Should lenders give away houses to delinquent borrowers to stabilize house prices? Would you be happy paying your mortgage knowing that your lender gave your neighbor their house for free?
Irvine Home Address … 23 BOWER TREE Irvine, CA 92603
Resale Home Price …… $705,000
Down, down in an earlier round
And Sugar, we're going down swinging
I'll be your number one with a bullet
A loaded God complex, cock it and pull it
Fall Out Boy — Sugar, We're Going Down
In the housing bubble debate, the bears clearly won the first round. People defaulted, banks foreclosed, and prices crashed just as predicted. However, round two has gone to the bulls. Banks stopped foreclosing, people squatted, interest rates went down, and the few buyers that remained pushed prices up slightly. Now we are on to round three: the Great Housing Liquidation.
Distressed sales equal lower prices
The general concept is obvious to everyone including the lenders: distressed sales cause lower prices. Statistical experience over the last several years clearly demonstrates that markets can only absorb about 30% of its sales as distressed inventory. But what happens when more houses are in distress than can be absorbed by the market? Squatting.
As we all know, loan owners have continued to go delinquent at a much faster rate than lenders have been processing their foreclosures. The resulting discrepancy is shadow inventory.
The bulls have been celebrating the recent price stability as a sign that the worst is behind us. It is not.
The floodplain analogy
Imagine you lived on a river in a flooplain after torrential rains. At first, the dam at the reservoir upstream from you was letting this stormwater go and threatening to wash away your property. As an emergency measure, the dam operator closes the floodgates and the waters calm in front of your house. As a homeowner, you might feel safe and believe the problem is resolved. You would be mistaken.
Stopping the flow does nothing to relieve the pressure on the dam, and the reservoir operators don't know what to do. If they let the water go, it will wash away your home, but if they don't, the pressure of the water threatens to destroy the dam and release the water in an uncontrolled manner. One way or another, that water will have to be released and pass by your house. Far from being safe, you are at the mercy of powerful forces under the watchful eye of a group of dam operators who have no idea what they are doing.
Do you believe a cartel of lenders, each with different levels of economic health, can limit the release of shadow inventory to 30% of the overall market? At that rate of sales, will they ever empty the reservoir? When lenders realize they aren't disposing of their REO fast enough, will they continue to be patient and hold properties, or will they succumb to the pressures to sell?
Shadow bank losses – FT Alphaville
US homeownership minus negative equity = 61.6% – FT Alphaville
The slow death of Hamp, the summer of delinquencies – FT Alphaville
Hamp, what is it good for? – FT Alphaville
Squatting works… for now
Banks have given people a large number of homes. Think about it — banks paid for the house when the loan owners purchased, then when these people stopped paying the loan, lenders have done nothing about it. Lenders have given away houses. If you believed your lender would not foreclose if you quit making payments, why would you keep making payments? Morality? Despite the obvious moral hazard created by squatting, lenders are choosing that alternative over the less palatable option of foreclosure in hopes of stabilizing home prices.
Do you think squatting is a viable long-term solution?
Think about the floodplain analogy above. If squatting is not the answer, then these properties will end up being sold; some will be foreclosed, some will be short sales, and a few may hold out for an equity sale, but all struggling, delinquent homeowners will need to be washed through the resale market. With all that product due to hit the market, it doesn't seem likely that house prices have found a stable bottom.
Option ARMs to the rescue
The problem from Option ARMs has already arrived. I have seen some bloggers point to the lull in the Option ARM reset chart as a reason for our temporary lull in foreclosures. That isn't really the case. For one, many Option ARMs have already blown up, and many of these loan owners are squatting in shadow inventory.
I don't foresee a flood of future loan delinquencies caused by Option ARMs because these loan owners are delinquent already. There will certainly be some among the few Option ARM holders who haven't already defaulted, but many of these loans have already stopped making their payments. The flood of foreclosures we would have had in 2011-2013 are squatters today. Only the lenders know when they will get around to foreclosing on these people.
- Today's featured property was purchased for about $580,000 in 4/302004. The owners used a $433,200 first mortgage, with the remainder as a down payment.
- On 5/4/2004 they obtained a $78,800 HELOC from Countrywide.
- On 1/30/2006 Countrywide gave this guy a $200,000 HELOC.
- On 12/13/2006 he got a $650,000 Option ARM with a 1% teaser rate.
- On 3/16/2007 JPMorgan Chase thought it wise to add a $178,000 HELOC on the back of a 1% Option ARM. Brilliant!
- The owner quit making payments in late 2008 and squatted for a long time.
- Total property debt is $828,000 plus negative amortization and squatting.
- Total mortgage equity withdrawal is $394,800 plus the down payment.
- Total squatting time was at least 16 months.
Recording Date: 07/29/2009
Document Type: Notice of Sale
Recording Date: 03/31/2009
Document Type: Notice of Default
Irvine Home Address … 23 BOWER TREE Irvine, CA 92603
Resale Home Price … $705,000
Home Purchase Price … $648,000
Home Purchase Date …. 5/6/2010
Net Gain (Loss) ………. $14,700
Percent Change ………. 2.3%
Annual Appreciation … 51.7%
Cost of Ownership
$705,000 ………. Asking Price
$141,000 ………. 20% Down Conventional
4.84% …………… Mortgage Interest Rate
$564,000 ………. 30-Year Mortgage
$143,330 ………. Income Requirement
$2,973 ………. Monthly Mortgage Payment
$611 ………. Property Tax
$183 ………. Special Taxes and Levies (Mello Roos)
$59 ………. Homeowners Insurance
$184 ………. Homeowners Association Fees
$4,010 ………. Monthly Cash Outlays
-$721 ………. Tax Savings (% of Interest and Property Tax)
-$698 ………. Equity Hidden in Payment
$262 ………. Lost Income to Down Payment (net of taxes)
$88 ………. Maintenance and Replacement Reserves
$2,940 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$7,050 ………. Furnishing and Move In @1%
$7,050 ………. Closing Costs @1%
$5,640 ………… Interest Points @1% of Loan
$141,000 ………. Down Payment
$160,740 ………. Total Cash Costs
$45,000 ………… Emergency Cash Reserves
$205,740 ………. Total Savings Needed
Baths: 2 full 1 part baths
Home size: 1,410 sq ft
($500 / sq ft)
Lot Size: 3,900 sq ft
Year Built: 2004
Days on Market: 37
Listing Updated: 40303
MLS Number: S616075
Property Type: Condominium, Residential
Community: Turtle Ridge
According to the listing agent, this listing is a bank owned (foreclosed) property.
WOW !Bank Owned and in Turn Key condition, gated communinty, beautifully upgraded with granite counters, Hardwood floors, custom paint, custom shutters, ceiling fans in every room, all into this beautiful three bedroom home. All bedrooms are upstairs with formal living, formal dining and a large kitchen downstairs. Patio off the kitchen, easy access for entertainment and a barbeque. This home won't last, a rare find, if serious don't wait come and see this beauty.