Lenders and borrowers shoulder responsibility for the housing bubble. But do they share the blame equally?

Irvine Home Address … 14102 SAARINEN Ct Irvine, CA 92606

Resale Home Price …… $619,900

You're a rockstar (Baby!)

Everybody wants you

Player!

Who could really blame you?

We're the ones who made you!

Eminem — We Made You

Banks created their own nightmare. They turned good borrowers into HELOC dependent Ponzis, inflated a massive housing bubble, and now that prices are crashing, lenders are surprised at the behavior of borrowers. Each side feels they are being victimized by the other. Lenders are being left to hold the bag and absorb the losses, so they have suffered consequences for their actions. Borrowers lost their homes, so they have suffered too. Beyond enduring the consequences, each party bears some responsibility for what happened. But who deserves blame, and how much?

Back in January of 2010 I advanced the proposition that Lenders Are More Culpable than Borrowers. It's a great old read and a good refresher for today's featured article.

The writing today is challenging for me to deal with because I agree with the central point of this author's argument that banks are more responsible than loan owners. However, the reasoning she uses is faulty and based on emotional appeals. The real points in favor of her position are missed entirely (see link above).

Who's to Blame for the Mortgage Mess? Banks, Not Homeowners

By ABIGAIL FIELD Posted 6:30 AM 01/20/11

As the foreclosure crisis has escalated over the past several months, one overarching debate has been about who bears the most blame: homeowners or banks?

After everything I've learned and written about the foreclosure mess, my verdict is: The banks are responsible for 90% of the problem, troubled homeowners 10%.

After writing about this phenomenon for four years, my verdict is: 66% lenders, 33% borrowers, and 1% for the rest of us that have to pay for it because we allowed it to happen.

Yes, every foreclosure involves a homeowner not paying his mortgage.

This is the classic lead-in where you acknowledge very damning evidence against your position as briefly as possible so the impact falls flat. The fact that loan owners are not paying their mortgage is exactly why they bear responsibility in this mess. Nobody forced people to take out loans. Borrowers were responsible for their actions. I would say they are 50% responsible, but lenders bear more than half because they should have known better.

But every foreclosure also involves a bank that made the loan. And usually another bank, or several more, that profited from securitizing the loan. And still another bank, or several, that profited from servicing the loan.

Banks and investors made money. So what? Making money does not make one evil. The system was set up for banks to originate loans. They did this for a profit.

Together, those banks have done three things that created the massive glut of foreclosures choking America's legal systems and laying waste to its real estate markets:

• They knowingly made millions of loans doomed for foreclosure as soon as the check was written.
• They deliberately and/or incompetently failed to modify many salvageable mortgages.
• They were so careless with their paperwork and processes that they've undermined the rule of law, clouded the title to untold numbers of properties and complicated the processing of the massive backlog of foreclosures that hurts the economically crucial real estate market.

Let's take a closer look at each factor.

Her first point is true. Lenders did knowingly make millions of loans that were doomed. Lenders did this because they were working on an origination model where they were compensated based on filling an order for a loan made by an investor. It was the investors who were demanding stupid loans that were doomed from the start. Investors demanded bad loans because the loans were often packaged into securities given AAA ratings by ratings agencies being paid by the syndicators to give them AAA ratings. The conflict of interest caused risk to be improperly priced and large amounts of money to flow into poorly underwritten mortgages.

Her second point about failing to modify salvageable mortgages is emotional pandering and nonsense. Many former loan owners find vindication in stories about how the evil banks failed to unilaterally change the terms of a contract to suit the borrower. It's easier for the renting-former-owners to rage against the system rather than feel responsible for a delinquent mortgage requiring modification.

Plus, the whole idea of a salvageable mortgage seems wrong to me. These borrowers are drowning in a cesspool and throwing them a life preserver in the form of a loan modification merely allows them to wallow in their own debt. Is it better to let them drown? I think so. After a foreclosure and bankruptcy, it is over, and they can rebuild their lives. Financial rebirth is a wonderful opportunity.

The emotional pandering is part of the left-wing political meme on this issue. The other political pandering to loan owners concerns robo-signer.

Her third point about procedural delays is off on many levels. First, she implies the procedural delays have hurt the housing market, but she isn't clear on what that means. Lenders have been creating and taking advantage of delays throughout the process in order to slow the flow of foreclosures. Lenders gain by having less inventory pressuring prices. Delinquent borrowers gain by more squatting time. Current borrowers gain by having prices remain higher than levels needed to clear the market. Those interested parties all benefit from delays. Renters and would-be buyers are the ones hurt by these delays, and their voices are seldom heard.

The facts aren't important to her point. She was merely making an emotional appeal to anyone who has gone through foreclosure. Renting-former-owners (RFOs?) think maybe their foreclosure was improper too? And maybe someone will give them a free house because of it?

What Happened to Underwriting?

Getting a mortgage isn't supposed to be as easy as getting cash from an ATM. Banks are supposed to make applicants prove they can repay loans before giving them. The process is called underwriting, and it's one of the most basic in banking.

Yet during the housing bubble, banks largely stopped underwriting in any reasonable way. Indeed, if the banks had been underwriting throughout, the bubble could never have inflated so much.

If you want to get a vivid and entertaining overview of the dynamics that eliminated underwriting, listen to Planet Money's interviews of people at every stage of the process, from making the home loan through its ultimate securitization.

The mortgages made without underwriting have lots of names: Low-doc loans (the borrower stated her income without proof, but proved the assets she claimed to own, or vice versa), no-doc loans (borrower stated both income and assets without proving either), NINJA loans (no proof of income, job or assets). They're all known as liar's loans. According to a recent Forbes article, in 2006 and 2007 liar's loans accounted for 40% of new mortgages, and more than 50% of new subprime mortgages.

The housing bubble would not have gotten legs in 2004 if it were not for Option ARMs and reduced lending standards. Prices were too high in 2004 (as evidenced by the fact that most markets trade below those prices even today). With a diminished buyer pool and higher prices, the market was nearing a top. Wall Street demanded mortgage-backed securities. To meet this demand loan balances would need to get larger and qualification standards would need to drop. The Option ARM allowed much larger loan balances, and the qualification standards were dropped sufficiently to meet demand. Demand was nearly infinite, and qualifications were nearly eliminated.

The Banks Knew Mortgage Applications Were Fraudulent

Now here's the thing: No one forced the banks to make those loans, even if the applicants were lying about their ability to repay.

People shouldn't be sympathetic to banks that effectively say: “Hey, we knew the applicants were lying and wouldn't be able to repay the loans. We didn't care because we didn't hold onto the loans. We offloaded the risk to investors through the securitization process. But so what? Blame the deadbeat borrowers for the volume of foreclosures today.“

That is a compelling argument. Deadbeat borrowers do deserve much of the blame. I peg it at 33%.

Why is it fair to say the banks knew they were being lied to? Well, beyond the obvious — everybody in the business used the term liar's loan — the FBI warned about mortgage fraud back in 2004. And take a look at this 2006 fact sheet from the Mortgage Brokers Association for Responsible Lending that analyzed data from 2004 and 2005. By doing a quick check, the group found that 90 out of 100 stated-income loans exaggerated the applicant's income, and 54 of those loans inflated it by more than 50%.

Or consider this Chase loan officer's email acknowledging that he had made up an inflated income amount to make a borrower's debt-to-income ratio “work.”

By 2007, the FBI reported that industry insiders — loan officers, mortgage brokers, real estate agents, appraisers and lawyers — not wannabe homeowners — were involved in some 80% of mortgage fraud. The FBI calls that “fraud for profit” as opposed to “fraud for housing,” which is when a homeowner lies to get a house he can't afford. As Calculated Risk's Tanta showed in 2007, that distinction started breaking down as the absence of underwriting by the banks enabled both types of fraudsters to join forces.

Tanta also explained that in addition to being directly complicit in mortgage fraud, lenders engaged in massive cost-cutting efforts that gutted their ability to underwrite loans:

So many of the business practices that help fraud succeed — thinning backoffice staff, hiring untrained temps to replace retiring (and pricey) veterans, speeding up review processes, cutting back on due diligence sampling, accepting more and more copies, faxes, and phone calls instead of original ink-signed documents — threw off so much money that no one wanted to believe that the eventual cost of the fraud would eat it all up, and possibly more.

Lenders certainly earned their 66% of the blame. That doesn't take away from the 33% that borrowers still are accountable for. The rest of her argument is pressing the point that borrowers are nearly blameless. She is wrong.

Beyond the idea that the banks knew, in real time, that they were making loans that couldn't be repaid, evidence shows that banks went a step further and tried to conceal that information from others.

Banks Hid Fraud by Shopping for AAA Ratings

Banks weren't the only entities to stop evaluating risk. Their key allies were the big three ratings agencies, Moody's, Standard & Poor's and Fitch. The ratings agencies put AAA ratings on securities that didn't come close to deserving that golden grade, in part by using outdated risk models that their own analysts complained inflated ratings. But why weren't the agencies worried about their professional reputations?

In 2009, professor and former financial regulator William K. Black used a paper from S&P to discuss how the banks and the raters chose not to look at the documents used to make the loans they were securitizing. Then Black cited a 2007 paper from Fitch to show why it mattered that no one was looking at the loan files, why it was at minimum willful blindness. (Willful blindness is trying hard to not know that the law holds you accountable for knowing.)

What was going on? According to 2010 testimony from former ratings agency executives and their emails, the agencies capitulated to demands from banks for AAA ratings on mortgage-backed securities even though they knew those ratings weren't deserved.

The banks had the leverage to get the AAA ratings they wanted because rating “structured finance products” — mortgage backed securities and the like — had become really profitable for the ratings agencies, and compared to other types of rated securities, very few clients issued them. So if those clients — the big banks — weren't pleased, they could simply “ratings shop” — that is, go from one agency to another until they got the desired rating.

In short, a large proportion of the foreclosures drowning the courts and the real estate market are a direct consequence of the banks' failure to effectively underwrite loans during the bubble. Those borrowers should have had — and today would have had — their loan applications rejected.

That is a good description of the shady dealings at the ratings agencies.

Servicers Get Paid to Foreclose, Not Modify

But wait, you might point out, it's not just the dodgy liar's loans going bust. Foreclosures have spread widely throughout the “prime” mortgage market as well. Surely, the Great Recession, not the banks, is to blame for many of those foreclosures.

You'd be only partly right.

What's generating many recession-induced foreclosures is the relatively new model of mortgage servicing. Prior to the mass securitization of mortgages, the bank that made a mortgage was the same bank that serviced it. As a result, the servicing bank made its money from the mortgage interest, and the long-term repayment of the mortgage was key to its profit. So, a bank was typically willing to work out a mortgage modification with the homeowner to keep that income stream intact.

Of course, sometimes the homeowner was in such trouble that foreclosure made more sense. Foreclosures do happen even in real estate markets filled only with solidly underwritten loans serviced by the bank that made the loan. That's because bad things do happen to prevent a once-creditworthy borrower from repaying.

Unemployment is a big problem. But there are other problems like a borrower's adjustable-rate mortgage recasting to fully amortizing and their payment going up 50%.

How many forecloses result from financial incentive and how many from incompetence isn't clear, but it's also irrelevant. The point is that a good chunk of foreclosures shouldn't happen because modifications make more money for the people the mortgage is owed to (usually, the investors in the mortgage-backed securities).

Simply put, if the banks had kept up normal underwriting and had modified mortgages (or approved more short sales) every time it made sense to do so, we wouldn't have the foreclosure volume, and thus delays, that we currently face.

Her contention that investors would make more from a modified mortgage is not proven. It is likely not true simply because so many modified mortgages fail costing the investors even more money. Since she is mistaken about what is best for the investors of the mortgage-backed securities (as if she cared) she is also mistaken in her contention that less foreclosure volume was in everyone's best interest.

The “Paperwork” Problems Aren't Meaningless

Now you might ask, in addition to volume-related delays, with so many foreclosures in the system, aren't defaulted homeowners to blame for gumming up the process? Aren't they just citing meaningless problems with the banks' paperwork so that they can stay in their homes for free, hurting everyone else in the process?

No.

Actually, yes. Attorneys enable squatters to game the system. The delays caused by this foolish procedural posturing stops a new family from moving into the property — a family likely to be paying a mortgage — which in turn hurts the lender.

While it's true that foreclosure defense attorneys want to slow the process to give their clients more time to relocate,

Bullshit! People are not looking for more time to relocate. How long does it take to move out? Two weeks? Three weeks, tops? This premise doesn't pass the sniff test. Attorneys enable squatters to game the system because squatters want them too. Squatters want to stay in a house with no rent and no payment. It is financial greed, pure and simple.

that doesn't mean the “paperwork” problems they're raising are meaningless. [actually, it does.]

For example, the banks' carelessness with the securitization of Massachusetts mortgages has clouded the title to thousands of properties. Foreclosure attorneys' use of nonlawyers in Pennsylvania may have clouded the title to thousands more. The use of a private, electronic database (called MERS) to track mortgages instead of recording them in government land records may have clouded yet millions more. And in any case, MERS is a legally problematic cost-savings strategy that has created only more confusion and delay.

Even homeowners who are capable of curing their default sometimes can't because banks' inaccurate record-keeping about how much the homeowners owe precludes the possibility. More outlandish problems have surfaced too: from multiple banks trying to foreclose on the same property, to banks foreclosing on homes bought with cash, to banks breaking into homes they haven't foreclosed on, to a bank ignoring its court-approved agreement to foreclose and demanding the money instead.

She has recounted every feeble story trying to give the robo-signer scandal legs. Each of them is pretty weak. None of this makes borrowers any less blameworthy for the housing bubble.

What Revelations Are Still to Come?

These cases are probably just the leading edge of a paperwork-problem tsunami. Even though these issues have been in the news for months, the official investigations and litigation are still in relatively early stages. Millions of foreclosures in nonjudicial states haven't gotten the scrutiny they deserve (except presumably as part of the 50-state attorneys general investigation), so who knows what will yet surface?

As major judiciaries force a closer look at bank documents, what will they find? The fact that all the major law firms advising on “typical” securitization deals didn't know that “assignments in blank” violated Massachusetts law is chilling. How many other states' laws were broken by the “typical” deal?

Moreover, everything we're seeing suggests the banks' papers for securitized loans are in total disarray. The note is in one place (theoretically), the record of payments on the loan (inaccurate as it may be) is in another, and the ownership of both the note and the mortgage may or may not be the same. When asked to produce securitization documents, banks frequently submit drafts and contracts without attachments. The attorneys doing the foreclosures are buried in volume, cutting corners themselves, and are unable to meaningfully communicate with their bank clients. Indeed, it may not even be attorneys doing the foreclosures.

Signs of this chaos abound, whether it's dead financial firms signing documents, banks changing their minds about who owns the loan in the middle of court proceedings, or attorneys unable to certify that the information in foreclosure complaints is true.

There is sloppiness in every industry. So what?

And What's the Fate of Mortgage-Backed Securities?

The banks also have a different type of mortgage “paperwork problem” relating to mortgage-backed securities. Will the banks discover that millions of mortgages they thought they had securitized instead stayed with them because they screwed up the paperwork to transfer the mortgages?

Massachusetts will be a leading indicator on that question because the “assignment in blank” problem may have prevented most of those Massachusetts mortgages from being securitized. Or if the securitizations technically succeeded, will investors still win suits against the banks or force them to buy back large volumes of securities because the papers the banks used to sell the securities were fraudulent?

The foreclosure paperwork problem damage the banks somewhat and the broader economy even more so, but the paperwork problem with mortgage-backed securities has the potential to trigger Bank Bailout II.

Whatever happens to mortgage-backed securities is irrelevant. Investors will demand a properly priced mortgage-backed security, and the market will find a way to supply that demand. After years of fighting the legal issues pertaining to buybacks will be resolved and the market will function again. None of this makes borrowers blameless.

No One Is Above the Law

But imagine for a second a world that doesn't exist — one in which the banks' foreclosure documents were all accurate, and their problems were simply a failure to abide by the rules that apply to everybody else? Shouldn't we blame the deadbeats for gumming up the system then? Many readers make comments to that effect on some of my reporting.

Yes, we should. Just like we should blame them now.

Let's flip the question: Why is it OK for the banks to ignore the rules? The rich and powerful and the ordinary Joe are all supposed to play by the same rules. No one is supposed to be above the law.

That is a straw-man argument. First, borrowers are not ignoring the rules. Deadbeat borrowers are exercising a contractual right to quit paying and surrender the property — at least the ones who are not squatting with the aid of an attorney. Flipping the question makes no sense, particularly when the original question was based on faulty observation.

The following points are false.

No matter whether it's America's real estate market getting crushed by millions of foreclosures that didn't need to be, or our real property records getting shredded through clouded titles, or

The following points are true.

citizens' tax dollars being used to bail out banks again, we're all paying for the banks “paperwork” problems.

And remember: We don't know yet just how big that bill is ultimately going to be.

We don't know how big the bills are going to be or who will ultimately pay them. As a taxpayer, you can be sure your name is on the bill.

She owned it for years, then she went Ponzi

Today's featured owner is another loss for a stupid lender, and another long-term home owner that went Ponzi and spent their home in just a few years.

My records don't go back far enough to find when they purchased the property. That often happens on properties owned since the mid 90s or longer. My first record is a HELOC she opened on 6/8/1999 for $67,000.

By 2002 she was fighting the urge to go Ponzi. On 3/5/2002 she refinanced her first mortgage for $287,000. This was likely a cash out transaction but still for much less than appraised value. In other words, she got a little kool aid buzz, but she didn't get enough to go crazy. On 11/4/2002 she refinanced the first mortgage again for $283,100. Since this is for a smaller amount, I surmise that she was at least trying to be responsible. She gave that up in 2005 and went Ponzi.

On 3/15/2005 she refinanced the first mortgage for $481,000 with an Option ARM with a 1% teaser rate. One can speculate on why she needed $200,000 in one lump sum, but she must have had bills to pay. Big bills.

Actually, she probably took the money simply because it was offered. With the Option ARM, she was likely told that their payment would go down and she would be given a check for $200,000. Not a bad sales pitch if you want to underwrite lots of mortgages. Once she went Ponzi with the Option ARM, the rest was merely whirling down the drain.

On 12/12/2005, blissfully unaware that she had gone Ponzi, she opened a HELOC for $100,000. The free money was flowing.

On 4/26/2006, with one last suck on the mortgage teat, the owner obtained a $647,000 first mortgage and a $80,000 HELOC to bring the total property debt to $727,000. The total mortgage extraction likely exceeded $500,000.

Oh, and she got to squat for a while too:

Foreclosure Record

Recording Date: 10/16/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 07/08/2009

Document Type: Notice of Default

At the most recent, the last payment she made would have been on March 1, 2009. In all likelihood she was delinquent far longer than that but the bank didn't bother filing the NOD.

Irvine Home Address … 14102 SAARINEN Ct Irvine, CA 92606

Resale Home Price … $619,900

Home Purchase Price … $694,179

Home Purchase Date …. 12/16/2010

Net Gain (Loss) ………. $(111,473)

Percent Change ………. -16.1%

Annual Appreciation … -66.0%

Cost of Ownership

————————————————-

$619,900 ………. Asking Price

$123,980 ………. 20% Down Conventional

4.78% …………… Mortgage Interest Rate

$495,920 ………. 30-Year Mortgage

$125,161 ………. Income Requirement

$2,596 ………. Monthly Mortgage Payment

$537 ………. Property Tax

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

$103 ………. Homeowners Insurance

$60 ………. Homeowners Association Fees

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

$3,296 ………. Monthly Cash Outlays

-$440 ………. Tax Savings (% of Interest and Property Tax)

-$621 ………. Equity Hidden in Payment

$226 ………. Lost Income to Down Payment (net of taxes)

$77 ………. Maintenance and Replacement Reserves

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

$2,540 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$6,199 ………. Furnishing and Move In @1%

$6,199 ………. Closing Costs @1%

$4,959 ………… Interest Points @1% of Loan

$123,980 ………. Down Payment

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

$141,337 ………. Total Cash Costs

$38,900 ………… Emergency Cash Reserves

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

$180,237 ………. Total Savings Needed

Property Details for 14102 SAARINEN Ct Irvine, CA 92606

——————————————————————————

Beds:: 4

Baths:: 3

Sq. Ft.:: 2268

$0,273

Lot Size:: 4,784 Sq. Ft.

Property Type:: Residential, Single Family

Style:: Two Level, Contemporary

Year Built:: 1973

Community:: Walnut

County:: Orange

MLS#:: S643944

Source:: CARETS

——————————————————————————

Most desirable floor plan with quiet end of cul-de-sac location. Adjacent to community greenbelt/park. Upgraded appliances with near new painted interior. Neutral colored carpet throughout.

This video has nothing to do with real estate, but I thought the artistry was fantastic, so I am sharing it here.

Credit standards are projected to tighten in 2011 because of losses on 2008-2010 mortgages and the ongoing drop in house prices.

Irvine Home Address … 39 EASTMONT 22 Irvine, CA 92604

Resale Home Price …… $347,800

Have you ever been for sale ?

when your isms get smart

oh so selfish and mindless

with that comment in your eye

Hide your face forever

dream and search forever

night and night you feel nothing

there's no way outside of my land

Guano Apes — Open Your Eyes

Government intervention and the amend-extend-pretend dance kept prices higher than if the market crash had been allowed to proceed unimpeded. Las Vegas is clear evidence of how lower prices can create a downward spiral of prices with strategic default ensuring supply problems will continue to pressure pricing. Prices in Las Vegas are below fundamental valuations by any historic measure. The fate of Las Vegas would have been shared by every distressed housing market in the country if lenders had foreclosed and pushed out the squatters.

Most pundits and bank economists agree that the between the government intervention and the bank's stopping foreclosure, a more significant decline in prices would have occurred — and, of course, supporting higher prices is a great thing. I disagree. And not just because I want to see lower price locally.

The markets that were not deflated will continue to see sluggish economic growth because so much of the local populations income is going toward their housing debt. Low house prices in Las Vegas, and even in some California fringe markets will be a huge boom to the local economy — not because prices will go up and people will have more HELOC spending money, but because people will be putting less money toward their mortgages, and they will enjoy a higher quality of life.

Get Ready For Another Housing Crash

Published: Tuesday, 18 Jan 2011 — 11:49 AM ET — By: John Carney

The best evidence that we're headed for a double-dip in housing is the quality of the mortgages during the recent period in which the housing market seemed to improve in many areas.

In the Freddie Mac review of Citigroup’s performing loans that I mentioned earlier today, the portion rated as “Not Acceptable Quality” was as high as 32 percent in the fourth quarter of 2009. While this has obvious implications for the repurchase or “put-back” liability of Citigroup, it also has broader implications for the housing market and the economy.

Keep in mind that the quarter in which Citi was churning out the highest amount of flawed mortgages was supposedly a good time for housing. The median price of previously owned single-family homes in the fourth quarter of 2009 rose in 67, or 44 percent, of the 151 metropolitan areas, according to a survey by the National Association of Realtors. Sixteen of the areas posted double-digit increases. The Case-Schiller numbers for that quarter showed U.S. home prices were trending up in 155 out of 384 metro areas.

Now there have been indications in the past that a mini-housing bubble was being built during that period. The Federal Housing Authority, for instance, was backing some very questionable loans. The home-buyer tax credit was allowing individuals to buy loans with no money down. All the bad practices of the 2005-2007 bubble seemed to be back again.

And now we know that this perception was correct. Mortgage quality had fallen off a cliff. If Citigroup's mortgages were this bad, we can expect the same level of problems at Wells Fargo, Bank of America and every other major US mortgage lender.

What does this mean for housing? It implies that home prices may be due for a another crash, as lenders try to avoid incurring losses from mortgage put-backs by raising credit quality once again. Much of the supposed health of the housing market may have been just another easy money illusion.

We may be able to avoid a crash if the economy improves rapidly enough to take up the slack created by the loose lending. Alternatively, more cheap money flowing from the Fed through the banks and into shoddily underwritten mortgages, could keep the bubble inflating for a while longer (and maybe, fingers crossed, the economy will improve and rescue housing.) And if a crash occurs it will likely not be as severe as the last one, simply because the improvements in the housing market in 2009 and 2010 were modest.

But one thing seems certain: much of the improvement in housing over the last two years was built on easy credit.

You can't build a sustainable market rally on easy credit at artificially low interest rates. You can create a great sucker's rally, but sustained house price appreciation requires income growth and household formation. Both of those are in short supply.

I described the problem this way in The Great Housing Bubble:

In 2007, the financial markets were abuzz with talk of a “credit crunch.” It was portrayed as some unusual and unpredictable outside force like an asteroid impact or a cold winter storm. However, it was not unexpected, and it was not caused by any outside force. The credit crunch began because borrowers were unable to make payments on the loans they were given. When lenders started losing money, they stopped lending money: a credit crunch. …

The massive credit crunch that facilitated the decline of the Great Housing Bubble was a crisis of cashflow insolvency. Basically, people did not have the incomes to consistently make their mortgage payments. This was caused by a combination of exotic loan programs with increasing payments, a deterioration of credit standards allowing debt-to-income ratios well above historic norms, and the systematic practice of fabricating loan applications with phantom income (stated-income or “liar” loans). The problem of cashflow insolvency was very difficult to overcome as borrowing more money would not solve the problem. People needed greater incomes, not greater debt loads.

When more money and debt was created than incomes could support, one of two things needed to happen: either the sum of money needed to shrink to supportable levels (a shrinking money supply is a condition known as deflation,) or the amount of money supported by the available cashflow needed to increase through lower interest rates. Given these two alternatives, the Federal Reserve chose to lower interest rates. The lower interest rates had two effects; first, it did help support the created debt, and second, it created inflationary pressures which further counteracted the deflationary pressures of disappearing debt and declining collateral assets. None of this saved the housing market.

Credit availability moves in cycles of tightening and loosening. Lenders tend to loosen credit guidelines when times are good, and they tend to tighten them when times are bad. This tendency of lenders often exacerbates the growth and contraction of the business cycle. During the decline of the Great Housing Bubble, the contraction of credit certainly played a major role in the decline of house prices. Lenders continued to tighten their standards for extending credit for fear of losing even more money. This meant fewer and fewer people qualified for smaller and smaller loans. This crushed demand for housing and made home prices fall even further.

Homebuyers will see stricter lending policies in 2011

By Kelli Galippo — Jan 17th, 2011

Buying a home will be more difficult in 2011 than in 2010, prompted by new government lending regulations and the newly-enacted Dodd-Frank Wall Street Reform and Consumer Protection Act.

In an effort to decrease the chances of an encore performance of the Great Recession, new federal legislation requires lenders to maintain at least 5% of the credit risk on the mortgages they originate. This retention of risk, instead of bundling the loans and selling 100% of them to the secondary mortgage market, eliminates this disastrous practice.

Wishful thinking to believe making banks hold some risk will totally eliminate bad loans. It is a step forward from the pure origination model.

What these risk-retention changes mean for the homebuyer is that securing a mortgage will be more difficult going into 2011 compared to the relaxed years of the mid-2000s. Mortgage lenders will now be less inclined to originate a mortgage for borrowers who pose a risk of default – that is, those who lack a solid employment history and peak FICO scores.

I am shocked! Lenders are going to stop lending to people who won't pay them back. What a concept!

Additionally, Fannie Mae and Freddie Mac will be imposing risk-based mortgage fees, dependent on homebuyers’ credit scores and loan-to-value (LTV) ratios. If the homebuyer is perceived as a risk, the increase in fees may result in thousands of dollars more out of pocket — potentially translating to about $10 extra on every monthly payment for a $200,000 mortgage. Thus, that homebuyer will need to wait a couple of years before buying a home to build up their credit score and save for a larger downpayment.

first tuesday take: The new consumer protection legislation is a double-edged sword. On one hand, lenders will be held accountable for their actions by fresh regulations aimed at defending homebuyers from exposure to unsuitable mortgages – particularly adjustable rate mortgages (ARMs). But in a collective and organized response, lenders have increased mortgage fees and are overreacting by making it more costly for anyone to obtain mortgage funding – for most, a requisite for purchasing a home. [For more information regarding Fannie Mae’s new lending guidelines, see the November 2010 first tuesday article, Fannie’s gift for the holidays: stricter lending guidelines.]

I doubt they are overreacting. They are simply taking prudent measures to mitigate risk, something they didn't even consider doing in 2006.

As brokers and agents adjust to lenders’ self-imposed tighter lending policies, loans will remain plentiful for all with a downpayment in hand, a better FICO score and a permanent job – fundamentals of lender underwriting in any market. The volume of sales transactions will not be affected by these developments.

However, these changes will leave the public believing loans are not available, and thus consumers will hesitate to buy a home. It is incumbent upon brokers and their agents to make potential buyers within their community aware that mortgages are in fact available, and the only issue is getting the lowest rate and fees by shopping at least two or three lenders for pre-approvals. This will cost the prospective homebuyer nothing but time and effort. [For more information regarding mortgage shopping, see the June 2010 first tuesday Form of the Month, A borrower’s mortgage worksheet: who has the most advantageous financing.]

LOL! I imagine many in the real estate community have failed to mention to their clients that financing is available. I rather doubt many buyers are sitting on the sidelines because they don't believe they can get financing.

Attitudes of lenders and consumers going forward will be much different, as both camps assert their influence and fight for favorable regulations. Lenders will not win the early battles, but in the long haul they have the staying power to move regulations in their favor. High-functioning brokers and agents will do their part to ensure their buyers succeed in the new real estate paradigm by guiding them to shop around for the best rates and most advantageous loan terms before signing on the dotted line.

So long as the mortgage rules remain level for all lenders, the competition imposed on them by homebuyers who shop several lenders and then take the best deal will keep mortgage lenders from playing games with the rates and fees they charge. But it is the brokers and agents as gatekeepers that have to gently push and guide their buyers to do the intuitive thing — shop. [For more information regarding the Dodd-Frank Act, see the October 2010 first tuesday Legislative Watch, TILA circa 2010; consumer protection enhancement and Section 32 consumer loans: TILA increases disclosures and tightens parameters; for additional commentary on the prudent practice of shopping around for a mortgage, see the May 2010 first tuesday article, Shop, shop, shop until you drop and the December 2010 first tuesday article, Homebuyers shop around for everything but their mortgage.]

Re: “Would-be homebuyers might encounter obstacles in 2011” from the Sacramento Bee and “Fannie Mae is jacking up mortgage fees” from the LA Times

Credit tightening is the inevitable consequence of bad loans. Credit must continue to tighten until the bad loans stop. That will not happen until borrower indebtedness is under control (less than 31% DTI), and prices fall to ranges affordable by the local populations. Until both of those events occur, lenders will continue to create distressed borrowers who will default either because their DTI is too high or house prices continue to fall.

Appreciation didn't happen

Many purchases at the end of the housing bubble were made purely because prices were going up and lenders were enabling buyers to play an elaborate game of musical chairs with real houses. When the music stops, anyone with a big mortgage and real estate gets wiped out.

The owner of today's featured property bought it at the peak with no money down. It appears they stayed for four years and defaulted last April. The lender wasted no time. These people were foreclosed on as quickly as the system will allow.

Foreclosure Record

Recording Date: 11/01/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 07/27/2010

Document Type: Notice of Default

I believe lenders are playing a form of mortgage roulette. Some delinquent borrowers are singled out each month at random and pushed through the system as quickly as possible. With stories floating around from former owners who did not get a period of squatting, the rest of the herd doesn't know what to do. Are they really going to get 18 months of free rent? What if they only get 7? Is it still worth it to strategically default?

Strategic default is at the root of this problem. Banks know that the squatting they are permitting is enticing those on the fringe to either strategically default or accelerate the inevitable.

By frightening the herd with terrorist tactics, lenders how to keep those on the margin from walking from their mortgage and leaving the bank with low-value real estate.

In this instance, the second mortgage of $97,800 was already wiped out in the December foreclosure. Now the first mortgage holder is going to take their haircut when another $125,000 to $150,000 is lopped off by the real estate crash.

The buyer/borrower only takes a hit to their credit score — that's all they were asked to risk. They had no money in the transaction, except perhaps 4 years where the cost of ownership likely greatly exceeded the cost of a rental. Despite the loss, there is nothing here that would deter this owner from speculating again if given the opportunity.

Irvine Home Address … 39 EASTMONT 22 Irvine, CA 92604

Resale Home Price … $347,800

Home Purchase Price … $454,051

Home Purchase Date …. 12/16/2010

Net Gain (Loss) ………. $(127,119)

Percent Change ………. -28.0%

Annual Appreciation … -149.7%

Cost of Ownership

————————————————-

$347,800 ………. Asking Price

$12,173 ………. 3.5% Down FHA Financing

4.78% …………… Mortgage Interest Rate

$335,627 ………. 30-Year Mortgage

$70,223 ………. Income Requirement

$1,757 ………. Monthly Mortgage Payment

$301 ………. Property Tax

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

$58 ………. Homeowners Insurance

$271 ………. Homeowners Association Fees

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

$2,387 ………. Monthly Cash Outlays

-$287 ………. Tax Savings (% of Interest and Property Tax)

-$420 ………. Equity Hidden in Payment

$22 ………. Lost Income to Down Payment (net of taxes)

$43 ………. Maintenance and Replacement Reserves

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

$1,746 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$3,478 ………. Furnishing and Move In @1%

$3,478 ………. Closing Costs @1%

$3,356 ………… Interest Points @1% of Loan

$12,173 ………. Down Payment

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

$22,485 ………. Total Cash Costs

$26,700 ………… Emergency Cash Reserves

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

$49,185 ………. Total Savings Needed

Property Details for 39 EASTMONT 22 Irvine, CA 92604

——————————————————————————

Beds:: 3

Baths:: 3

Sq. Ft.:: 1220

Property Type:: Residential, Condominium

Style:: Two Level, Contemporary

View:: Park/Green Belt

Year Built:: 1978

Community:: Woodbridge

County:: Orange

MLS#:: P764835

——————————————————————————

Bank Owned Property!!! 3 Bedrooms with over 1200 Sqare feet of living space! Located in the Beautiful Woodbridge Community of Irvine. This unit is located in a quite and private area with fabulous tree lined pathways to your front door! Large fenced rear patio perfect for the warm summer evening BBQ's! Must see property!! Call today For potential Seller financing and incentives!

Government policymakers have gone through heroic efforts to save the housing market. The question is: should they?

Irvine Home Address … 20 AVANZARE Irvine, CA 92606

Resale Home Price …… $599,000

There's nothing left to say

But so much left that I don't know

We never had a choice

This world is too much noise

It takes me under

It takes me under once again

Rise Against — Savior

Should US Taxpayers responsible for every underwater homeowner? Many in government act as if they should, and many in the mainstream media report as if the status quo should be preserved.

It's common at housing blogs to find calls for the government to get out of the housing market. It's rare when you find this sentiment coming from a local newspaper editorial in conservative South Carolina.

Should we work to 'save' housing market?

Source: Herald; Rock Hill, S.C.

Publication date: January 5, 2011

By Thomas Sowell

“Housing Market Setback Forecast,” the newspaper headline said. A recently released report on housing says that home sales are down more than 25 percent and the inventory of unsold homes is about 50 percent higher than it was the same time last year.

This is just one of innumerable stories about the woes of the housing market. We all understand about human beings having woes. But how can a housing market have either setbacks or woes? Moreover, why should politicians be riding to the rescue of the housing market with the taxpayers' money?

Investors lost money. Many of them were homeowners who over-indebted themselves to capture appreciation. That's our daily tale of woe. Politicians are riding to the rescue, not to save the crying masses who lost money on their homes, but to save their large campaign backers in the banking industry. The are raping the US taxpayer because they can.

We hear all sorts of sad stories about people whose homes are “under water” or who are facing foreclosure. But why should our attention be arbitrarily focused on these particular people, rather than on the many other people who would benefit from being able to buy those same houses if the prices came down? The government is artificially keeping the prices up with subsidies and with pressures on lenders to accommodate the current occupants.

Can we not walk and chew gum at the same time? Is our attention span so limited that we can only think about one set of people that the media and the politicians have chosen to highlight?

Hasn't that been the story of the housing bubble from the mainstream media? Renters don't exist. Not like real people who own houses. The interests of renters as a group does not capture the attention of anyone in the mainstream media. The story is rarely told from their point of view.

Do other people count for less just because the media don't put their pictures in the paper or on the TV screen? Or because politicians are ignoring them?

Sometimes we are more concerned about some people because they are especially deserving. But this cannot be said about those who borrowed money to buy homes that they could not afford, or who borrowed against the equity in their homes, and now find that what they owe is more than the home is worth.

If anyone is especially deserving, it is those who had the common sense to avoid taking on bigger financial obligations than they could handle, but who are now expected to pay as taxpayers for other people's irresponsibility.

The circumstance that angers me most from the housing bubble is what has been done to the people who were responsible.

No doubt some people who are facing foreclosures might have been able to continue making their mortgage payments if they had not lost their jobs. But since when were we all guaranteed never to lose our jobs? People used to put money aside “for a rainy day.” But now people who have spent like there are no rainy days are supposed to have the taxpayers pay to give them an umbrella.

Why are so few making more noise about this? Think of the message we are sending everyone. Once Uncle Sam commits to bailing out everyone, what incentive is there to be prudent?

What about the people who saved and put their money in a bank? Those who blithely say that the banks ought to modify the mortgage terms to accommodate people who are behind in making their monthly payments forget that, however “rich” a bank may be, most of its money actually belongs to vast numbers of depositors, most of whom are not rich.

Those depositors deserve to get the best return on their money that supply and demand can offer. Why should people who save be sacrificed for the benefit of those who spent more than they could afford?

When the federal reserve lowers interest rates it diverts money to banks that would have gone to savers. Stealing from the prudent for the greater good, right?

Why are politicians so focused on one set of people, at the expense of other people? Because “saving” one set of people increases the chances of getting those people's votes. Letting supply and demand determine what happens in the housing market gets nobody's votes.

If current occupants are put out of their homes and the prices come down to a level where others can afford to buy those homes, nobody will give politicians credit – or, more to the point, their votes. Nor should they.

Rescuing particular people at the expense of other people produces votes. It also produces dependency on government, which is good for politicians, but bad for society.

That is why politicians give what Adam Smith called “a most unnecessary attention” to things that would sort themselves out better and faster without heavy-handed government intervention.

Why do the media fall in with this arbitrary focus on particular people who are having trouble holding on to homes they cannot afford? Partly because it makes a good story and partly because too many people in the media simply go with the politicians' talking points. That is a lot easier than thinking.

But the rest of us have no excuse for not thinking – or for letting ourselves be stampeded by rhetoric about “saving” the housing market.

Thomas Sowell is a senior fellow at the Hoover Institution. His Web site is www.tsowell.com.

Actually, every homeowner in America has a huge incentive to let politicians do whatever is necessary to save them. Willful ignorance will rule the day. It always does.

The fate of sheeple

I am trying to do more posts on different mortgage situations I find in the property records. The HELOC abuse cases are still the most interesting, but they do not tell the full story of the housing bubble.

A sheeple would be a middle of the road borrower: someone who didn't take out the most exotic terms and who put some money down but less than 20%.

Your typical Irvine sheeple borrower at the top of the bubble was more like today's owners. They bought at the wrong time with the wrong financing, and they are losing their home, their equity, and their credit rating. California real estate is not always a pot of gold.

These owners paid $753.000 on 6/5/2005. They used a $602,400 ARM, a $75,300 HELOC, and a $75,300 down payment. Five and a half years later, and the owners are selling short, and the bank is hoping prices haven't dropped more than 20%. The owner doesn't care anymore.

Foreclosure Record

Recording Date: 11/24/2010

Document Type: Notice of Default

Irvine Home Address … 20 AVANZARE Irvine, CA 92606

Resale Home Price … $599,000

Home Purchase Price … $753,000

Home Purchase Date …. 6/3/05

Net Gain (Loss) ………. $(189,940)

Percent Change ………. -25.2%

Annual Appreciation … -4.0%

Cost of Ownership

————————————————-

$599,000 ………. Asking Price

$119,800 ………. 20% Down Conventional

4.79% …………… Mortgage Interest Rate

$479,200 ………. 30-Year Mortgage

$121,081 ………. Income Requirement

$2,511 ………. Monthly Mortgage Payment

$519 ………. Property Tax

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

$100 ………. Homeowners Insurance

$162 ………. Homeowners Association Fees

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

$3,292 ………. Monthly Cash Outlays

-$426 ………. Tax Savings (% of Interest and Property Tax)

-$598 ………. Equity Hidden in Payment

$219 ………. Lost Income to Down Payment (net of taxes)

$75 ………. Maintenance and Replacement Reserves

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

$2,562 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$5,990 ………. Furnishing and Move In @1%

$5,990 ………. Closing Costs @1%

$4,792 ………… Interest Points @1% of Loan

$119,800 ………. Down Payment

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

$136,572 ………. Total Cash Costs

$39,200 ………… Emergency Cash Reserves

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

$175,772 ………. Total Savings Needed

Property Details for 20 AVANZARE Irvine, CA 92606

——————————————————————————

Beds: 4

Baths: 2 full 1 part baths

Home size: 1,876 sq ft

($319 / sq ft)

Lot Size: 2,582 sq ft

Year Built: 1996

Days on Market: 210

Listing Updated: 40543

MLS Number: S622739

Property Type: Single Family, Residential

Community: Westpark

Tract: Trovata (Trov)

——————————————————————————

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

Short Sale: Light & bright detached home In desirable Westpark area. This beautiful home has 4 bedrooms, living room, family room & Formal dining room. Kitchen with tile floor, granite counters & breakfast counter. Large master suite w/walk-in closet, shower & large bath tub. Separate laundry room upstairs. Side yard w/patio. Wood floors downstairs, Laminate on stairs/hallway & carpet in bedrooms. Plantation shutters. Washer, dryer & Refrigerator are included. Walking distance to association pool, spa, tennis court & park. Walk to Plaza Vista Elementary school. Very close to shopping center. EZ access to freeway.

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

People will resort to some cooky rituals to make them feel good about living in a foreclosed home.

Irvine Home Address … 51 LAKESHORE 20 Irvine, CA 92604

Resale Home Price …… $499,000

Raven hair and ruby lips

sparks fly from her finger tips

Echoed voices in the night

she's a restless spirit on an endless flight

wooo hooo witchy woman, see how high she flies

wooo hooo witchy woman, she got the moon in her eye

The Eagles — Witchy Woman

Witches are being brought in to spiritually decontaminate foreclosed houses.

The Housing Slump Has Salem On a Witch Hunt Again

Buyers Worried About Bad Vibes From Foreclosed Homes Seek a Cleansing

By S. MITRA KALITA — JANUARY 13, 2011

SALEM, Mass.—There's a certain look and feel to a foreclosed home, and 31 Arbella St. has it: fraying carpet, missing appliances, foam insulation poking through cracked walls.

That doesn't faze buyer Tony Barletta since he plans a gut renovation anyway. It's the bad vibes that bother him.

So two weeks before closing, Mr. Barletta followed witch Lori Bruno and warlock Christian Day through the three-story home. They clanged bells and sprayed holy water, poured kosher salt on doorways and raised iron swords at windows.

It's amazing the silly things both big and small people do in order to feel good about a new purchase. Guys will typically run numbers on spreadsheets to convince themselves they can afford it. Women will imagine each room of the house, where the furniture goes, and whether or not the place gives them a warm and fuzzy feeling. I guess some people feel they need some dude with a broadsword to walk through their house and frighten the ghosts away. Sounds pretty stupid to me.

“Residue, residue, residue is in this house. It has to come out,” shouted Ms. Bruno, a 70-year-old who claims to be a descendant of 16th-century Italian witches. “Lord of fire, lord flame, blessed be thy holy name…All negativity must be gone!”

The foreclosure crisis has helped resurrect an ancient tradition: the house cleansing. Buyers such as Mr. Barletta are turning to witches, psychics, priests and feng shui consultants, among others, to bless or exorcise dwellings.

Normal, middle-class Americans don't go for strange rituals. No, if mainstream people have a problem, they turn to St. Joseph. He will help them out.

Sellers, too, are adopting the trend to help move a property stuck on the market.

In recent months, foreclosure and other distressed sales have represented about a third of all home sales, according to the National Association of Realtors. With so many foreclosures riddling the market, some buyers find that a coat of paint is hardly enough to rid a house of its creepy quotient.

“It's not entities or ghosts that we're dealing with anymore,” says Julie Belmont, a so-called intuitive who works in Orange County, Calif., where 40% of home sales last year were distress sales. “With foreclosures, a lot of it is energy imprints from past discussions, arguments, money problems. All of that is absorbed by the house.”

The Julie Belmont site is an interesting exploration of how some people make a living.

Homeowners of various faiths have turned to different rituals—called house cleansings or space clearings—for centuries. Catholics and Hindus, for example, might ask a priest to bless a new home before moving in. Before their new year, the Chinese cleanse the home to sweep away any bad luck accumulated over the past twelve months.

Ms. Bruno's process pulls from a few methods: Ringing bells, she says, breaks up the negative energy of a place. Iron keeps evil spirits away, says Mr. Day, brandishing a sword across the living room.

Mr. Barletta heard about the pair through his real-estate agent after his offer on the home was accepted. “I'm a spiritual person,” he says. “I just wanted to remove the negative energy first.”

In Salem, the site of the 1692 witch trials, the occult is a part of the everyday, from the high-school sports team known as the Witches to entrepreneurs such as Mr. Day and Ms. Bruno. He owns the Hex Old World Witchery magic shop downtown and she gives psychic readings there.

“It's a very spiritual city,” says Salem real-estate agent Janet Andrews Howcroft.

I think she means to say the city is filled with suckers who can best be appealed to with mumbo jumbo.

But the city's real-estate market hasn't been so charmed. Home prices here fell by about a third in the past two years, according to Ms. Howcroft. And Essex, the county that Salem calls home, had the state's second-highest foreclosure level in October, says the Warren Group, which tracks real-estate data in New England.

Ms. Howcroft attributes recent requests for house blessings in part to the economic picture here. She counted at least eight transactions last year that involved a house cleansing, compared to the occasional request in prior years.

I attribute the recent requests to the last gasp of desperation on the part of loan owners who cannot get the price they need to get out of the hole. When denial is stretched to its breaking point, people can engage in some pretty bizarre behavior. Do any of you remember the bulls in 2006-2008 who used to spam Lanzner's blog with dozens of daily comments to talk up the market?

The house on Arbella Street is under contract for $167,000, and was appraised for nearly double, pending renovations. But, Ms. Bruno cautioned, that bargain comes with a price. She gestured toward an empty room with “Mike, Age 13” scrawled on the wall in child's handwriting. “If someone took your home away, how would you feel?”

Taking her cleansing agent of kosher salt in a bowl of water and lighting a candle, she led the group—including the buyer's agent—up the stairs. Arriving at the upstairs kitchen, gutted of its cabinetry and appliances, Ms. Bruno yelled into the air: “You will not hurt anything I hold dear. I am the exorcist of your garbage!”

LOL! Do I really need to comment?

She is quick to distinguish her services from that of a plain-vanilla psychic. “Unlike psychics, witches know you can change the future,” she explains.

They might be described as good witches. Ms. Bruno, who feels she is well compensated for her readings, doesn't charge for her house cleansings—she's done more than 100, she says. Rather, she considers them to be a form of charity work. “I don't want to live off people's sadness,” she says. Fellow Salem witch Lillee Allee also performs house blessings and, like Ms. Bruno, she doesn't take a fee.

Elsewhere, others are viewing the rituals as a real business opportunity. Austin, Texas-based feng shui consultant Logynn B. Northrhip is teaming up with Scottsdale, Ariz., real-estate agent Jason Goldberg to offer a package of services to create better vibes in a home, either before sale or after purchase. The two met at a yoga retreat.

In Sacramento, Calif., realtor Tamara Dorris also used feng shui to help speed the sale of a property that had been on the market for more than a year. She placed a jade plant, believed to bring good financial luck, in a “prosperity corner” and waited.

“Within two weeks, I had two offers,” she says. “Most homes have at least one or two prosperity flaws. Foreclosed homes have five or six flaws.”

Foreclosed homes only have more flaws is the flipper fails to renovate and fix those flaws.

Sometimes, it's bad feng shui to even attempt to buy a foreclosure. That was Grace Lee's discovery as she toured 30 houses in the San Diego area, her consultant Simona Mainini in tow, to find a new home. In the end, Ms. Mainini just advised her to buy new construction, saying it would save her money on repairs and other troubles in the long run.

“You can keep looking for deals in distressed properties,” Ms. Mainini recalls telling her client. “But they all have an energy that is very weak for money.”

Sorry, Ms. Mainini, but distressed properties are not very weak for money. Although, I suppose they aren't helping the distressed owners much.

Another owner hoping for 10% appreciation last year

I remember when the housing bust first started, it was common to see peak buyers offer their properties for sale at a price that would give them some negotiation room, pay the realtors's commission, and get them out at breakeven. Now that prices are double dipping, we are seeing this behavior all over again.

This owner probably thought she was getting a bargain. The previous owner paid $551,000 back in 2004. He imploded when his Option ARM went bad. She was getting a 20% discount in late 2009. Was it enough?

Irvine Home Address … 51 LAKESHORE 20 Irvine, CA 92604

Resale Home Price … $499,000

Home Purchase Price … $450,000

Home Purchase Date …. 12/22/09

Net Gain (Loss) ………. $19,060

Percent Change ………. 4.2%

Annual Appreciation … 9.6%

Cost of Ownership

————————————————-

$499,000 ………. Asking Price

$17,465 ………. 3.5% Down FHA Financing

4.79% …………… Mortgage Interest Rate

$481,535 ………. 30-Year Mortgage

$100,867 ………. Income Requirement

$2,524 ………. Monthly Mortgage Payment

$432 ………. Property Tax

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

$83 ………. Homeowners Insurance

$367 ………. Homeowners Association Fees

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

$3,406 ………. Monthly Cash Outlays

-$412 ………. Tax Savings (% of Interest and Property Tax)

-$601 ………. Equity Hidden in Payment

$32 ………. Lost Income to Down Payment (net of taxes)

$62 ………. Maintenance and Replacement Reserves

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

$2,487 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$4,990 ………. Furnishing and Move In @1%

$4,990 ………. Closing Costs @1%

$4,815 ………… Interest Points @1% of Loan

$17,465 ………. Down Payment

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

$32,260 ………. Total Cash Costs

$38,100 ………… Emergency Cash Reserves

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

$70,360 ………. Total Savings Needed

Property Details for 51 LAKESHORE 20 Irvine, CA 92604

——————————————————————————

Beds: 2

Baths: 2 baths

Home size: 1,610 sq ft

($310 / sq ft)

Lot Size: n/a

Year Built: 1979

Days on Market: 8

Listing Updated: 40553

MLS Number: S643538

Property Type: Condominium, Residential

Community: Woodbridge

Tract: Al

——————————————————————————

MODEL PERFECT & HIGHLY UPGRADED SINGLE LEVEL WOODBRIDGE HOME WITHIN STEPS TO THE LAKE! Lake! Lake! Spacious floorplan with lots of windows makes this home very bright and desirable. This spectacular home is maticulously upgraded with the finest materials. WOW! OVER 85k in upgrades!!! Spacious Living room, formal dining room, and the hallway has upgraded with the highest quality hardwood flooring. Large Gourmet kitchen with breakfast nook and garden window has upgraded with stainless steel Samsung refrigerator, dishwasher, microwave, stove, lighting fixtures, and beautiful TRAVERTINE flooring. Recessed lightings, Crown Moldings, LG washer & dryer, 3 tone painting, and designer draperies throughout the home are examples of more upgrades. Beautiful private frontyard, and remodeled large backyard completes the desirability of this home, and make it one of the nicest home in the community.