Monthly Archives: December 2010

Profiles in Squatting: Ladera Ranch, California

Money Magazine takes a detailed look at the housing debacle and the squatting phenomenon.

Irvine Home Address … 32 COLUMBUS Irvine, CA 92620

Resale Home Price …… $799,000

I am the Astro-Creep

A demolition style

Hell american freak

I am the crawling dead

A phantom in a box

Shadow in your head

White Zombie — More Human Than Human

Is shadow inventory all in your head? Is it real? Are there really debt zombies roaming the shopping malls spending the money they should be putting toward their mortgage?

Home ownership in California means you gorge on HELOCs when times are good, and squat in luxury when your creditors cut you off. Its a great system for Californians. They get to spend as they please and pass the bills off to the rest of America in taxpayer bailouts. I see no reason to believe it will not happen again soon.

Welcome to Zombieland: Ladera Ranch, California

By Pat Regnier, assistant managing editor — December 7, 2010: 4:10 PM ET

ORANGE COUNTY, Calif. (MONEY Magazine) — Joshua and Irene Vecchione are cleaning the dinner dishes one evening in October when Joshua's cellphone rings. It's Rhea from the Chase collections department, and she wants to know if he has $123,000 today. That's what it will take to get the Vecchiones current on their mortgage.

Rhea is a new caller, but Joshua has been talking with Chase reps a lot since February 2009, when he and Irene stopped making the $8,000 monthly payment on their five-bedroom spread in Ladera Ranch, Calif., an upscale development in south Orange County.

After a few months, they were allowed into a trial mortgage-modification program, which let them pay less than half as much and kept Joshua on the phone as Chase requested more and more documents.

In July, though, the bank decided the couple didn't merit a permanent "mod." The Vecchiones, who own the toy store in Ladera, began negotiating with Chase to do a short sale, in which the lender allows the debtor to sell for less than what's owed and walk away. So what Rhea says troubles Joshua: They're still listed in Chase's system as an active foreclosure.

"How am I in foreclosure?" he asks after hanging up. "I'm not in foreclosure."

I think it was because you quit paying your mortgage almost two years ago. I'm not sure, but I think that is pre-requisite for the bank to call a foreclosure sale, or at least it is supposed to be. So, if you haven't been paying your mortgage, there might just be a chance that you are in foreclosure.

In a way, many people who don't get their loan modifications should thank the banks for accelerating their default. Some of these people might have held on for years making their payments if the bank had not induced them to default by holding out the possibility of a lower mortgage payment. Without question, the banks created many strategic defaults by the incentives they put into the system.

A few weeks after that call, the Vecchiones get another one, this time approving the short sale. They bought it for more than $1.1 million in 2006 — the height of the bubble — with a high-rate, interest-only mortgage. Paying it meant staycations and other cuts, but they figured they could refinance in a couple of years, as the house grew in value.

You know how the story ends, but in 2006 few people (especially in the O.C.) had any idea what was coming, and lenders were hardly waving folks away from the cliff.

There's a spot in the backyard where Joshua once planned to add a little apartment for his parents. Now he figures his family of five will move in with them. He's sad not to have one last holiday season in the house. But if all goes as planned, the entire process, from first missed payment to renting the U-Haul, will have taken 22 months.

Since these owners obtained the beneficial use of a house that was supposed to cost them $8,000 a month, does anyone else like the idea of taxing these people on the $176,000 in squatter benefits?

The Long Goodbye

There are stories like the Vecchiones' slowly unfolding all around the culs-de-sac of Ladera Ranch — and in prestigious zip codes across America. The foreclosure crisis has hit lower-income communities the hardest, but it has touched every slice of the market, and resolving it may well be harder in places where homes are too expensive to attract investors with ready cash.

The reason this crisis hit the lower income communities first (so far worst, but really only the first) is because the loans given to the lower income communities reset or recast first. The Option ARMs and interest-only loans given to Alt-A and prime customers are resetting and recasting now. Many of those borrowers have already accelerated their defaults and are squatting in shadow inventory.

The shadow inventory problem will be much harder to resolve in prime areas where prices are far too high because there are not enough buyers able to pay the inflated prices to absorb the inventory. Prices will have to come down on mid to high priced homes or the banks are going to own them for a very long time.

Naperville, a tony Chicago suburb, has more than 230 homes valued at over $300,000 in danger of seizure, according to RealtyTrac, a foreclosure data provider. Monmouth County, a New Jersey Shore area that boomed in the early 2000s, has 462 over $400,000.

Ladera, an unincorporated community of about 25,000, is conspicuously affluent — it's home to Tamra of The Real Housewives of Orange County. The schools are strong, the surrounding chaparral foothills pretty. Good jobs are to be had in nearby Irvine. In short, this is a place a lot of folks would consider a slice of heaven, which is why MONEY began following what was going on here two years ago, as the dream of the house that made you rich began crumbling.

Now heaven has turned into limbo, where defaulters may live for a year or more with a giant mortgage they can't fully pay. Not counting homes already in the foreclosure process, about one in 10 Ladera mortgages is at least 30 days late, according to LPS Applied Analytics. And houses in the foreclosure process have been delinquent an average of 16 months, up from seven in 2008.

Ten percent of Ladera Ranch loan owners are not making their payments. That is a lot of distressed mortgages. If that many houses have to go through the foreclosure meat grinder, prices will get pushed much lower.

The national figures are almost as ugly. And what they show is that our collective real estate hangover is far from over. And limbo will start to last even longer as the "robo-signing" scandal raises questions about the integrity of the foreclosure process.

To judge from recent stories about poorly (if not fraudulently) documented seizures, you would think servicers are snatching up houses quickly. In fact, rushed doc signings and long delinquencies are two sides of the same problem: During the boom, lenders tripped over themselves to create millions more ultimately unsustainable mortgages than they can now unwind.

Yet for the housing market to return to health, there needs to be resolution for these zombie loans that won't ever be paid in full and won't quite die either. Until they can be eliminated through short sales, foreclosures, and permanent modifications, the zombies will keep home values from recovering and suck momentum from the economy. They're not departing soon.

As Christopher Thornberg of Beacon Economics in Los Angeles puts it, "This is going to bleed on for years. People will wander in and out of trouble."

Foreclosures are essential to the economic recovery.

It Only Looks Healthy

On MONEY's first day back in Ladera Ranch this summer, what jumps out is how nice the place still looks — no air of depression here. Although it's a bubble-era town, having sprung up in 1999 from what had been a real ranch, Ladera isn't like some of the foreclosure disaster zones you've heard about — the outskirts of Phoenix, say, or Riverside County, Calif., just over the Santa Anas.

Ladera wasn't a magnet for "drive till you qualify" buyers who might have been better advised to rent. The average credit score on a loan here was a solid 734.

Today 4.4% of homes in Ladera with mortgages are in some stage of foreclosure, compared with less than 3% for Orange County. That's given the place a bad rap locally, even though the vast majority of Laderans are, of course, paying their mortgages.

"What's annoying is the perception that Ladera has a bigger group of people who were irresponsible," says Devon Hocker, a real estate agent and publisher of a local magazine.

The facts are what they are. With a 10% delinquency rate and a 4.4% foreclosure rate, Ladera Ranch is above the average for Orange County and above the average for the nation. How is that possible with a large concentration of high wage earners?

Houses were wired for broadband and set up for home offices, she says, attracting entrepreneurs who had high incomes, at least in the boom. (Many were in real estate; a local joke goes that when you're pulled over on the main drag of Antonio Parkway, the deputy asks for your registration and broker's license.)

Because Ladera is so young, owners are more likely to have paid nosebleed prices and to have financed with one of the easy-pay mortgages that swept California after 2005. If someone told you he had a fixed-rate loan, quips Hocker, you knew he had just arrived from the Midwest.

Being from the Midwest, I never considered any kind of financing other than a fixed-rate mortgage. The fact that houses were not affordable using a fixed-rate mortgage is what told me there was a housing bubble early on.

The exotic loans also attracted flippers, who set the market's torrid pace. Troy Lowder says he went through four houses in Ladera; a friend and family members did the same, buying as tracts were first developed. "We all went from neighborhood to neighborhood, Phase 1 to Phase 1," he says. Lowder made more than $200,000 on one deal.

The flood of easy money shows on local streets. Planners designed neighborhoods to appeal to different psychological profiles: One was for green types, another for the "achievement-oriented." Landscaped trails and pocket parks dot the area — amenities that developers skimp on in less frenzied markets.

"You won't see another Ladera Ranch for a good long time," says Brooke Warrick of American Lives, which did market research for the development.

The area's desirability, and the potential inventory that is still in limbo, have produced an odd dynamic. While the median home price fell from $780,000 in 2007 to $530,000 in 2009, according to the service DQNews, you can't waltz into Ladera and snap up a quick bargain.

"Many houses are on backup offer," says a man out with his agent on a sunny afternoon. (He asked not to be named.)

Big deal. Many houses are in backup offers because it is a ridiculously priced short sale that the bank has taken more than a year to approve because the borrower is hiding money from the second mortgage holder or the borrower will not agree to pay up.

This appearance of vitality masks a deeper problem, and not only in Ladera. Simply put, housing isn't bought and sold now in anything resembling a normal market. On the one hand, the federal government has worked overtime to keep houses attractive, with super-low interest rates, higher conforming loan limits, and, until recently, a homebuyer's tax credit. Those moves have real costs, and low rates hurt savers even as they help owners.

Meanwhile, foreclosure moratoriums, mod programs, and bank delays have kept homes off the market, to the detriment of would-be buyers.

"They've done an amazing job of restricting supply and stimulating demand," says Sean O'Toole of ForeclosureRadar, which sells data on California foreclosures to investors.

Up to this point, says Brookings Institution economist Karen Dynan, "there was an argument that delaying foreclosure — even if you couldn't prevent it — was valuable, because the economy couldn't have withstood the consequences" of more homes dumped onto the market.

That is a great argument if your a banker or a loan owner. If you are a renter or a buyer, that argument sucks.

But the zombies remain, threatening a second leg down in prices should the pace of foreclosures speed up. Recent numbers suggest this deflation was already starting, says housing analyst Ivy Zelman of Zelman & Associates. But with the robo-signing scandal, she adds, it's unclear what happens next.

How Many Zombies Are Still Out There?

Estimating the number of zombies isn't a simple matter. Rick Sharga of RealtyTrac says mortgage servicers are delaying filing notices of default, the first public record of a problem.

An October report from Amherst Securities takes internal industry data on all loans with late payments, as well as loans now current that were once delinquent, and applies a formula that calculates the probability that those loans will ultimately fail.

The rough national count of zombie mortgages: 7 million. Considering that existing homes sell at a rate of 5 million a year — and that a six-month inventory is a sign of a healthy market — that's a big backlog.

It might be bigger. There are 2.6 million on-time loans where the borrowers are deeply underwater — that is, they owe a lot more than the house is worth. All told, about a quarter of mortgages in the U.S., and a third in California, are underwater, according to Core Logic, and Ladera residents are quite aware of the incentives to try to get out of such loans by defaulting to seek a modification or short sale.

I am curious if lenders thought the word would not get out.

When MONEY met Stuart and Judy Manley in 2008, they were trying to sell their Ladera town-house for $430,000 and trade up; they couldn't, and homes near theirs are now selling in the $200,000s.

They've seen neighbors receive modifications that drastically cut their rates. The Manleys' trouble is that they aren't in trouble; they're making payments on a fixed-rate loan.

"When you call and ask for assistance or a modification, they laugh and say, 'You don't call us, we call you,' " says Judy.

The Manleys say they won't consider it, but the social stigma of default may be fading. David Averell, a mortgage broker, says that a neighbor who stopped paying "is the pop star of the neighborhood. Everybody wants to know how to be that guy."

What's the Holdup?

Why the process of unwinding bad loans has moved so slowly is an even more complicated question than how many zombies exist — as complicated, in fact, as the mortgages themselves, which were often created by one lender, sold off to investors, and then passed around among different servicers. (Chase, for example, wasn't the Vecchiones' original lender). The most obvious explanation is that the industry is simply overwhelmed. "Foreclosure activity is six times the normal level," says Sharga.

That leads to confusion; Patti Arnold, an escrow officer in Orange County, just had a short sale fall through because the bank demanded the owner get a power of attorney from her deceased spouse. Second and third mortgages add to the mess. Lien holders have competing interests, and that gums up short sales as Lender A haggles with Lender B over how much cash the latter gets, says Arnold.

Some market watchers believe banks have incentives to take their time.

"Because of the drop in home prices, lenders aren't necessarily motivated to rush properties onto the market," says Alan White, an expert on mortgage law at Valparaiso University.

A flood of inventory that weakened prices could motivate more borrowers to default. There's even fear for the banking system as a whole. Although most mortgages are owned or insured by Fannie Mae or Freddie Mac or have been sliced up into investment pools, trillions of dollars of whole loans sit on banks' books, many of them second mortgages, says Daniel Alpert of the investment bank Westwood Capital, which buys and modifies distressed loans

These second mortgages are difficult to pass off to the US taxpayer. The denial over the fate of these loans keeps our banking system in need of amend-extend-pretend.

The modification of a loan's principal or the sale of the house whether in a short sale or after foreclosure — forces the bank to write off its loss. Alpert thinks banks are "slow-walking" the process, hoping the market rebounds.

Amherst's Laurie Goodman counters that investors' losses get worse the longer a default drags on. (In fact, Fannie Mae in September told servicers to speed things up.) Goodman blames the slog more on modification programs which, as the Vecchiones have learned, often merely delay the loss of a house.

In the government modification program called HAMP (which the Vecchiones didn't qualify for because of their jumbo loan), about half the trial participants drop out. And a huge percentage of modified loans go back into delinquency.

Not that getting a mod is easy to begin with. Stella Matadama from the Consumer Credit Counseling Service of Orange County has personally worked on 95 modifications during the past year. She's succeeded with 18. In all, fewer than 470,000 of the 1.3 million trial modifications done under HAMP have led to permanent relief.

Loan modification programs are a proven failure, and they will continue to be.

Life Underwater

Orange County has long been a bastion of conservative values; the idea of homeowners not paying and then staying put rankles. Larry Roberts, a local blogger and real estate investor better known as IrvineRenter, calls them "squatters."

One hot question is how much of this is "strategic" defaulting — that is, how many people who have stopped paying have simply decided they will no longer pour money into a bad investment? Californians talk about short sellers with BMWs and/or conspicuous surgical enhancements. (A tour of Ladera short-sale listings confirms the first part of the story.)

But the financial picture of defaulters usually isn't rosy. "There's a strategic element in most defaults, and few defaults are purely strategic," says analyst Goodman. "You have your hours cut back at work or go through a divorce and re-evaluate … You don't just say, 'Oh, it's three o'clock, time to default.' "

Not surprisingly, people who approach real estate as an investment show the most sang-froid about defaulting. Troy Lowder, the flipper, lost his last house in Ladera, purchased in 2006 with a mortgage that didn't even require paying the interest due every month.

Option ARMs were ideal loan for flippers. The low payments made holding costs negligible, and the large financing amounts made any flip within reach.

He had planned to sell at a profit in a couple of years, but comparable houses were soon going for $400,000 less than he had paid. And since both Lowder and his wife worked in real estate, less money was coming in.

"It sucks. We lost everything," says Lowder. But he says he'd play the game again in another boom.

Rik Hendrix's story is probably more typical. When he bought his house in 2008, he says, he was earning a six-figure salary as an assistant service manager at an RV dealership. But his wife got a better job, so he decided to go back to mechanic work to spend more time with his kids. Now he's going through a divorce and taking home half what he did as a supervisor.

"We're not selling as many accessories, and that's where you make your money," he says.

All this made his $5,000 monthly housing nut unsustainable. He finished a short sale in late October and says he was able to pay off a lot of credit card debt while not paying his mortgage.

An assistant manager at an RV dealership had a $5,000 monthly nut. No wonder the housing market is in trouble.

The Vecchiones, too, took an income hit. Their store is a Ladera fixture, but the crash squeezed local wallets. "The average person spent $40 per birthday gift, and that went down to $15 or $20," says Joshua.

He claims Chase wouldn't put them in a trial modification until he missed a payment; Chase says that's not policy.

In any case, the couple celebrated when they made their first $3,260 trial modification payment, thinking they were on their way to saving their house. But a trial merely slows the foreclosure machinery while the bank makes a decision.

Owners typically still owe the balance they aren't paying, plus additional late charges if they aren't approved for permanent terms. The Vecchiones were first turned down for not enough income, let back in, then rejected for not fitting Chase's financial models, decisions with which Joshua disagrees. Regardless, by that point they were even deeper in the hole.

Anyone who thinks the banks are doing them a favor with a loan modification hasn't read the terms carefully.

The common thread in these stories: Once homeowners are underwater, it doesn't take much to set them on the path toward losing their house, especially if they stretched to buy. That's what has made the foreclosure crisis into such a Gordian knot. The more defaults, the further prices fall; the further prices fall, the more people default.

Getting Out From Under

Do we have to muddle through several more years of foreclosures and a semi-functioning housing market, or can the situation be improved? That's a tough question; a lot of conflicting interests would require resolution. If you didn't overreach for your mortgage, it stings a bit when your neighbor gets help or stops paying on the house he couldn't afford.

Then again, your property's value will go down if the bank forecloses on that neighbor. If you're a renter who wants to buy, a wave of foreclosures that drives down prices sounds like just the ticket — but only if that wave doesn't roil the economy enough to cost you your job.

Do any renters reading this story believe that their job was saved by the government subsidies that keep house prices out of reach?

So Congress and the Obama administration have tried to walk a fine line. The White House has resisted calls for a national foreclosure moratorium, and HAMP has proved to be anything but a radical homeowner bailout.

Under HAMP, mortgage servicers get a subsidy for modifying a loan, but the vast majority of those modifications reduce only monthly payments, not the principal, meaning homeowners remain underwater.

To really slice into the inventory that will eventually end up in foreclosure, argues Amherst's Goodman, we'll need a program that pushes servicers to reduce the principal owed for those who could afford a mortgage closer to current market values, perhaps while forcing them to give up some future appreciation. This would still leave lots of foreclosures, but it could more quickly sort who can and who can't save their home.

Another approach: Ease struggling homeowners out of their loans altogether, so they can make a fresh start. Investment banker Alpert and the economist Dean Baker have separately proposed giving defaulters a temporary right to rent their homes at market rates. Homeowners would have less incentive to prolong the foreclosure process, but they would still lose their investment and their good credit. And people in houses way beyond their means couldn't afford the rent.

The Right to Rent Would Flatten the California Housing Market.

Banks and mortgage investors would bear the direct costs of such efforts — boo-hoo — but here again, that doesn't mean you'll pay nothing. As Brookings' Dynan notes, the banking system remains fragile: Want another bailout?

And economist Bill Emmons of the St. Louis Fed thinks that forced write-downs would make lending unpredictable, which in turn could make mortgages costlier. In any case, given the climate in Washington, the chances for any major federal legislation seem slim. It's more likely that a push for write-downs will come from state attorneys general pursuing the robo-signing scandal. "The AGs are out for blood," says analyst Zelman.

So the ultimate workout remains unclear, but two things are certain. First, says Dynan, for the economy to get back on solid footing, households have to unwind much of the leverage they've taken on, and mortgage defaults are an inevitable part of that. (note the impact on disposable income in our consumer-driven economy when the ATM is turned off.)

HELOC

The question is whether families who misjudged the real estate market (the majority of whom are not as affluent as folks in Ladera) must bear the brunt of the cost of this deleveraging, or if more of the burden can be placed on the lenders that inflated the bubble — and that have, as noted, already enjoyed a bailout.

Second, the status quo has costs, even for those who've stayed in homes they can't afford. It's stressful: Before her short sale was approved, Irene Vecchione feared her house would be foreclosed at any moment and visited the courthouse-steps auction in Santa Ana, where scruffy guys in wraparound shades snap up houses, to see how her dream might end.

And every month that the Vecchiones, and millions like them, don't pay in full is another month they don't rebuild their credit. Finally, when a modification doesn't work out, a homeowner has simply thrown good money after bad. "We paid what they told us to pay," says Joshua. "But we're in the same position as people who just didn't bother."

A responsible borrower goes Ponzi

The lure of free money is difficult to resist. Even those who demonstrated that they could borrow responsibly later blew up after they spent a pile of free money and couldn't pay it back. HELOC money is like heroin or cocaine: don't try it because you might like it, and once your hooked, it ends badly.

  • This property was purchased on 9/26/2000 for $452,000. The owner used a $332,000 first mortgage and a $120,000 down payment.

  • On 1/28/2002 she refinanced with a $322,000 first mortgage.

  • On 1/18/2002 she refinanced with a $331,200 first mortgage. Through her first two years of ownership she at least broke even on her debt.

  • On 4/11/2003 she refinanced with a $322,500 first mortgage and a $50,000 stand-alone second. It was the beginning of the end.

  • On 2/27/2006 she refinanced with a $450,000 first mortgage.

  • On 3/13/2007 she refinanced with a $450,000 first mortgage.

  • On 4/7/2008 she borrowed $70,000 from a friend who was just wiped out in the foreclosure.

  • Total property debt was $520,000.

  • Total mortgage equity withdrawal was $198,000.

  • The lender moved quickly once they issued the NOD.

Foreclosure Record

Recording Date: 08/25/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 05/24/2010

Document Type: Notice of Default

The property was sold at auction for $641,000 on 9/28/2010. The flipper is trying to make almost $160,000 on the deal. Do you think the market will give it to them?

Irvine Home Address … 32 COLUMBUS Irvine, CA 92620

Resale Home Price … $799,000

Home Purchase Price … $452,000

Home Purchase Date …. 9/28/2010

Net Gain (Loss) ………. $299,060

Percent Change ………. 66.2%

Annual Appreciation … 250.9%

Cost of Ownership

————————————————-

$799,000 ………. Asking Price

$159,800 ………. 20% Down Conventional

4.87% …………… Mortgage Interest Rate

$639,200 ………. 30-Year Mortgage

$163,001 ………. Income Requirement

$3,381 ………. Monthly Mortgage Payment

$692 ………. Property Tax

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

$133 ………. Homeowners Insurance

$0 ………. Homeowners Association Fees

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

$4,206 ………. Monthly Cash Outlays

-$822 ………. Tax Savings (% of Interest and Property Tax)

-$787 ………. Equity Hidden in Payment

$299 ………. Lost Income to Down Payment (net of taxes)

$100 ………. Maintenance and Replacement Reserves

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

$2,997 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$7,990 ………. Furnishing and Move In @1%

$7,990 ………. Closing Costs @1%

$6,392 ………… Interest Points @1% of Loan

$159,800 ………. Down Payment

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

$182,172 ………. Total Cash Costs

$45,900 ………… Emergency Cash Reserves

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

$228,072 ………. Total Savings Needed

Property Details for 32 COLUMBUS Irvine, CA 92620

——————————————————————————

Beds: 5

Baths: 3 baths

Home size: 3,230 sq ft

($247 / sq ft)

Lot Size: 5,300 sq ft

Year Built: 1979

Days on Market: 35

Listing Updated: 40513

MLS Number: S638691

Property Type: Single Family, Residential

Community: Northwood

Tract: Pl

——————————————————————————

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

Great 5 bedroom PLUS bonus room model… Could be 6 bedrooms as bonus room has a closet. Interior tract location with livingroom with vaulted ceilings, 1 bedroom downstairs, open kitchen, familyroom w/fireplace, plus den downstairs, spiral staircase. Huge master with sitting area with fireplace has vaulted ceilings also and large bath, walk-in closet. All bedrooms are good sized. BRAND NEW roof just installed. 3 car garage, great bonus room, back yard has firepit, in ground spa. Park located within tract. This beautiful familyhome is in a great area with an excellent school district… This is NOT a short sale.

Robo-signing scandal creates more false hopes among squatters

Some loan owners delayed their mortgage default on the false hope that the robo-signing scandal might net them a free house.

Irvine Home Address … 92 AGOSTINO Irvine, CA 92614

Resale Home Price …… $449,900

I make a rich woman beg, I'll make a good woman steal

I'll make an old woman blush, and make a young girl squeal

I wanna be yours pretty baby, yours and yours alone

I'm here to tell ya honey, that I'm bad to the bone

B-B-B-B-Bad

B-B-B-B-Bad

B-B-B-B-Bad

Bad to the bone

George Thorogood — Bad To The Bone

Denial and the desire to be rescued runs deep in our culture. From our religious traditions to popular television, everyone has a sob story and some reason why they need to be relieved of the responsibility for their actions. Back in March of 2008, I wrote about Bailouts and False Hopes:

One of the more interesting phenomenon observed during the bubble was the perpetuation of denial with rumors of homeowner bailouts. Many homeowners held out hope that if they could just keep current on their mortgage long enough, the government would come to their rescue in the form of a mandated bailout program. Part of this fantasy was not just that people could keep their homes, but that they could keep living their lifestyle as they did during the bubble. What few seemed to realize was any government bailout program would be designed to benefit the lenders by keeping borrowers in a perpetual state of indentured servitude. With all their money going toward debt service payments, little was going to be left over to live a life.

All of these plans had benefits and drawbacks. One of the first problems was to clearly define who should be “bailed out.” The thought of bailing out speculators was not palatable to anyone except perhaps the speculators themselves, but with regular families behaving like speculators, separating the wheat from the chaff was not an easy task. If a family exaggerated their income to obtain more house than they could afford in hopes of capturing appreciation, did they deserve a bailout? The credit crisis that popped the Great Housing Bubble was one of solvency, and there was no way to effectively restructure payments when a borrower could not afford to pay the interest on the debt, and this was a very common circumstance. None of the bailout programs did much for those with stated-income (liar) loans, negative amortization loans, and others who are unable to make the payments, and since this was a significant portion of the housing inventory, none of these plans had any real hope of stopping the fall of prices in the housing market.

It has been nearly three years since I wrote that, and every few months, there is another loan modification program, proposed bailout, or some other news issue that gives debtors false hope. The latest has been the robo-signer controversy.

So far, politicians on the Left have used this issue to try to pander for votes with populist appeals of innocent homeowner versus the evil banking machine. The banks were happy to go along if it made a few loan owners make a few more payments in the false hope that may may get their debts forgiven. And as we will see today, attorneys have already found a way to exploit the issue to make a few dollars on the false hope of the masses.

Fannie and Freddie give green light to resume sales of foreclosures

by CHRISTINE RICCIARDI — Monday, November 29th, 2010, 1:35 pm

Fannie Mae and Freddie Mac gave real estate agents the green light to resume selling foreclosed homes, after suspending the process as the robo-signing debacle unfolded the past two months.

Freddie told agents in a memo last week to "resume all normal sales activity," as the government-sponsored enterprise will "resume marketing, sales and disposing of assets previously placed 'on hold.'"

Fannie Mae told its real estate agents "to proceed with scheduling and holding the closings" of sales of homes with mortgages owned or backed by the GSE.

The green light is unambiguous. No special conditions or circumstances allowing delay. Foreclose as quickly as possible.

The mortgage-finance giants initially enacted a moratorium on sales of foreclosed properties because servicers were allegedly signing affidavits either without prior knowledge of the case or without a notary present — a phenomenon that became known as robo-signing.

Many other lenders, including Ally Financial, JPMorgan Chase and Bank of America, issued foreclosure moratoriums that have since been lifted.

Bank of America started refiling new affidavits Oct. 25. A spokesperson for JPMorgan Chase said they have not started refiling and will do so state-by-state. The process should take three to four months.

Ally Financial said it will move forward with a foreclosure in the 23 judicial states when it has reviewed and remediated the affidavit. Cook County, Ill., restarted foreclosure evictions two weeks ago.

Both Fannie Mae and Freddie Mac recently pulled their existing foreclosures cases from one Florida-based firm at the center of the robo-signing scandal, The Law Offices of David J. Stern.

David Stern already made a fortune, and the pullout by the GSEs is more for press relations than anything else. As scandalous details emerge, this issue will re-appear now and again over the next few months, but with exception of the articles promising more false hope, this issue is behind us.

Robo-signing scandal overrated?

By: Liz Farmer 12/09/10 12:05 PM

A foreclosures expert says that the national investigation into the robo-signing scandal, in which lenders blazed through thousands of foreclosure filings without reading them, is so far not yielding any results that would give people their homes back.

The definition of false hope: people are not getting their houses back, nor are they getting any principal reductions.

Rick Sharga, CEO of RealtyTrac, a foreclosure tracking firm, said the investigation by state attorneys general will likely result in fines against mortgage servicers and even some criminal prosecution. But the bottom line for homeowners who have lost their homes is the same.

"We've seen very little fallout in the way of forseclosures … being overturned," Sharga said. "There's not a single case where a home that has already sold has been overturned."

The 50 states and the District are participating in the investigation into illegally filed foreclosures.

Reporters have been scouring the nation looking for the victims of robo-signer, and so far, nothing. Sometimes people forget that the reason robo-signer is after these debtors is because the debtors are not making payments on the loan for the money they used to buy the house they are squatting in. Borrowers used the bank's money, and now that they can't pay the bank back, the bank wants to take the house purchased with the bank's money. That's how the system works.

Money Talks: Foreclosure Rip-Off

by Stacy Johnson — Posted: 12.10.2010 at 7:35 AM

Some look at a foreclosure and all they see is someone who borrowed money they didn't repay.

The homeowner is the bad guy, the bank is the victim.

It's more nuanced than that black-and-white view. Clearly, a foreclosure is a process against a borrower who did not repay the money they borrowed. If lenders didn't have ability to get their money back, there would be no lending. Whether these people are good or bad is beside the point. The borrower needs to either repay the money or give up the house pledged as security to the loan.

A foreclosure defense lawyer, however, sees it differently.

It isn't the way most people think it is in terms of "Oh, these people haven't paid their mortgage."

These people were sucked into a horrible deals buying ARMs that they never should have been able to put into.

I grow tired of this nonsense. Lenders Are More Culpable than Borrowers because lenders should only extend loans to those capable of repayment. The greater responsibility of lenders in this mess does not relieve borrowers of their responsibilities, nor does it entitle them to special rights not extended to them by law or by contract.

Why is it when someone wants to screw the banks, they justify it by making borrowers blameless and the lenders the epitome of evil?

Why?

Because the conscience was out of the deal.

Peter Tickten's firm is defending more than 3,000 foreclosures.

His goal?

Using things like lost paperwork and robo-signing to get a a mortgage wiped out so the homeowner never has to pay it back.

It doesn't happen often, but it does happen.

No, it doesn't happen ever.

As it turns out, however, the fees some of these lawyers are charging may send some homeowners seeking a defense from their defense lawyers.

Can you think of a worse example of preying on someone's false hope?

Because this lawyer has pioneered a new fee structure: 40% of any mortgage reduction he achieves.

Say you've got a 200,000 mortgage and it gets dismissed: you never have to pay it back.

The fee will be 40% of $200,000: $80,000.

Where does a consumer in foreclosure come up with $80,000?

Why, with a mortgage, of course.

OMG! Who is going to give the borrower this mortgage? Will the attorney lien the property and put the loan owner on a new payment plan? This attorney is trying to crowd out the lender and become the recipient of the borrowers home payment income stream.

And that leaves only one question.

How can a lawyer possibly justify a fee like this?

"If I do that in a case where you lose your leg and I get a million dollars for you, I get 40% of that.

So if I do the same thing in a case where I save you a million dollars on the mortgage on your home, I should be able to get the same amount."

Mr. Tickten said his fee is negotiable and he'd never foreclose on a homeowner to collect it.

But still it seems like when it comes to foreclosures, even when you win you lose.

He would never foreclose on a homeowner to collect? How nice of him. No, if you fail to pay him, he will put a judgement lien on the property — a lien that will be in first position after the mortgage is wiped out — and he can wait until the property sells. Most likely he won't need to wait that long because eventually the former loan owner will want to get access to their newfound equity, and in order to get a new loan, the judgment will need to be paid off first.

Should this owner be given his home?

The owner of today's featured property is a HELOC abuser. He could probably make the argument that he was "sucked in" by unscrupulous mortgage brokers to take out a loan he never should have been given.

Does that mean we should forgive his debt?

Should this house remain in the hands of someone who made a stupid financial mistake at the expense of a new owner buying under today's stricter terms?

Existing loan owners — particularly the stupid ones who over borrowed — are crowding out new buyers. Any of you looking to buy today have to pay higher prices than you should because banks are keeping loan owners and squatters in houses they can't afford. This inventory is being held off the market to screw you, and the higher price you will pay is going to pay the debts of someone who over-borrowed and couldn't afford their house.

  • This property was purchased on 5/13/1994 for $225,000. The owner used a $213,700 first mortgage and a $11,300 down payment.

  • On 12/20/1999 he refinanced with a $215,200 first mortgage.

  • On 2/13/2003 he refinanced with a $280,000 first mortgage.

  • On 10/1/2003 he refinanced with a $310,000 first mortgage.

  • On 1/18/2005 he obtained a $150,000 HELOC.

  • On 7/31/2006 he refinanced with a $417,000 first mortgage, and he got a $150,000 HELOC.

  • Total property debt is $567,000. He more than doubled his mortgage during the time he owned the property.

  • Total mortgage equity withdrawal is $353,300.

  • He recently received his NOD.

Foreclosure Record

Recording Date: 09/13/2010

Document Type: Notice of Default

Let's say this guy gets his loan balance forgiven due to the robo-signer problem. Would that be a good thing? Should borrowers like this be given a pass?

If they are giving away houses, I'll take two.

Irvine Home Address … 92 AGOSTINO Irvine, CA 92614

Resale Home Price … $449,900

Home Purchase Price … $225,000

Home Purchase Date …. 5/13/1994

Net Gain (Loss) ………. $197,906

Percent Change ………. 88.0%

Annual Appreciation … 4.2%

Cost of Ownership

————————————————-

$449,900 ………. Asking Price

$15,747 ………. 3.5% Down FHA Financing

4.87% …………… Mortgage Interest Rate

$434,154 ………. 30-Year Mortgage

$91,782 ………. Income Requirement

$2,296 ………. Monthly Mortgage Payment

$390 ………. Property Tax

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

$75 ………. Homeowners Insurance

$308 ………. Homeowners Association Fees

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

$3,069 ………. Monthly Cash Outlays

-$377 ………. Tax Savings (% of Interest and Property Tax)

-$534 ………. Equity Hidden in Payment

$29 ………. Lost Income to Down Payment (net of taxes)

$56 ………. Maintenance and Replacement Reserves

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

$2,244 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$4,499 ………. Furnishing and Move In @1%

$4,499 ………. Closing Costs @1%

$4,342 ………… Interest Points @1% of Loan

$15,747 ………. Down Payment

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

$29,086 ………. Total Cash Costs

$34,300 ………… Emergency Cash Reserves

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

$63,386 ………. Total Savings Needed

Property Details for 92 AGOSTINO Irvine, CA 92614

——————————————————————————

Beds: 3

Baths: 2 full 1 part baths

Home size: 1,597 sq ft

($282 / sq ft)

Lot Size: n/a

Year Built: 1989

Days on Market: 6

Listing Updated: 40521

MLS Number: S641019

Property Type: Condominium, Residential

Community: Westpark

Tract: Lp

——————————————————————————

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

Feels like a single family home!! — Largest floorplan in Las Palmas Community with private enclosed entry, 2 car-attached garage with storage, inside laundry and easy access to community parks, pools, tennis courts, and bike paths. This open floorplan has cathedral ceilings, spacious kitchen with plenty of counter space and serving bar into dining room, mirrored wall and fireplace in living room, dining room access to large patio with spanish pavers and built in bbq. Conveniently located near UC Irvine, Irvine business district, 405 fwy and John Wayne Airport. Enjoy the convenience of Irvine, award winning schools, and a 5 star lifestyle in Westpark!

IHB News 12-11-2010

I hope you are enjoying your weekend.

Irvine Home Address … 195 BRIARWOOD Irvine, CA 92604

Resale Home Price …… $339,990

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Fri Dec 10 2010

US House Values to Drop by $1.7 Trillion This Year (bloomberg.com)

LAOC house values lost $677 billion vs. peak (lansner.ocregister.com)

Excellent charts of happy deflation (PDF – msurkan.podbean.com)

Simple Math of Renting vs. Buying Your House (financialsurvivalradio.com)

Mortgage Rates Hit Six Month High, Threatening To Benefit Buyers With Savings (cnbc.com)

Jumbo loan market has completely evaporated (doctorhousingbubble.com)

Treasury Bonds: From Ultra-Safe to Battered and Bruised (dailyfinance.com)

Are The Federal Reserve's Crimes Too Big To Comprehend? (ampedstatus.com)

A Real Jaw Dropper at the Federal Reserve (huffingtonpost.com)

Bloomberg Poll Shows More Than Half of Americans Want Fed Reined In or Abolished (Mish)

Ron Paul Claims Chairmanship of Monetary Policy Subcommittee, Prepared to Subpoena Fed (Mish)

Mendacious Bernanke (atimes.com)

50% housing bubble looms over 7 major Chinese cities (english.peopledaily.com.cn)

The Grim Truth About America (exaggerated, but real) (escapefromamerica.com)

House Democrats defy Obama on tax cut bill (politicalticker.blogs.cnn.com)

Sanders: Middle class held hostage by Tea Party servants of billionaires (dailybail.com)

Working Poor Will Pay More After Obama's GOP Tax Sellout (dailyfinance.com)

Wanking Bankers (youtube.com)

Find the real worth of property, based on rents

Thu Dec 9 2010

Plunging House Prices Fuel Property Tax Appeals Swamping US Cities, Towns (bloomberg.com)

Property tax error increases assessment (wgnradio.com)

North CA House Prices Drop to Lowest Level Since 2004 (northcoastjournal.com)

Caught by mistake in foreclosure web (news.yahoo.com)

US housing doldrums to last until 2013 (bbc.co.uk)

Americans see housing inflation still far off (miamiherald.com)

Inflation Has The Upper Hand, Except In Housing (chrismartenson.com)

Repairing the Damage of Fraud as a Business Model (4closurefraud.org)

David Stockman With Stephen Colbert (dailybail.com)

Why Tax Deal Confirms the Republican Worldview (robertreich.org)

Bond vigilantes may thwart tax deal (finance.yahoo.com)

Bernanke's Lies Regarding "Printing Money" (video – Mish)

Bank of America in Municipal Bid-Rigging Case Tip of Iceberg (bloomberg.com)

"Irish People Owe Nothing To Banks, Billionaires" (dailybail.com)

10 reasons to shun stocks till banks crash (marketwatch.com)

US fiscal health worse than Europe's: China adviser (news.yahoo.com)

China #1, US #2: Corporate corruption of gov't dooms America (endoftheamericandream.com)

Is the Political Class Economically Incompetent or Simply Bought and Paid For? (Mish)

WikiLeaks cables: US lobbied Russia on behalf of Visa and MasterCard (guardian.co.uk)

WikiLeaks sparks 'mirror' sites, leaked cables easier to access than ever (nydailynews.com)

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Find the real worth of property, based on rents

Wed Dec 8 2010

Welcome to Zombieland: Ladera Ranch, California (money.cnn.com)

Chapman U. says prospects dim for Orange County housing (lansner.ocregister.com)

Dramatic price drops in Mt. Vernon, NY (dailyfinance.com)

At least 3 more years of good news for potential buyers (reuters.com)

Foreclosure mess: Much bigger than you thought (boston.com)

Rural Foreclosures: The Hidden Heartland Inventory (upi.com)

Walking Away from Your House for Dummies (blogs.wsj.com)

College students getting expensive lesson in debt (doctorhousingbubble.com)

Ron Paul might get to oversee Federal Reserve! (businessweek.com)

Mish emails to congress (Mish)

Sen. Sanders Keeps Pressure on Fed (online.wsj.com)

JP Morgan Getting Squeezed In Silver Market? (sfgate.com)

Irish taxpayers sacrificed to pay private bank debts to foreign investors (guardian.co.uk)

Euro collapse 'possible' amid divisions over bail-out (telegraph.co.uk)

A Reasonable Budget Would Never Pass (slate.com)

Corporate officers never go to jail (dealbook.nytimes.com)

Corporate corruption of government: Taking Down America (tomdispatch.com)

Wanted poster: ASSANGE, JULIAN PAUL (interpol.int)

Arrested WikiLeaks chief denied bail in U.K. (msnbc.msn.com)

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Find the real worth of property, based on rents

Tue Dec 7 2010

Renting a House: It's a Great Time Not to Own (housingwatch.com)

Dr. Doom Predicts $1 Trillion in Housing Losses (dealbook.nytimes.com)

US headed for recession (reuters.com)

As housing problems linger in US and Ireland, so do fears (dallasnews.com)

The Rise and Fall of Default (observer.com)

For House Buyers, a Season for Deep Discounts (nytimes.com)

New Orleans real estate computer crash brings industry to its knees (nola.com)

Lender Processing Services, Foreclosure Giant, Faces Growing Legal Trouble (huffingtonpost.com)

Bank of Israel deputy governor hints at real estate bubble (globes.co.il)

New Zealand housing market remains in doldrums (nbr.co.nz)

Bernanke thinks housing "can't get much weaker." (cbsnews.com)

CBS Allows Fed to Spread Disinformation Unchallenged (usawatchdog.com)

Robert Reich The American Jobs Emergency Requires Action (robertreich.org)

Who Rules America: Wealth, Income, and Power (sociology.ucsc.edu)

Let's not make a deal (nytimes.com)

Movie: Inside Job (imdb.com)

Does Wikileaks Represent The End Of Internet History? (crunchgear.com)

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Find the real worth of property, based on rents

Mon Dec 6 2010

Value Sinking Fastest on Low-Price Houses (nytimes.com)

Bank-owned houses go for one-third less (tulsaworld.com)

The 25-Year Foreclosure From Hell (4closurefraud.org)

When Borrowers Default on Second Houses (nytimes.com)

Walking away from your mortgage – Military Financial Advice (armytimes.com)

Scrap the Mortgage Interest Deduction (bayarearealestatetrends.com)

The Mortgage Deduction Should Be Done Away With–But It Won't (theatlantic.com)

How The Mortgage System Works, And How It's Been Rattled (realtytrac.com)

The Bubble Was in Credit, Not Housing (ritholtz.com)

What Chase CEO Jamie Dimon Wont Tell You About Leverage (baselinescenario.com)

Federal Reserve reveals $trillions dished out to foreign banks (dailymail.co.uk)

Fed shows how hedge funds and baseball players got their cut of its cash (guardian.co.uk)

So That's Where the Fed Money Went (nytimes.com)

Ron Paul stands up for Wikileaks' Julian Assange (politico.com)

How to burst Aus. property bubble: rational lending based on rents (heraldsun.com.au)

China's credit bubble on borrowed time as inflation bites (telegraph.co.uk)

Chinese train sets speed record, US rotting from lobbyist corruption (edition.cnn.com)

72 super PACs spent $83.7 million on election manipulation (washingtonpost.com)

If Democrats are big spenders, why do Republican states get the money? (slate.com)

A little HELOC dependency is okay, right?

HELOCs were often used to pay off credit cards. It seems logical to pay off high interest debt with low interest debt, particularly when you get a tax deduction on the low interest debt as well. Unfortunately, any way you look at it, Ponzi borrowing is stupid. Does it make sense to pay for consumer goods with 30-year debt? That is the net effect. When you think about it, does it make sense to finance any kind of consumer debt? I don't think so.

The owner of today's featured property has owned it for almost 20 years. She only sipped kool aid during the bubble, but she still managed to pull out nearly $100,000 for purposes unknown.

  • This property was purchased for $142,000 on 1/25/1991. The original mortgage information is not available, but it was likely a $113,600 first mortgage and a $28,400 down payment.

  • On 3/28/2002 she refinanced with a $125,000 first mortgage.

  • On 8/5/2002 she refinanced again with a $133,750 first mortgage.

  • On 10/20/2004 she refinanced with a $151,577 first mortgage.

  • On 1/25/2007 she obtained a stand-alone second for $50,000.

  • Total property debt is $201,577.

  • Total mortgage equity withdrawal is $87,977.

By Irvine standards, taking out less than $100,000 makes her a responsible homeowner — which says something about how low the bar is here.

Irvine Home Address … 195 BRIARWOOD Irvine, CA 92604

Resale Home Price … $339,990

Home Purchase Price … $142,000

Home Purchase Date …. 1/25/1991

Net Gain (Loss) ………. $177,591

Percent Change ………. 125.1%

Annual Appreciation … 4.5%

Cost of Ownership

————————————————-

$339,990 ………. Asking Price

$11,900 ………. 3.5% Down FHA Financing

4.71% …………… Mortgage Interest Rate

$328,090 ………. 30-Year Mortgage

$68,092 ………. Income Requirement

$1,704 ………. Monthly Mortgage Payment

$295 ………. Property Tax

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

$57 ………. Homeowners Insurance

$308 ………. Homeowners Association Fees

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

$2,363 ………. Monthly Cash Outlays

-$277 ………. Tax Savings (% of Interest and Property Tax)

-$416 ………. Equity Hidden in Payment

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

$42 ………. Maintenance and Replacement Reserves

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

$1,734 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$3,400 ………. Furnishing and Move In @1%

$3,400 ………. Closing Costs @1%

$3,281 ………… Interest Points @1% of Loan

$11,900 ………. Down Payment

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

$21,980 ………. Total Cash Costs

$26,500 ………… Emergency Cash Reserves

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

$48,480 ………. Total Savings Needed

Property Details for 195 BRIARWOOD Irvine, CA 92604

——————————————————————————

Beds: 3

Baths: 1 full 1 part baths

Home size: 1,135 sq ft

($300 / sq ft)

Lot Size: n/a

Year Built: 1978

Days on Market: 40

Listing Updated: 40492

MLS Number: S636940

Property Type: Condominium, Residential

Community: Woodbridge

Tract: Vg

——————————————————————————

Probably the nicest 3 bedroom upper unit ever offered in Woodbridge's Village Green. Beautifully remodeled kitchen with nice appliances and fixtures, plus lots of tile and designer carpets, fresh paint, new mirrored wardrobe doors, etc.

Probably the nicest 3 bedroom upper unit ever offered in Woodbridge's Village Green? Probably the dumbest realtor comment ever written in the MLS….

Home values crater by $1.7 trillion in 2010

A billion here a billion there, and before you know it, the market losses add up to a lot of money.

Irvine Home Address … 2305 APRICOT Dr 2305 Irvine, CA 92618

Resale Home Price …… $244,900

Dad believed what Maggie said

Get a mortgage buy a home

So dad took out a great big loan

For a while there we were chuffed

Now the market has collapsed

And we're absolutely stuffed

Our house, in the middle of a slump

Our house, no one wants to buy this dump

Dad is desperate to sell

But now our homes worth even less

Than a pension from Maxwell

Our living room's a mess

Full of magistrates and bailiffs

Trying to repossess

Our house, in the middle of the boom

Our house, it was worth a small fortune

Our house, left us in a dreadful state

Our house, why the hell'd we decorate

We really caught a cold

Nowhere we can go to now

All the council houses have been sold

Our dads taken some stick

He's still voting Tory though

By God he must be thick

Our house, didn't work out like we planned

Our house, prices dropped by fifty grand

Our house, threw us out and changed the locks

Our house, it is now a cardboard box

Spitting Images — Our House

The headline about cratering home values is catchy, but what are we really talking about here? The underlying value of houses hasn't changed much, but the trading price of properties went way up and now way back down in a classic asset price bubble. The $1.7 trillion dollars in "value" was imaginary. If we had never had a housing bubble, we would not have had a crash, and nobody would believe in their own minds that they "lost" so much value in their property.

For the people who did not abuse their HELOC, buy at the peak with a toxic mortgage, or lose their job during the recession — let's hope this is still the majority — those people did not "lose" anything other than their imaginary wealth. For those that made the mistakes of the bubble and those who were swept up in the recession in the bubble's wake, those people lost their houses. Losing imaginary wealth is not as painful as losing the family home.

Zillow: Home values crater by $1.7 trillion in 2010

by KERRY CURRY — Thursday, December 9th, 2010, 10:19 am

U.S. homes are expected to lose more than $1.7 trillion in value this year, 63% more than the estimated $1 trillion lost in 2009, according to Zillow.

The decline brings the total value lost since the market peaked in June 2006 to $9 trillion. By comparison, from 2001 to the end of September 2010, the war in Iraq has cost $750.8 billion, according to a September report by the Congressional Research Service.

The second half of the year was more punishing on values. From January to June, the housing market lost $680 billion. From June to December, Zillow projects residential home value losses will top $1 trillion.

Less than one-fourth, or 31, of the 129 markets tracked by Zillow showed gains in total home values during 2010. Among those were the Boston metropolitan statistical area which gained $10.8 billion in value, and the San Diego MSA, which gained $10.2 billion.

“Government interventions like the homebuyer tax credit helped buoy the market during the second half of 2009 and the first half of 2010, but we saw a renewed downturn in the last half of this year. It's a testament to the nearly irresistible force of the overall market correction that government incentives can only temporarily hold back the tide, and that the market will ultimately find its natural equilibrium of supply and demand,” said Zillow Chief Economist Dr. Stan Humphries. (Click to expand.)

When we bounced off the false bottom in 2009, the market gained strength through the expiration of the government tax credits. The second half of 2010 saw house prices roll over and begin another leg down. The downtrend is expected to continue throughout 2011.

Fitch sees 10% drop in home prices in 2011, negative outlook for MBS

by JASON PHILYAW — Thursday, December 9th, 2010, 12:37 pm

Fitch Ratings expects another 10% decline in home prices in 2011, as the supply of distressed properties continues to weigh down the housing market.

Accordingly, analysts maintained the agency's negative outlook for the residential mortgage-backed securities space and said 53% of all investment-grade RMBS rated by Fitch have a negative outlook. The number of downgrades will once again outpace upgrades in RMBS, but not as severely as the past few years, according to analysts.

Fitch said the robo-signing debacle plaguing loan servicers, loan buyback pressures hitting mortgage lenders and a handful of other macroeconomic issues cause analysts to "remain cautious" regarding a sustainable stabilization for the market.

"Key factors that will continue to weight on performance include negative equity for recent vintage collateral, lower loan modification volume, and slightly higher loss severities," analysts said.

Fitch also said the market for commercial mortgage-backed securities should improve next year, as property market fundamentals have turned the corner. Still loan performance within the CMBS space will begin to diverge from the fundamentals next year because of asset-specific tenant rollover and high leverage, according to analysts.

Analysts said vacancies have peaked in many of the largest metropolitan areas of the country while rents have reached bottom indicating some stabilization. But the lack of construction financing over the past three years skews those gains, meaning "it will be some time before income growth is seen."

We discussed the market's fate in High prices, low demand, and large supply means lower prices ahead. Lower prices is the consensus opinion among economists outside of the NAr.

No money in. Much money out.

Many Ponzi borrowers simply ripped off the banks. Of course, lenders asked for this treatment when they gave people property with no money down and then gave them the appreciation as the values increased. It is difficult to resist the offer when lenders are willing to give you property and lots of money if you keep it.

The owner of todays featured property probably didn't set out to game the system. In fact, she probably still believes there is nothing wrong with what she did or what the bank did, particularly since the rest of us are picking up the tab. There is no reason to believe she will not do this again if given the chance.

  • This property was purchased on 5/11/2001 for $174,400. The owner used a $165,850 first mortgage, a $8,550 second mortgage, and a $0 down payment. Basically, she was given a free house by the bank.

  • Since the free house was not good enough, she then refinanced with a $207,200 first mortgage on 9/24/2003.

  • On 6/11/2004 she refinanced again with a $244,600 first mortgage.

  • On 11/24/2004 she refinanced with a $323,200 first mortgage.

  • On 11/8/2005 she obtained a $30,500 HELOC.

  • On 10/27/2006 she obtained another $30,500 HELOC.

  • On 7/3/2007 she refinanced with a $373,000 first mortgage.

  • On 2/14/2008 she got a stand-alone second for $10,000.

  • Total property debt is $383,000.

  • Total mortgage equity withdrawal is $208,600.

  • She quit paying in early 2009, and she got to squat for about 18 months before the bank finally took the property back.

Foreclosure Record

Recording Date: 08/19/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 05/18/2009

Document Type: Notice of Default

BTW, you know your house is a glorified apartment when there is a number on your front door….

Irvine Home Address … 2305 APRICOT Dr 2305 Irvine, CA 92618

Resale Home Price … $244,900

Home Purchase Price … $174,400

Home Purchase Date …. 5/11/2001

Net Gain (Loss) ………. $55,806

Percent Change ………. 32.0%

Annual Appreciation … 3.5%

Cost of Ownership

————————————————-

$244,900 ………. Asking Price

$8,572 ………. 3.5% Down FHA Financing

4.71% …………… Mortgage Interest Rate

$236,329 ………. 30-Year Mortgage

$49,048 ………. Income Requirement

$1,227 ………. Monthly Mortgage Payment

$212 ………. Property Tax

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

$41 ………. Homeowners Insurance

$372 ………. Homeowners Association Fees

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

$1,852 ………. Monthly Cash Outlays

-$114 ………. Tax Savings (% of Interest and Property Tax)

-$300 ………. Equity Hidden in Payment

$15 ………. Lost Income to Down Payment (net of taxes)

$31 ………. Maintenance and Replacement Reserves

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

$1,485 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$2,449 ………. Furnishing and Move In @1%

$2,449 ………. Closing Costs @1%

$2,363 ………… Interest Points @1% of Loan

$8,572 ………. Down Payment

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

$15,833 ………. Total Cash Costs

$22,700 ………… Emergency Cash Reserves

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

$38,533 ………. Total Savings Needed

Property Details for 2305 APRICOT Dr 2305 Irvine, CA 92618

——————————————————————————

Beds: 2

Baths: 2 baths

Home size: 910 sq ft

($269 / sq ft)

Lot Size: n/a

Year Built: 1979

Days on Market: 26

Listing Updated: 40491

MLS Number: S638534

Property Type: Condominium, Residential

Community: Orangetree

Tract: Sc

——————————————————————————

According to the listing agent, this listing is a bank owned (foreclosed) property.

Great Value! Top Floor Unit. Spacious Condo two private balconies. Plenty of natural light. Enjoy high ceilings & fireplace In Living Room. Nicely sized bedrooms. Enjoy reading on your private balcony of your master bedroom. Master has Mirrored Closets & Double Sinks. Formal Dining Room & Breakfast Bar Living Room. Inside Laundry Area. Extra storage in balcony closet. Must See!

I hope you have enjoyed this week, and thank you for reading the Irvine Housing Blog: astutely observing the Irvine home market and combating California Kool-Aid since 2006.

Have a great weekend,

Irvine Renter

Spain shows how to keep house prices inflated

Spain managed to inflate a nastier housing bubble than the US did. Now Spain is showing US banks how to keep a housing bubble inflated… For now.

Irvine Home Address … 184 ALMADOR Irvine, CA 92614

Resale Home Price …… $399,000

I was a player when I was little

But now I'm bigger, I'm bigger

A heart breaker when I was little

But I'm bigger {I'm bigger}, I'm bigger

And all the haters, I swear

They look so small from up here

Cause we're bigger, our love's bigger

I'm bigger and your bigger

Justin Bieber — Bigger

In the United States, we inflated a massive housing bubble. In Spain, its even bigger. Everything we did, they did with gusto. Their solutions for the problem have been similarly extreme.

For as bad as our problems are here in the United States, we did not create a housing bubble as bad as Spain's. How Spain deals with this issue is instructional for our handling here in the United States.

Bankers used loans to inflated house prices, and now that prices are crashing, the debt greatly exceeds the value of the real estate used to secure it.

Bankers believe they can re-inflate the housing bubble and push home values back above the level of debt. That isn't going to happen. The mis-allocation of resources caused by the bubble, the resulting unemployment in the aftermath, and the fact that the level of debt isn't supportable by incomes are forces that will put more inventory on the market preventing house prices from rising until the debt is purged.

Here in America, we have embarked on a policy of amend-extend-pretend. Government regulators are looking the other way while bankers wankers live in a fantasy world where borrowers who couldn't afford the debt when it was issued suddenly go back to work and can afford to diligently pay off the loans bankers foolishly underwrote.

Prices will continue to crash in Spain just as they will continue lower here.

The Inevitability of a Spanish Property Crash

By Tom Harris — 8 Dec 2010

The Inevitability of a Spanish Property Crash, article supplied by Fairhomes (Gibraltar) Limited

Despite the best efforts of the European Financial Stability Facility it was evident that even before the ink had dried on the Irish bail-out agreement that the contagion could not be contained.

Immediately nervous investors began looking to other Eurozone countries, such as Belgium, Italy, Portugal and especially Spain fearing the same issues that dragged Ireland down will resurface elsewhere. After all it was not the state’s inability to borrow (Ireland is well funded until well into 2011) but the inability of Irish banks to refinance their borrowing in the wholesale markets that triggered the bail out.

But could Spain’s banks face a similar problem?

At present the response from Spain seems to be bullish with the country’s Economics Minister, Elena Salgado telling CNN that the eurozone’s fourth biggest economy has “absolutely no need” for an Irish style rescue. This was then followed by the extremely brave statement of Snr Zapatero that speculators betting short against Spain would “lose their shirt” and that the government is already doing enough to avert a debt crisis.

Politicians and bankers lie in their public statements whenever they fear the market's reaction.

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Whilst this may seem like an admirable attempt to re-assure and calm the markets it ignores the hard facts that underlie the current situation. Barclays Capital reckons that combined, the Spanish sovereign and Spanish banks need to raise €73bn in the first four months of 2011, some half of it in April 2011 alone.

These figures in isolation don’t seem to point to bail-out territory but when you take into account the fact that Spanish bond yields are at their highest in 8 years it’s clear that more than words are required to attract investors. The speed of the increase in yields from 4% to 5.2% in a month is a dramatic shift for bond markets which usually move in small doses. It means Spain’s bonds are slumping in value and holders are dumping them as they’re worried they won’t get all their money back.

So what is it that is spooking these investors? The country has made big efforts to scale back spending by central government and the national debt this year will be 60% of GDP – not great but not as bad as Ireland’s near 100%. But as Victor Mallet points out in the FT there’s a lack of clarity about the figures as despite the “strict limits” the debts of the country’s 17 autonomous regions (104.8 bn euros) account for over half of the public sector deficit which makes it much more difficult for the central government to impose reforms. “Spanish sovereign risk is increasingly at the sub-national level” says Nicholas Spiro of Spiro Sovereign Strategy and several regions including Catalonia and Madrid have such financial difficulties that a recovery seems unlikely given the economic stagnation and sluggish growth forecast for Spain.

It’s also in the regions where the problems for the banking systems lie. Spain experienced a huge property bubble, accompanied by a huge rise in private sector debt, and fell into recession when that bubble burst. But whilst the larger national banks such as Santander were well capitalised (and even in a position to acquire troubled foreign firms), in the regions the cajas (regional savings banks) have accumulated vast exposure to the construction and development sector. When the big two banks (BBVA and Santander) put the brakes on in 2006-07, the cajas continued lending more keenly, tapping wholesale debt markets to fund themselves. That alone makes them higher risk. But the savings banks also supplied about half of the €318 billion borrowed by Spain’s property developers. These loans now represent about a fifth of the cajas’ assets, according to Santiago López Díaz, an analyst at Credit Suisse. They are deteriorating fast.

We witnessed a similar phenomenon here in the United States. The primary lenders for acquisition, development, and construction loans were smaller regional banks. I sat in on a meeting in 2009 with representatives of one Midwestern bank that had more than 20 land projects in Southern California. I guess the returns were good when the developers thought it was in their best interest to continue to make payments. Once the land market imploded, land assets declined about 80% in value, and these smaller regional banks ended up with much REO.

So now the cajas are undoubtedly facing the grimmest outlook for sometime in what is already an extremely volatile situation. The results of the stress tests earlier in 2010 were supposed to have calmed fears but investigation revealed that much of the supposed liquidity in the regional banks was due simply to the over-valuation of much of their repossessed housing stock. A recent survey by the Economist estimated that Spanish property is still over-valued by 47.6% which suggests that a painful correction is on the way.

We have the same accounting slight-of-hand here in the US. We allow bankers to use bullish market assumptions concerning the underlying real estate to project loan loss reserves and unrealistically low levels. Banks Refuse to Recognize HELOC and Second Mortgage Losses. "Together with Citigroup the banks hold about 42 percent of the $1.1 trillion in second-home liens. Unlike first mortgages, they are typically not bundled and sold off to investors but kept on the banks' books. The biggest home-equity lender in the U.S. is Bank of America, holding some $138 billion in such loans. Wells Fargo has about $123.8 billion of home-equity loans." Realistically, lenders will lose most of the money they have tied up in these bad loans. That isn't how it is reflected on their balance sheets.

Indeed events of the last few days have only made this more likely. New accounting rules by the Bank of Spain will force lenders to dump depreciating assets, according to Bloomberg News. Under the changes, banks must now make provision for bad loans after just 12 months rather than the current 72 months, which will provide a strong incentive for lenders to sell properties quicker. The rules also force banks to value properties more realistically, which gives them a further incentive to sell.

Interesting that Spanish bank regulators are making the banks recognize their losses whereas here in the United States, regulators are doing everything to prevent banks from recognizing their losses.

Pisos Embargados de Bancos estimates that there are around 100,000 bank owned properties currently on the market but they estimate that this figure will rise to 300,000 next year.

Obviously this change in provisions has been designed to force banks to raise capital through sales of their property assets which would also provide a boost to domestic demand. The hope being that this income will negate the need for extensive bail-outs. However the release of this vast stock of property onto the market will drive prices down sharply and Fernando Rodriguez from Madrid-based property adviser RR de Acuna & Ass predicts a further 20% fall next year.

The danger here is that the property stock valuation is the only thing that gives the balance sheets of the cajas any respectability. Decrease these assets by 20% and many will be looking extremely vulnerable – and with no chance of borrowing on a nervous bond market the only solution will be to seek European aid.

The central bankers for the Euro aren't giving Spanish banks 0% loans like our Federal Reserve is favoring our banks. IMO, that is a good thing. Spain will see a dramatic house price crash, but then the economy will recover and the mis-allocated capital is released from real estate and allowed to be put to use in more productive assets.

Until now the response from the banks has been distinctly Canute-like, vaingloriously attempting to turn back the tide of falling prices by using their market power to artificially inflate prices.

The method which the banks use to have higher than open market price accepted as the appraisal benchmark for valuations of their property assets, starts with how the banks dispose of the homes they are currently repossessing. The banks are using subsidised mortgages which typically also include 100% mortgages, non-payment windows, extended terms (even up to 50 years) and interest free options to attract buyers.

Perhaps we should bring back 100% financing, Option ARMs, stated-income loans, ninja loans, interest-only loans, and the whole variety of really stupid lending ideas thoroughly discredited during the housing bubble. We get close to that with FHA loans, but we haven't resorted to the recklessness of the Spanish banks.

These mortgage deals are being granted at a subsidised interest rate totally at odds with market rates being offered for deposits. Typically, these subsidised mortgage rates are offered at just 0.3-0.5% over Euribor, whilst deposit rates offered by the same financial institutions are currently around 4%.

How do you sustain that policy without going broke?

The purpose of these subsidised mortgages is to encourage the purchase of bank repossessed homes at valuations that are higher than current open market prices. Indeed they are available only in conjunction with repossessed homes held by the bank offering the mortgage, whereas privately sold homes in the open market must apply through the usual channels for normal mortgage deals, which are typically 65% of value, 25 years and normal market interest rates.

Anecdotal examples show properties with a subsidised mortgage are between 25-40% above the open market price.

We tried that on a smaller scale when the Federal Reserve began buying mortgage-backed securities to drive down interest rates. The main reason interest rates have gotten so low is because lenders would far rather refinance their bad debt at very low interest rates that they would like to take a write down of original capital. Spain takes this idea to its extreme.

In October 2010 in El Rosario, Marbella, a 2000m2, frontline golf villa was sold by CAM Bank which had an asking price on their website of 1.3 million euro but were, in reality, looking for offers of 750,000 euros – however the final sales price was 601,000 euros – a difference of 54%. Another example in Santa Maria Village, Elviria was advertised by a bank at 269,500 euros but sold at 188,400 euros – a difference of 31.1%.

In effect the valuations of the bank’s property assets are supported by the banks own sales data of their repossessed homes, which are artificially inflated prices by the provision of subsidised mortgages. The result is a self perpetuating cycle where property values are kept high which in turn supports the bank’s approach to provisions against non-performing loans being required only at a low level.

We are doing the same here. Low interest rates supports bloated mortgages which in turn supports higher home prices than a natural market would support.

But with 1.4 million homes to sell this response looks remarkably inadequate, indeed many investors point to this practice as being one of the main reasons it’s impossible to judge the real price of property in Spain today – as it over-inflates the official figures so the real price of Spanish property is never reliably reported.

2011 may be the year we finally find out.

We may find out here what prices are supposed to be in 2011. The Federal Reserve is no longer buying mortgage debt and the government tax subsidies have expired. The government is no longer directly supporting house prices; although, it can be argued that the explicit backing of mortgage debt through the FHA and the GSEs is a market support. With the props removed, the market will wend its way toward a natural equilibrium. Most likely that means falling prices in 2011.

No equity left behind

Since the banks were giving out free money, most homeowners (at least the ones who have tried to sell houses in Irvine since 2006) took the free money as it became available and spent it. Their goal seemed to be to make sure no equity was left behind.

  • Today's featured property was purchased for $363,000 on 3/13/2003. The owner used a $286,000 first mortgage and a $77,000 down payment.

  • On 6/7/2004 he obtained a stand-alone second for $90,000 and withdrew his down payment plus another $13,000.

  • On 9/20/2004 he refinanced with a $384,000 first mortgage.

  • On 8/30/2006 he obtained a $10,000 HELOC.

  • On 10/17/2006 he got a $24,900 HELOC.

  • On 1/8/2007 he refinanced with a $455,000 Option ARM first mortgage.

  • Total mortgage equity withdrawal is $169,000 plus negative amortization.

  • He quit paying early in 2010.

Foreclosure Record

Recording Date: 08/20/2010

Document Type: Notice of Default

Irvine Home Address … 184 ALMADOR Irvine, CA 92614

Resale Home Price … $399,000

Home Purchase Price … $363,000

Home Purchase Date …. 3/13/2003

Net Gain (Loss) ………. $12,060

Percent Change ………. 3.3%

Annual Appreciation … 1.2%

Cost of Ownership

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$399,000 ………. Asking Price

$13,965 ………. 3.5% Down FHA Financing

4.71% …………… Mortgage Interest Rate

$385,035 ………. 30-Year Mortgage

$79,911 ………. Income Requirement

$1,999 ………. Monthly Mortgage Payment

$346 ………. Property Tax

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

$67 ………. Homeowners Insurance

$280 ………. Homeowners Association Fees

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

$2,742 ………. Monthly Cash Outlays

-$325 ………. Tax Savings (% of Interest and Property Tax)

-$488 ………. Equity Hidden in Payment

$25 ………. Lost Income to Down Payment (net of taxes)

$50 ………. Maintenance and Replacement Reserves

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

$2,003 ………. Monthly Cost of Ownership

Cash Acquisition Demands

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$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

$30,700 ………… Emergency Cash Reserves

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

$56,495 ………. Total Savings Needed

Property Details for 184 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: 19

Listing Updated: 40512

MLS Number: S639158

Property Type: Condominium, Residential

Community: Westpark

Tract: Lp

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

Elegant Westpark home with prime private location featuring two master suites, two and one-half baths, two-car attached garage with built-in storage cabinets, and spacious yard! Fabulous floor plan with soaring vaulted ceilings, cozy fireplace, and convenient inside laundry. Highly upgraded kitchen includes stainless steel dishwasher and oven/range, built-in microwave, and dry-foods pantry. Upgrades include custom tile floors, custom paint, and custom window treatments. Dual master suites each with their own master bath. Enjoy Las Palmas resort style amenities and Irvine Schools!