid above market up to the face value of the loan in order to throw you out of your house. They don't benefit from this behavior financially as they will need to process your house and sell it in the resale market, but by punishing a random selection of underwater home owners, they hope to thwart Superfund and discourage strategic default.

Isn't taking chances what Las Vegas is about? Guaranteed, you can eliminate your mortgage debt through strategic default, and if you work with a Superfund, you have a good chance at staying in your home. How good are your odds? Next time your in a casino, place a chip on red or black at the roulette wheel. Imagine that if it comes up red, you must move out of your home, but if it comes up black, you get to stay. Superfund may not succeed, but if it does, you are back in the black. If it doesn't, you are still better off in a nearby rental than you are with a huge debt over your roof.

How does the deal work?

A representative of Superfund will collect information on the rental and resale market and prepare a report showing what you will need to pay in rent, and how much you will need to pay to repurchase your home from Superfund on a pre-determined schedule. Once you have agreed to these preliminary terms (they will be updated just prior to auction), the only remaining thing for you to do is stop paying your mortgage and wait for the foreclosure sale. Superfund recommends that you begin saving money for your down payment by putting aside the money you were spending on your mortgage.

You will be paying an above-market rent to stay in your home. Plus, you will agree to a 2% automatic yearly rental increase. The higher rent allows the Superfund to bid higher at auction. Your rent will still be much less expensive than the massive mortgage you are currently paying.

That house you have that is worth $150,000 and has a $400,000 mortgage. How would you like to buy it back in 5 years when your credit is better for $182,500?

Superfund will establish a baseline value from comparable resales on the date of the sale. The price increases 4% per year. There is one very important condition, the price actually paid for the property is the greater of the number in the chart above and appraised value at the time of sale. If there is another housing bubble, this right-to-repurchase can't be exercised like an option to a third party to profit from the difference. If you are unable to qualify for a loan and resale values are higher than the numbers above, the benefit of the irrational market exuberance falls to Superfund. If values never come back, you are certainly no worse off by renting.

The deal being offered to you by Superfund is much better than staying in your house and repaying the loan, and it is much better than a loan modification where you can temporarily afford the loan but can't later. Neither the bank nor the government is offering you the chance to drastically reduce your debt and stay in your home.

Superfund is.

Think about it. You have little to lose except your debt.

Interested in Superfund?

Are you interested in Superfund? So am I. I wish I had the backing of a couple hundred million dollars to make Superfund happen. Unfortunately, I don't.

If you like the idea, forward this post to anyone you know in the finance or gaming industries or anyone in Las Vegas. If the right people see this idea, we can make it happen. We can save your home!

Contact me: IrvineRenter [at] IrvineHousingBlog.com

The Big Las Vegas House Party

Attention casino owners,

This impacts you.

Home prices in Las Vegas doubled between 2003 and 2005. The entire city of Las Vegas, at least every homeowner there, saw hundreds of thousands of dollars flow on to their household balance sheets. Las Vegas is already home to every vice known to man — many of which you casino owners provide — so there was no way the citizens were going to resist a pile of free money even if they saw a reason to resist, which they didn't. You don't need to imagine what a party that must have been. Your casino income during that time is a testament to the power of unlimited borrowing on a home equity line of credit.

I shudder to think the money your casinos must have taken in from the local population. How many houses were spent there? Most of them, I imagine.

Gaming interests can save Las Vegas home debtors

I recently wrote about how hedge funds could keep original buyers in foreclosures. Check it out. You casino owners have access to enough capital to form a hedge fund to buy up properties at foreclosure auction and rent them to the former owners. You need to form your own Superfunds. Saving the Las Vegas housing market requires the concerted efforts of several large operators with access to cheap debt now readily available from Wall Street. Right now, you can earn a 6% to 8% return on money invested in your local housing market through collection of rents. If you can borrow for less — which most of you can — you can save the housing market and make a fortune on the recovery.

The financial returns to the Superfunds will be great. The current cashflow will be tremendous from these properties, and you casino owners will be housing your workers (and thereby capturing more of their income), and you will be freeing up more of their income to spend in the local economy — in your casinos.

Casino Superfunds are not about real estate

The Casino Superfund would certainly get good publicity; after all, your actions would be keeping your staff in their homes. Las Vegas workers would be very grateful and perhaps even more loyal. If my employer saved my home, I would be grateful and loyal. Wouldn't you? The good publicity aside, there is a more practical reason to run a debt-cleansing Superfund: the lenders are killing your business.

Where do you think all the money in Las Vegas is going right now? It is going to the banks through payments on the toxic mortgages that infest your town. These lenders came to your town with their slick suits and sales spiel and sucked the life blood out of everyone living there.

Think about how much money you casinos spend trying to capture customer dollars once they walk in the door. Everything you do is about capturing the customer and getting them to stay in your establishment until their wallet is empty. The lender lampreys have moved in on you. They are sucking the money out of the local economy that previously was spent in your casino.

Take a typical example. Lets say the typical borrower has a $3,000 house payment, and they can rent the same house for $1,500 a month — a common situation in the Las Vegas housing market. Each month that borrower makes that oversized payment, the local economy (read your casino) failed to make any of that $3,000. Now lets say you form a Superfund, buy the borrower's house and rent it back to them for $1,500 a month. Not just will you get the $1,500 they spend on rent, they will spend the other $1,500 in your casino.

So, casino owners, what would you rather have that $3,000 a month go to the lenders, or would you rather have it flow back to you? Multiply that by the number of underwater borrowers in your town, and the answer becomes apparent.

Now is the time for Casino Superfunds

This is not a high-risk venture or some flashy mega-resort, but this will have a much greater impact on life in Las Vegas. Buying properties for cash and holding them for cashflow is relatively safe. In fact, it is funds like Superfund that will come in an buy the distressed assets and form a durable market bottom. Las Vegas's housing market is a mess. But contained within this catastrophe is the conditions for a brighter tomorrow.

More can qualify for homeownership in Las Vegas

Housing affordability for Las Vegas is the best it has been in 30 years, California-based real estate consultant John Burns said Wednesday.

And Las Vegas home prices have never been more affordable in relation to income, correcting back to 2000 levels, said Burns, who has been studying the market since 1981.

Housing cost-to-income is 19 percent in Las Vegas, based on a median home price of $133,800 in April, John Burns Real Estate Consulting reported.

"A lot of cabdrivers and hotel workers below the median income have a chance to become homeowners for the first time in a long time," Burns said from Irvine, Calif. "I think they realize that for $700 a month, they can own a home in Las Vegas."

Housing is truly affordable in Las Vegas, arguably too affordable. Prices have overshot fundamentals.

Housing affordability has returned across the nation with most states in the 20 percent to 30 percent range of housing cost-to-income, according to Burns' report. The cheapest area is Saginaw, Mich., at 12 percent, followed by Pine Bluff, Ark., and Danville, Ill., at 13 percent.

The most expensive is San Francisco at 66 percent. Other California areas above 50 percent include Orange County, San Luis Obispo and Santa Cruz.

The only reason we pay so much for housing here in California is kool aid intoxication. People in Danville, Illinios, go to work, earn money, and take on mortgages to buy houses. It only costs them 13% of their income on average whereas it costs us here in Orange County well over 50%. Why are we putting so much more into housing? Because everyone in Orange County thinks the house has an endless ATM machine built in.

… Few homes under $300,000 could be found in Summerlin two years ago, including condos and townhouses, he said. Now that product is available at prices starting around $185,000, or $100 to $120 a square foot.

The better product was witheld to keep up pricing on the garbage. If Las Vegas is finally going through the desirable properties, they are approaching the bottom.

Last week, I discussed The Cash Value of Real Estate. Since prices are so low, as John Burns noted, cash investors like Superfund are coming in to buy properties. These investors are not speculating on the comeback of prices, they are buying because the great positive cashflow these properties offer. Many of these buyers know that prices will still go lower when the rest of Las Vegas's housing stock goes through foreclosure, but there is no need to time the bottom tick. Acquiring cashflow properties makes sense as long as the returns warrant the investment.

Superfund is hope

Las Vegas will experience a nearly complete turnover of its housing stock over the next several years. Housing prices may rebound from the lows, but they will not reach the peak for decades. Without Superfund, there is no way for borrowers to eliminate their toxic debts and stay in their family homes.

With Superfund, there is new hope. Viva Las Vegas!

Bought at the peak

The owners of today's featured property managed to buy at the peak. However, they did refinance. The first mortgage holder was Wells Fargo, and the second mortgage holder was Chase bank. Since the same bank did not hold both mortgages, the first lien holder — in this case Wells Fargo — had no problem blowing out the second lien holder in a foreclosure. The properties going to foreclosure now are the ones where the bank does not hold both the first and the second mortgage. Anyone who refinanced into two mortgages with the same bank has much more negotiating leverage than borrowers who used different banks. Borrowers with the same lender are also much more likely to be allowed to squat.

Wells Fargo bought this property for $489,000 on 4/26/2010. Despite the dropped bid, they grossly overpaid at auction, and now they have another REO to deal with.

Foreclosure Record

Recording Date: 01/07/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 12/23/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 09/08/2009

Document Type: Notice of Default

Irvine Home Address … 5 LA SERENA #21 Irvine, CA 92612

Resale Home Price … $439,900

Home Purchase Price … $669,000

Home Purchase Date …. 4/21/2006

Net Gain (Loss) ………. $(255,494)

Percent Change ………. -34.2%

Annual Appreciation … -9.7%

Cost of Ownership

————————————————-

$439,900 ………. Asking Price

$15,397 ………. 3.5% Down FHA Financing

5.01% …………… Mortgage Interest Rate

$424,504 ………. 30-Year Mortgage

$91,189 ………. Income Requirement

$2,281 ………. Monthly Mortgage Payment

$381 ………. Property Tax

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

$37 ………. Homeowners Insurance

$377 ………. Homeowners Association Fees

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

$3,076 ………. Monthly Cash Outlays

-$377 ………. Tax Savings (% of Interest and Property Tax)

-$509 ………. Equity Hidden in Payment

$30 ………. Lost Income to Down Payment (net of taxes)

$55 ………. Maintenance and Replacement Reserves

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

$2,275 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$4,399 ………. Furnishing and Move In @1%

$4,399 ………. Closing Costs @1%

$4,245 ………… Interest Points @1% of Loan

$15,397 ………. Down Payment

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

$28,440 ………. Total Cash Costs

$34,800 ………… Emergency Cash Reserves

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

$63,240 ………. Total Savings Needed

Property Details for 5 LA SERENA #21 Irvine, CA 92612

——————————————————————————

Beds: 3

Baths: 2 baths

Home size: 1,507 sq ft

($292 / sq ft)

Lot Size: n/a

Year Built: 1976

Days on Market: 8

Listing Updated: 40309

MLS Number: S616141

Property Type: Condominium, Residential

Tract: Jh

——————————————————————————

According to the listing agent, this listing is a bank owned (foreclosed) property.

Beautiful lower end unit on Rancho San Joaquin Golf Course, steps to the golf clubhouse and Assoc pool! Great golf course/city lights view! Unit has granite counters, wood shutters, fireplace, 3 Patio's, mirrored wardrobes,inside laundry, limestone flooring, 3rd bedroom converted to a den with wet bar and fridge, very close to UCI and the 405 freeway.

Government Sponsored Loan Modifications are the New Liar Loans

The taxpayers are absorbing bad bank debt through the TARP loan modification program. It is a direct transfer of wealth from Main Street to Wall Street.

Irvine Home Address … 5212 SKINNER Ave Irvine, CA 92604

Resale Home Price …… $699,000

{book1}

I won't ever leave while you want me to stay

Nothing you could do that would turn me away

Hanging on every word

Believing the things I heard

Being a fool

You've taken my life, so take my soul

That's what you said and I believed it all

I want to be with you as long

As you want me to

I won't move away

Ain't that what you said?

Ain't that what you said?

Ain't that what you said?

Liar, liar, liar

Three Dog Night — Liar

The newest liar loan is sponsored by the US government. The HAMP loan modification program is merely documenting the bad loan underwriting standards that collapsed to bring down the housing bubble. The effect of these loan modifications is to transfer the bad debt from the lender to the US government. In short, it is government orchestrated theft. Taxpayer money is being given to the banks. And what's worse, the poorer the loan quality on the banks books, the bigger the bailout.

The New Liar Loan

John Burns — President John Burns Consulting

May 6, 2010

Does anyone really think that homeowners can afford to pay 60% of their income for housing? Apparently, the architects of the latest loan modification program called HAMP do. Government officials are touting that they are saving the housing industry by modifying more than 1 million loans to date, and converting 170,000 of those to "permanent" status, with many more to come.

Those so-called "permanent modifications" cost the Borrower 31% of their income today, but the Borrower still has 61% of their income going to total debt obligations (credit card, HELOC, car payment, etc.). These statistics, known as the Back-end Debt to Income ratio, can be found on page 6 located PDF here. Although not disclosed, we believe most of these loans exceed 100% LTV today as well. This is nothing more than a fully documented version of the same garbage that took down the banking system two years ago, and this time the Federal government rather than Countrywide and New Century are underwriting it. Almost all of these Borrowers will eventually re-default.

Last Friday, I wrote about The Mechanism For Diverting Bank Losses to the US Taxpayer. This program is a manifestation of the same thing. Take a toxic mortgage, modify it with a government guarantee certain to fail, and a toxic mortgage is moved from a bank balance sheet to the government's balance sheet. It is a direct transfer of wealth from the US government to the banks in a thinly disguised rip off.

It is very obvious that the architects of HAMP are short-term focused, and are tricking us into thinking they are solving the problem by calling these permanent modifications. Until these loans are renamed, let's call them "Liar Loans 2," except this time the liar is the Bank of the United States rather than the Borrower because this modification is anything but "permanent". We do believe that stabilizing home prices and the banking system are critical to the recovery of the U.S. economy, but let's at least tell the truth about what is being done.

The truth is that the banks are off-loading their toxic crap. First, about $1,200,000,000,000 was purchased by the Federal Reserve indirectly through their GSE purchases, and now billions more are being recycled directly through bogus government loan modification attempts.

I wonder how many of these will be done without borrower knowledge or consent? The bank could modify the loan themselves, and when the borrower continued to be delinquent, the bank could then turn to the US government to make them whole.

Did you realize each loan modification made this transfer of liability and it is designed to fail?

What this means for you is that the housing recovery that is being touted by elected officials is far from assured. There will be fewer homeowners thrown out on the street this month than would have occurred otherwise, but they will be tossed out later. The modification programs have helped stabilize home prices around the country, mostly because they have created so much confusion that people can live in their home for free for one year or more, and are buying time for thousands of banks to continue improving their balance sheets with earnings from good loans, while deferring the write-off of bad loans. The biggest beneficiaries of this program are the banks with the largest Home Equity Loan portfolios, which are also the banks needed to provide capital to businesses to start hiring again.

The banks are embarking on a program of widespread borrower squatting until loans can be modified. Last week we looked at The Lender Decision Tree and Limited Resale Inventory. They are choosing squatting over foreclosure because when they foreclose, declining neighborhood values encourage too much strategic default. Of course, the squatting causes its own issues including moral hazard, but the banks are so desperate they are choosing moral hazard to stay alive — a zombie existence.

This is the problem of zombie banks. Rather than allocating capital toward making good, new loans, banks must constantly buffer their loan loss reserves to cover the losses on the very stupid loans from the past. New banks can make new loans. Zombie banks cover losses on old loans. If we had nationalized the banks back in 2008, we would have eliminated the zombie banking problems.

How does this change things? We will be adding 170K additional future foreclosures to our forecast, with many more to come, and guiding our clients through these turbulent times by analyzing every indicator we can get our hands on. Despite the negative tone of this email, there are and will continue to be plenty of opportunities to make money, particularly taking advantage of the distressed selling that will go on for years, but having a long term investment horizon. Also, the national housing market is becoming more local than ever, which means those with local market knowledge, or the ability to roll up all of the local factors into a national view, will make the most money. In other words, those who do their homework will get straight A's.

Unfortunately, the real estate industry's only prospect for growth for the foreseeable future is in distressed properties. One of the effects of this property loan distress is going to be continuing deflation as lenders finally take the painful write downs they are trying to avoid.

Future interest rates

We are at the bottom of the interest rate cycle, and it is very unlikely that mortgage interest rates will go much lower, but I don't see rates rising very high very fast either. Part of the reason is that I believe the The Bernanke Put: The Implied Protection of Mortgage Interest Rates is very real, but I also think we have some huge deflationary headwinds blowing. The amount of second mortgage debt on the books of the banks is very troubling. The losses are certain to be much larger than the banks are currently willing to admit.

Also, the commercial real estate bust has barely started. The only hope lenders have with commercial loans is that many of them were personally guaranteed by wealthy people or corporations that will stand by the losses. The write downs for commercial mortgages has only just begun, and as the cycle drags on, many small and mid-sized banks are going to get wiped out. There are Midwestern banks with entire portfolios of California raw land deals. The assets in many instances have a near negative current value, but loans on the books of these lenders is in the millions. Marking to reality is going to be very painful, and squatting has ruled the day. Most of the raw land deals in California are tied up in some underwater banking limbo.

The yet-to-be-recognized loan losses are very deflationary. Loan losses are the destruction of lender capital. The loan itself may have been imaginary money, but the losses are very real. This deflationary pressure will keep interest rates low for as long as it lasts. The commercial real estate bust is in front of us, not behind us.

Some loan modifications can and should work

Loan modification programs fail because borrowers are generally better off in default. Some can't afford the debt service under any circumstances. They can get out from under their debt and be much better off than hanging on for fantasies of better days to come. However, when borrowers have plenty of equity and if they could afford their payments under normal circumstances, then loan modifications are a good solution. Unfortunately, there aren't many people who have equity and can afford the debt under normal repayment terms.

The owner of today's featured property purchased for $275,000 on 3/22/1999. Or at least that is what my data source shows. I don't think this is right. I think he paid $345,000 based on the $276,000 first mortgage, $28,000 second mortgage. I suspect there was also a $41,000 down payment, but I can't be sure. I doubt this was cash-out purchase in 1999.

The mistake this owner made was taking out an Option ARM for $320,000 on 11/2/2007. He may have fallen on hard times when he opened a HELOC on 6/19/2008 for $80,000. This owner went through the entire bubble without refinancing, so he didn't start refinancing for HELOC abuse.

Foreclosure Record

Recording Date: 01/27/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 05/11/2009

Document Type: Notice of Default

This guy defaults on his Option ARM, but he still has 50% equity in the property, so foreclosing on him simply forces him to sell. This is a borrower for whom loan modification program are designed. He needs his Option ARM converted to a low-interest fixed-rate mortgage so he can stay in his house. He could afford the smaller mortgage under stable terms. He did for seven years without Ponzi borrowing.

I support loan modifications for borrowers like this guy. Unfortunately, he is the exception rather than the rule. Most are over extended Ponzis waiting for their bailout to continue building their huge pile of debt to support their fake lives.

He was given a small private loan to cure his default.

Foreclosure Record

Recording Date: 02/22/2010

Document Type: Notice of Rescission

Perhaps he has come to accept that he can't afford this house any longer and he must sell. That is sad… Well, it is sad to a point. He is still going to sell and pocket $350,000 for being an owner during the housing bubble.

When loan modifications don't work, borrowers are really screwed

In the year since the program got rolling, it has generally failed to lower payments. Of the 3.4 million eligible loans, 228,000 have been permanently reduced, while 155,000 have been rejected during the trial period, according to Treasury Department data compiled by the nonprofit Pro Publica.

"If they're rejected, collection starts again immediately," said Ali Tarzi, housing supervisor for the San Diego nonprofit Community Housing Works.

Robles said his payments were lowered by about one-third for nine months, and he paid them all on time. In February, he got a letter saying he'd been rejected from the program because he had too much in savings to qualify.

Then he got the bill for $10,500, the sum of the difference between nine months of lowered payments and the amount he was supposed to pay, plus interest charges and late fees. He also learned his credit rating had fallen steeply, thanks to two reports of being 60 days overdue, and two of being 30 days overdue.

"I was like, how can you do that?" he said. "I never missed a payment!"

Treasury guidelines say that when borrowers go into a trial modification, their credit status should freeze: If the borrowers are delinquent, they stay delinquent; and if they're current, they stay current, though the guidelines allow lenders to report that the payment is being modified, which causes a small credit hit.

Irvine Home Address … 5212 SKINNER Ave Irvine, CA 92604

Resale Home Price … $699,000

Home Purchase Price … $275,000

Home Purchase Date …. 3/22/1999

Net Gain (Loss) ………. $382,060

Percent Change ………. 154.2%

Annual Appreciation … 8.1%

Cost of Ownership

————————————————-

$699,000 ………. Asking Price

$139,800 ………. 20% Down Conventional

5.01% …………… Mortgage Interest Rate

$559,200 ………. 30-Year Mortgage

$144,900 ………. Income Requirement

$3,005 ………. Monthly Mortgage Payment

$606 ………. Property Tax

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

$58 ………. Homeowners Insurance

$0 ………. Homeowners Association Fees

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

$3,669 ………. Monthly Cash Outlays

-$735 ………. Tax Savings (% of Interest and Property Tax)

-$671 ………. Equity Hidden in Payment

$273 ………. Lost Income to Down Payment (net of taxes)

$87 ………. Maintenance and Replacement Reserves

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

$2,624 ………. 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

$40,200 ………… Emergency Cash Reserves

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

$199,572 ………. Total Savings Needed

Property Details for 5212 SKINNER Ave Irvine, CA 92604

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Beds: 4

Baths: 2 full 1 part baths

Home size: 2,324 sq ft

($301 / sq ft)

Lot Size: 6,240 sq ft

Year Built: 1972

Days on Market: 81

Listing Updated: 40310

MLS Number: P722993

Property Type: Single Family, Residential

Tract: Rc

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GREAT LOCATION IN IRVINE. THIS HOME NEEDS A LITTLE TLC, BUT HAS A GREAT FLOOR PLAN AND LARGE YARD.A WINE CELLAR IS IN BACK YARD. A HUGE FAMILY ROOM OFFERS AN AREA FOR THE ENTIRE FAMILY TO RELAX. THIS PROPERTY HAS BEEN REDUCE $25000 AND WE ARE LOOKING FOR A FAST SALE.

Foreclosure Is a Superior Form of Principal Reduction

The lingering problem from the Great Housing Bubble is excessive debt. Foreclosure, which has long been identified as the problem, is really the cure. People simply are not ready to accept that fact, and in their denial, they suffer.

Irvine Home Address … 146 West YALE Loop Irvine, CA 92604

Resale Home Price …… $645,000

{book1}

I won't cast the first stone

or leave the first mark

but I will leave a lasting impression

you believe what you want

and you said what's been said

and i do hope you learn a lesson

what's your problem

can't you see it

and you go and blow it

like everyone knows you will

A New Found Glory — Failure's Not Flattering

The banks blew it. We all know that, and now we are all being asked to pay the bills for their catastrophic mistakes. I didn't cast the first stone, but I hope my writing about this issue has left a lasting impression. I also hope we can all learn something from this are avoid the mistakes again in the future. I have my doubts. We can all see the problem and the solution, but we all know the government is likely to blow it.

Excessive debt is the problem

Ever since the Great Housing Bubble began to deflate, everyone has incorrectly identified the problem as foreclosure. The real problem is not foreclosure, the real problem is that borrowers have excessive debts due to the huge loans lenders underwrote that inflated the housing bubble. Foreclosure is not the problem, it is the cure. Further, there is only one reason foreclosure is seen as the problem: people have to move out of their homes after a foreclosure, and I have demonstrated how private hedge funds and other parties could solve that problem.

One way or another, the banks are going to write down huge amounts of bad debt. Nothing can save them, and we shouldn't try. Principal reductions are the worst possible solution to the problem of excess debt left over from the Great Housing Bubble. Principal reductions merely gives foolish borrowers a pass. If the borrowers go through foreclosure, they have consequences that minimize moral hazard:

  1. Borrowers will be forced to rent, at least for a time.
  2. Borrowers will have reduced access to consumer credit as the foreclosure lowers their FICO score.
  3. Borrowers will have to save and be prudent in order to meet the standards of home ownership and get another loan.

All of those consequences — inadequate though they may be — are eliminated if the GSEs merely reduce principal. The borrowers who have the most to gain are those who borrowed most foolishly, and the people paying the price are (1) prudent borrowers and (2) those who didn't borrow at all. Next time around, there will be no prudent borrowers, and everyone will participate. Who is going to pass on free money?

The worst part is that the government may decide this is a good idea. If every borrower in the country had their principal balance reduced to the lower of (1) current property values or (2) their ability to repay, prices would stabilize in most markets because the distressed property issues would be eliminated. With the distressed properties eliminated, prices would begin to rise, and HELOC spending could resume again. This would be a huge boom to the economy, and we could begin inflating the next Ponzi scheme. I could see government officials thinking this is a good idea.

Freddie and Fannie won't pay down your mortgage

By Tami Luhby,

But their stance is out of synch with the Obama administration, which is seeking to expand the use of principal writedowns. In late March, it announced servicers will be required to consider lowering balances in loan modifications.

And just who would tell Fannie and Freddie to start allowing principal reductions? The Obama administration.

Asked whether they will implement balance reductions, the companies and their regulator declined to comment. The Treasury Department also declined to comment.

The savior Obama is being thwarted by the GSEs and the Treasury Department? Does anyone really believe that? The Secretary of Treasury, Tim Geithner, serves at the pleasure of the president. If Geithner were doing something Obama didn't approve, Geithner would be fired. The GSEs are totally controlled by the Treasury under the conservatorship agreement. If Obama decided principal reductions at the GSEs was a good idea, he could make it happen. He doesn't because it would be a catastrophe.

What's holding them back is the companies' mandate to conserve their assets and limit their need for taxpayer-funded cash infusions, experts said. If Fannie and Freddie lower homeowners' loan balances, they are locking in losses because they have to write down the value of those mortgages. Essentially, that means using tax dollars to pay people's mortgages.

That seems like a pretty good reason not to give principal reductions. Do taxpayers really want to directly gift people hundreds of thousands of dollars in debt relief? What are we getting out of it? What lessons will these people learn? Obama knows that principal reduction is a very costly solution that creates a transfer of wealth from the taxpayers to homeowners. The gross unfairness of such a transfer and the moral hazard it would create is a very good reason not to do it.

The housing crisis has already wreaked havoc on the pair's balance sheets. Between them, they have received $127 billion — and recently requested another $19 billion — from the Treasury Department since they were placed into conservatorship in September 2008, at the height of the financial crisis.

Housing experts, however, say it's time for Fannie and Freddie to start reducing principal. Treasury and the companies have already set aside $75 billion for foreclosure prevention, which can be spent on interest-rate reductions or principal write downs.

"Treasury has to bite the bullet and get Fannie and Freddie to participate," said Alan White, a law professor at Valparaiso University. "It's all Treasury money one way or the other."

Though servicers are loathe to lower loan balances, a growing chorus of experts and advocates say it's the best way to stem the foreclosure crisis. Homeowners are more likely to walk away if they owe far more than the home is worth, regardless of whether the monthly payment is affordable. Nearly one in four borrowers in the U.S. are currently underwater.

Notice the repeated nonsense about expert opinions. The reporter is promoting the idea that there is consensus among experts that principal should be reduced. That is not reality. The consensus among experts is that principal reduction is a bad idea because principal reduction is a bad idea. The "growing chorus" is a group of crazies assembled to promulgate the purposeful lie to get people to hang on and make a few more payments.

"Principal reduction in the long run will lower the risk of redefault," said Vishwanath Tirupattur, a Morgan Stanley managing director and co-author of the firm's monthly report on the U.S. housing market. "It's the right thing to do."

This is a specious argument. Reducing principal to lower risk of redefault? While they are at it, why don't they forgive all mortgage debt? If people had no mortgage at all, defaults would certainly decline. This idea is like saying we should give money to theives so they don't steal from us.

If the mortgage balance is reduced through a foreclosure — which is how the system is designed to work — then there are consequences to the borrower. The government or private entities can work to improve the lives of former owners and even allow them to stay in their homes, but they must endure the consequences of (1) renting for a few years, (2) living without new consumer debt, and (3) saving to be able to purchase a home again. If their principal is reduced by the GSEs, none of these meaningful consequences will impact borrowers.

Meanwhile, a growing number of loans backed by Fannie and Freddie are falling into default. Their delinquency rates are rising even faster than those of subprime mortgages as the weak economy takes its toll on more credit-worthy homeowners. Fannie's default rate jumped to 5.47% at the end of March, up from 3.15% a year earlier, while Freddie's rose to 4.13%, up from 2.41%.

On top of that, the redefault rates on their modified loans are far worse than on those held by banks, according to federal regulators.

Some 59.5% of Fannie's loans and 57.3% of Freddie's loans were in default a year after modification, compared to 40% of bank-portfolio mortgages, according to a joint report from the Office of Thrift Supervision and Office of the Comptroller of the Currency. This is part because banks are reducing the principal on their own loans, experts said.

So, advocates argue, lowering loan balances now can actually save the companies — and taxpayers — money later.

What? The GSEs will lose money on their portfolios whether through principal reduction or through foreclosure. They will lose less if they go through foreclosure because fewer loans will go bad. If they forgive principal, they will need to forgive everyone in their entire portfolio. How could they selectively forgive principal and achieve fairness to all borrowers? Do we forgive principal for HELOC abusers? They really need it.

What message does principal forgiveness send to those who were foolishly prudent? Think about it: if you were prudent and paid down your mortgage, you will probably not see much if any principal reduction; however, if you were a wildly irresponsible HELOC abuser, you will see significant principal reduction which will merely enable more HELOC abuse later. Principal reductions will serve as a major incentive for reckless borrowing. Everyone knows if enough people take the money and behave stupidly that everyone will get bailed out.

Foreclosure balances the equation. There must be some consequences to borrowers for their behavior, not because it is immoral, but because what you don't punish, you encourage. We can't afford to privatize gains and collectivize losses or we will go broke as a country. We are not a banana republic, but principal reduction without consequence is certainly a path that leads us there.

Hooray! No HELOCs!

It's a discretionary seller, folks. This owner really has some equity. The property records show very little activity as these owners responded to the free money by allowing it to accumulate. Good for them. Too bad they will be asked to pay off the debts of their foolish neighbors.

Carpe Diem

These owners resisted the tempation to spend their equity as it accumulated, and now they will get a check at the closing table for more than $300K. Their lives during the housing bubble was boring by the standards of conspicuous consumption of their HELOC abusing neighbors.

Which is better? Spending $300K propping up deficient income over a period of years, or obtaining a $300K check at the end? The possibility of principal reduction changes the answer to that question. HELOC abusers can obtain the benefit of the spending, and once they get their principal reduced after the crash, they can get the benefit again on the next cycle. The prudent only see the benefit once when they sell. Principal reductions make HELOC abuse twice as rewarding.

Irvine Home Address … 146 West YALE Loop Irvine, CA 92604

Resale Home Price … $645,000

Home Purchase Price … About $262,500

Home Purchase Date …. Unknown/1987?

Net Gain (Loss) ………. $343,800

Percent Change ………. 145.7%

Annual Appreciation … 3.8%

Cost of Ownership

————————————————-

$645,000 ………. Asking Price

$129,000 ………. 20% Down Conventional

5.01% …………… Mortgage Interest Rate

$516,000 ………. 30-Year Mortgage

$133,706 ………. Income Requirement

$2,773 ………. Monthly Mortgage Payment

$559 ………. Property Tax

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

$54 ………. Homeowners Insurance

$410 ………. Homeowners Association Fees

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

$3,796 ………. Monthly Cash Outlays

-$475 ………. Tax Savings (% of Interest and Property Tax)

-$619 ………. Equity Hidden in Payment

$252 ………. Lost Income to Down Payment (net of taxes)

$81 ………. Maintenance and Replacement Reserves

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

$3,034 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$6,450 ………. Furnishing and Move In @1%

$6,450 ………. Closing Costs @1%

$5,160 ………… Interest Points @1% of Loan

$129,000 ………. Down Payment

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

$147,060 ………. Total Cash Costs

$46,500 ………… Emergency Cash Reserves

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

$193,560 ………. Total Savings Needed

Property Details for 146 West YALE Loop Irvine, CA 92604

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Beds: 4

Baths: 1 full 2 part baths

Home size: 2,161 sq ft

($298 / sq ft)

Lot Size: n/a

Year Built: 1977

Days on Market: 14

Listing Updated: 40311

MLS Number: S615514

Property Type: Condominium, Residential

Tract: Es

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**WOW**MUST SEE** Wood floor entry welcomes you to this lovely home.** REMODELED throughout, also stairway which leads to 4 spacious bedrooms with remodeled bathrooms,cabinets,sinks,bathtub lights & much more. Walk-in closet & organizers in MA BR. Double pane windows upstairs. 2 ceiling fans. Neutral carpet. The Kitchen features, Granite Countertops & Stainless Steel appliances. Walk- in pantry & GREAT eating area. **LARGE Family Rm**with fireplace, & built-ins. Windows running the lenght of the Family rm, overlooking the** STUNNING** backyard which has been landcaped & hardcaped beautifully. This is a LARGE BACKYARD with Apricot & Fig tree. ** EXTRA BONUS** of a Playhouse or small office/studio with electricity & a window. **NATURAL LIGHT in Living rm** with Cathedral Ceilings & Formal Dining rm overlooking the* SUNNY landscaped atruim* . 2 car garage with storage. Storage in attic as well. AC. Walk to all Wonderful Woodbridge amenities . Close to award winning schools.

What is an EXTRA BONUS? I thought getting a bonus was by definition getting something extra. Perhaps I could get an ADDITIONAL BONUS, or an ADDITIONAL EXTRA, or a BONUS EXTRA?

You get this added extra special bonus as well as many additional features to supplement our unique offer.