Government Expedites Foreclosures, Threatens Banking Cartel

The end of the banking cartel is being signaled by coordinated efforts at a variety of governmental agencies to expedite the foreclosure liquidation process.

Irvine Home Address … 10 EXETER 11 Irvine, CA 92612

Resale Home Price …… $379,000

You know it all by heart

Why are you standing in one place?

Born to blossom, bloom to perish

your moment will run out

What you waiting for?

What you waiting for?

(What you waiting for)

Take a chance you stupid ho,

Take a chance you stupid ho

Gwen Stefani — What You Waiting For?

Last week I wrote about The Upcoming Collapse of the Banking Cartel. In that post, I noted that as soon as the parties to the cartel begin to feel some urgency to liquidate their holdings that the cartel would crumble. The only thing sustaining prices are current levels is the limited availability of product. Once enough product hits the market in a salable form (short sales are still a very slow process), prices will begin to fall.

Given how much effort and resources the government has put into market stabilization, it is surprising that the FDIC, the GSEs and the FHA are leading the movement to liquidate properties and bring down the banking cartel.

FDIC sells another $760 million in REO

Jon Prior — September 3, 2010

Mariner Real Estate Management (MREM), a real estate investment and management firm based in Kansas, closed a deal to acquire a $760 million portfolio of residential and commercial loans and REO properties from the Federal Deposit Insurance Corp. (FDIC).

MREM is part of Mariner Holdings, a $7 billion wealth and asset management company. The portfolio includes roughly 1,100 loans and properties from 20 banks the FDIC has taken into receivership. The properties are located across 24 states.

Earlier in August, the FDIC sold a similar $1.7 billion portfolio to PMO Loan Acquisition Venture, a partnership of other investment firms. If bank failures continue, the amount of REO held by the FDIC would increase. Those banks insured by the FDIC currently hold $49.2 billion worth of REO, a 45% increase from a year ago.

This problem is enormous. Even selling a billion dollars in REO a month, the FDIC is going to take four years to dispose of the REO it currently has, and since they are getting more REO through failed bank takeovers, the actual inventory they will need to dispose of is much larger.

Most people don't understand absorption rates. Buyers at various price points are limited by their incomes. Once the available buyers at a certain income level are satisfied, the only way to move more product is to lower prices and expand the buyer pool. When absorption rates are as low as they are now, lenders will either hold properties forever, or they will need to lower prices to get rid of it.

In this most recent deal, MREM acquired a 40% managing member interest for roughly $52 million in a company created by the FDIC to hold all of its loans and REO assets recovered from failed banks. The FDIC will keep the other 60% interest in the company.

MREM tapped Cohen Financial, based in Chicago, to handle the asset management services for the deal. Cohen provides loan servicing and asset management services to third parties.

“We are very pleased to partner with the FDIC on this important transaction,” said Marty Bicknell, CEO of Mariner, in a press statement. “Together with Cohen Financial, we can offer the FDIC the best asset management solutions for this portfolio.”

Tim Mazzetti, a partner and executive vice president at Cohen Financial said his company has been preparing for an opportunity like this for some time.

“We have been building out our platform over the past four years to be in a position to take on such a large and diversified pool of performing, sub- and nonperforming assets in an efficient and cost effective manner,” Mazzetti said.

"Taking on" a portfolio of nonperforming assets is code for "liquidation." These guys are going to keep what cashflows and liquidate the rest.

One of the barriers to liquidation is the write downs required by "solvent" banks (we all know most of them are not solvent). A huge problem within the GSE portfolios is that the services of delinquent loans are intentionally delaying foreclosure when the parent bank holds the second mortgage.

For example, let's say the Bank of America is the servicer on a delinquent first mortgage. Their servicer agreement with the GSEs lays out a procedure to mitigate losses for the GSE portfolio. If there is no second mortgage, servicers will generally follow these procedures to the letter, and in the end, most properties end up in foreclosure. However, if Bank of America is the servicer, and they also hold the second mortgage, they do not follow standard procedure because the resulting foreclosure will cause them to lose most or all of the value in the second mortgage.

This servicing arrangement creates an enormous conflict of interest. The easiest solution would be to bar servicers from working on loans where they have a junior lien position, but that isn't what the GSEs are doing. In their first tentative steps toward dealing with this huge conflict of interest, the GSEs are going to start charging servicers who fail to properly follow their loss mitigation procedures.

Fannie Mae gets tougher on mortgage servicers

By Al Yoon — Wed Sep 1, 2010

(Reuters) – Fannie Mae (FNMA.OB), the largest provider of funding for U.S. residential mortgages, will begin demanding compensation from mortgage servicing companies that fail to properly handle troubled mortgage loans, the company announced late on Tuesday.

The government-controlled company also said it may begin conducting reviews of loan files, processes and procedures used by the servicers, in another sign it is growing impatient with the firms that collect and distribute homeowners' payments.

Mortgage servicers have come under intense scrutiny as they have struggled with record delinquencies and foreclosures. Their efforts to ease payments on loans to avert default have fallen short in many cases, playing some role in disappointing results of a federal program to refinance or modify mortgages.

"A compensatory fee not only compensates Fannie Mae for damages but also emphasizes the importance placed on a particular aspect of a servicer's performance," Fannie Mae said in an announcement to servicers.

"In some cases, a compensatory fee will relate to the action a servicer took, or failed to take, in handling a specific mortgage loan," it said.

Fees will be applied in various instances, including failure to provide access to records and delays on completing foreclosures and selling foreclosed properties.

These comments are aimed directly at the practice of avoiding foreclosure on properties that have second mortgages on the servicer's books. That is the primary reason a servicer fails to foreclose and dispose in a timely manner.

More aggressive action by mortgage servicers could help ease burdens on Fannie Mae, whose losses on loans it guarantees or owns forced it into regulator's hands in September 2008. It has required some $86 billion in taxpayer funds since then.

Fannie Mae, which uses hundreds of servicers, did not specify any that might have prompted the announcement but has identified rising stress at the firms. A spokeswoman declined to comment beyond the announcement.

"The growth in the number of delinquent loans on their books of business may negatively affect the ability of these counterparties to continue to meet their obligations to us in the future," Fannie Mae said in its quarterly filing with the Securities and Exchange Commission last month.

If the GSEs are not forced to back down from this policy due to pressure from lenders, this change in policy and incentives will signal the end of the banking cartel because this will push product on the market whether or not the market is capable of absorbing it. That will push prices down.

Are there cashflow properties in Irvine?

Of course the answer to that question is "it depends." I would say no; the prices are too high relative to the income stream it produces. I have a personal test I believe in to test a cashflow property. The capitalization rate must be at least 30% higher than the cost of fixed-rate mortgage debt. Under those circumstances, leverage boosts returns and the cashflow from the property itself makes the payments. That is an investment that you would keep irrespective of what happens to the resale price because you are obtaining a good cash-on-cash return.

The only reason people invest in real estate in Orange County at these prices is because they believe (1) Orange County is a safe haven where prices cannot go down relative to rents and incomes, or (2) they are betting that we will inflate another housing bubble, and they will get to benefit from that appreciation. Note that the belief in option 2 is self fulfilling: those that believe it can happen make it happen. The disease mechanism is in place, and all it takes to release the kool aid virus is for lenders permit loan programs with lending standards that do not amortize loans with payments based on a reasonable percentage of wage income — or worse yet like interest-only or Option ARMs, that do not amortize at all. The lack of amortization in the prevalent loan programs in the market is a sure sign of Ponzi borrowing and a housing bubble.

Properties like this one, even at 4.34% interest rates are at best cashflow neutral. Owning it doesn't set and investor back, and they might make a few extra bucks in positive cashflow, but the reason someone is buying this property is because they believe prices are going to go back up and they will benefit from the appreciation or lack of depreciation. I believe this is the wrong place to put money at the wrong time, but I could be wrong. I have no doubt California borrowers and buyers will certainly try to push house prices higher.

The owner facing short sale on this property paid $529,000 on 10/11/2005. He used a $423,200 Option ARM with a 1.37% teaser rate and a $105,800 down payment. He got a HELOC on 11/6/2006 for $75,625 and may have recovered some of his down payment. He hasn't paid his mortgage this year.

Foreclosure Record

Recording Date: 06/28/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 03/10/2010

Document Type: Notice of Default

Irvine Home Address … 10 EXETER 11 Irvine, CA 92612

Resale Home Price … $379,000

Home Purchase Price … $529,000

Home Purchase Date …. 10/11/2005

Net Gain (Loss) ………. $(172,740)

Percent Change ………. -32.7%

Annual Appreciation … -6.6%

Cost of Ownership


$379,000 ………. Asking Price

$75,800 ………. 20% Down Conventional

4.34% …………… Mortgage Interest Rate

$303,200 ………. 30-Year Mortgage

$72,687 ………. Income Requirement

$1,508 ………. Monthly Mortgage Payment

$328 ………. Property Tax

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

$32 ………. Homeowners Insurance

$190 ………. Homeowners Association Fees


$2,058 ………. Monthly Cash Outlays

-$249 ………. Tax Savings (% of Interest and Property Tax)

-$411 ………. Equity Hidden in Payment

$120 ………. Lost Income to Down Payment (net of taxes)

$47 ………. Maintenance and Replacement Reserves


$1,564 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$3,790 ………. Furnishing and Move In @1%

$3,790 ………. Closing Costs @1%

$3,032 ………… Interest Points @1% of Loan

$75,800 ………. Down Payment


$86,412 ………. Total Cash Costs

$23,900 ………… Emergency Cash Reserves


$110,312 ………. Total Savings Needed

Property Details for 10 EXETER 11 Irvine, CA 92612


Beds: 2

Baths: 3 baths

Home size: 1,344 sq ft

($282 / sq ft)

Lot Size: n/a

Year Built: 1981

Days on Market: 3

Listing Updated: 40423

MLS Number: 10475961

Property Type: Condominium, Townhouse, Residential

Community: University Town Center

Tract: 0


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

Well maintained condo located near UCI, Hardwood floor in livingroom with granite counter top kitchen. Plantation shutter throughout. This is a short sale.

22 thoughts on “Government Expedites Foreclosures, Threatens Banking Cartel

  1. CH

    I know Irvine is a nice city (I used to live there), but I’ve always thought it utterly absurd to pay half a mil for a 70s/80s-era 2-bedroom townhome. Unbelievable.

    My rule of thumb for rents is the 1% rule. If the monthly rent is at least 1% of the purchase price, it should at least break even. In other words, if I am looking at a property that is listed for $200K, $2000/month in rent is more or less the breakeven point.

      1. Shevy

        In areas the 1% rule works the cap rate is still no where near 12% as the 1% rule uses gross rents not net. However, they are still much better than Orange County cap rates. Nevertheless, as previous people have written, there is a trade off.

      2. CH

        Again, it’s just a rule of thumb I use to filter out at a glance the garbage that doesn’t cash flow. Obviously, for the stuff that gets through this filter and looks interesting I do a much more detailed analysis to determine ROI then make an investment decision based on that.

    1. Shevy

      The 1% rule is good in areas like Texas and other states; I use that as well as a quick way to narrow down properties and areas to consider.

      However, one has to keep in mind that in California the property tax rate is just over 1% while in Texas it’s circa 3% and also much higher in other states. As a result the 1% rule can not be applied equally to properties in areas that have a relatively large spread in property tax rate. Not to mention other differences that make the 1% rule more applicable in some areas than others.

  2. Alan

    “Given how much effort and recourses the government has put into market stabilization …”

    I presume this is a typo rather than sarcasm or wry humor? If only the government had put in place more means of recourse for taxpayers/government to recover their money from the various bailout money pits.

  3. FoolishRenter

    I’m back. It looks like a misunderstanding of the intent of the govt. Is the govt. preventing a melt down or delaying a melt down so the liability can be changed?

    The Keynesian econ makes sense in the short-term and as long as core growth catches up with spending. For my 50 plus years in the US, I’ve not witnessed free market econ for the larger business. The most seen was deregulation to create the law of the jungle with govt supports (subsidies and bailouts). The little guy sees free markets without supports, other than welfare when hitting rock bottom.

    The housing market will either be inflated (not by appreciation) or price corrected to substainable levels. The delays are being used to modify, refinance and finance (upon sale). The banks need high turn-over of the loans because the prior defective underwritting needs to be corrected to avoid liability to the banks, WS underwriters and insurance companies. The new loans will default, but the liabilities will no longer be with the banks, insurance companies, WS and investors. The liabilities will become the US taxpayers’ problem and hopefully your childrens and grandchildrens problem (kick the can down the road). It will explode when enough loans are converted to govt liable loans. Narcassism at it best (eat the young).

    I don’t see the govt able to convince another counties bank to hold the bag, PRC has refused, Arabs have held it before but are in the US debt again, BOJ is still holding the previous bag, Europe is getting the US to hold their bags. That essentially leave Russia and S. Korea, who are not known for as bag holders. My bet is the US leverages S. Korea with the N. Korea card and stirs up the PRC pot with the Korea’s and VN.

    FoolishRenter, paying rent, but could of been squatting.

    1. Swiller

      FoolishRenter, I’m paying rent right now too, but the difference is, I’m deciding if I want to squat or not. As time goes by and my value drops, squatting to get back some of my initial $100,000 is looking better and better. If I walk I lose everything. If I default and squat, I mattress $2k a month. If I can stretch it to 12 months, I’ll have $25k SAVED.

      The problem is…I lose my $75k, AND I help pay for the banksters losses through my taxes.

      Hard choices….hard choices indeed. The rules have changed, and while I surely detest them, I have to admit they are reality (for now) and make my financial decisions appropriately. These are not good times for those of us who *used* to be considered middle class.

      1. FoolishRenter

        Why the inital $100,000? The FHA DP is for 5% and the new BHO plan is to have a 0% DP for conventional and a 0% for jumbo for new MD’s and lawyers. Come on diploma mills. That a pure walkaway DP and free squatting. It’s designed to keep the first round of prices high while creating a new note that will remove liabilities from the banksters. Neat. Only the US taxpayers will be paying for the defaults.

        Without much negative interest and the note being the taxpayers’ liability, the banks may not be so willing to give 2 or more year of squatting.

        Renting for money, but could of been squatting for free.

  4. Kirk

    Well, I sure hope they speed up these foreclosures. I’m tired of paying the storage fees for the razor wire and watch towers I’ve invested in.

  5. Planet Reality

    Well it’s nice to know that the REOs will be dominates by low class areas like Irvine and Newport Beach.

    I was worried premium communities like Riverside and Las Vegas may see the bulk of the devastation.

    The banking cartel collapse is clearly imminent. What a joyous day it will be when everyone dances on the graves of the banks with their unemployment checks in hand.

    Also thank god I was wrong about mortgage rates heading to 3.5-4, we should be in the 6-8% by next week. Fantastic predictions delivered here. Let your money ride on the voluptuous Las Vegas market.

    In all seriousness I’ve made a killing on my interest rate bets. Now that Goldman entered the game rates will be heading lower than I thought, the bet is a winner.

    1. BD

      …million and multi-million dollar down “adjustments” have been in the news as well as foreclosures.

      Bottom line… two Neurosurgeons can’t afford 2M dollar plus homes. Newport Coast is toast. I’ll wager the greatest percentage and nominal declines come from the coast go forward. Better hope for wealthy Europeans and Asians to come to the rescue. I won’t hold my breath.

      My .02


  6. IrvineGuy

    Curious what people think about the above property in terms of owning. Was looking in the area a few months ago to rent and all of the IAC offerings withing similar size in this community (walking distance to UCI) were much higher than IR’s monthly cost of ownership. In some cases higher than the monthly cash outlay as well.

    1. Swiller

      What I think….hmmm. Well, how many total commercial apartments are built in Irvine?

      How many apartments are managed by IAC (Irvine Apartment Communities), owned of course by TIC (The Irvine Co.)?

      It is a VERY high percentage. I’m surprised no one has brought up the word “monopolization”. If you control 70% (just a guess, it may actually be higher) of available units, you control the market.

      I’m sure they can prove that Don Bren never said “I love you” or was actually IN love with the city of Irvine, so no jury in the world would award monetary compensation for the years of manipulated pricing.

  7. BD

    IR –

    If we assume rates are at a bottom or close. What will happen if we have a regression to mean around rates – say 6 or 7 or 8% for a 30 year fixed?

    I think we will have serious headwinds against appreciation in housing (socal) for the next 10 years at least – meaning prices could be flat for a decade or more. I know others don’t believe this and are busy getting in on the ‘buy of a lifetime’ (which they can barely afford with two people making 6 figures).

    Unless wages increase by 20-30 percent a year for the next 5 years, I don’t see how prices can go higher if not much lower.

    My .02


  8. Shevy

    With rates this low it’s becoming more common to see properties at or below rental parity for owner occupants. We saw this as early as 2009 in areas of South County and that’s why besides the fundamental cash flow value we added the IHB fundamental value which uses the historic average interest rate over the past 40 years to give fundamental valuation based upon the cost of ownership.
    It’s likely that rates will not go back to 8% plus until our economy has recovered and there will likely have been wage inflation and rents will likely have rose as well, so the report is static, however, gives a good point of reference and helps to demonstrate why people buying now need to plan for a long term hold. Moreover, for those that will lose sleep if their property loses value and for those with heavy cash positions planning to make large down payments should wait until rates go up even if the property is at or below rental parity. As IR has communicated in the past, historically people are better off buying when rates are high and prices are lower because they can refinance when rates go back down but cannot change their principle without paying it down with cash. In addition, it’s why we recommend that our clients, who are interested in purchasing regardless, get solid 15 or 30 year fixed financing, plan to hold the property ideally for the term of the loan, and at minimum 7-10 years even if it means renting the property out when they choose to move.

  9. chuckconners

    This is BS.I was promised 18 month of squatting in my La Habra stucco crap box. Fannie Mae/Citimortgage suck.

  10. theyenguy

    Several comments:
    1) You write: “When absorption rates are as low as they are now, lenders will either hold properties forever, or they will need to lower prices to get rid of it.” …. My reply is, the lender will hold it for forever and once the loan-owner is out the property, the lenders will lease it.

    2) You reference the recent deal where “MREM acquired a 40% managing member interest for roughly $52 million in a company created by the FDIC to hold all of its loans and REO assets recovered from failed banks. The FDIC will keep the other 60% interest in the company” …. My comment is that this is called a public private partnership; and I’ve provided a link to my blog section where I cover Barry Sternlicht who created a 40%/60% corporation with Sheila Barr
    to obtain luxury condos from the failure of Corus Bank. This is a practice of state corporatism.

    3) You relate: “If the GSEs are not forced to back down from this policy due to pressure from lenders, this change in policy and incentives will signal the end of the banking cartel because this will push product on the market whether or not the market is capable of absorbing it. That will push prices down” …. My comment is that the policy will extinguish bank capital as short selling and credit default swaps will quickly and progressively pressure the capital of banks downward. The GSE announced policy of loss mitigation and loan management is the antithesis of FASB 157; it will effectively extinguish banks and transform them into property leasing organizations.

    4) Today, September 10, 2010, the FX currency traders took the major currencies, DBV, and the developing currencies, CEW, higher against the Yen, rallying the European Financial, EUFN, and the banks, KBE, but stocks manifested bearish. But the world stocks, ACWI, and the S&P failed to rally significantly, and closed manifesting a lollipop hanging man candlestick, suggesting that an Elliott Wave 2 up has been completed, and an Elliott Wave 3 Down is ready to commence. This would actually be an Elliott Wave 3 of 3 of 3 Down, the severest of all waves. It is the one that builds wealth on the way up; and for all practical purposes extinguishes all wealth on the way down. We are likely to see a significant fall in stock value of banks, which will compel banks to transform from lending and mortgage servicing into property leasing.

    5) Given what I have written above I expect real estate prices to fall fast and hard.

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