How The Lending Cartel Disposes Their REO Will Determine the Market's Fate

Currently, lenders control the housing market. How they go about disposing their supply will determine the fate of prices.

Irvine Home Address … 4 STAR THISTLE Irvine, CA 92604

Resale Home Price …… $640,000

Sometimes you think your playing the fool

he's runaround braking all the rules

some how that don't seem fair.

There's got to be a better way

you know what I'm trying to say

When It's Over! — Loverboy

Many people believe the crash is over because removing the supply stabilized prices. Most people who carefully watch housing markets agree that a cartel of lenders controls the market through its ability to control supply. Since lenders are being permitted to hold non-performing loans on their books — and allow delinquent borrowers to squat — they control the flow of properties through the foreclosure process. Also, they control the approval of short sales; therefore, they control the flow of properties through the short sale process. Since distressed sales of foreclosure properties and short sales make up a significant percentage of market sales, lenders control the bulk of the supply on the market.

I believe this cartel will fall apart (The Upcoming Collapse of the Banking Cartel) partly because all cartels are inherently unstable, and partly because the Government Expedites Foreclosures, Threatens Banking Cartel. The article below from the Wall Street Journal is one of the better descriptions of the problem I have read in the mainstream media.

Banks' Plans for Foreclosed Homes Will Drive Market


The speed at which house prices fall over the next few months could depend less on mortgage rates and Americans' appetite for home buying than on how banks decide to manage the huge number of foreclosed homes they own or may take from delinquent borrowers in the near future.

Unlike home owners, banks often are much quicker to slash prices to unload properties quickly.

This has certainly been true in the past, but lenders seem much more willing to emulate homeowner denial this time around. Loan owners are quick to lapse into denial on the false belief that prices will quickly rebound. We explored that phenomenon in Contrarian Investing and the Psychology of Deflation. Lenders are usually pressured by regulators and investors to process their non-performing loans and dispose of their REO. Because this inventory problem is so large, the groups that usually pressure disposition are embracing a hold-and-hope strategy largely doomed to fail.

The upshot is that, the more homes being sold by lenders, the faster prices tend to fall. That pattern was clear over the past two years: Price declines that began four years ago accelerated rapidly in 2008 as banks dumped foreclosed properties at fire-sale prices. By January 2009, the share of distressed sales had soared to 45% of all sales nationally; it was even higher in hard-hit markets such as Phoenix, according to analysts at Barclays Capital.

Even though mortgage defaults kept mounting, housing markets began to stabilize early last year as low prices and government interventions broke the downward spiral. Policy makers spurred demand for homes by holding down mortgage rates, offering tax credits for buyers, and extending low-down-payment loans through the Federal Housing Administration.

This is the squatting problem. We didn't have much squatting prior to 2008 because lenders processed their foreclosures in a timely manner. When they saw what this did to markets like Las Vegas, they stopped processing these foreclosures. Since subprime defaulted first, they were foreclosed on, and since the alt-A and prime mortgages defaulted later, and since those mortgages are much larger, lenders have opted to let those delinquent owners squat.

The government also attacked the supply problem. Regulators relaxed mark-to-market accounting rules, giving banks more flexibility in valuing certain real-estate assets and removing some of the impetus for banks to quickly foreclose.

This is mark-to-fantasy accounting, otherwise known as Amend-Extend-Pretend: 780 Day Short Sales, 60% of Delinquent Loans Remaining.

Meanwhile, the Obama administration put in place an ambitious program to modify mortgages.

The Home Affordable Modification Program has fallen short of its goals. So far, fewer than 500,000 loans have been modified, below the target of three million to four million. Yet the program served as a "closet moratorium" on foreclosures that stanched the flow of bank-owned homes to the market, said Ronald Temple, portfolio manager at Lazard Asset Management.

The result: The share of distressed sales fell by November to 25% of home sales, and prices stabilized. After rising in the winter, the distressed share fell to 22% in June, before bouncing to 30% in July.

The loan modifications programs have all failed, and they will continue to fail. They have provided some political cover for the amend-extend-pretend policy exercised by nearly every bank.

The problem is that these measures are wearing off. Demand plunged this summer after tax credits expired, and unsold homes are piling up. More foreclosures could move onto the market as borrowers fall out of the loan-modification program.

"We see the perfect storm brewing with rising supply and falling demand," said Ivy Zelman, chief executive of research firm Zelman & Associates and one of the first to warn of trouble five years ago. She estimated that distressed sales could account for half of the market by year-end if traditional sales didn't rebound.

Does anyone think the traditional sales market is going to rebound this fall and winter? I don't either. Ivy Zelman is usually correct. Her analysis has been some of the best of the housing bubble.

The market does have some tailwinds: Housing starts are at all-time lows. Banks have hired more staff to manage problem loans and government entities such as Fannie Mae and Freddie Mac that own a growing share of foreclosures are less likely to deluge the market.

Actually, the GSEs are processing their foreclosures: Government Expedites Foreclosures, Threatens Banking Cartel.

The next leg down in prices "isn't going to be the foreclosure-induced freefall where you just had inventory coming out the wazoo, and it was going to be sold one way or the other," said Glenn Kelman, chief executive of Redfin Corp., a real-estate brokerage.

He is probably right that we will not have a mass forced auction that pounds prices back to the stone ages, but we will have significant pricing pressure until this supply is cleared from the market.

Prices also have come down so much already they have less distance to fall. During the housing boom, prices inflated much faster than incomes rose, thanks to speculation and lax lending. The ratio of home prices to annual incomes reached 1.6 at the end of June, which is below the ratio of 1.88 from 1989 to 2003, according to Moody's Analytics.

By those metrics, prices are actually undervalued in markets that have already seen huge declines, such as Las Vegas, Phoenix and Los Angeles. But Moody's data show that prices remain "significantly overvalued" elsewhere, including Boston; New York; Seattle; Orange County, Calif., and Charlotte, N.C. Markets in both camps face supply imbalances that will pressure prices for years.

Moody's is right on. Las Vegas is too low relative to incomes, and Orange County is much too high.

The fastest cure for housing would be job creation because it would boost demand for homes while putting delinquent borrowers back on solid footing.

But if that doesn't materialize, policy makers face a thorny question: whether to intervene if price declines accelerate beyond the 5% to 10% that most economists expect. In recent weeks, the White House has been surveying industry analysts on how to manage the inventory overhang.

I believe the government will intervene if prices fall too fast, particularly if interest rates go up too fast: The Bernanke Put: The Implied Protection of Mortgage Interest Rates.

Analysts at Barclays Capital estimate that some four million loans are in some stage of foreclosure or are at least 90 days past due, down slightly from a January peak.

While more tax credits aren't likely, policy makers could still attack the supply problem by, for example, taking foreclosed homes off the market and renting them out.

An idea I endorse: From Squatting to Renting: Another Solution to Stabilize Housing.

Ultimately, market fundamentals will prevail "and any attempt to get around that will only be short-term," said Susan Wachter, a professor of real estate at the University of Pennsylvania's Wharton School. But officials should be prepared to intervene anyway, she said, if psychology spurs a downward spiral "where price declines are feeding further price declines."

You mean if deflation psychology takes over? Good luck combating that one: Contrarian Investing and the Psychology of Deflation.

That leaves few attractive options. Prolonged intervention could backfire by creating uncertainty that keeps buyers on the sidelines. Extending foreclosure timelines also risks inducing more borrowers to default and live rent-free.

The amend-extend-pretend policy has been a fiasco: Thinking About Accelerated Default? The Average Squatting Time Is Up to 449 Days.

Letting the market take its medicine sounds more appealing than it did 18 months ago. But it risks saddling taxpayers and the banking system with billions more in losses and trapping more borrowers in homes on which they owe more than the house is worth.

Write to Nick Timiraos at

Kudos to Nick Tamiraos for such a lucid description of the problem, and of the problems associated with all the bad solutions that have been implemented to solve the problem to date.

Knife catcher gets sliced

One thing all knife catchers have in common is their belief that they got a good deal when they bought. They are all mistaken.

If we go back two owners, we find a major HELOC abuser:

  • This property was purchased on 3/4/2005 for $611,000. The owner used a $488,800 first mortgage, a $61,100 second mortgage, and a $61,100 down payment.
  • On 6/27/2005 he obtained a $102,500 HELOC.
  • On 1/5/2006 he refinanced with a $742,500 first mortgage.
  • On 11/14/2006 he refinanced again with a $655,200 Option ARM and a $81,900 stand-alone second.
  • The total property debt was $737,100 plus negative amortization and missed payments.

The property was sold to the current owner for $820,000 on 3/3/2007. The previous HELOC abuser got away with the abuse plus obtained some extra cash. Not a bad deal for him.

  • The current owner paid $820,000. The original mortgage data is not in my records. However…
  • On 5/3/2007 he obtained a $656,000 first mortgage and a $123,000 HELOC.
  • On 7/31/2007 he increased his HELOC to $160,000. If he maxed it out, he got most of his down payment back.
  • Total property debt is $816,000.

It's currently listed as a short sale, so we can assume he is no longer making payments.

Irvine Home Address … 4 STAR THISTLE Irvine, CA 92604

Resale Home Price … $640,000

Home Purchase Price … $820,000

Home Purchase Date …. 3/3/2007

Net Gain (Loss) ………. $(218,400)

Percent Change ………. -26.6%

Annual Appreciation … -6.6%

Cost of Ownership


$640,000 ………. Asking Price

$128,000 ………. 20% Down Conventional

4.34% …………… Mortgage Interest Rate

$512,000 ………. 30-Year Mortgage

$122,743 ………. Income Requirement

$2,546 ………. Monthly Mortgage Payment

$555 ………. Property Tax

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

$53 ………. Homeowners Insurance

$30 ………. Homeowners Association Fees


$3,184 ………. Monthly Cash Outlays

-$421 ………. Tax Savings (% of Interest and Property Tax)

-$694 ………. Equity Hidden in Payment

$202 ………. Lost Income to Down Payment (net of taxes)

$80 ………. Maintenance and Replacement Reserves


$2,351 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$6,400 ………. Furnishing and Move In @1%

$6,400 ………. Closing Costs @1%

$5,120 ………… Interest Points @1% of Loan

$128,000 ………. Down Payment


$145,920 ………. Total Cash Costs

$36,000 ………… Emergency Cash Reserves


$181,920 ………. Total Savings Needed

Property Details for 4 STAR THISTLE Irvine, CA 92604


Beds: 4

Baths: 3 baths

Home size: 2,474 sq ft

($259 / sq ft)

Lot Size: 4,275 sq ft

Year Built: 1974

Days on Market: 111

Listing Updated: 40365

MLS Number: P735477

Property Type: Single Family, Residential

Community: El Camino Real

Tract: Di


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

Great Schools!!! 4 bedrooms + den. This great house offers thousands in upgrades!! State of the art gourmet kitchen. All bathrooms remodeled. Two bedrooms down three up. Spacious family room. Flat TV and Pool table and bar could be included. Wood floor through out the first floor. Inside laundry room. Built in barbeque. Central air. Close to park.Walking distance to great schools & shopping center, NO Mello roos and low low HOA dues. This home must be seen to be appreciated. Directions Culver & Irvine Center

Great exclamations!!!

Judging by the disheveled appearance, I have to assume this property belongs to a bachelor. You have to admire a guy that has a bar in his bedroom. If he gets his dates drunk, he doesn't have to pursuade them to go far. Those horseshoes are great: Get Lucky!

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

28 thoughts on “How The Lending Cartel Disposes Their REO Will Determine the Market's Fate

  1. Joe Manausa

    Well done. You asked “Does anyone think the traditional sales market is going to rebound this fall and winter?”

    Honestly, I don’t even think the great spinster Dr. Yun at NAR believes that. I’m thinking it is a minimum of 7 years to consume the foreclosures in most markets, with niche markets going faster or slower. This winter … no way!

  2. Planet Reality

    $24 a night hotel stays in Vegas, yep that is desperation.

    Take one trip to the Irvine Spectrum and marvel at the activity. The future of Irvine is bright. There is no comparison.

    1. IrvineRenter

      Actually, there is a comparison: Irvine properties are seven times the price of Las Vegas properties. I’ll take my chances that an imbalance that large will break in favor of Las Vegas.

      1. Planet Reality

        Good luck, your best investment may be a bulldozer to knock down miles of Las Vegas homes and the growing number of casinos in other parts of the country. You may also want to invest in something to stop the shifts in entertainment consumption.

    2. mikeyD

      That doesn’t tell me much. I have a half dozen 35-45yr old friends who have lost their high tech jobs, and moved home with the folks and are still spending like crazy. I don’t think they are even looking for jobs.

      Certainly none of them are in any position to even think about buy a home let alone a $900,000 one in Irvine.

  3. Pwned

    It will take years for the banks to clear out the shadow inventory, especially in areas like SoCal. Banks and the government will drag this out as long as possible with desperate measures taken every several months. Once the baby boomers have to start down-sizing in a couple of years even more homes will flood the market, competing with all the distressed sales. Older people will stop spending and many will have to move in with their kids as their pensions and retirement savings evaporate. Yes the average Irvine owner is better positioned than most Americans to withstand the storm, but this will be a national depression and everyone will be affected for years if not decades. Good morning 🙂

    1. GenXRenter

      I was thinking about this the other day – will baby boomers really downsize, or will they start staying in their homes so that their kids can move back in with them to raise a third generation? The baby boomers’ houses have appreciated so much that the boomers’ children cannot afford to buy in the neighborhoods they grew up in. But they still have the amenities and schools that make a great place to raise little ones.

      I hate reading listings that talk about a great “family neighborhood” where the homes start at $2M. Yeah, it was a great family neighborhood when you bought there in the 80s for $150K. Just don’t complain when you wind up in public assistance elder care because your kids have a crippling mortgage and can’t afford to help you.

      Will the boomers finally give up their “me me me” sense of entitlement and let younger families move into the “family neighborhoods” – either by letting prices fall or by letting the kids and grandkids move back in?

      I doubt it – I’m guessing many of them will have to sell, because they deserve to travel the world and drive Lexuses in their retirement, and they need the money locked up in their homes to live the lifestyle they deserve.

      1. Pwned

        It depends on the area/situation. I think the majority will HAVE to downsize to extract their equity and have any comfortable retirement to speak of. Since they’re not employed, these boomers have more flexibility to move. For the kids, they could only move in with mom and dad if they had jobs in that location – doesn’t matter how “family-friendly” the neighborhood is. So even in the more affluent areas, as they age the boomers will most likely in my opinion sell and either retire to smaller homes and use their equity to help support themselves and their kids, or just move in with their kids.

        1. Planet Reality

          I love it when I see people over generalize here and make crazy ass extrapolations.

          Dude, the vast majority of boomers live in 100K to 200K homes that are paid for across the country.

          In Irvine boomers live in million dollar homes that are paid for, but they make up a minuscule portion of the boomer population. Open your eyes to Reality, Irvine is not the norm to be generalizing the future of boomers. You shouldnt worry your little head about what will happen to the tens of thousands of Irvine boomers that exist on our planet.

          1. Pwned

            Dude. Talk about crazy ass extrapolations. These $200k – $1 million homes won’t be worth that for long. And since you say every one of these is “paid for” the boomers will have the choice of either sitting on that equity until they die or selling soon to cash out and buy a smaller house for much less. That’s reality.

          2. Planet Reality

            The reality is your kids generation will be complaining about you should you be so lucky to own a home that is paid for 30 years from now. Cue the circle of life music.

          3. GenXRenter

            That’s the thing – those Irvine boomers were able to buy those “million dollar homes” with upper-middle-class jobs and 30 year fixed mortgages. And they sure didn’t pay a million dollars for them, at least not when they were starting their families.

            While most of the country is not as bad as Orange County, the effect is exaggerated here with the higher home prices and fact that we have older homes that are still desirable. I’m not generalizing the future of boomers nationwide based on the norm of Irvine – rather I’m extrapolating the huge problem in Irvine based on the norm of baby boomers, which does worry my little head. Enjoy the state-run assisted living facility in Riverside, Mom, at least you’ll be closer to the grandkids!

            I don’t blame the individuals at this point; the system has blown up so that their expectations seem reasonable to what they see around them. But doesn’t it seem the least bit greedy to be looking for an $800K profit on something that you spent 25 years defecating and vomiting in?

          4. Pwned

            I know several examples of well-to-do older parents who have given their kids my age as much as they can without busting their retirement savings, and their kids still need help. They have the following options: A) They sell their homes to cash in to augment their retirements/support the kids. B) The kids get higher paying jobs and out of financial trouble. and C) They basically say “Screw you kids. We’re going to continue living in our over-sized houses with rooms we never go into until we die while you drown in an ocean of debt we helped you get into by convincing you that real estate is the bestest investment ever!” And all of this has to start playing out in the next 5-10 years, precisely when the foreclosure hangover will be in full force. Option A seems most likely to me.

  4. Kelja

    Strategic Default? What about “Strategic Foreclosure” which the banks are guilty of at the moment?

    Some fault the homeowner who defaults strategically. What about focusing on the banks who are performing strategic foreclosures.

    Term was just coined by Barry Ritholtz.

  5. Alan

    “Those horseshoes are great: Get Lucky!”

    Oh, that’s what they are! Thanks, I was thinking they were toilet seats and wondering why …

    Quite a lot of wasted space for a single guy’s home, and not much of a loss for a knife-catcher. Though I guess the loss is bigger than is apparent even if the HELOC was completely used, since it would have to be squandered on purchases with no (travel, restaurants) or low (car, electronics, boat) resale value. Granted having a new car is better than nothing, but the spending money is gone. Or is it possible to take out HELOC money as cash?

  6. Roger Rabbit

    Yea, Orange Country is depressing. Burbank, the media capital of the world, is the place to be. We have value homes in Toon Town, and we also throw in Disney and Warner Bros, not to mention NBC and ABC. CBS is only a couple of miles a way. The Burbank airport is great. Walk on and off. We have trains and subways as well.

    1. tenmagnet

      The people that work at the various entertainment and media companies commute to Burbank.
      They don’t actually live there.
      Lay off the weed.

  7. DarthFerret

    $172/sf for a 5BR SFR in Westpark?!?!

    Yep, you read that right. It’s a Westpark 5BR SFRIt will be interesting to see what this eventually sells for. This one will most certainly be flipped, but it is yet another data point on where home prices are headed in Irvine and all of The OC.

    As with my previous posts, I am not a [r]ealtor, and I have no connection to this home whatsoever. I am not posting this because I think it’s such a great deal, but rather because I think it’s more confirmation of the jaw-dropping plunge that is NOW HAPPENING in Irvine home prices. Some knifecatcher(s) will snap this up, and they will be underwater within 1-3 years.

    Be patient, aspiring loanowners. Supply cometh.


    1. DarthFerret

      Too quick on the Submit button…

      Meant to say: “It’s a Westpark 5BR SFR for <$500K." -Darth P.S. After El Camino Real and Orangetree, Westpark is one of my least favorite Irvine neighborhoods, so yet another reason that I am neither trying to grab this up for myself or pitch it to others. This is ONLY the latest in a long stream of data points on how Irvine home prices are getting CRUSHED.

  8. DarthFerret

    Also, we now have the first 3BR SFR in Woodbury below $500K:

    These cramped stucco boxes are SFR’s in name only, as the Woodbury builder went to the extreme in cramming this tract of SFR’s onto the tiniest lots possible. This lot is a mere 690sf bigger than the house!

    In any case, more of these price drops are sure to follow, and all these Woodbury properties have the joy of another 6 years of Mello-Roos tax. Yippee!


      1. DarthFerret

        Just noticed this in the description: “Tax records indicate this property as SFR, but it is a Detached Condominium.”

        I don’t understand that definition. How is it fully detached AND a condo? Anyways, its ‘condo’ status is what results in the higher HOA (Woodbury HOA + condo HOA). I wonder what that condo HOA covers? If it includes exterior upkeep/damage (walls, roof, landscaping), then that’s a pretty reasonable deal as condo HOA’s go.


  9. notjonathon

    Speaking of the boomers, you forgot to mention that Mom and Dad aren’t living there any more. Mom might be, with her third husband, Bob, the one she married after Uncle Al, the second one, got arrested for child abuse. Bob’s loud and keeps ranting about “them,” and how they’re trying to take over the country.
    Dad, on the other hand, still lives with Betty, the hard-drinking blonde he ditched Mom for, but you and Betty never got along anyway. Besides, Dad and Betty have a couple of kids of their own, and they’re not about to let you move in.
    Where’s an X-er or a Y-er to go?
    Seriously, changing patterns of household formation and extinction and the short-term nature of modern jobs (and marriages) threaten the financial future of all those McMansions even more than the soaped nails and substandard plywood they were built with threaten their physical future.

    And with the dollar already weak against other currencies (I’m old enough to remember not only a 360 Yen dollar, but a black market of 400 Yen or more), there is little room for a Nixon-style inflation and little appetite among US trading partners to allow further deterioration of the dollar.
    Remember that quantitative easing in itself does not create new money; that only happens when the bank actually lends–and banks can’t lend when they have such massive liabilities (on the books as assets). Borrowers, too, won’t borrow when their promised assets turn out to be worthless, so we enter the vicious circle of deflation, forcing younger people to rent, share or delay household formation, even if they have to live with Bob.

    1. Pwned

      Hehe – so true. The Bobs of the world make it even less appealing to move in with mom. Plus with these newfound “loves” the boomers aren’t inclined to focus on their kids and would rather finally travel the world and eat out several times a week.

  10. BD

    Hello All –

    …does anyone disagree that in general here in SoCal and other ‘hot markets’ we likely pulled a decade or more of appreciation forward? The estimates that I seem to suggest that we won’t be back to the highs until 2020 or later.

    I personally don’t think it will be that soon. Can anyone please explain to my logically how prices will rise from here or why buying is a great opportunity?

    I have a friend who works at one of the large banks. He and his family are wanting to buy but, despite the cheap rates believe that 10 years from now they are still likely to loose money on the purchase simply because of rates that must rise. By 2020 the US will be at 100% debt to GDP… ugly things will happen when spreads blow…

    Don’t get me wrong.. I want to own! But, it makes no sense to pay twice to own what it costs to rent…


Comments are closed.