We thought we were giving millions of people the American Dream when financial innovations like the Option ARM put people into homes. Instead these innovations and a variety of government subsidies have diminished home ownership and created hardships for millions.

Irvine Home Address … 6 Twin Branch Irvine, CA 92620

Resale Home Price …… $1,159,900

I work so hard, man, so don't trip me up

Shakin' a leg like the tail o' the pup

I'm payin' dues till I register heat

Sure hope I don't end up on the street

Home, boy

Home, boy

Everybody needs a home

Iggy Pop — Home

Does everyone really need to own a home? Our government, which rarely acts with a single mind, certainly seems to think we all need to own a home. Of course, to accomplish that feat, we have so perverted the meaning of home ownership that people with no equity — those merely renting money from a bank to occupy property — are considered homeowners. They aren't. They don't own anything — except perhaps a loan.

As a nation we can't all afford to be homeowners. Some people are not up to the task. It requires the ability to save and to consistently make payments. Home ownership reduces mobility, and some people have careers that require them to move. During the housing bubble, we were selling homes to migrant farm workers, and nobody bothered to question whether or not that is a good idea.

Renting is making a comeback. Not because anyone wants to rent, and not because anyone in our government sees a virtue in renting. Renting is coming back because we are foreclosing on millions of former home owners, and they don't have much choice. Perhaps after they have rented for a while and they see some of the benefits, many won't we quite so anxious to own again. Although, if HELOC money is still made available so people can spend the slightest bit of market-induced home equity, home ownership will not lose its appeal.

We Can't Afford This House

Christopher Papagianis and Reihan Salam — July 20, 2010

Part 1 of 2:

At the end of June, the House of Representatives voted to extend the $8,000 homebuyers’ tax credit, by an extraordinary margin of 409–5. The Senate approved the measure on a voice vote. At a polarized political moment, this near unanimity was noteworthy in itself. Conservative Republicans and liberal Democrats, from cities and suburbs and small towns across the country, joined together to shower a bit more taxpayer largesse on one of America’s favorite industries: real estate. But there’s a problem with this bipartisan idyll.

Though the homebuyers’ credit was sold as a stimulus measure, we have no reason to believe that it is anything other than another wealth transfer to a large and powerful industry, one with allies conveniently situated in every congressional district. Casey Mulligan of the University of Chicago has suggested that the credit had almost no economic impact. As Harvard economist Edward Glaeser observed, it did little more than create an incentive for “mindless house swapping.” It didn’t even have a meaningful impact on the behavior of first-time homebuyers — people already planning to make purchases simply moved them forward a few months. Yet this is where we find a consensus in policymaking: We can’t agree on balancing the budget or reforming entitlements or the tax code, but we can agree to churn the housing market so that a handful of real-estate agents can make a buck on commissions while the economy crumbles.

It is very rare that both parties in government agree on anything. Unfortunately, they happen to agree on providing taxpayer money to realtors. The NAR has a very powerful lobby.

Across the world, governments have spent vast sums on doomed industrial policies. We often hear about the occasional success of efforts in East Asia to nurture shipbuilding and automobile manufacture and electronics. But we don’t hear about the countless failures, in which cronies of the party in power receive endless subsidies and concessions, getting richer at the expense of the economy as a whole.

In the United States, our industrial policy for most of the last century has been centered on housing. Tax subsidies and the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac have helped channel hundreds of billions of dollars into housing. There was a certain logic, however flawed, behind this policy. As opportunities for less-skilled workers declined, construction jobs provided a much-needed income boost to many working- and middle-class households. But like any arrangement built on government favoritism, this one was bound to fall apart. Long-term unemployment has skyrocketed in no small part because of the evaporation of construction jobs that date from the overbuilding that occurred during the bubble years.

What we need now is to turn away from this disastrous policy and find new, sustainable sources of jobs and economic growth. That will require a series of painful steps — among them, phasing out the mortgage-interest deduction and eliminating the GSEs — that will minimize the privileges housing enjoys relative to investments in other industries. By shifting resources from housing to more productive sectors, we will have higher and more sustainable growth. With trillions of dollars and the health of the economy at stake, the question isn’t whether we must do it, but whether we will do it now or wait until our economy is in even worse shape.

There is no question that we will not do anything that might hinder real estate sales at the highest possible price, probably for years. If we are giving tax credits and other incentives to get people to buy who probably shouldn't at prices that are way too high, we certainly aren't going to undermine that effort by eliminating some of the other government props to the market — even if those props are what helped inflate the housing bubble in the first place.

The basic argument for housing subsidies is that homeownership allows Americans of modest means to accumulate wealth. From the New Deal on, the federal government has played a decisive role in the mortgage marketplace. As journalist Alyssa Katz recounts in her 2009 study of the housing industry, Our Lot: How Real Estate Came to Own Us, homeownership was far less common in the United States of the 1920s than it is today. Borrowers had to make down payments that approached half the purchase price of a house to secure a three- to five-year mortgage. For families without enough savings, there was a market in second mortgages to finance down payments, at startlingly high interest rates. As housing prices collapsed with the onset of the Great Depression, millions found themselves underwater, and this created intense pressure for what we might reasonably call a government takeover of the mortgage industry.

The political case for federal intervention was strong. Americans had come to believe that homeownership was essential to economic security and that it made for better citizens. Research had found that housing was a particularly important component of total wealth accumulation for lower-income households and suggested that it led to improved educational outcomes. The portion of the monthly mortgage payment that pays down the principal constituted a source of savings for households that were unlikely to have other significant savings or investments.

The forced-savings aspect of conventionally amortized mortgages is exactly what makes them such a good idea. Most people don't have the discipline to save for themselves. Unless that discipline is forced on them by a mortgage loan — or even government withheld tax money — most Americans won't save a penny. An amortizing mortgage created wealth because it forced people to save and because people had no way to access this savings account until they sold their houses.

The high down payments and short-term mortgages meant that households all over the country held a significant amount of equity in their homes just a few years after buying them. In some cases, the value of this equity grew as the value of the home appreciated. These capital gains, in conjunction with the forced savings of mortgage payments, meant that millions of families had assets they could pass on to future generations. The New Dealers believed this was the path industrial workers could take to reach the independence once associated with prosperous ranchers and farmers in the American West.

Our housing markets from the late 40s to the early 70s were very stable despite frequent deep recessions and other unsettling events. This stability was a direct result of the widespread use of 30-year fixed-rate mortgages with conventional amortization. It isn't until we tried to "innovate" that we destabilized the housing market. First, we ruined the market with "inflation expectation" when lenders allowed borrowers to utilize insane debt-to-income ratios with the idea that wage inflation would make the mortgage payment affordable after a few years.

In the late 1980s, we experimented with affordability products, but we found that Affordability Mortgage Products Make Prices Unaffordable. We inflated another housing bubble that took seven years to deflate. Finally we tried interest-only loans and Option ARMs, and we all know how that turned out.

The formula, however, changed dramatically at the end of the 20th century. From 1994 to 2005, the homeownership rate reached record highs, thanks largely to innovations in the mortgage-finance market that reduced down payments and minimized equity. This shifted the basic wealth-building proposition of homeownership away from savings to an almost exclusive focus on capital gains.

In other words, kool aid intoxication took over. The entire market no longer cared about saving money or paying down debt.

Average down payments fell, reducing the savings required to “get in the door.” More significant was the rise of mortgages that involved no forced savings: the interest-only loan, in which no equity is built because the principal is never paid down, and the “negative amortization” loan, in which payments are so low that they do not even keep up with the interest, leaving homeowners more indebted, rather than less, each month. By 2006, more than one-third of subprime mortgages had amortization schedules longer than 30 years, nearly half of Alt-A mortgages were interest-only, and more than one-fourth were negative-amortization loans.

One effect was to reduce the social benefits of homeownership, because the benefits are a product of equity and not of the mere fact that a contract has been signed and a mortgage taken out. The relationship between homeownership and social goods had been misunderstood: The traits that enabled households to build up the savings necessary for significant down payments — hard work and the deferral of gratification — were misattributed to homeownership itself. Paying a mortgage did nothing to improve children’s educational outcomes; instead, the factors that gave rise to homeownership also led parents to raise children in a manner that led to greater educational attainment.

Without substantial down payments and conservative amortization schedules, the entire proposition of homeownership as a social good is turned on its head. Think of a homeowner with a zero-down, negative-amortization mortgage: The balance would equal at least 100 percent of the value of the house at origination and would steadily grow, putting him ever deeper in debt unless the market value of the house grew at an even faster rate. Rather than being a source of wealth, the mortgage would actually reduce the net worth of this homeowner below what it would have been had he rented.

I wrote about this in Money Rentership: Housing and the New American Dream: "The mortgage encumbrance gets to the core of the unnoticed change in people's concept of property ownership; people who have little or no equity stake in a property have no ownership despite what legal documents may say. What they have is money rentership and the illusion of home ownership. Emotionally, they still feel like homeowners; they still behave and believe like homeowners, but they're not home owners. They own a loan; they're loan owners."

Rather than providing a social benefit, then, homeownership without equity imposes costs. Andrew Oswald of the University of Warwick has argued that such homeownership can exacerbate unemployment by making workers less likely to move from one labor market to another. Labor mobility is badly undermined when homeowners in a depressed market can’t sell their property for anything approaching the principal balance of the mortgage they originally took out to buy it.

The macroeconomic consequences of this shift toward low-equity homeownership are visible in research from the Federal Reserve that examines the assets and liabilities of U.S. households. In the first quarter of 2001, U.S. households’ home equity stood at $7.7 trillion, or 61 percent of the value of all residential real estate. By the third quarter of 2008, it had declined to $7.6 trillion, even as outstanding mortgage debt increased by $5.6 trillion over the same period. By the first quarter of 2009, home equity was $1.35 trillion lower than it had been in 2001. Put another way: Despite the housing boom, the portion of residential real estate actually owned by households declined. This means that the increase in homeownership rates (and the subsequent rise in housing prices) was entirely debt-financed.

In 2009 people actually own less of their homes than they did in 2001. All the innovation in finance, all the government subsidies and market props were a dismal failure. How else do you explain the results? We have managed to obtain the opposite of what we desire, and we are paying a huge amount of money to do so. We would be better off to do nothing. The money we spend as a society to encourage home ownership actually diminishes it.

These developments provide important lessons for policymakers. First, subsidies designed to turn renters into homeowners likely did harm to many households, given that home equity declined over the 2001–09 period. Second, there was a reduction in real mortgage rates, thanks to the subsidies provided by the GSEs, the Federal Housing Administration (FHA), and the tax code. By increasing households’ purchasing power, such measures drive up the prices of homes — over the period in question, by as much as 25 percent — without doing anything to encourage real affordability. This is why homeownership rates in Canada and in European countries that do not offer a mortgage-interest deduction are roughly the same as in the United States. While ending these subsidies would probably not alter homeownership rates, it would likely shift capital away from artificially bid-up residential real estate to more productive uses.

(Part 2 tomorrow)

For all our government programs, we don't have higher home ownership rates than countries with no props at all. It's time for everyone to stand up and say no. Enough is enough. We are spending money and creating problems… well, problems for most people. The Ponzis have certainly enjoyed themselves.

Irvine equity surfers fall on hard times

Irvine is full of "sophisticated" financial managers who routinely withdrew the equity from their homes. Those that didn't take out too much still have a few pennies in the home equity piggy bank. Of course, their debts are now outrageously high, but if they can sell to someone who can afford to pay off their debts, the cycle can restart again.

• This property was purchased on 4/13/1998 for $541,000. The owners used a $432,600 first mortgage and a $108,400 down payment.
• On 1/20/1999 they obtained a HELOC for $85,406.
• On 1/16/2003 they refinanced with a $560,000 first mortgage.
• On 9/25/2003 the refinanced the first mortgage again for $610,000.
• On 12/16/2005 they obtained a HELOC for $250,000. Although there is no direct evidence they took this money out, their pattern would suggest they did.
• Total property debt is $860,000.
• Total mortgage equity withdrawal is $427,400.
• Total squatting is at least 10 months and counting.

Foreclosure Record

Recording Date: 06/23/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 04/21/2010

Document Type: Notice of Rescission

Foreclosure Record

Recording Date: 04/01/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 03/08/2010

Document Type: Notice of Default

Foreclosure Record

Recording Date: 12/31/2009

Document Type: Notice of Default

You have to wonder if lenders are going to be so stupid with HELOCs on the next cycle.

If you would like to learn how you can get involved with trustee sales, please contact me at sales@idealhomebrokers.com.

Irvine Home Address … 6 Twin Branch Irvine, CA 92620

Resale Home Price … $1,159,900

Home Purchase Price … $541,000

Home Purchase Date …. 4/13/1998

Net Gain (Loss) ………. $549,306

Percent Change ………. 101.5%

Annual Appreciation … 6.0%

Cost of Ownership

————————————————-

$1,159,900 ………. Asking Price

$231,980 ………. 20% Down Conventional

4.62% …………… Mortgage Interest Rate

$927,920 ………. 30-Year Mortgage

$229,887 ………. Income Requirement

$4,768 ………. Monthly Mortgage Payment

$1005 ………. Property Tax

$200 ………. Special Taxes and Levies (Mello Roos)

$97 ………. Homeowners Insurance

$175 ………. Homeowners Association Fees

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

$6,240 ………. Monthly Cash Outlays

-$1282 ………. Tax Savings (% of Interest and Property Tax)

-$1196 ………. Equity Hidden in Payment

$402 ………. Lost Income to Down Payment (net of taxes)

$145 ………. Maintenance and Replacement Reserves

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

$4,310 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$11,599 ………. Furnishing and Move In @1%

$11,599 ………. Closing Costs @1%

$9,279 ………… Interest Points @1% of Loan

$231,980 ………. Down Payment

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

$264,457 ………. Total Cash Costs

$66,000 ………… Emergency Cash Reserves

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

$330,457 ………. Total Savings Needed

Property Details for 6 Twin Branch Irvine, CA 92620

——————————————————————————

Beds: 5

Baths: 4 full 1 part baths

Home size: 3,700 sq ft

($313 / sq ft)

Lot Size: 6,807 sq ft

Year Built: 1998

Days on Market: 1

Listing Updated: 40380

MLS Number: S625891

Property Type: Single Family, Residential

Community: Northwood

Tract: Cris

——————————————————————————

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

Priced to sell NOW!!! Priced under Market!!!Private cul-de-sac location and great curb appeal. Dramatic floor plan, foyer with vaulted ceilings invites you to a living room open to courtyard and separate dining. Gourmet kitchen with granite counter and large center island. Cozy family room with fireplace open to breakfast nook. One bedroom downstairs with full bath. Master suite with retreat , master bath and oversized walk-in closet. Two secondary bedrooms with a Jack and Jill bath, open to loft. Separate private bedroom with full bath perfect for guests or home office. Private yard professionally landscaped. Minutes from Canyon View elementary and Northwood high. Close to parks, pools, nearby tennis courts and more. Dues $40+$135.

The realtor is certainly excited about the price. I count six exclamation points. WOW!!!!!!

The shift to short sales is increasing shadow inventory. Will the liquidation be any quicker or more orderly under a short sale process? We will see.

Irvine Home Address … 2422 SCHOLARSHIP Irvine, CA 92612

Resale Home Price …… $409,000

Let's dance

Let's dance

Let's dance, put on your red shoes and dance the blues

Let's dance, to the song they're playin' on the radio

Let's sway, while colour lights up your face

Let's sway, sway through the crowd to an empty space

If you say run, I'll run with you

And if you say hide, we'll hide

David Bowie — Let's Dance

The result of the amend-extend-pretend dance is shadow inventory. Lenders cannot waive a magic wand or bury their heads in the sand and make delinquent loans disappear. People are not paying their mortgages; in fact, more people are not paying their mortgages every day. Delinquency rates are still rising with no end in site. Unemployment is often blamed, and it certainly plays a role, but astronomical delinquency rates was predicted by everyone who saw the housing bubble for what it was. People took on debt they could not afford, and with or without unemployment, delinquency rates were going to be very high.

Lenders have been playing games with foreclosure filings since 2008 when the subprime foreclosures wiped out the housing markets wherever these loans were concentrated. Once the rate of delinquency began to exceed the rate of foreclosure, we began creating shadow inventory. At first many pundits thought we could amend our way out of the problem. As I pointed out, this is merely a game of Bailouts and False Hopes. The dismal failure of the various loan modification programs surprised no one who understood the housing bubble.

The growth of shadow inventory has been steady and consistent since 2008. The current foreclosure inventory is huge, but shadow inventory is at least four-times larger. There are 3,600+ Distressed Properties in Irvine, and There are 36,000+ Distressed Properties in Orange County. As lenders shift their focus from foreclosure to short sale, shadow inventory will continue to grow unless they can pick up the pace of sales though the short-sale process.

As I pointed out in Banks Cancel Foreclosures in Shift to Short Sales… For Now:

The HAFA program pays the second mortgage holder $1,500 to go away. Most aren't taking it. Since many Orange County borrowers have assets, these second mortgage holders are demanding the sellers liquidate and pay them off before they approve the sale. In typical OC fashion, most of these sellers are unwilling to pay up. Perhaps at the lower rungs of the housing market where the borrowers have no assets, more short sales will go through, but in more affluent areas, the HAFA program is doing nothing to facilitate short sales.

Lenders and services will try to force more short sales, but their efforts will ultimately fail in the more affluent areas. Then they will need to go back to the foreclosure process to clean up this mess once and for all.

Lenders Slow Foreclosures By 5% in 2010, Boosting Shadow Inventory: RealtyTrac

Foreclosure filings dropped 5% over the first half of 2010 as lenders continue to delay proceedings to focus on short sale and loan modification efforts, according to RealtyTrac, an online foreclosure marketplace.

More than 1.6m homes received at least one filing, including default notices, auction sale notices and bank repossessions over the last six months, according to the report. That translates to one in 78 homes. Foreclosure filings remain 8% above the amount issued in the first half of last year.

James Saccacio, CEO of RealtyTrac, said at the current pace, more than 3m properties will receive a foreclosure filing by the end of the year, and lenders will repossess more than 1m of them. According to a report from the Toronto-based Capital Economics, the weight of the shadow inventory may contribute to a double dip in the housing market. The report found that for every home currently on the market, two homes are waiting to be sold.

The math is inescapable. Prime loan delinquencies have increased for 37th straight months. If foreclosures and foreclosures filings have actually decreased, that means lenders are falling farther and farther behind. That is shadow inventory: houses where the owners are delinquent but no filings have been made.

“The roller coaster pattern of foreclosure activity over the past 12 months demonstrates that while the foreclosure problem is being managed on the surface, a massive number of distressed properties and underwater loans continues to sit just below the surface, threatening the fragile stability of the housing market,” Saccacio said.

Foreclosure filings decreased 3% in June after another 3% drop in April. It’s the third straight month of declines. Foreclosure filings were down 7% from June 2009. Despite the recent downward swing, June marked the 16th straight month of more than 300,000 filings.

For the second quarter of 2010, foreclosures dropped 4% from Q110 and remained 1% above Q209. As default and auction notices fell, REOs increased 5% from the last quarter and 38% from Q209. It’s the most REOs measured in a quarter since RealtyTrac began publishing the reports in January 2005.

“The second quarter was a tale of two trends,” Saccacio said. “The pace of properties entering foreclosure slowed as lenders pre-empted or delayed foreclosure proceedings on delinquent properties with more aggressive short sale and loan modification initiatives. Meanwhile the pace of properties completing the foreclosure process through bank repossession quickened as lenders cleared out a backlog of distressed inventory delayed by foreclosure prevention efforts in 2009.”

Nevada continued to hold the highest foreclosure rate in the country. Nearly 6% of all Nevada properties, which equals one in 17 homes, received at least one filing in the first half of 2010.

Arizona holds the second highest. There, 3.36% of its units received a filing, equaling one in 30 homes. Florida was third with 3.15%.

More than 340,000 properties in California received a filing in the first half of 2010, the state holds the highest foreclosure volume. Florida was second with more than 277,000 properties.

I recently spoke with a VP at a major title company who told me that the FDIC is pressuring servicers to shift from foreclosure to short sales. Those servicers who want to dispose of FDIC properties need to have a ratio of foreclosures to short sales that strongly favors short sales. Since a short sale requires a cooperative owner, loan servicers are working on their outreach programs to get more owners vested in the process. The properties that are abandoned for various reasons will end up as foreclosures, but lenders and servicers are now doing all they can to increase the number of short sales.

The argument in favor of short sales is simple: the asset recovery is better. If a property goes to auction, it needs to be discounted by 20% to attract all-cash buyers. If the property can be sold at short sale, this 20% is recovered by the bank — at least in theory. In reality, if the loan sits on the lender's books for another six months of missed payments while the parties bicker and the borrower hides assets, the amount recovered isn't any larger than if foreclosure had occurred in a timely fashion. However, since the FDIC is not accounting for the lost payments, and since they don't want to expedite the liquidation and lower home prices, opting for the longer short-sale process makes perfect sense — to them.

A crushing lender loss

Today's featured property was purchased by the original owner on 2/23/2006 for 623,000. The owner used a $497,600 first mortgage, a $62,200 second mortgage, and a $63,200 down payment. My data service does not have the information on when this owner when delinquent. The property was purchased at auction on 6/17/2010 for $321,000. The opening bid was only $225,500, but the property was bid up from there. The auction price is nearly 50% off the original purchase price. The second mortgage holder was wiped out along with the owner's down payment.

The flipper will make a substantial profit if he can get asking price. It isn't likely much was spent on renovation as these are new stacked-flats in a large condo building. A nearly 20% profit turned over in less than 60 days makes for a great annualized return.

If you would like to learn how you can get involved with trustee sales, please contact me at sales@idealhomebrokers.com.

Irvine Home Address … 2422 SCHOLARSHIP Irvine, CA 92612

Resale Home Price … $409,000

Home Purchase Price … $321,000

Home Purchase Date …. 6/17/2010

Net Gain (Loss) ………. $63,460

Percent Change ………. 19.8%

Annual Appreciation … 329.0%

Cost of Ownership

————————————————-

$409,000 ………. Asking Price

$14,315 ………. 3.5% Down FHA Financing

4.59% …………… Mortgage Interest Rate

$394,685 ………. 30-Year Mortgage

$80,779 ………. Income Requirement

$2,021 ………. Monthly Mortgage Payment

$354 ………. Property Tax

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

$34 ………. Homeowners Insurance

$451 ………. Homeowners Association Fees

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

$2,861 ………. Monthly Cash Outlays

-$326 ………. Tax Savings (% of Interest and Property Tax)

-$511 ………. Equity Hidden in Payment

$25 ………. Lost Income to Down Payment (net of taxes)

$51 ………. Maintenance and Replacement Reserves

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

$2,099 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$4,090 ………. Furnishing and Move In @1%

$4,090 ………. Closing Costs @1%

$3,947 ………… Interest Points @1% of Loan

$14,315 ………. Down Payment

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

$26,442 ………. Total Cash Costs

$32,100 ………… Emergency Cash Reserves

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

$58,542 ………. Total Savings Needed

Property Details for 2422 SCHOLARSHIP Irvine, CA 92612

——————————————————————————

Beds: 2

Baths: 2 baths

Home size: 1,260 sq ft

($325 / sq ft)

Lot Size: n/a

Year Built: 2005

Days on Market: 16

Listing Updated: 40367

MLS Number: S623000

Property Type: Condominium, Residential

Community: Airport Area

Tract: Ave1

——————————————————————————

A gorgeous top floor (4th) unit in the exclusive Avenue One Community !!! 2 bedrooms, 2 baths with a loft Open to Living Area Below. High Ceiling in the living room. No one above. Open and functional floorplan. Grourment Kitchen with granite countertops stainless steel appliances. Elegant Clubhouse and superb onsite amenities including a comfortable lounge w/plasma TV , fitness center, pool tables, indoor basketball court, pool and Jacuzzi. Located at the heart of commerce and entertainment in Irvine. Close to shopping, museums, theaters. Easy access to 405. A truly exclusive home!

Grourment?

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