Everyone has their pet ideas for saving the housing market. Today's post analyses one of the better ideas I have seen so far.
Irvine Home Address … 23 CALISTOGA Irvine, CA 92602
Resale Home Price …… $799,900
You look like
A perfect fit
For a girl in need
Of a tourniquet
But can you, save me
Come on and, save me
Aimee Mann – Save Me
Some housing markets need a tournequet to stop the profuse bleeding of home equity. In the most beaten down markets, prices have overshot fundamentals to the downside. In Monday's post I discussed Another Dumb Idea to Shift Private Mortgage Losses to Taxpayers. Today, I am going to look at a much better proposal for dealing with the reality of millions of foreclosures owned by the US government.
GSEs to Lose Tens of Millions
Lisa Marquis Jackson — John Burns Real Estate Consulting
August 28, 2010
While officials were gearing up for the August 17, 2010 meeting on GSE reform, the GSEs were losing millions of dollars every hour. Why? Because home prices are falling again. We have a solution.
Recent Market Changes: When the tax credit expired on April 30, home buying activity slowed 30%+ and hasn't rebounded much while the number of homes for sale has risen. With lower demand and higher supply, it is once again a buyer's market, where sellers are forced to drop price if they want to sell. It will take almost 1 year to sell every home on the market right now! According to our proprietary survey of home builders across the country, new home prices nationwide have dropped 3% since the tax credit expiration, with declines in 9 of 10 regions, and we are seeing similar signs in the resale market. Falling home prices hurt almost everyone, especially Fannie Mae and Freddie Mac and the taxpayers that are now backing them.
Falling prices do not hurt buyers who want to see lower prices, but lower prices certainly do harm banks and now the US taxpayer who is backing the housing market.
DC Trip: This month, we spent time in Washington D.C. informing HUD, Treasury, Fed, Fannie Mae and Freddie Mac officials of what was going on. While most were not surprised about the price declines after we laid out the facts, we were pleasantly surprised at how much traction our proposal to help alleviate the problem received.
Proposed Rental Housing Solution: Falling home prices don't help anyone, and anyone who says we can let the free market take care of things is saying that it is ok for taxpayers and the banking system to lose many more billions of dollars, virtually assuring another recession and maybe worse.
Falling home prices do help sidelined buyers, and yes, it is okay for taxpayers and the banking system to lose billions of dollars. I don't think anyone really gives a crap about the banks, and if the taxpayers lose money perhaps those in charge that made taxpayers liable for losses they shouldn't be covering will be punished. Probably won't happen, but Ms. Jackson needs to recognize that not everyone shares her view that lower prices are the root of all evil.
To boost housing demand and limit supply, we propose the following:
1) Create an Apartment REIT: Distressed sales need to be kept off the market. Rent out the Fannie, Freddie and FHA REO (owned properties through foreclosure). These properties currently comprise 42% of the 562,000 REO and a large percentage of the 5.1 million homes currently in the foreclosure pipeline (already 90+ days delinquent or in foreclosure). This is best accomplished by contracting with an outside firm (competitively bid of course) to manage local property management firms. The rental income will be self-sustaining and the properties will be financeable in the public markets, just like publicly traded REITs are financeable. The GSEs will benefit from future price appreciation too, as opposed to being damaged by further price deterioration. The Banks, who currently own 22% of the REO, should also be allowed to contribute properties to the REIT. The Administration can keep pushing for loan mods if they want, and we heard over and over again how government doesn't want to foreclose on people. All we ask is that you keep the distressed sales off the market.
Some form of toxic turd fund as described above is the most likely solution to this problem. Renting a property is a far superior form of asset utilization than long-term squatting. People who are paying neither a mortgage nor rent need to be forced out or converted to rental status. In the post How Gaming Interests Could Save the Las Vegas Housing Market, and Why They Should, I laid out a private market solution that keeps owners in their homes and allows them to buy the property back at a later date. If this rent-to-own feature is added to the above proposal, I think the final piece to the puzzle will be in place. Of course, banks will resist the rent-to-own idea because it will encourage accelerated default, but if the government was really interested in keeping people in their homes they could do that. (Which shows where the government's allegiance is.)
Consider this: any loan requires some steady stream of payments to pay interest and recover the original capital. Since the loan balance is already set by the oversized loan of the bubble, and since the only available income stream is property rent, the GSEs could modify the interest rate on the loan to be as low as necessary to have the rental income stream pay off the loan over a 30-year term. In this fashion, the "loan" could be kept alive on the GSEs balance sheets and the debt can be retired over time by the rental income stream. There is no need to write down the loan balance if they have a steady income stream and if they control the interest rate. The taxpayers would avoid any paper losses backstopping these loans because the capital is preserved.
Once properties go REO, the GSEs can (1) keep the loan alive, (2) pay it down with the rental income from the property, (3) and offer the property to the former owners with an option to repurchase. This allows the GSEs to avoid costly write-downs, keeps people in their homes, and prevents a wave of foreclosures from pounding prices back to the 1990s like they have in Las Vegas. Isn't that what they are trying to accomplish?
2) Loans to Landlords: To stimulate demand and restrict supply on non-GSE distressed sales, have the GSEs make very safe loans to individuals or corporations who will promise to rent them out for an extended period of time. The GSEs should make a tidy profit on these loans, while also helping provide affordable rental housing to those who need it.
Sign me up for 10 of those loans. I want to buy cashflow properties in Las Vegas, keep them off the resale market, and provide an affordable rental. If they want to loan me cheap money to accomplish this, I will take all they want to offer.
3) Keep Mortgage Liquidity Flowing: Housing is extremely affordable right now [except in Coastal California], but the uncertainty in the mortgage industry is making underwriting more challenging, and uncertainty in the economy is hurting buyer confidence. Stop changing the underwriting rules so everyone knows what is required, and keep the fantastic financing environment. Once the economy turns around, real buyers will return to the market.
That is a fallacy. Many people who want to buy real estate will not be eligible to obtain a loan regardless of their income. The rent-to-own solution I outlined above will help alleviate this problem, but to suggest that buyers with good credit and a substantial down payment will suddenly emerge once the economy picks up is wishful thinking. It is a delusion everyone in the industry suffers from, particularly lenders.
We believe that the solutions above will also help restore home buyer confidence that prices won't plunge, which will boost demand.
That is a strong acknowledgement of the deflation physchology that rules the markets; although, I believe qualification standards create more problems then buyer psychology.
GSE Reform: As far as GSE reform goes, the answer is simply to turn back the clock. Fannie Mae was formed in 1938 to create mortgage liquidity, and the GSEs have played a very useful role in preventing another Great Depression, so we still need them. However, the GSEs need to be told ASAP that elected officials are not going to pull the rug out from under them so they can focus on helping manage us through the remainder of this crisis. Turn back the clock to:
- 1967, which was the last year before Fannie Mae became a publicly traded corporation. It is impossible to serve two masters, and allowing the entities formed to assure mortgage liquidity to have their strategies dictated by shareholders was a grave mistake.
- 1998, which was the last year before elected officials mandated that Fannie and Freddie grow homeownership by making more aggressive loans to low income households.
You can't go back. That simply isn't going to work. I discussed these issues in Can the GSEs Exist Outside of Government Conservatorship? We need to have a secondary mortgage market because it is the only way banks can manage asset-liability mismatch, but the GSEs are not the only method for maintaining a secondary mortgage market. As they are current structured, there is no way they can exist without the explicit backing of the US government. Any attempt to pretend they don't have this backing will be a joke.
We are sure this will create some controversy, particularly among extremists. I am staying out of the politics and making recommendations that we believe are sound business advice. For those who are running the troubled balance sheet of The United States of America, you need to act quickly to make sure that your asset values don't plunge. Only those who want to see you go bankrupt will oppose these ideas.
Sorry, but there are many reasons to oppose these ideas that are not extremist nor do they require a desire to see the United States go bankrupt. Give me a break.
Despite the occasional hyperbole, the ideas presented are good. If we add in the ability to keep owners in their homes with a rent-to-own arrangement, I think this proposal has real merit. If some solution like this is not implemented, we will see a repeat of the Las Vegas experience in every housing market in the country.
How low are prices in Las Vegas?
When I blather on about Las Vegas properties, people in Orange County can't quite wrap their mind around how much less expensive these properties really are.
The property pictured above is located in Henderson, Nevada. It is a 2000 SF 3/2 built in 2007 in a nice neighborhood. It originally sold for $339,993. The opening bid at auction is $92,605, and comps run about $130,000. It will likely sell for $100,000 to $105,000, and it may go for less than $100,000. That's about $50/SF. It would likely rent for about $1,250 a month. Comparable properties to this one in Irvine would cost $350/SF — seven times as much.
The cheapest 470 SF 1/1 in Irvine sells for $129,000 or $274/SF. The worst property in Irvine is more expensive than this nice middle-class home in Henderson, Nevada.
Does it make sense to you that the Orange County premium is that large?
Why Las Vegas prices are so low
What is it about the Las Vegas market that makes prices so low relative to the peak and relative to rents? When bubble bloggers first began describing what would happen when prices collapsed, the narrative when something like this: exploding loan payments would cause massive numbers of foreclosures, and this must-sell inventory would push prices lower because supply would increase and demand would collapse through a combination of deflation psychology and a diminished buyer pool brought about by all the foreclosures. In fact, this is exactly what has occurred in Las Vegas.
In a normal real estate market, properties trade at a discount to rents. Renting carries a premium because renting provides freedom of movement and insulation from liabilities for property maintenance or declining prices. However, if the renting premium becomes too large, renters are enticed by the lower cost of ownership, and many become homeowners in order to save money versus renting. If you look at historically stable housing markets, you will see the premium for renting is evident, and the premium is relatively stable.
Right now in Las Vegas, the premium for renting is very high. A property that costs $1,000 a month to rent can be owned for about $550 a month. So how does the premium get that large? It isn't because of deflation psychology. The entire buyer pool has been poisoned by foreclosure. There literally are not enough potential owner-occupants in the Las Vegas market to absorb the available inventory. Since there is a severe shortage of potential owner-occupant buyers, and no shortage of potential renters with jobs, the rental premium gets pushed to an extreme, and cashflow investors recognize this opportunity and begin buying to obtain great positive cashflow. (Yes, I know unemployment is high, but vacancy is not a problem for Las Vegas properties in nicer neighborhoods).
Think about it: we all knew the home ownership rate was going to decline because of the large number of foreclosures. That means many properties are going to get converted from owner-occupied to renter-occupied. The only way that happens is if prices fall so low that the rental income stream attracts cashflow investors. It doesn't take Nostradamus to see that cashflow investors were going to be called upon to clean up this mess.
This price-to-rent disparity exists in Las Vegas, and it will likely persist for another three to five years before the renter pool is cleared for home ownership through improved credit scores, expired waiting periods, and accumulated down payments. In the interim, cashflow properties will be abundant, and the returns to cashflow investors will be high. It is what it is.
It may seem like I am selling — and I do plan on selling readers these properties — but I am not exaggerating or puffing. I am merely educating readers to an opportunity to profit from the collapse of the housing bubble — an opportunity that hopefully will never occur again in our lifetimes. If you want to take advantage of this opportunity, I will facilitate that for you. If not, I can only lead the horse to water. Go to Las Vegas and see for yourself, or check out the listings on Realtor.com. Condos start at $12,000, less than 10% of what they cost here, and less than most will spend on their next car.
Her own private ATM machine
The married woman who bought this property as her sole and separate property treated it as her own personal ATM machine. If it doesn't cost you anything, and if you can get hundreds of thousands of dollars out of it that you never have to pay back, why not?
- The property was purchased on 12/5/2001 for $475,500. The owner used a $468,750 first mortgage and a $6,750 down payment.
- On 4/16/2003 she refinanced with a $450,000 first mortgage.
- On 5/11/2004 she obtained a $600,000 first mortgage.
- On 7/7/2005 she got a HELOC for $106,000.
- Total mortgage equity withdrawal is $237,250.
- Total property debt was $706,000.
- She didn't get to squat long as Wells Fargo foreclosed on her quickly. Surprise, surprise, Wells Fargo did not originate the HELOC that was blown out in the foreclosure, so the process was expedited.
Recording Date: 05/03/2010
Document Type: Notice of Sale
Recording Date: 02/01/2010
Document Type: Notice of Default
She put down $6,750 and withdrew $237,250. Do you think she will want another house? I do.
Irvine Home Address … 23 CALISTOGA Irvine, CA 92602
Resale Home Price … $799,900
Home Purchase Price … $475,500
Home Purchase Date …. 12/5/2001
Net Gain (Loss) ………. $276,406
Percent Change ………. 58.1%
Annual Appreciation … 5.9%
Cost of Ownership
$799,900 ………. Asking Price
$159,980 ………. 20% Down Conventional
4.36% …………… Mortgage Interest Rate
$639,920 ………. 30-Year Mortgage
$153,773 ………. Income Requirement
$3,189 ………. Monthly Mortgage Payment
$693 ………. Property Tax
$283 ………. Special Taxes and Levies (Mello Roos)
$67 ………. Homeowners Insurance
$145 ………. Homeowners Association Fees
$4,378 ………. Monthly Cash Outlays
-$755 ………. Tax Savings (% of Interest and Property Tax)
-$864 ………. Equity Hidden in Payment
$254 ………. Lost Income to Down Payment (net of taxes)
$100 ………. Maintenance and Replacement Reserves
$3,113 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$7,999 ………. Furnishing and Move In @1%
$7,999 ………. Closing Costs @1%
$6,399 ………… Interest Points @1% of Loan
$159,980 ………. Down Payment
$182,377 ………. Total Cash Costs
$47,700 ………… Emergency Cash Reserves
$230,077 ………. Total Savings Needed
Property Details for 23 CALISTOGA Irvine, CA 92602
Baths: 2 full 1 part baths
Home size: 2,223 sq ft
($360 / sq ft)
Lot Size: 3,922 sq ft
Year Built: 2000
Days on Market: 39
Listing Updated: 40410
MLS Number: P746520
Property Type: Single Family, Residential
According to the listing agent, this listing is a bank owned (foreclosed) property.
This property is in backup or contingent offer status.
BANK REPO!!! BEAUTIFUL EXECUTIVE HOME IN GATED 'NORTHPARK'. FRESH INTERIOR TWO TONE PAINT AND NEW CARPET. TILED ENTRY, FORMAL LIVING ROOM WITH PLANTATION SHUTTERS, GUEST BATH WITH PEDESTAL SINK, OPEN AND BRIGHT KITCHEN WITH GRANITE COUNTERTOPS & CENTER ISLAND, SEPARATE FAMILY ROOM WITH FIREPLACE, CEILING FAN AND FRENCH DOOR, SPACIOUS MASTER SUITE WITH WALK-IN CLOSET AND BUILT-INS, DUAL SINK VANITY AND TILED FLOORS IN MASTER BATH, JACK AND JILL BEDROOMS WITH PLANTATION SHUTTERS, UPSTAIRS LAUNDRY ROOM. SUPER MOTIVATED SELLER. SUBMIT!!!
This article, based solely on median price numbers, says that housing in CA in on the rebound:
As the market mix shifts from low priced homes to higher price points, the median will go up even if house prices on individual properties do not.
True. But that’s what this article ignores, along with the looming shadow inventory and the fact that the banks have been able game the RE market by limiting supply of distressed properties for sale, thereby affecting median prices.
You hit the nail on the head IMHO.
From what I see, the banks have ABSOLUTE control over the median prices.
When they control the majority of the inventory, they can even pick and choose which market segment they want to focus on. If the median appears to be falling, they can throw more high dollar foreclosures on the market at “attractive” prices and ask WTF prices on their low end boxes.
Exactly, we’re already seeing this in the OC Register’s reports of “price increases in XXX OC zip codes!”.
How can the median price go up in a zip (like 92649), yet every house sold for 20% off of its initial asking price? Because the more expensive homes in that zip are being sold, as the tax credit stole only $800K and below home sales from today’s market. Hence, sales of $800K+ homes are disproportionate to <$800K homes. "Price increase." "There are liars, damned liars and statisticians." -- Mark Twain
IrvineRenter: “If this rent-to-own feature is added to the above proposal …”
Most squatters never intended to own properties. They expected to resell with profit or to cash out appreciation.
Actually they need “rent-to-quick money” feature. “Rent-to-own” is absolutely useless for them.
Aren’t these deals usually a “Rent-with-an-option-to-own”?
They can buy them if they want, or just rent until their term is up and they move out if owning is not to their liking.
Every renter can buy house and become homeowner.
So “rent-to-own” option is marketing gimmick that targets particular human weaknesses.
Typical squatter has much bigger problem. Greed. Simple marketing gimmick is not strong enough against capital sins.
As a stock investor you should know that the “rent-to-own” option may or may not have value depending on the current market price and the strike price.
It may or may not just be a marketing gimmick depending on the terms of the option and the behavior of the market over the term.
Yes, theoretically this option has value, but how about real-world conditions?
The concept is not new, and “rent-to-own” option was always available in Orange County. Easy to run numbers.
Did you look at all those properties? Fourth one down looks like it nearly burned down and is probably a tear-down. Some of the other ‘condos’ look like they’d be better converted to apartments. I’ve definitely seen that in FL, where a 4-8 unit building got ‘condo’d’, and the prior owner made a killing. Investors should really look at getting those units back together to reduce some of the property maintenance & repair costs. I would like to see the GSE’s do this and then set up local REITs, and then spin them off individually – Vegas REIT 1, Dade County REIT 1…
A difference between condos in Vegas and FL is that people will vacation in the condos in FL, but I think most vacationers in Vegas want to be near the gambling and in a hotel. So in FL, you can have a seasonal rental, people renting months at a time, and possibly empty in the summer.
Can a few foreclosures in your neighborhood bring down your house value? When they compare recent comps are they figuring in the sold foreclosures?
And, this may sound stupid, but if the squatters don’t pay why can’t the bank garnish their wages(assuming they have a job).
“why can’t the bank garnish their wages”
It is not part of the legal remedies in the mortgage contract if the loan defaults.
I figured I’d do a similar search in Southeast Florida. I found a listing for ~ $22k. Has interior pictures and looks relatively clean, but is in a rougher neighborhood. I checked to see bubble sale price ~ $175k. 100% financed.
Sold by a ‘conversion corp’. 26 units, 10 now bank/GSE owned. They all sold for ~$180k in 2006, and lets say they’re worth $30k now. That’s 26*$150k = $3.9M in bubble cashing out by the prior owner. Four mortgages, all with problems, all with the same originator…
A single owner will probably not be able to roll this one back up, as there are still a number of non-foreclosed units, but they could probably get enough and then offer maintenance services to the other owners.
Whatever your politics, this represents a massive inefficiency. Also there seems something fishy with all the buyers in a condo conversion like that getting their mortgages at the same smaller broker.
Cover curse ?
So doesn’t that mean that homeownership makes perfect sense now???
I generally like the idea of turning the mortgage holders into renters. I think that’s a great compromise solution. They can’t claim to be made homeless and this cushions the losses for Fannie Mae and Freddie Mac.
However, they should just be renters. I am against a “rent to own” model, because it would simply be principal forgiveness by another name. That is rewarding bad behavior.
Also, the program would need to ensure that these new renters didn’t sublet their house.
This should be a program only for government held mortgages. If the private sector wants in on this, they can do it themselves without a government program. If memory serves me correctly, Fannie Mae and Freddie Mac were already forced to buy up a ton of bad loans from the private sector (under Paulson/Bush?). And we had the Troubled Asset Relief Program (definitely under Paulson/Bush). So, they’ve been helped out enough. Let them fend for themselves on this one.
As far as Fannie Mae and Freddie Mac, they should close up shop in an orderly manner. They are too tainted to be viable. Move their mission over to Ginnie Mae.
Oops, that should be:
I like the idea of turning the mortgagors into renters.
Irvine Renter, may we assume there are property management companies that can help run single-family rental properties in a cost-effective manner, for those landlords who can’t fly to Vegas to unclog toilets?
If unemployment and foreclosures are causing downward pressures on costs of owning, why aren’t those same pressures action on rents? For how long can a house cost $550 to own and $1000 to rent? Shouldn’t the market for rentals also be affected by lowered house prices?
Simple. Housing in the 20th century is tied credit just as much as income. Rent is tied purely to income.
What are the property tax trends in Las Vegas, or any other city for that matter? The last I heard most towns/cities/counties/states don’t exactly have rosy financial outlooks. I can only guess that it’s going to have a big impact on tax rates.
I know CA has prop 13, but do any other places have such limits on tax increases? Even if there is a limit, what’s to stop the governing bodies from repealing it?
Here’s an interesting idea:
Gov’t say banks should share Fannie, Freddie costs
GSE’s just play hardball. Don’t want these bad loans, well then we won’t buy any of your new originations. 90+% of new mortgages are GSE bought, so that should be enough of a stick to get them moving. And not just short term. For every day loans aren’t taken back, 3 or 4 of no new gse loans.
This would be a credibile threat and one that the GSE’s would be well within their means to make. Wells Fargo Nets $3bn in Q210 Earnings as Mortgage Applications Rise 14%
Hello, Irvine Renter, I appreciate you and I want to give you a “heads up”, well actually, “two heads up”.
I just finished writing “Yentervention Restarts The Bear Market”, and in summary: 1) the mother of all bear markets has commenced, it will commence an Elliott Wave 3 of 3 down, these destroy most all wealth: and 2) I believe that out of a liquidity crisis, a Financial Regulator, one called a Seignior is coming, supposedly to set things right, and I think that person will be Elizabeth Warren.
Well here are the details: Yentervention has restarted a sell off in currencies that will produce a sell off of stocks globally.
The Bank of Japan in selling the Yen, FXY, on September 15, 2010, has created the consequence of restarting competitive currency devaluation that occurred on April 26, 2010, with the European Sovereign Debt Crisis coming to a head. This being evidenced by the small cap pure value, RZV, shares falling more than small cap growth, RZG, shares.
On September 15, forex traders who were long the AUD/JPY, opened their portfolio to find that during the night, with the Bank of Japan’s currency operation, their position was massively larger as is seen in the chart of FXA:FXY; substantially larger than the EUR/JPY, FXE:FXY, portfolio.
Many of the beneficiaries of the BoJs selling operation have likely gone short, producing today’s Australian Dollars, FXA, bearish harami.
Other evidence for another bout of debt deflation, is the Mexico Peso, FXM, turning lower inducing Mexican Stocks, EWW, to fall 0.4% lower; and the Russian Ruble, XRU, to fall lower inducing Russian S&P, RBL, to fall 2.0% lower.
I believe that soon, out of a liquidity evaporation and a liquidity crisis, stemming from a fast fall in bond and/or stock values, that here in the US, a Financial Regulator will be announced who will oversee lending and credit, as well as money market and brokerage accounts.
This person will be what I call a credit boss or credit seignior who funds economic operations with an emphasis on seeing that the strategic needs of the country are met and that monies for food stamps keeps flowing. I believe the government will become the first, last and only provider of liquidity and money.
I believe that here in the US, the Financial Regulator will exercise Discretionary Governance, and announce a Home Leasing/Renting Program administered by the banks on their REO properties and those of Freddie Mac, Fannie Mae and the US Federal Reserve. Mortgage lending and securitization of loans will cease, and leasing of homes will be a public private partnership cooperative endeavor. Companies that have created and serviced mortgage-backed securities, such as Anworth Mortgage Asset Corporation, ANH, and Annaly Capital Management, NLY, will quickly disappear from the economic landscape, as mortgage bond funds such as Goldman Sachs Mortgage Bonds, GSUAX, tumble in value.
And I envision that in Europe, a continuing fall in the EUR/JPY from 112, will result in further stock deflation, seen in the ETF, FEZ, falling below 36 and EUFN falling from 22. Then a liquidity crisis will emerge, where there will not be enough buyers for sellers of stocks as well as bonds, causing small business failures, and banks to become sorely decapitalized, resulting in the president of the ECB arising to be an “Eurozone Credit Seignior” and provider of liquidity to Europe.
While many write that Ms Warren has been appointed as lapdog, I believe that Ms. Warren, is more likely to turn out to be the top dog, that is the Seignior, meaning top dog who takes a cut, and be called upon in time of crisis, to assume the role of Financial Regulator overseeing investment, banking, lending, credit, seigniorage and house leasing as her many articles would uniquely qualify her for such a role.
I provide a link to my article
Irvine Renter thanks again, as your articles have educated me.
oh wonderful site bro. provides so many vital informations on residence prices, & USA home owners graph.