Last week I profiled a neighborhood in Irvine that inexplicably dropped about 20% in value since the tax credit expired. As it turns out, widespread price declines are beginning to show up in the aggregate statistics. The leg down we have been expecting this fall and winter is happening now.
by KERRY CURRY — Friday, October 22nd, 2010, 12:25 pm
Clear Capital said a 6%, two-month decline in home prices represents a magnitude and speed not seen since March 2009.
“Clear Capital’s latest data through Oct. 22 shows even more pronounced price declines than our most recent (Home Data Index) market report released two weeks ago,” said Alex Villacorta, senior statistician with data analytics firm. “At the national level, home prices are clearly experiencing a dramatic drop from the tax credit-induced highs, effectively wiping out all of the gains obtained during the flurry of activity just preceding the tax credit expiration.”
In other words, the billions the government spent trying to prop up the housing market was a complete waste of taxpayer dollars. We are right back were we started. Since I have consistently maintained that would be the result, I won't pretend to be surprised.
Prices are now at the same level as in mid-April, two weeks prior to the expiration of the federal homebuyer tax credit. The drop, in advance of typical winter housing market slowdowns, paints an ominous picture that will likely show up in other housing indices in the coming months.
If previous correlations between the Clear Capital and S&P/Case-Shiller indices continue as expected, the next two months will show a similar downward trend in S&P/Case-Shiller numbers.
I have also consistently stated we will see the Case-Shiller roll over this fall and winter. We will likely take out the false bottom formed in April of 2009. The bear rally is officially over.
Clear Capital uses rolling quarter intervals that compare the most recent four months to the previous three months. The rolling quarters have no fixed start date and can be used to generate indices as data flows in, the multi-month lag time experienced with other indices.
See chart below:
So where does this leave us? If home prices take another steep drop, the resulting strategic defaults will end the bank's denial and may lead to another TARP bailout, only this time, some believe the bailout will benefit loan owners instead.
I just got off the telephone with economist, Forbes magazine columnist and newsletter editor Gary Shilling. As you probably know by now, Gary has been spot-on in his predictions on the economy, global markets and housing.
I asked him what was new and he told me that he had revised his forecast for housing. Here are some of his comments :
“If I am right and we see another 20% decline in housing prices, then we figure that the number of mortgages underwater will go from 23% to 40%. That is a huge amount and at some point the dam breaks,” says Shilling.
Why does the dam have to break? Nobody thought we would get this many underwater loan owners. Why didn't it break at 10% or 20%?
What would really cause problems is loan owner capitulation. If and when loan owners give up hope and accelerate their defaults, banks will have to deal with several million more delinquent squatters. So far they have been dealing with it through a combination of denial and government assistance. Why would a few million more delinquent squatters make any difference?
That’s bad news for the economy and bad news for homeowners and real estate brokers. It’s also bad news for banks and the stock market.
Shilling went on to say that if there is a bright spot in all this gloom it probably will benefit the profligate spending homeowners, who were lured by men like Angelo Mozilo into homes and mortgages they couldn’t afford.
Bailing out HELOC abusers is a bright spot? Perhaps for the HELOC abusers, but not for anyone else.
“Home ownership still has a lot of political clout in this country,” said Shilling. ” By hook or by crook, the politicians will come up with some kind of bailout for a lot of people underwater on their mortgages.”
In other words it doesn’t help anyone to have millions of homeowners foreclosed on and thrown into the street. Gary estimates that houses that are foreclosed on and vacant lose an average of $1,000 per month in value as long as they remain unsold. He adds that all the scrutiny that banks are under fire over concerning foreclosure procedures is creating the perfect environment for a massive bail-out of deadbeat homeowners.
If we bail out HELOC abusers, we will have made the final transition to "banana republic" status. You see the borrowers I profile here every day. Do you want your tax money to go toward paying off their debts? While you were being frugal and playing by the rules, they were out spending like kool aid intoxicated owners and having a good time. Now they are looking to you to pick up the tab.
Perhaps I am too cynical, but I also wonder if this story isn't a plant to convince underwater homeowners to stay on a bit longer and make a few more payments. If there is a false or feeble hope of principal forgiveness, many considering accelerated default may delay the inevitable to see what happens. This is exactly the kind of story the banks want to have circulating the web.
Gary thinks we need a Resolution Trust Corp (RTC) type solution for the housing market. You may remember that the RTC was set up by the Office of Thrift Supervision in the 1980s to deal with hundreds of insolvent thrifts who, like homeowners, got in way over their heads. Some of them invested in Mike Milken junk bonds, others invested in real estate and other highly leveraged loans.
The RTC entered into a number of equity partnerships to help liquidate real estate and other assets it had inherited from insolvent thrift institutions. Gary says the key to the RTC’s success was that it acted relatively quickly and that is what is needed for the housing market in order to lift the giant overhang caused by our zombie homeowner situation.
We don't need an RTC-type institution to clear out the housing inventory. What we need is for the banks to foreclose on the squatters and put the houses back on the market. The sooner we get this done, the sooner the housing market bottoms and the sooner we can get back to a healthy real estate market. Amend-extend-pretend creates an overhand of supply that will hinder economic growth for a decade.
I reminded Gary that many investors got rich from buying assets of troubled savings and loans, including billionaire Leon Black. We shall see who steps up this time. Any guesses?
Me for one. There are many people stepping up to buy these troubled assets. Cash is king in the aftermath of a debt-fueled asset bubble.
They thought it would be okay
Many of the Irvine equity strippers really believed everything would work out to their advantage. The value of their property was steadily climbing, and the magic of California real estate assured them prices would rise forever. Taking out all the equity to spend it seemed like no big deal. What's the worst that could happen?
Well, if they over-borrowed based on ever-increasing home prices, and if they can't afford the debt service payments, they may be forced to sell. If prices go down, they can't sell, and they end up in short sale or foreclosure. Welcome to the reality of many of those who spent their houses.
Today's featured property was purchased for $335,000 on 3/19/2002. The owners used a $268,000 first mortgage, a $50,250 second mortgage, and a $16,750 down payment.
On 4/8/2002 they obtained a $67,000 HELOC which allowed them to consolidate the second mortgage and withdraw all of their down payment. It took them less than three weeks to get their money back out of the property.
On 5/23/2003 they refinanced with a $304,000 first mortgage and a $38,000 HELOC.
On 8/23/2003 they obtained a $76,000 HELOC.
On 4/20/2004 they obtained a $98,000 HELOC.
On 10/26/2004 they refinanced with a $448,000 first mortgage.
On 11/29/2004 they got a $100,000 HELOC.
Total property debt is $548,000.
Total mortgage equity withdrawal is $229,750.
Total squatting time is about 18 months so far.
Foreclosure Record
Recording Date: 10/23/2009
Document Type: Notice of Sale
Foreclosure Record
Recording Date: 07/20/2009
Document Type: Notice of Default
Since they stopped going to the housing ATM in 2004 and prices went up thereafter, I think these borrowers knew they were getting overextended and chose not to go Ponzi. They were trying to be somewhat responsible. Unfortunately, it was too late.
According to the listing agent, this listing may be a pre-foreclosure or short sale.
This is a beautiful home with 3 bedrooms 2.5 baths, formal living room with fire place, dining room, kitchen with granite counters, extra room off kitchen that is great for eating area or many have used this area as a family room with sofas and TV area, upstairs family room and office area, this home has a nice patio that leads to a 2 car garage. Close to great schools and shopping!
Are you ready to pay to bail out the HELOC abusers?
I have been extremely busy lately. The responsibilities of being an entrepreneur are both exhilarating and exhausting. I have many great Las Vegas stories, and when I get a moment to breathe, I will start to write more about them. No drunken debauchery (I don't drink, and I am happily married), but I have been negotiating cash-for-keys, getting into title disputes with Fannie Mae, cleaning out Sanford and Son's property, and generally having a great time.
I have received several emails from investors concerning my progress. I should have the subscribers website up next weekend. I am still setting up the accounting system, and until I have detailed and accurate reports, the website will not be ready. Just so you all know, the fund currently owns 5 properties, and despite the usual headaches associated with this kind of work, I am very pleased with the margins.
Writing for the IHB is a great creative release for me, but I have been so busy, I haven't been able to devote the time to it I should. As I get my systems in place, my job should get a little easier, and I will put more time back into my writing.
Guest Post
THE REAL STORY ABOUT YOUR HOME
Roger Banowetz, Retired City Building Inspector ICBO Certified, cell (714) 401-5980
Second lesson: What about Termites and dry-rot
Here is the truth about termites; it is not like you see on T.V. or what you have been told how it affects your home; termites are in almost every home, and termites don’t just come to your home and stay there until your house is all eaten up. That’s not how it works.
Don’t be afraid. Termites come and go, and they are not monogamist to your home. It takes many years to do significant damage, and most important you do not ever have to use any poison in your home ever. The official code says (paraphrasing) if you have termite or dry-rot in or on the lumber you must remove and replace infected area with new lumber and your home is back to original. Think of it, contractors cover your home and fill the whole home with “harmless” gas, and this gas goes though drywall and beams and kills the bugs but doesn’t leave any poison on your carpet or floors for your children or your animals. Of course, it does, and down the road your animals get sick and you don’t know why.
Some termite inspectors will try to scare you by telling you your home is in danger and that is not true as long as you keep up normal maintaince, this is not magic you can see the same things inspectors can see so if you knock on your door or window frames and termite dust falls out but you don’t see any termites then they were there and are now gone. In that case just replace the infected wood, but if you see termites then there are other ways to take care of the problem. Orange oil is a way, borax is another. The point is don’t be afraid of your home. If you have questions call your local building dept. Let your city be your friend, and if have concerns about your city please call me and I will be your friend.
According to the listing agent, this listing is a bank owned (foreclosed) property.
OPEN FLOOR PLANE 1 BEDROOM, 1.5 BATH WITH BONUS ROOM, LIVING ROOM, INSIDE LAUNDRY ROOM, RECESSED & UNDER CABINET LIGHTING, UPGRADED FLOORING AND COUNTERS, APPROX. 1135 SQ FT, ASSOC POOL, SPA, COURTYARD, BBQ AREA, TENNIS COURTS, PLAYGROUND, FIRE PT, FITNESS CENTER, HOA DUES $266.98 MO, CLOSE TO FREEWAYS, SHOPPING, PARKS & ENTERTAINMENT
WILTON, CT—Michael Chandler looks out the windows of his sun room, past the swimming pool and guest cottage, to the wide backyard where his two children are playing with their pet dalmatian, Scotty. At a time when Americans everywhere are sharing the struggle of a once-in-a-generation recession, Chandler can't help but wonder how he and his family fell through the cracks.
"It's just not fair," said the 49-year-old real estate developer and grandson of oil baron Duncan Chandler. "Everyone is worrying about an uncertain future and coming together to express their outrage, and I don't get to be a part of it."
Staring out at the ornate garden where workers were installing a large marble fountain, Chandler sighed and added, "It's like I don't even exist."
According to the multimillionaire, the past 18 months have been incredibly difficult to endure, as he is often left feeling excluded from an American populace that includes millions who struggle every day to make ends meet. Chandler, who watched helplessly as his enormous fortune easily withstood the market freefall, has been "completely left out" of one of this nation's most significant cultural moments.
"Everybody's suffering," Chandler said. "And here I am, not scrimping and saving at all, with no demoralizing periods of financial hardship, or frantic weeks living paycheck to paycheck. What about me, you know? Where's my struggle?"
"Everyone's supposed to get a fair shake at this misery," Chandler added. "Even incredibly wealthy people of privilege like me."
Throughout the economic downturn, Chandler has tried to tap into the recession and experience some of the sorrow and widespread desperation he has so cruelly been denied. Sadly, all of his attempts have been thwarted by his seemingly insurmountable stack of riches.
According to longtime financial adviser Ben Schultz, Chandler "constantly" inquires as to whether any of his diversely invested mutual funds are losing money, but is always let down.
"Michael's portfolio is better than ever, to be honest," Schultz told reporters. "In fact, his only real connection to the recession is that he helped to cause it by artificially inflating home prices and making millions off unstable derivatives trading."
Chandler has been so devastated by his inability to feel the same anguish and hopelessness the rest of the country is enduring that he took the extraordinary step last week of speaking openly with a chauffeur about how hard the recession has been on everyone. He even went so far as to tip the driver 50 percent less than usual in an attempt to show the man that he, too, was hurting financially.
"I kept waiting for him to say, 'Well, times are tough on all of us,' or 'Who isn't feeling the pinch these days, eh?'" Chandler said. "But he just seemed really angry."
Despite his best efforts, Chandler told reporters he knows that someday the crisis uniting so many of his fellow Americans will pass, and that the far-reaching anger will give way to the worship of money that preceded it.
But until then, he admitted, it will hurt to be excluded.
"Every month they announce tens of thousands of layoffs," Chandler said, "and every time, I'm not one of them. No matter what I say or do, it'll never be me. My only memory of this historic point in time will be the prosperity I have always known."
Added Chandler, "Dear God, when's this recession going to end?"
The difference a HELOC makes
Do you remember the chart of the options the lender and the borrower have in a delinquency?
HELOCs can be either a purchase money or a non-purchase money loan. For it to be a purchase money loan, it must be originated and fully used to purchase the property. The HELOC retains its non-recourse status up until the day the borrower first uses it for any purpose other than the purchase of the property. For instance, if a borrower uses a $132,216 HELOC to purchase a property (as today's featured owner did), and he borrowed all $132,216 to buy the property (no way to know on my end), the loan is non recourse. However, as time goes by and the borrower pays down the loan, there is equity available for the borrower to extract. The moment they do, all non-recourse protections are lost.
This issue becomes very important to today's featured property owner. It determines whether or not he walks away with no further responsibility to the lender for the debt, or if he falls down to the last three options on the chart — none of which are very appealing. The property was purchased for $661,500 on 12/22/2005. The owner used a $528,864 first mortgage, a $132,216 HELOC, and a $420 down payment.
In either case, the sale of this property is going to ruin this guy's credit, but whether or not he used that HELOC determines if he only loses $420 or $132,216. That is quite a difference.
According to the listing agent, this listing may be a pre-foreclosure or short sale.
This is a three bedroom townhome style open floorplan that is perfect for entertaining. Bring your must discerning buyer and notice all the fine detail in the finely open gourmet kitchen. could have a main floor bedroom or office. Woodbury is one of the nations finest communties with a walk to destination mall amenties to fit any five star accomodations and the finest schools. Come see this gem. Model perfect.
communties? amenties? accomodations?
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.
After suspending foreclosures in order to review cases that may be flawed by procedural errors or fraud, major mortgage companies have injected new uncertainty into the already weak housing market. While few of the homeowners under scrutiny are likely to avoid foreclosure, the freeze adds additional confusion and delays recovery of the troubled housing sector, according to Wharton faculty and real estate analysts.
The foreclosure flap is the most recent of many setbacks for the troubled industry, even as a new generation of potential buyers is rethinking the traditional dream of homeownership. "Buying a home doesn't make sense for a large proportion of the population," says Wharton real estate professor Fernando Ferreira, noting that ownership reduces the flexibility to pursue work in other regions and ties up cash in a down payment that might be used for better investments. "We forgot these lessons in the housing boom. But I think the new generation is learning them — at least for the next five to 10 years."
Our government's obsession with home ownership has blinded lawmakers and bureaucrats to the advantages of renting. Real estate is not going to produce high returns over the next decade as we work off the excesses of the housing bubble, and everyone who has bought property because they think they will make a fortune on appreciation is going to be very disappointed.
After discovering that employees violated procedures while attempting to process a crush of foreclosure cases, three of the nation's leading mortgage servicers — J.P.Morgan Chase, GMAC and Bank of America — are holding off on further action in 23 states that require foreclosures to undergo judicial review. One GMAC "robo-signer" acknowledged signing off on as many as 10,000 cases a month, even though the law requires the signer to review all documents personally. Bank of America later extended its halt to foreclosures in all 50 states.
Wharton real estate professor Susan Wachter says the foreclosure freeze might temporarily buoy prices by keeping foreclosed properties off the market and could give some families another chance to come up with enough money to save their home. However, she expects that most of the now-stalled foreclosures will eventually move forward. "This will only delay the market clearing process."
The banks can't afford the write-downs associated with the market clearing process, so they actively encourage and participate in delaying foreclosures.
According to Wharton real estate professor Georgette Chapman Phillips, lenders may be guilty of shoddy paperwork, although she stops short of calling it fraud. Lengthy delays or overturning foreclosures based on improper documentation, she adds, would create new levels of moral hazard that might lead even more homeowners to stop paying their mortgages. "This is a horrible mess created by the banks and the secondary market. It's sloppiness, but the borrowers are not asserting fraud in the lending of money. We can't ignore that, at the bottom of all this, the people who were foreclosed upon didn't pay their mortgages."
All the nonsense about improper foreclosures seems to miss one basic point: the people being foreclosed on are not paying their mortgage. Banks are worried that walking away will be socially acceptable. Well, it has. People who are not paying their mortgages have now achieved victim status which will almost certainly make their ranks grow larger. The housing entitlement in this country has gotten so bad that people no longer believe they have to pay for their housing. Whatever they can move into they can keep.
The Key Driver: Jobs
The questionable cases are part of a backlog of more than 1.2 million loans that are in the process of foreclosure in the United States, according to RealtyTrac, a housing data firm based in Irvine, Calif. In addition, another 900,000 properties taken back by banks remain on lenders' books, while five million more loans are seriously delinquent. The National Association of Realtors reports that distress sales, including foreclosures, made up 34% of all existing home sales in August.
For every property in visible bank inventory, there are four that are in shadow inventory waiting for the banks to initiate foreclosure proceedings.
"The only way to clear prices is by getting rid of the foreclosure backlog, but that will take a long time to work out. It's still a multi-year process," says Wharton real estate professor Joseph Gyourko, adding that 20% to 25% of all U.S. homes are worth less than what their owners owe lenders. "Every one of them is a candidate for default and foreclosure. It will just take a while to work through."
It looks like flipping houses in Las Vegas will be a viable business plan for a while….
While housing is always highly cyclical, Gyourko says the current prospects for recovery are hampered by extremely low levels of activity throughout the market, including new housing starts and sales volume. And the current slump is different from others because it is driven not only by imbalances in the sector, but also by larger economic problems. "This recovery is different. It's slower than normal…. You won't get much pickup in housing market activity — buying and selling — until you get job growth." Wachter agrees: "The key driver in housing is still jobs."
It is ultimately about jobs, but we have a chicken and egg problem with housing. One reason growth in residential investment corresponds to the bottom of recessions is because once job growth creates housing demand, that puts people back to work in homebuilding which creates even more job growth and more housing demand. Since our current problems are centered in housing, any recovery will not get the same housing demand and homebuilding job growth that helps the recovery gain strength.
Rick Sharga, senior vice president at RealtyTrac, says the latest foreclosure problems represent a "breach of trust" but will have little effect on the final resolution of cases. "It really is more of a temporary delaying issue." The foreclosure reviews will probably add 60 to 90 days to the process, Sharga predicts. This could cause foreclosures to be delayed an additional 6 to 18 months and string out the adjustment in home prices by that amount of time, according to residential mortgage tracker Access Mortgage Research & Consulting. While Chase has disclosed that 56,000 cases are under review, the other companies have not said how many foreclosures will be delayed. Some of the states with the largest numbers of foreclosures — including California, Nevada, Arizona and Michigan — are not ones that require formal judicial review for a lender to take back possession of a property.
According to RealtyTrac, foreclosure filings — including default notices, scheduled auctions and bank repossessions — were reported on 338,836 properties in the U.S. in August, up 4% from July, but down 5% from August 2009. One in every 381 U.S. housing units received some form of a foreclosure filing during the month. Sharga suggests that 2011 will be the peak year in bank repossessions, and that "2012 will be a little better….In 2013, we could see foreclosure activity drop significantly [as] we deal with getting through the overhang of foreclosed properties."
I think he is dreaming to think foreclosure activity will see any significant decline in activity even when the economy picks up. People couldn't afford their houses in good times, so when the economy picks up, loan owners are still facing the fact that they can't afford their homes. Foreclosure activity will likely peak in 2012, but there will be a long tail as this drags on for many years.
Of the 900,000 foreclosed homes now owned by banks, only a third are on the market, he notes. Banks are carrying homes on their books because of delays in processing the volume of paperwork and also because of state laws that put a six-month hold on sales as a way of giving owners a last chance to pay back their loans. Another factor, Sharga says, is banks' unwillingness to take title to foreclosed properties because new accounting rules would require the homes to be valued at their current market price. In many cases, the amount would be less than the outstanding loan, diminishing the bank's financial statements.
While some forecasters have suggested there are as many as eight million homes in the so-called "shadow inventory" of properties waiting to come on the market, RealtyTrac estimates that the total number of distressed properties that will change hands as a result of the financial crisis will top out at 3 million to 3.5 million. According to Wachter, when homes are sold in foreclosure, they go for 40% to 50% less than in a standard transaction between homeowners.
I don't know why he thinks so many will ultimately keep their homes. I wager the number will be closer to eight million homes than three million homes.
… According to Wachter, a look at the city-by-city Case-Shiller data shows that homes in some markets are improving strongly while others are continuing to lose value. For example, the most recent data shows home prices are up in San Francisco (11.2%), San Diego (9.3%) and Los Angeles (7.5%) compared to the same month last year. At the same time, prices for the period are down in Las Vegas (4.9%), Charlotte (3.5%) and Tampa (3.2%). "Different markets are responding in different ways," Wachter notes. "The story now is that markets are bifurcating between the ones that are coming back and the markets that are very slow to recover."
The differences in the performance of various markets has largely been dictated by how much squatting the banks are allowing. In the markets doing the best, loan owners are not being foreclosed on. in the markets doing the worst, loan owners are being booted out.
Homeowners who are disappointed with their decision to buy a home are only discovering what housing economists have always known — a home should not be considered an investment, Gyourko states. Paying a mortgage can be a good way to save because it requires the discipline to make regular payments. But, he notes, a rise in the price of a home is less valuable than a rise in price for other investments, such as stocks or bonds. If a homeowner pays $100,000 for a house that appreciates in value to $200,000, the gain is not really $100,000; the homeowner would not realize the gain because he or she would still need to find a new place to live. A comparable home would also have appreciated as much, eating into the homeowner's gain. A stock that rose in value by the same amount would yield the full $100,000 gain upon sale, less taxes.
Did you catch that? Home price appreciation is not the great deal everyone thinks it is. You still have to live somewhere, and if you spend the house — like everyone else did — then you still need to replace it with a house that has also gone up dramatically in price. People who buy for appreciation do not get the same advantages as a competing investment. Of course, everyone ignores those issues when prices are rallying and lenders are giving out HELOCs like crack to an addict.
In the years leading into the crisis, Gyourko says, homeowners "fooled" themselves into thinking their homes were investment vehicles, and they leveraged the value of their homes to borrow new money for vacations, cars or college educations. "But that's risky. When prices dropped, these homeowners were underwater." The only time home price appreciation counts as savings is when the homeowner trades down in the quality of their housing, or dies and no longer needs a new place to live.
Homeownership also prevents workers from relocating to get a better job if they are locked into a home that cannot easily be sold. In a paper written with Ferriera, Gyourko found that between 1985 and 2007, people with negative equity in their homes were one-third less likely to move. "A lot of people are stuck," he says.
Loan owners don't move. If there is a better job in another town, forget it.
According to Ferreira, the market is close to being stabilized, but could continue to decline over the next two years; he does not expect a pick up in prices for five or possibly even 10 years. In addition, it is difficult to even forecast prices because so few transactions are occurring. Between 1980 and 1986, he says, the U.S. housing market recorded 600,000 to 800,000 home sales per year. That figure jumped to 1.4 million in 2005-2006. Now the market is down to 350,000-400,000 home sales per year, even though the nation's population has grown more than 30% since 1980.
Yet another problem that will weigh on the market in the future are those homes owned by people who are able to make their mortgage payments, or have paid off their loans, but would still like to move to a bigger or a smaller home, to a new neighborhood or to another state. These people, Ferreira says, have been holding off on listing their homes because the market is so weak. Eventually, he adds, they will grow tired of waiting and will put their homes up for sale, adding even more supply to the market and further depressing prices. "They can stick with the investment for now, but the reality is that eventually — and that can be one, two or three years from now — a lot of people will be tired of investing in housing and will sell for any price."
He is describing market capitulation. Until everyone abandons hope and sells, the overhang of supply will keep prices from rising.
Over the long run, Ferreira predicts that housing will return no more than 3% a year, barely keeping pace with inflation. Going forward, he says, homes should be considered a place to live, not an investment. "I strongly recommend not using housing as a potential investment. Leave that for the speculators. If you buy a house, you should buy it for your own consumption. That's all you should care about."
Owner occupants should never consider home price appreciation in their purchase decision. For one, most people dramatically overestimate how much house prices will go up. When people start factoring in appreciation, they are usually just playing games with numbers to find some rationalization for an emotional decision they already made.
This neighborhood is crumbling
I have written many times about how the banks have withheld supply to artificially support prices. The neighborhood where today's featured property is located is a perfect example of what happens when the inventory gets too abundant for the available sellers to mop up.
This particular neighborhood within Oak Creek is north of Alton and adjacent to the shopping center. There are numerous three-story units and a mix of other product types. The prices for these units has been holding steady at $610,000 to $650,000 for the last 18 months. Since the expiration of the tax credits, very little has sold, and a few of the properties not mired in short-sale debt have been competing for the few remaining buyers.
The bank bought this property at auction in February, and they put in on the MLS in June. The have been steadily lowering their price, and they are still unable to find a buyer:
Date
Event
Price
Sep 29, 2010
Price Changed
$500,000
Sep 02, 2010
Price Changed
$555,000
Jul 29, 2010
Price Changed
$595,000
Jun 22, 2010
Listed
$625,000
Feb 16, 2010
Sold (Public Records)
This home was foreclosedForeclosure is a process that transfers the right of home ownership from the homeowner to the bank or lender. A home goes into foreclosure when the owner stops paying his mortgage loan payments. and bank-ownedShort for "real estate owned," REOs are foreclosed homes owned by banks and lenders..
$617,971
Their first list price was reasonable for comps at the time. When they lowered the price below $600K, I imagine they where quite surprised the offers didn't come flooding in. Now they stand at $500,000. Where are the multiple offers over the ask? Why have they had to lower the prices 20% and they still haven't found a buyer?
The answer is simple: the tax credit pulled all the demand forward, and there are no buyers ready, willing, and able to pay the previous price equilibrium. I must admit, I am surprised by how far the banks and the flippers have had to lower prices to get out of these properties. When some of these properties close, the comps are going to be crushed, and a big drop will become reality.
Hat tip to Shevy for pointing out this neighborhood's activity.
A refi they will regret
The previous owner of today's featured property paid $695,000 on 6/28/2004. They used a $556,000 first mortgage and a $139,000 down payment. The wend into default in mid 2009, and the bank bought it at foreclosure for $617,971 which is the total of the note, missed payments, various fees, and so on — BTW, that means many of the bank losses I show are actually much larger.
The owners refinanced their first mortgage for $562,500 on 6/15/2007. They only took out $6,500 which probably covered their origination fees plus gave them a few dollars. The refinance cost them their non-recourse protections. When the bank finally disposes of the REO, they may go after this couple for the shortfall. The previous owners already lost $139,000 and their good credit, and later the bank may come back for another pound of flesh.
-$375 ………. Tax Savings (% of Interest and Property Tax)
-$665 ………. Equity Hidden in Payment
$27 ………. Lost Income to Down Payment (net of taxes)
$63 ………. Maintenance and Replacement Reserves
============================================
$2,101 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$5,000 ………. Furnishing and Move In @1%
$5,000 ………. Closing Costs @1%
$4,825 ………… Interest Points @1% of Loan
$17,500 ………. Down Payment
============================================
$32,325 ………. Total Cash Costs
$32,200 ………… Emergency Cash Reserves
============================================
$64,525 ………. Total Savings Needed
Property Details for 5 PERIWINKLE Irvine, CA 92618
——————————————————————————
Beds: 2
Baths: 3 baths
Home size: 1,750 sq ft
($286 / sq ft)
Lot Size: 2,000 sq ft
Year Built: 2001
Days on Market: 117
Listing Updated: 40457
MLS Number: U10002802
Property Type: Condominium, Residential
Community: Oak Creek
Tract: Othr
——————————————————————————
According to the listing agent, this listing is a bank owned (foreclosed) property.
PRICE REDUCED! WELCOME HOME TO THE CITY OF IRVINE AND WHAT MAY WELL BE THE VERY BEST CITY IN ORANGE COUNTY.THIS IS A SINGLE FAMILY DETACHED CONDOMINIUM LOCATED IN THE SOUGHT AFTER OAK CREEK COMMUNITY. THE PROPERTY FEATURES TWO BEDROOMS PLUS A DEN, AND 3 BATHROOMS. YOU ARE PART OF A GATED ASSOCIATION THAT CREATES THE FEELING OF BEING ON PERMANENT VACATION IN AN EXCLUSIVE RESORT. YOU WILL ENJOY THE ASSOCIATION POOL AND SPA, AND MANICURED GREENBELTS. THE LOCATION IS FANTASTIC YOU ARE CLOSE TO ALL THE GREAT THINGS IN IRVINE; PARKS, SCHOOLS, GOLF,THE NATURE CONSERVANCY, RECREATION, THE SPECTRUM, AND SO MUCH MORE. SO COME HOME TO IRVINE, AND START TO LIVE THE ORANGE COUNTY LIFESTYLE TODAY. THE BUYER SHOULD INVESTIGATE THE PROPERTY WITH PROFESSIONAL INSPECTORS.
Anthony Mozilo, former CEO of Countrywide Financial, has settled his case with the SEC and paid a large fine. IMO, he is a crook, and he should go to jail.
If I had to narrow my list down to the people most responsible for the housing bubble, Anthony Mozilo would be near the top of the list.
The Option ARM loan was the primary loan product that inflated the housing bubble. Using negative amortization and teaser interest rates, people were able to borrow more than twice the amount than they could afford with a conventional 30-year fixed-rate amortizing mortgage. Once the Option ARM imploded and lending retreated to conventional mortgages, prices needed to fall significantly to rebalance affordability. The Option ARM was the Ponzi virus that caused the debilitating financial disease that inflated the housing bubble and created the current economic morass still plaguing the country.
The only person perhaps more responsible for the housing bubble is Alan Greenspan. If he hadn't let the Ponzi virus out of its vial, and if he didn't allow unregulated insurance "swaps" to encourage dumb money to flow into what they thought were riskless transactions, the air that inflated the housing bubble would not have found its way into Option ARM loans being peddled by Mozilo. Greenspan and Mozilo are my nominees for the fools most responsible for the housing bubble.
Alan Greenspan was clueless, incompetent, and philosophically blinded to the mess he created. What's arguably worse about Mozilo is that he recognized that he released a monster and did nothing about it. Personally, I hope he does go to jail, and he forfeits everything he made from about 2002 onward. It won't happen, but I can always wish for it….
By GRETCHEN MORGENSON — Published: October 16, 2010
ON June 27, 2006, Countrywide Financial, the nation’s largest mortgage lender, was about to close its books on a record-breaking six-month run. The housing market was on fire and Countrywide’s earnings were soaring. Despite all the euphoria inside the company, some executives noticed that Angelo R. Mozilo, the company’s brash and imperious chief executive, seemed subdued.
At a town hall meeting that day with 110 of the company’s highest-ranking executives in Calabasas, Calif., Mr. Mozilo sat alone on a stage, fielding questions and offering rosy predictions about his company’s prospects. But then he struck a sober note in response to a question from one of his colleagues.
The questioner wanted to know what, if anything, worried Mr. Mozilo, according to a participant.
“I wake up every day frightened that something is going to happen to Countrywide,” Mr. Mozilo said.
A year and a half later, that day arrived. In January 2008, Countrywide, the company he had built from a two-man mortgage operation into a lending behemoth, had to sell itself to Bank of America at a bargain price because it was being smothered by losses tied to a mountain of sketchy loans.
Let's be very clear on this point: Anthony Mozilo made a fortune while running his company into bankruptcy. While his company profited hugely as the Ponzi Scheme took over, Mozilo divested himself of his options and shares so that very little of his personal fortune was lost when Countrywide went under.
Yet almost until the moment Countrywide was taken over, Mr. Mozilo was publicly buoyant about its ability to ride out the mortgage crisis. Privately, however, he occasionally offered a gloomier assessment of Countrywide’s prospects and practices, according to e-mail and interviews.
What Mr. Mozilo, now 71, knew about Countrywide’s problems, and precisely when he knew it, was what eventually led the Securities and Exchange Commission to file civil securities fraud charges against him last year. And on Friday, in the Los Angeles courtroom of John F. Walter, a federal District Court judge, representatives for Mr. Mozilo and for two of his top lieutenants — David Sambol, Countrywide’s former president, and Eric Sieracki, the company’s former chief financial officer — settled those charges.
As part of the settlement, Mr. Mozilo and his co-defendants didn’t admit to any wrongdoing. But Mr. Mozilo agreed to pay $67.5 million in a penalty and reparations to investors and is permanently banned from serving as an officer or a director of a public company. Mr. Sambol is paying $5.52 million in a penalty and reparations and agreed to a three-year ban from serving as an officer or director of a public company. Mr. Sieracki agreed to pay a $130,000 penalty.
The settlement is a signal event in the credit crisis and its aftermath, including the foreclosure debacle that is now rattling the mortgage market and upending the lives of average homeowners. Although Goldman Sachs settled securities fraud charges earlier this year, Mr. Mozilo is the first prominent chief executive to be held personally accountable for questionable business practices that contributed to the housing bubble, the dizzying financial machinations that surrounded it, and a ruinous lending spree that ultimately threatened to undermine the nation’s economy.
They got him! $67.5 million!
Mr. Mozilo and his two former colleagues were accused of misrepresenting the company’s declining lending standards during 2006 and 2007 and portraying themselves publicly as underwriters of high-quality mortgages even as they learned that the company’s loans were becoming increasingly risky.
The government also contended that Mr. Mozilo and Mr. Sambol improperly profited on inside information about the company’s problematic loans when they sold Countrywide shares. From May 2005 to the end of 2007, Mr. Mozilo generated $260 million from his stock sales, while Mr. Sambol’s sales produced $40 million, the government says.
$67.5M was not enough. He needs to forfeit all of his ill-gotten gains. With as large as his fine is, as long as he profited from the deal, there is no deterrent for others to do the same.
Lawyers for Mr. Mozilo declined to comment. Mr. Sambol’s lawyer said his client had “put the matter behind him for the benefit of his family and loved ones.” Mr. Sieracki’s lawyer noted that the S.E.C. had decided not to pursue fraud charges against his client and that his client had not been barred from serving at a public company. Bank of America is paying Mr. Mozilo’s legal bills. Countrywide is paying $5 million toward Mr. Sambol’s repayment to investors and $20 million of Mr. Mozilo’s reparations.
Bank of America is paying his legal bills and part of his fine? That's outrageous!
The S.E.C.’s legal team, led by John M. McCoy III, associate regional director of the enforcement division, said the settlement amounted to a hard-won victory.
In a statement on Friday, Mr. McCoy said: “This settlement will provide affected shareholders significant financial relief, and reinforces the message that corporate officers have a personal responsibility to provide investors with an accurate and complete picture of known risks and uncertainties facing a company.”
Actually, it reinforces that corporate CEOs can do whatever they want, and either the taxpayers or the shareholders will have to clean up the mess. CEOs are above the law.
Battered by widespread criticism that it failed to corral scam artists like Bernard L. Madoff and to effectively police Wall Street as a whole during the years leading up to the credit crisis, the S.E.C. may now regain some stature as a successful litigator and investor advocate from its settlement with Mr. Mozilo.
“As is the case with most settlements, this is a compromise where nobody comes out a complete winner,” said Lewis D. Lowenfels, an authority on securities law at Tolins & Lowenfels. “The S.E.C. gets a substantial monetary settlement and a bar with respect to Mozilo serving as an officer or director. On Mozilo’s side, he is probably satisfied to have this behind him. He suffers a considerable stain on his reputation, has to pay a substantial amount of money but retains significant wealth and at the age of 71 may find the possibility of being an officer or director of another public company less enticing.”
The fact that Mozilo finds any "win" in this situation is a loss for everyone.
COUNTRYWIDE FINANCIAL began operations in 1969, when Mr. Mozilo and his mentor, David Loeb, refugees from an established mortgage lender, decided to start their own loan originator. The company grew slowly at first, but by 2004, Countrywide was the nation’s largest home lender, generating annual revenue of $8.6 billion. Mr. Mozilo ran the company alone after Mr. Loeb retired in 2000. (Mr. Loeb died in 2003.)
After Mozilo's partner dies, Mozilo unleashes a Ponzi Scheme that ruins the company and the national economy.
An up-by-the-bootstraps entrepreneur — his father was a butcher in the Bronx — Mr. Mozilo was obsessed with wresting market share away from his buttoned-down rivals in the staid world of banking.
“I run into these guys on Wall Street all the time who think they’re something special because they went to Ivy League schools,” he told The New York Times in 2005. “We’re always underestimated. And we still are. I am. I must say, it bothered me when I was younger — their snobbery and their looking down on us.”
In an industry that favored low-key behavior and conservative dress, Mr. Mozilo stood apart. He offered blunt opinions about banking and was open about his corporate aspirations. To complement his ever-present tan, he wore flashy clothes and drove expensive cars like Rolls-Royces that were often painted in a shade of gold.
Still, he managed his business for most of its history with a tight focus on the bottom line and on vigilant lending practices.
If he was so vigilant, why did he approve the Option ARM? Sometimes I wonder if guys like him approach the end of their career and say "WTF, I will maximize short-term gains, make a fortune, and walk away when it all crashes." He is old enough, he probably couldn't spend his fortune if he tried. Like Greenspan, his reputation will never recover, but perhaps a couple of hundred million dollars makes you care less about that sort of thing.
For years, Countrywide specialized in plain-vanilla, fixed-rate loans. As recently as 2003, such mortgages accounted for 95 percent of the company’s loans, according to regulatory filings. Countrywide was the biggest supplier of mortgage loans to Fannie Mae, the federally backed mortgage finance giant that was also hobbled in the credit crisis.
Don't for a moment think that Mozilo is any less responsible for this disaster just because the GSEs got into the game late. The GSEs were trying to make up market share being lost to subprime lenders and lenders like Countrywide that were taking market share with Option ARMs.
In 2004, Countrywide’s sober-minded lending style changed significantly. It began aggressively offering loans to first-time home buyers and to borrowers with modest incomes. These mortgages were known in the industry as “affordability products,” but that ho-hum designation belied the potential financial dangers embedded in the loans if borrowers — particularly low-income borrowers — wound up unable to pay their debts.
Even so, Countrywide embraced such loans with gusto. For example, adjustable-rate mortgages — those with a low introductory rate that could ratchet up in later years — accounted for about 18 percent of Countrywide’s business in 2003. But a year later, they made up 49 percent of its loans.
Subprime loans also grew in 2004, to 11 percent of its originations, up from 4.6 percent in 2003. These loans often required no down payments and very little documentation of borrowers’ incomes, assets or employment; they generated immense profits to Countrywide but, again, presented a bevy of risks. And even when the going got rough for some homeowners, Countrywide didn’t hesitate to take a hard line with borrowers who fell behind.
Up until the time Countrywide collapsed, all lenders were taking a hard line with borrowers who fell behind. It wasn't until subprime foreclosures crashed the housing markets in places like Las Vegas, Riverside County, Arizona, and Florida that anyone cared about loan modifications, foreclosure moratoriums, and widespread squatting.
A born salesman, Mr. Mozilo promoted his company’s prospects wherever he went. In front of a crowd of investors or analysts, he would predict what Countrywide would generate in profits five years down the road and how many of its competitors the company would vanquish. No matter what, Countrywide would survive, he vowed.
“Over the entire history of this country, housing prices have never gone down nationally. They have gone down in some local areas, but never nationally,” he told an interviewer for CNBC in early 2005. “Secondly, any homeownership over the 10 years has proved to be the best investment that you could ever make. Over any 10-year period, housing prices go up.”
Mozilo was completely kool aid intoxicated.
Later that year, he was equally optimistic when he again visited CNBC’s studios.
“From our perspective — and we’ve been doing this for 38 years — we’re still in a terrific mortgage market,” he said. “So the road ahead to us appears to be extremely vibrant, very sound.”
Even as the wheels were coming off of the Countrywide cart in 2007, Mr. Mozilo’s upbeat public pronouncements continued.
“I think you have to keep things in perspective. You know, there’s an old saying that you don’t know who’s swimming naked until the tide goes out, and obviously the tide’s gone out,” he told CNBC in March 2007, when a number of once-successful subprime lenders were plunging toward bankruptcy. “I think it’s a mistake to apply what’s happening to them to the more diversified financial services companies such as Countrywide.”
When Bank of America invested $2 billion in Countrywide in August 2007 — a move that caused many analysts to question Countrywide’s financial wherewithal and its ability to remain independent — Mr. Mozilo again struck an optimistic note.
“Countrywide’s future’s going to be great. You know, it’s always been great,” he told CNBC at the time. “So I think, down the line, this is going to be a better company, a more profitable company and a company that’s going to be a great investment for shareholders as we continue down the line. Because the market ultimately will come to us. This is America. People want to own homes.”
PRIVATELY, however, Mr. Mozilo had long been worried about some of the loans his company favored, as indicated by e-mails he sent to his deputies. And this gulf between Mr. Mozilo’s private views and his public proclamations went to the heart of the S.E.C.’s case against him.
Mozilo knew the Option ARM was going to end badly, and yet he allowed that product to grow to nearly half of his origination volume. Why would someone do that? To me it seems obvious that he knew he could make huge short-term gains and bail before it all crashed.
Beginning in 2005, for example, he fretted about lending practices at Countrywide, e-mail messages show. One target of his ire was the “pay-option adjustable-rate mortgage,” a loan that let borrowers pay a fraction of the interest owed and none of the principal during an introductory period. These loans put homes within many borrowers’ financial grasp — at least initially.
When a borrower made only modest payments, the shortfall was added to the principal balance on the loan, meaning that the mortgage would grow in size. Given this arithmetic, borrowers could wind up owing more than their homes were worth.
In 2004, pay-option A.R.M.’s accounted for 6 percent of Countrywide’s originations. Two years later, they accounted for 21 percent of its loans. The loans were moneymakers for Countrywide; internal company documents show that the company made gross profit margins of more than 4 percent on such loans, double the 2 percent generated on standard loans backed by the Federal Housing Administration.
Countrywide pushed the lucrative loans hard. A sales document called “Pay Option A.R.M.’s Made Simple” asked rhetorically what kinds of customers would be interested in these loans. “Anyone who wants the lowest possible payment!” was one of the answers.
But these loans unnerved Mr. Mozilo, as his e-mails indicate. In April 2006, for example, he learned that almost three-quarters of the company’s pay-option customers had chosen to make the minimum payment the prior February, up from 60 percent the previous August, according to the S.E.C.’s complaint. In an e-mail to Mr. Sambol, Mr. Mozilo wrote: “Since over 70 percent have opted to make the lower payment it appears that it is just a matter of time that we will be faced with much higher resets and therefore much higher delinquencies.”
Mozilo knew exactly what was coming. The statement above from his emails could have been written on a bubble blog at the time.
Two months later, and just one day after he talked up his company’s pay-option A.R.M.’s to investors at a Wall Street conference, Mr. Mozilo wrote an e-mail to Mr. Sambol predicting trouble ahead for many borrowers in these mortgages. They “are going to experience a payment shock which is going to be difficult if not impossible for them to manage,” he said.
And in September 2006, Mr. Mozilo wrote an e-mail saying the company had no way to assess the risks of holding pay-option A.R.M.’s on its balance sheet. “The bottom line is that we are flying blind on how these loans will perform in a stressed environment of higher unemployment, reduced values and slowing home sales,” he wrote.
Another Countrywide product that concerned Mr. Mozilo was its so-called 80/20 loan, named for the fact that the combination allowed a borrower to receive money covering 100 percent of a home’s purchase price.
Mr. Mozilo had become worried about these loans in the first quarter of 2006, when HSBC Bank, a buyer of Countrywide’s 80-20 loans, began forcing the lender to repurchase some that HSBC contended were defective.
“In all my years in the business, I have never seen a more toxic product,” he wrote to Mr. Sambol in an April 17, 2006, e-mail cited by the S.E.C. “With real estate values coming down … the product will become increasingly worse.”
Such e-mails suggest that by mid-2006, Mr. Mozilo had recognized how reckless some of his company’s lending had become. And just three months later, according to the S.E.C. complaint, he met with his financial adviser to increase the amount of Countrywide shares he could cash in under a planned executive stock-sale program.
How else can you interpret his behavior? He obviously knew his company was going to implode, and he wanted to get as much money as he could out of the company before the end.
Mr. Mozilo had always been a big seller, and rarely a buyer, of the Countrywide shares he was granted as a part of his compensation. The timing of some of his sales, however, has drawn the scrutiny of the S.E.C.
For example, on Sept. 25, a day before writing the e-mail about how Countrywide was “flying blind” on pay-option A.R.M.’s, he set up a new planned stock-selling program for himself, known as a 10b-5 plan, the S.E.C. said.
Such plans allow executives to sell stock regularly, without running afoul of regulations governing the sale of stock around significant corporate announcements. Mr. Mozilo also set up plans enabling a family foundation and a trust he oversaw to sell shares.
Altogether, the S.E.C. said, from November 2006 to October 2007, he sold more than five million Countrywide shares under his personal plan. His gains were $140 million, the S.E.C. said.
Mr. Mozilo has long maintained that his stock sales were not unusual, and in the past Countrywide has said that it and Mr. Mozilo were battered by economic forces beyond their control.
Mozilo is a liar. His stock sales were unusual, and he did now that Countrywide was going to be battered by the economic forces his mistakes created.
“No one, including Mr. Mozilo, could have foreseen the unprecedented combination of events that led to the problems borrowers, lenders and investors face with many of these loans today,” a Countrywide spokesman told The Times in 2007. “Countrywide is proud of its role in making homeownership affordable to lower-income households.”
But lawyers and analysts say Friday’s settlement means that Mr. Mozilo’s legacy is likely to be something quite different from that of a banker who brought homeownership to the masses.
“Mozilo is agreeing to a permanent ban on serving as an officer or director of a public company,” said James A. Fanto, a professor at Brooklyn Law School and a specialist in corporate and securities law. “That is a significant punishment and does not look good for his legacy.”
Mozilo should be forced to face every borrower who took out his toxic loans. These people lost their family homes, and they should be angry.
Mozilo's legacy will be one of personal greed and foolishness. He drove his company into oblivion for his personal enrichment.
Bought at the bottom of the bear rally
The current bear rally began in the spring of 2009 when the Federal Reserve bought down the interest rates, regulators permitted amend-extend-pretend, and banks began the policy of widespread squatting in high-end homes. People who bought in that time period believe they purchased at the bottom and now they have some equity. We will see.
The previous owner of today's featured property bought the place for $416,000 on 6/24/2003. When this property sold for a loss in 2009, it was a 2003 rollback. That owner managed to own California real estate for 6 years and lose money.
The property was then purchased for $400,000 on 6/22/2009. Apparently the new owners have changed their minds and now would like to get out at breakeven. They have priced the property at $429,500. This gives them some room to negotiate and still get out at even.
So will they get it? Have prices of individual properties increased 10% since last year allowing these owners to get out at breakeven?
What a beauty! Perfectly designed for a roommate situation, this quality Lennar home with two big master suites has loads of upgrades: travertine flooring with an inlaid marble design pattern downstairs, elegant sand-colored corian kitchen counters and a BIG walk-in pantry. One of the master bedroom baths has a shower with dual heads, travertine floors, double sinks and a roomy walk-in closet. This popular plan has a big common room downstairs with a kitchen that opens directly to the living room with fireplace, and a big 2-car garage with easy direct access into the home. Relax on the front stone patio of this beautifully-designed community and have an afternoon cool drink or a casual barbecue with friends. Located walking distance to the huge community pool, spa, kiddy pool and public tennis courts, and popular Tustin Marketplace. Enjoy an evening stroll to the much-utilized year-round Tustin Sportspark with walking paths, tennis and baseball diamonds.
.jpg)
.jpg)
.jpg)
.gif)
