Zillow's Stan Humphries gives a clear explanation of the Mortgage Electronic Registration System and the problems it creates.

Irvine Home Address … 174 HAYWARD Irvine, CA 92602

Resale Home Price …… $480,000

Lend me your ear while I call you a fool.

You were kissed by a witch one night in the wood,

And later insisted your feelings were true.

Washed clean by the water but nursing its pain.

The witches promise was cunning,

And you're looking elsewhere for your own selfish gain.

Jethro Tull — Witches Promise

The mortgage industry was kissed by a witch in the night. Looking for their own selfish gain they came up with a cunning system to transfer mortgages and shortcut the public recording system. Washed clean by the market crash, mortgage holders insisted their title claims were true, and the system is nursing its pain.

Bubble, Bubble, Toil and Trouble in the Foreclosure Market

By: Stan Humphries, — October 11th, 2010

Well, what initially looked to be a technical road bump in the foreclosure process is now certainly blossoming into something with a more material impact on the housing market. Initially, this situation had the appearance of a sloppy record-keeping scandal, one that was important to resolve but that involved supporting documents that could ultimately be located and where correct procedures could be put into place. On the other hand, there are hints now of a mortgage system that has been put into place in service of mortgage securitization objectives that may have become detached somewhat from the underlying governmental recording procedures for titles and mortgages.

The latter situation involves a Reston, VA based company named Mortgage Electronic Registration System (MERS), which launched a mortgage tracking system in 1997. The system was designed to simplify the registration and transfer of mortgage ownership. From their website:

MERS acts as nominee in the county land records for the lender and servicer. Any loan registered on the MERS® System is inoculated against future assignments because MERS remains the nominal mortgagee no matter how many times servicing is traded. MERS as original mortgagee (MOM) is approved by Fannie Mae, Freddie Mac, Ginnie Mae, FHA and VA, California and Utah Housing Finance Agencies, as well as all of the major Wall Street rating agencies.

Note that MERS is used by the GSEs and other government mortgage entities. That makes it the standard in the industry.

Ok. For those fortunate individuals not initiated into the intricacies of deeds and mortgage notes, this statement might need further elaboration. Let’s use an analogy. Let’s say that you, I and a bunch of our friends all sell mortgages to people who want to buy homes. But, once we’ve sold a mortgage to an individual, we periodically re-sell it to each other. That is, I take the note that I’m holding on a house located at 123 Main Street (that obligates the homeowner to pay me a certain principal plus interest) and I sell it to you. Now the homeowner living at 123 Main Street pays their monthly mortgage payment to you and not me (and I’ve gotten a lump sum payment from you in return).

In the old days, this exchange would involve me walking down to the county courthouse and filling out some paperwork transferring the mortgage on 123 Main Street over to you. Not fun, but not the end of the world either. Enter mortgage-backed securities. Now, it’s not just a few of us friends holding onto mortgages. We create a bunch of companies that buy certain mortgages and then essentially sell shares in this new company to investors, each of whom now owns a small piece of all the mortgages owned by the new company (i.e., mortgage-backed securities). In this new world, we’re transferring mortgages on homes all the time. I’m not just having to go down to my local courthouse and assign the mortgage to another of my mortgage-holding friends. I’m having to go to the more than 3,000 courthouses around the country and assign the rights to a multitude of different parties. I’m on the road all the time just doing paperwork or I’m having to pay somebody in all the counties to do it for me. This whole recording process has become more than a minor nuisance. It’s now a major cost of business for me and it seriously affects the speed at which I can buy and sell mortgages.

So, you and I come up with an idea. We get our friend Sally to agree to be listed as the mortgagee on all these mortgage notes instead of you or me. Sally is someone we both trust and agrees to serve as an honest broker for recording agreements between you, me and all of our other mortgage-holding friends. So, for example, when I sell the homeowners of 123 Main Street a mortgage, we file a mortgage note that lists the homeowners as the borrower and Sally as the mortgagee (instead of me although I’m still listed as the lender, a distinction that will become important later).

The old system required recordation in the public record of every transaction that is secured by real estate. The public record has no organization at all which is why title companies sprung up to create a searchable database of all this recorded information. From the beginning of our property records system, private databases of public records have been the foundation of the real estate industry.

Title companies issue title insurance because they have organized the data and know all the encumbrances and transfers in a chain of title. Everyone relies on title insurance companies. If no insurance were offered on title, mortgage interest rates would be much, much higher because it would be impossible to loan on a secured basis. Every loan would become unsecured debt similar to a credit card. Loan balances would be a small fraction of what they are today.

Certainty of title is the foundation upon which our system of real estate finance is built.

Sally then starts a spreadsheet where she lists me as the actual lender of 123 Main Street. When I go to sell this mortgage to you, I don’t need to go down to the courthouse and transfer the mortgage to you. We simply call up Sally and tell her to update her spreadsheet with the information that you are now the lender for the mortgage on 123 Main Street and not me (I also send a letter to the homeowners telling them to send their monthly payment to you now and not to me).

This is a critical point: MERS allows the transfer of ownership of mortgages without that transfer being recorded in the public record. With the ownership of the promissory note is the mortgage, the right to foreclose in event the borrower fails to pay on the promissory note. The basic claim of those challenging this system is that transfer of the promissory note does not simultaneously transfer the mortgage unless both are recorded in the public record; therefore, the new holder of the promissory note does not have the right to foreclose.

This innovation makes the current lender of any mortgage quickly knowable by anyone and allows for the rapid transfer of mortgage rights. Think of it as a clever work-around to the Federal system put into place by our Founders (i.e., local, state and national governments, each of which controls different governmental functions) which can make nationalized businesses that deal with local-level processes cumbersome.

The current imbroglio that seems to have developed arises when the homeowners of 123 Main Street stop making payments to you (assuming I’ve sold the mortgage to you), thus necessitating you to foreclose on them. When this occurs, you tell Sally to head over to the county in which 123 Main Street is located and file a foreclosure notice (since Sally is the registered mortgagee for the property). Generally, this proceeds along the lines of any foreclosure: the house is foreclosed and you attempt to recoup some of your money by selling the house subsequently. Sally is really just acting as an agent on your behalf in this process.

In some cases, however, the local courts will take a dim view of the record-keeping system that you, Sally and I have set up. They will assert that, according to their records, Sally is the mortgagee but I’m still the lender of record. They’ll go on to say that since Sally is not the lender and they have no record that you are, in fact, the lender either (remember, my sale of the mortgage to you was just recorded in Sally’s spreadsheet, not with the county itself), neither Sally nor you can foreclose on the property. Only I can, but I’ve long since forgotten about this mortgage because I sold it to you (but only told Sally about the sale, not the county). This leads Sally to whip out her spreadsheet in open court and start explaining the system that we’ve set up. This, in turn, can leave the judge feeling a bit like a New York state judge who, when confronted with exactly this scenario in his courtroom this past May, observed that the mortgage and servicer companies seemed to be “operating in a parallel mortgage universe.” He actually called it the Twilight Zone. His opinion is a good read.

If a judge were to rule that the MERS system does not transfer the holder of the promissory note the right to foreclose, the entire MERS system would collapse. Every mortgage would need to be recorded in the public record as being transferred to the new holder of the promissory note. The result would be millions and millions of filings in recorders offices all over the country and months of delay while this happened.

Just to make sure we’re all on the same page in this analogy, you and I are mortgage-holding companies like Bank of America, HSBC, and others. Sally is the Mortgage Electronic Registration System, a company jointly owned by all the big financial firms which has as its members any financial firm that lends money for mortgages and wants to easily exchange them to other firms. Sally’s spreadsheet in the analogy is actually the MERS database which is online for anybody to look at. Any mortgage for which MERS is acting as the mortgagee will list a MIN number (see example below). Anybody can type this MIN number into the MERS website and find out the name of the servicer and the actual lender for the mortgage (note, sometimes the lender info is not shown and you must contact the servicer first). Try it yourself: Search for MERS on your county recorder website, type any MIN number that you happen to find into the MERS system and see what you get.

So, where does all this leave us?

• The securitization of mortgages in this country has been a powerful innovation which has created enormous benefits to homeowners. Mortgage-backed securities provide vastly more money for the mortgage markets than would be available in the prior system where lenders held onto each mortgage that they originated.

The benefits of securitization are debatable. Securitization is not the reason we had a housing bubble, but it was the mechanism by which the housing bubble was inflated. Look at securitization as the pumps the hoses that inflated home values. It was still foolish lenders and kool aid intoxicated homeowners who operated the pumps.

Ok, let’s be honest, it probably benefitted too many consumers during the bubble, lots of whom got mortgages because the money was there courtesy of securitization while the people approving the mortgages weren’t aware enough of the potential risks. By reaching deeper into the pool of potential homeowners to sell new mortgages, the risks were two-fold. First, they were lending to people with more credit risk (so, in bad times, default rates would be higher). Second, the expansion of homeownership helped fuel unsustainable price appreciation which, when markets began to correct, made real estate a depreciating asset. This depreciating asset roiled both the newer, less credit-worthy borrowers but also lots of the more credit-worthy people who now found themselves in negative equity precisely at a time when lots of them started to lose their jobs in the recession.

In short, securitization made the Ponzi Scheme possible.

• I’m not a real estate lawyer so I won’t comment on the legality of the MERS system, but it does seem a logical response to the tangible problem of complying with long-standing county recordation processes while still enabling a modern mortgage market. It’s been in place since 1997, has registered more than 64 million mortgages, and, notwithstanding the occasional legal challenge that I describe above, it seems pretty well established in most jurisdictions.

• If the entire MERS approach were deemed illegal tomorrow, the only thing that would change is the speed with which these foreclosures would occur. Back to our analogy, if a court deemed that neither Sally nor you could foreclose on the homeowners of 123 Main Street, they could ask me to come down to the courthouse and do the foreclosure myself. Or, more likely, I would make an official assignment of the mortgage to you, and then you now have the legal standing to proceed with the foreclosure. The house would still be foreclosed upon, a fact that was precipitated by the homeowner’s non-payment, not by anything about the record-keeping system itself. A reversion to the old county process would just make things go more slowly.

Everyone seems to forget that each of these "unwarranted foreclosures" is a delinquent borrower. This problem didn't spring up because people making their payments were suddenly facing foreclosure. A paperwork problem does not make the house belong to the delinquent borrower, nor does it make their debt go away. These people are not keeping their homes, they are keeping the bank's house through procedural delay.

• At the risk of understatement, slowing down the foreclosure process just for the sake of slowing it down is really not helpful at this point in the housing correction. In fact, it’s really quite bad for the market as it will delay the natural process of supply and demand reaching equilibrium because buyers will stay away from a market that they view as still heading down. And we’ll have less of a real sense of total supply because a lot of it will be tied up in homes that are in foreclosure limbo. We absolutely need to make sure that the foreclosure process is proceeding in a legal and transparent manner but, once that is satisfied, it’s not going to help real estate markets to delay foreclosure actions that are ultimately going to happen anyway at some point in time.

Clearly, the banks do not believe that delay hurts them. They have been looking for excuses to delay foreclosure for the last three years.

• With the various states serving as laboratories for different foreclosure processes, we have the opportunity to see the differing results produced by these processes. I believe that a key reason for why markets in some non-judicial states like California seem to be recovering faster than markets in judicial foreclosure states like Florida is because foreclosures are clearing through the market faster in the non-judicial foreclosure states. Since I risked understatement in my previous bullet point, let me be clear here: calls for a moratorium on foreclosures – while politically attractive for elected officials and their regulators – are misguided and would do significant damage to the nascent stabilization in home values.

Actually, the reason California has temporarily stabilized is because the banks have chosen not to foreclose and instead have chosen to create an enormous shadow inventory. His contention in support of his argument is pretty weak.

• Those of us who’d like to find a way to help stem the foreclosure crisis should focus on some of the concrete proposals to help homeowners like tweaking the FHA streamline refinance guidelines or more ambitious proposals like that of Hubbard and Mayer. I don’t always agree with every proposal but it’s ideas like these that explicitly target the foreclosure problem that merit our consideration, not putting our hope in gumming up the gears of government and commerce (again, unless we come to the conclusion that these gears are not legally constituted).

He is missing the bigger point: there is not foreclosure problem. Foreclosure is not the problem, it is the cure.

• My hunch is that the MERS approach will stand up to scrutiny and that this current situation will end up being more of a sloppy record-keeping scandal that should and will be cleaned up. This will result in a slowdown of foreclosures over the next 30 to 90 days. If the MERS approach doesn’t survive, I’d be gravely concerned for the near-term stabilization of the housing market and for the long-term viability of mortgage securitization.

I agree with him on his conclusions. There will be a short-term slowdown in foreclosures that will hardly be noticed. Right now, at every auction site in the country, 80% to 90% of currently scheduled foreclosures are postponed or canceled. We are only processing a tiny fraction of the foreclosure backlog on any given day. When the floodwaters are washing away everything in site, a few days without rain do not make the raging floodwaters recede significantly. Even after the delinquencies and foreclosure proceedings stop being initiated, it will take years to work through the backlog.

Is MERS really a problem, or is this whole exercise a witch hunt?

I watched the flow of properties through the Las Vegas auction site last week. Monday was slow due to the holiday, but the Tuesday through Friday showed no difference in the number of properties that were auctioned. Any Bank of America foreclosures that were postponed were made up for by the other banks who ordinarily would have postponed their sales.

The hot potato

The Ponzi Scheme that is the California housing market is a giant game of hot potato. Each participant in the Ponzi Scheme runs up a huge mortgage and tries to pass it to someone else before the market crashes and they get their hands burned by the hot potato. The story of today's featured property begins with the previous owners. They managed to buy the property, extract significant equity through periodic, foolish borrowing and pass that debt on to the current owner who has to deal with a huge loss.

• The house was purchased by the previous owners on 3/23/2004 for $550,000. They used a $440,000 first mortgage, a $82,500 second mortgage, and a $27,500 down payment.
• On 3/14/2005 they refinanced their first mortgage with a $492,000 Option ARM with a 1% teaser rate, and they obtained a $46,000 HELOC.
• On 6/6/2005 they enlarged their HELOC to $91,000.
• Total property debt was $583,000 plus negative amortization.

Of course, they were the lucky ones because the current owner bought it from them for $639,000 by taking out a $639,000 first mortgage and putting $0 down. It looks like the knife catcher tried for a while, but he finally gave up in the spring, probably after realizing he was $150,000 underwater on a property he put nothing into. No sense sending good money after bad.

Foreclosure Record

Recording Date: 06/21/2010

Document Type: Notice of Default

Irvine Home Address … 174 HAYWARD Irvine, CA 92602

Resale Home Price … $480,000

Home Purchase Price … $639,000

Home Purchase Date …. 4/18/2007

Net Gain (Loss) ………. $(187,800)

Percent Change ………. -29.4%

Annual Appreciation … -8.1%

Cost of Ownership

————————————————-

$480,000 ………. Asking Price

$16,800 ………. 3.5% Down FHA Financing

4.25% …………… Mortgage Interest Rate

$463,200 ………. 30-Year Mortgage

$91,079 ………. Income Requirement

$2,279 ………. Monthly Mortgage Payment

$416 ………. Property Tax

$100 ………. Special Taxes and Levies (Mello Roos)

$40 ………. Homeowners Insurance

$306 ………. Homeowners Association Fees

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

$3,141 ………. Monthly Cash Outlays

-$360 ………. Tax Savings (% of Interest and Property Tax)

-$638 ………. Equity Hidden in Payment

$26 ………. Lost Income to Down Payment (net of taxes)

$60 ………. Maintenance and Replacement Reserves

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

$2,228 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$4,800 ………. Furnishing and Move In @1%

$4,800 ………. Closing Costs @1%

$4,632 ………… Interest Points @1% of Loan

$16,800 ………. Down Payment

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

$31,032 ………. Total Cash Costs

$34,100 ………… Emergency Cash Reserves

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

$65,132 ………. Total Savings Needed

Property Details for 174 HAYWARD Irvine, CA 92602

——————————————————————————

Beds: 3

Baths: 2 baths

Home size: 1,752 sq ft

($274 / sq ft)

Lot Size: n/a

Year Built: 2002

Days on Market: 163

Listing Updated: 40457

MLS Number: S616203

Property Type: Condominium, Residential

Community: Northpark

Tract: Aubr

——————————————————————————

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

SHORT ESCROW OK!! Excellent private location, all living space on one floor, high ceiling entry, rotundra extends to expansive great room w/custom paint, neutral carpet, shutters, fireplace, versatile media niche, lighted ceiling fan, kitchen w/granite, upgraded cabinetry, walk-in pantry, recessed lighting, dining area leads to large balcony, lovely master suite w/retreat, separate shower, deep oval soaking tub, dual sinks, oversize walk-in closet, French door opens to balcony, attached side/side garage with vertical storage cabinetry, resort association amenities: pools, parks, spas, meandering greenbelts, gazebos w/fountains, sports courts, clubhouse, walk to Hicks Canyon Elementary/Beckman High Schools, close to freeways, toll-roads, and Tustin/Irvine entertainment complex

rotundra?

It's a myth that foreign cash buyers are smart money that purchases bargains. FCBs are generally dumb money that overpays for declining assets.

Irvine Home Address … 170 ALMADOR Irvine, CA 92614

Resale Home Price …… $399,000

I've been looking for a reject

And you ain't had nothing like me yet

Don't you think it's time for motion

I can take what you've been pushin'

Soundgarden — Big Dumb Sex

Are foreign cash buyers savvy investors who are taking advantage of low prices to snap up bargains, or are they the fools who purchase overprices assets that natives won't touch? Often its a little of both. I always enjoy reading Rich Toscano's writing, and back in 2006, he wrote a brief post on what generally happens when foreign investment becomes prevalent in a market.

The Dumb Money

RICH TOSCANO — December 20, 2006

One argument I hear a lot is that foreign demand for local real estate has grown substantially in recent years, and that such foreign demand will be supportive of prices in the future.

Unfortunately, this argument puts the cart squarely in front of the horse. Investors from other countries are well known to be the very last participants to arrive at the scene of a financial bubble. They are the last to hear about all the riches to be made, the last to buy in, and the last to realize that the party is over.

The chart to the right provides an example from the history of bubbles past. The blue line represents the price of the Nasdaq Composite Index during its late-1990s flight to the heavens, along with the very beginning of its eventual journey back to earth. The red line denotes the dollar amount of U.S. stock purchases made by foreign investors.

It can easily be seen that foreign buyers chased the U.S. tech stock bubble all the way to the tippy top, and that they lagged prices the entire way. The final onslaught of foreign cash did not even hit our shores until after the Nasdaq had begun to decline from its final peak.

Far from being a positive fundamental, a sudden excess of foreign participation in an asset market is indicative of ill-informed speculative money at work. When the foreigners really start piling on, it's always a good sign that the end of the bubble is nigh.

As a rule, foreign investment comes from those with the least understanding of the market. Most often these investors are merely chasing the latest short-term rally in hopes it will continue. Sometimes they hit big paydays, but most often they end up overpaying for assets that take years to recover in price. Today's featured article is a mixed bag; some investors are getting great deals while some are not.

Foreign buyers see big opportunity in housing bust

By MICHELLE CONLIN (AP) – October 4, 2010

The Viceroy, a swanky condominium complex in downtown Miami, gives the impression that the United States is in another real estate boom. The sales office is strangely exuberant. Buyers gush about the glam condos — designed by hipster tastemaker Kelly Wearstler — and their hotel-like amenities: poolside libations, daily housekeeping and room service food stirred up by a celebrity chef.

Since January, 262 of the Viceroy's 372 units have sold. But there's a twist: Almost 90 percent of the buyers are foreigners. And they all paid cash.

The Viceroy's story is playing out across Miami. Individual investors from as far as Argentina, Canada, Colombia, France, Israel, Italy, Norway and Venezuela are swarming the city's sales offices to get in on what they see as one of the greatest real estate fire sales in the history of the United States.

At one time, these people would have invested in the U.S. stock market.

See Rich Toscono's graph above to see how well that usually turns out.

Now they see the opportunity of a lifetime in the nation's debilitated housing market. The idea is to rent out the properties and then sell them once the economy turns around.

As a general strategy, that idea isn't bad, but it all depends on the cashflow. Anyone who is buying cashflow negative properties and plans to wait for a rally is a fool. Those who buy cashflow positive properties with plans on waiting for a rally are not fools, but they may not be successful either. Those who buy cashflow positive properties purely for the cashflow may have an option to sell later if the price bubbles again, but they don't need that for the investment to be successful. True cashflow investors have a win-win because whether they keep the property for long-term cashflow or sell it for a huge gain, they win either way. Being cashflow positive is everything.

The math is seductive: Prices at the Viceroy are roughly 52 percent off the 2007 peak. Units once sold for as much $670 a square foot. Today the average price is $319.

That isn't seductive, that is stupid. That's like saying the $10 tee shirt you see in a clothing store that is marked down to $50 from $100 is a good bargain. The bubble price was never justified, and just because that price is cut in half doesn't make the price any better. Cashflow value is the only stable measure of value of any investment, but it is particularly useful for real estate.

"I have never seen such a high concentration of foreign nationals acquiring real estate," says Peter Zalewski, who has been in real estate for 15 years and founded Condo Vultures, a consulting and brokerage firm. "Eighty percent of the sales in downtown Miami are foreign-based. This is unprecedented."

If it can happen in Miami, it can happen in Irvine, right? ~~ giggles to self ~~

Miami is hardly the only hot spot for buyers from outside the United States. Real estate brokers say they've seen a surge in Washington, New York, Las Vegas, Los Angeles and San Francisco. In Seattle, Asians are buying property sight unseen, says Joe Brazen of Brazen Sotheby's International. In New York, 25 percent of buyers at the Armani-designed 20 Pine building, near the World Trade Center site, are from overseas.

"It's a positive in a sea of negatives," says Jonathan Miller, chief executive of Miller Samuel, a real estate consulting firm in New York.

This year in Phoenix, for the first time, there have been more buyers from Canada than from California, according to real estate data outfit Information Market. With the Canadian dollar approaching parity with its U.S. counterpart, the opportunity was simply irresistible to Jim Chuong, a 38-year-old Novartis sales manager from Toronto.

Chuong, whose house in Canada is already paid off, used to invest in U.S. stocks. Now he's investing in Phoenix condos, paying $50 a square foot for units that would cost $500 a square foot in Toronto.

"It's ridiculous is what it is," Chuong says.

This part of the story is true. I was recently contacted by a Canadian investment company that is flipping properties in Las Vegas. They are also active in Phoenix and other markets.

For foreigners with cash, the deals can make them money from day one. Chuong buys two-bedroom condos for less than $40,000 in low-crime areas. He only picks up units that already have renters. After paying association fees and taxes, he walks away with $300 a month, pre-tax, on each. The deals are now easy to do, thanks to the cottage industry of companies that has grown up to manage virtually everything for foreign buyers, down to badgering renters for the monthly check.

Investments like these will be the home runs of the housing bubble. With the positive cashflow those properties are giving off relative to their price, the investors can hold them forever.

For the international investor class, the United States' bloated inventory of homes, high unemployment and weak currency make for an unusually attractive buyer's market.

"Never before have all these things come together like this," says Patrick O'Neill, chief executive officer of the Hong Kong-based O'Neill Group, which helps Chinese invest in international real estate. O'Neill says Chinese buying in places like New York is on track to double this year.

"Unless you want to go to Baghdad," O'Neill says, "the United States is the best you can get."

Are there good cashflow properties in Baghdad? I wonder if this guy likes Detroit?

The trend is showing up in the statistics. In a National Association of Realtors report released in July, 28 percent of brokers reported they had worked with at least one international client, up from 23 percent a year earlier. Among those, 18 percent had completed at least one sale, compared with 12 percent in the 2009 report.

"I was going invest in the stock market, but I decided to invest in real estate instead," says Diego Garcia, a Mexico City native on assignment in New York City with Pfizer Inc., where he is a regional finance director. Garcia paid $850,000 for a Manhattan one-bedroom in a gleaming new high-rise that he plans to live in for now. "I'm a conservative guy," Garcia says, "and this was more conservative."

That is an investment that may turn to crap like the North Korea towers. Buying on speculation without regard to the underlying cashflow is a fool's game.

That's not to say there aren't steep risks. An economic jolt could easily throw the whole plan into disarray. The housing market is far from a recovery. In many places, prices continue to fall. What happens if currency values reverse and a foreign owner needs a quick sale? Or a renter bolts in the middle of the night, leaving an empty unit and no cash flow?

It's not as if foreign buying can be counted on for a housing market turnaround. Overseas buyers represent a mere 7 percent or so of today's total.

That that number sink in, folks. This is not an invasion. Foreign buyers represent a small fraction of the buyer pool. In places like Las Vegas that will see a 50% or more turnover of its housing stock, a few additional sales to foreign buyers won't support the market.

Yet in some cities, such as Miami and Washington, the foreign sales are helping to stabilize the markets.

In past downturns, buying a property in the U.S. was the prestigious purview of the wealthy, but today the market is within reach of the swelling ranks of the global upper-middle class.

Colombians, who often call Miami the most beautiful city in their country, have always been drawn to Florida. The difference now is the upside-down economics. It is cheaper to buy in Miami than in Bogota, and you can fly between the two cities for $59 each way.

Interesting that the substitution effect can reach across thousands of miles. I wonder what it means to Irvine prices to be seven times higher than Las Vegas prices. It's a premium on a premium, right?

"Muchos muchos muchos muchos opportunity," says Elsa de Blaschke, who owns a construction company with her husband in Barranquilla, Colombia, and is hunting for an investment property to buy in Miami. De Blaschke chose not to invest the capital at home because she says Florida offers a better chance of a bigger return.

"The international buyer pool is better than we have ever seen it before," says Phillip White, president of Sotheby's International, based in New York.

To match demand, U.S. brokerages are hiring agents who can speak foreign languages and are pouring more resources into marketing overseas.

In October, agents from 11 Sotheby's International branches will descend on Hong Kong's convention center to regale wealthy buyers there with slick visuals on showcase properties. In Toronto, agents from Florida Home Finders play to crowds of 800 every other Sunday at a Holiday Inn banquet hall. Jenny Huertas, Condo Vultures' international sales director, throws seminars for potential clients across South America.

"Their jaws drop. They can't believe it," Huertas says. "They think these deals are too good to be true."

Some of these deals are. I am buying property in Las Vegas for $/SF prices last witnessed in the late 80s early 90s. I am the foreign cash buyer in that marketplace. Perhaps I am the foolish knife catcher, right?

Today's featured knife catcher

We don't need to look to foreign nationals to find knife catchers. Of course, if a buyer uses an FHA loan, who cares? The US taxpayer will eat the losses. Today's featured property was purchased for $499,000 on 5/16/2008. The owner used a $491,290 first mortgage, and a $7,710 down payment. Without much skin in the game, he didn't feel like he needed to stay on long.

Foreclosure Record

Recording Date: 08/05/2010

Document Type: Notice of Default

When you consider that this "owner" hasn't been making a payment since February, he has already recouped his down payment in squatting savings. This property has certainly cost him less to own it than it would have to rent it, and if its value had gone up, he would have made a fortune off his tiny investment.

Irvine Home Address … 170 ALMADOR Irvine, CA 92614

Resale Home Price … $399,000

Home Purchase Price … $499,000

Home Purchase Date …. 5/16/08

Net Gain (Loss) ………. $(123,940)

Percent Change ………. -20.0%

Annual Appreciation … -8.8%

Cost of Ownership

————————————————-

$399,000 ………. Asking Price

$13,965 ………. 3.5% Down FHA Financing

4.21% …………… Mortgage Interest Rate

$385,035 ………. 30-Year Mortgage

$75,350 ………. Income Requirement

$1,885 ………. Monthly Mortgage Payment

$346 ………. Property Tax

$50 ………. Special Taxes and Levies (Mello Roos)

$33 ………. Homeowners Insurance

$271 ………. Homeowners Association Fees

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

$2,585 ………. Monthly Cash Outlays

-$297 ………. Tax Savings (% of Interest and Property Tax)

-$534 ………. Equity Hidden in Payment

$21 ………. Lost Income to Down Payment (net of taxes)

$50 ………. Maintenance and Replacement Reserves

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

$1,825 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$3,990 ………. Furnishing and Move In @1%

$3,990 ………. Closing Costs @1%

$3,850 ………… Interest Points @1% of Loan

$13,965 ………. Down Payment

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

$25,795 ………. Total Cash Costs

$27,900 ………… Emergency Cash Reserves

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$53,695 ………. Total Savings Needed

Property Details for 170 ALMADOR Irvine, CA 92614

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Beds: 2

Baths: 2 full 1 part baths

Home size: 1,307 sq ft

($305 / sq ft)

Lot Size: n/a

Year Built: 1989

Days on Market: 18

MLS Number: S633520

Property Type: Condominium, Townhouse, Residential

Community: Westpark

Tract: Lp

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

Private interior location of community. Central location in Irvine. Wonderful High Ceilings, Great Sun Exposure, Plantation Shutters, Wood Flooring Downstairs. Large Kitchen with Lots of Counter Area. Dual Master Bedrooms with Spacious Bathrooms. Nice Sized Patio Area with In Ground Spa.