The battle lines in the fight to create a stable housing market is being waged over minimum down payment requirements on qualified residential mortgages.

Irvine Home Address … 2306 SCHOLARSHIP Irvine, CA 92612

Resale Home Price …… $254,900

Oh but ain't that America for you and me

Ain't that America somethin' to see baby

Ain't that America home of the free

Little pink houses for you and me

John Mellencamp — Pink Houses

America was a frontier country. People flocked to America from Europe for the opportunity to own their land, something denied to most living in post-feudal Europe. The idea of having a piece of property with your own pink house is deeply woven into the American culture. it's part of our history, and to this day, many identify home ownership with being American.

I wrote about our modern perversion of ownership in Money Rentership: Housing and the New American Dream. Questions of our concepts of financing and ownership are coming to surface in Washington as we take up debate on down payment requirements for the new qualified residential mortgage.

Homeownership should not be part of the American Dream

Posted by Nin-Hai Tseng, writer-reporter

March 15, 2011 8:30 am

Most banks want to securitize loans made to borrowers buying homes with little money down. Did we learn nothing from the financial crisis?

Lenders did learn from the financial crisis. They learned they can underwrite unconscionable loans to make a quick buck at origination, and when the loans go bad, the government will cover their losses. Why would lenders want to change that system? Keep that in mind as you watch the lending lobby posture in Washington to game the rules in their favor.

In an attempt to fix some of the problems that caused the housing bubble and financial crisis, banking regulators are coming up with new mortgage lending rules that will address what lower-risk quality mortgages should look like. The goal is to let lenders sell so-called “qualified residential mortgages” to investors without having to retain the risks.

The question the Treasury Department must now answer is what makes a qualified mortgage? Regulators including the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency are pushing for a 20% down payment on such loans. While the big banks like Bank of America (BAC) and JP Morgan Chase (JPM) have not formally weighed in, their lobbyists at American Bankers Association and the Mortgage Bankers Association say that requirement is far too high and would price many buyers out of the housing market.

The most pernicious lie in real estate lending is that restricting access to loans prices buyers out of the market. The hidden assumption is that bids must always be raised because prices never go down. If the government chose to enact the most Draconian standards possible, it may reduce sales volumes at current pricing, but it does not price buyers out of the market — it prices sellers out of the market. As credit tightens, asking prices need to go down for transactions to occur.

Lenders want to make the largest loan possible at the highest interest rate they can. That is their business model. Of course, they would also like the borrower to repay that money, so pushing loan balances up too high leads to Ponzi borrowing, widespread insolvency, and a catastrophic market crash as we have witnessed. However, lenders don't care about the risks as long as Uncle Sam backstops them. They will push for the ability to make the largest loans they can and pass the risk off to whoever they can.

The debate will have broad implications for how homebuyers finance their mortgages. During the housing boom, many Americans took out home loans with little to no money down. When prices fell steeply following their mid-2006 peak, many borrowers didn't have enough equity to cushion the blow, leading to record foreclosures nationwide. Meanwhile, the big banks and investors holding these risky loans suffered huge losses.

We have witnessed many tempest-in-a-teapot issues like robo-signer that flare up and go away without long-term impact on the housing market. This issue is different. The minimum qualifying standard on this loan is going to become the bedrock of mortgage finance. If we get this wrong, we will rebuild the mortgage market on a weak foundation.

Joseph Pigg, vice president and senior council of the ABA, says the 20% proposal is much too narrow and he worries it could further hamper demand for homes, especially when the fragile real estate market is still recovering. And while a heftier down payment generally reduces the risks of a loan, he says, other factors such as income, credit score, and the property's location determine the quality of a loan.

Yes, there are other factors besides the down payment that impact loan quality. There are undoubtedly many buyers who put less than 20% down that will not default on their loan. So what? We are talking about establishing a minimum threshold for all loans. It should be a conservative measure with little or no real risk exposure. Lowing down payment requirements for this loan shifts risk from lenders to the US taxpayer who will end up paying the bills if we create another unstable Ponzi scheme.

But perhaps it's time to question whether homeownership should even be part of the American Dream.

Tighter mortgage lending rules could return the housing market to the way it was in the 1970s, when homeownership was much lower and virtually all homebuyers put down at least 20% of the value of the house. Standards began changing around the 1980s as home prices appreciated significantly and mortgage financing became more sophisticated.

Sophisticated?

Financing has become more sophisticated… sophisticated at creating new Ponzi schemes.

Finance professionals view lower lending standards as progress and tightening lending standards as regression. For an industry of parasites trying to siphon the cashflow from all the world's assets, that paradigm makes sense. In reality, their progress generally amounts to some new Ponzi scheme. I wrote in The Fallacy of Financial Innovation,

“Many in the lending industry think their work is like science that continually advances. It is not. It is far more akin to assembly line work where the same widgets are pumped out year after year. When lenders start to innovate, trouble is brewing. The last significant advancement in lending was the widespread use of 30-year amortizing loans that came into favor after World War II. Prior to that time, home loans were interest-only, short-term loans with very high equity requirements (50% was most common.) This proved problematic in the Great Depression as many out-of-work owners defaulted on their loans. A mechanism had to be found to get new buyers into the markets and allow them to pay off the loan. The answer was the 30-year, fixed-rate amortizing loan. To say this was an innovation is a stretch as this loan has been around as long as banking has existed, but it did not become widely used until equity requirements were lowered. The lenders were willing to lower the equity requirements as long as the loan was amortizing because their risk would decline as time went by and the loan balance was paid off.”

Lenders used to originate loans with an assumption of flat pricing. The reasoning was that they didn't know if that borrower may not be compelled to sell within months of purchase. They wanted to be sure they could discount the sales price, pay a sales commission, and still recover their capital. That meant at least a 10% cushion from day one. Twenty percent was better.

During the housing bubble, the originators of the Option ARM made the assumption that house prices would go up 3% per year every year because past history confirms that house prices rise with inflation. As a lender, if you believed the value of your collateral was rising 3% per year, you could originate with low down payments, increasing mortgage balances, and the whole host of problems the Option ARM created because even when the loans go bad, the loss severities would be low due to the increasing value of the collateral. Hah. That didn't go as planned.

Borrowing against the increasing value of an asset destabilizes the price of that asset. Once aggregate debt levels get too high, a financial disruption can cause prices to crash which in turn spawns wave after wave of strategic default which drives house prices well below fundamental values. The upward frenzy of rally buying is closely mirrored by the downward spiral of default, foreclosure, excess supply and lower prices which causes more default.

It's easy to see why bankers would gripe about the 20% minimum. Smaller loans translate into smaller profits, and a smaller market for securitized mortgages. And lenders can fully securitize only qualified mortgages — any loans made without the designated down payment can still be sold, but the lenders would have to retain 5% of their value on their books.

Wells Fargo (WFC) is the one exception among the banks on this rule — it's arguing for a 30% down payment for qualified mortgages. Wells executives call it skin in the game, but smaller lenders are calling it an unfair competitive advantage — as one of the largest lenders, Wells would be able to tolerate more risk on its balance sheet from the many borrowers who won't be able to afford such a down payment.

That is fantastic. With internal division on policy, it will be much harder for the lending lobby to push a 10% down mortgage.

Certainly a 20% down payment — much less a 30% one — isn't easy for many homebuyers, especially as unemployment stays unnervingly high. The average loan-to-value ratio for January 2011 was 73%, which means borrowers on average put 27% down, according to the Mortgage Bankers Association.

The Irvine bulls always tout the high down payments of Irvine buyers as a sign of special interest by FCBs. Apparently, averaging more than 20% down is normal for real estate markets. Considering almost of third of homeowners own outright, it isn't surprising some amount of ported equity moves from property to property keeping down payments up. Perhaps Irvine is not that special after all?

But while home sales have started to tick up slightly, demand is mostly coming from cash-rich investors who are scooping up foreclosed properties at bargain prices, not from first-time buyers. Economist Paul Dales of Capital Economics recently pointed out that more than two-thirds of existing home sales since last summer were made to cash buyers or investors, while a mere 6% were sold to first-time homebuyers.

Maybe the answer isn't to give borrowers more leeway, but less. Given all we've learned in the years following the housing crash, perhaps a little time travel back to the 1970s might not be so bad. During the boom years, many lenders passed on their mortgages, including all of the risk, to speculative investors. That proved disastrous, leading to a banking crisis and a housing bubble that all too quickly went bust.

It will be painful to endure a longer, deeper housing crisis that could come from tighter standards. But do we want to relive the nightmare that got us here?

I wholeheartedly agree with the author's contentions. Returning to sane lending standards is not regression, it is progress from where we are today. Lending lost its way. The billions in losses prove that. We need to retreat to what works. Some may chose to view that as going back to the stone ages. I prefer to view it as a return to fiscal sanity and a stable housing market.

Nearly $500,000 for a one bedroom apartment condo?

The Jamboree Corridor condos were 20 years before their time, just like the prices of 2006 in general. These condos don't make sense. They never did. Even after a 50% decline in prices and below 5% interest rates, these properties still don't make sense. The prices on these properties are only now reaching rental parity — and these properties should trade at a discount to rental partiy because it is not a place people want to live long term. This is a great 20-something apartment, but it makes for a less desirable family home.

My data service doesn't pick up this particular address, but the details of who lost what isn't important. The lender didn't likely require a big downpayment, so the first mortgage is taking a big hit.

The assymetric nature of drawdown

People who study financial markets and portfolio returns note an interesting phenomenon regarding returns on financial investments: losses are more devastating to returns than slow gains. This property has declined nearly 50% in value since it was purchased in 2006. So when the property goes back up 50% in value, will it be back up to the peak?

Nope. A 50% decline requires a 100% increase to offset it. By the time peak buyers see values reach their entry points, buyers from today will have accumulated $250,000 in equity. Timing does matter.

The frenzied rally of the Great Housing Bubble saw double-digit appreciation for several consecutive years. Depending on the market, most of all of that gain was wiped out in two-years of double-digit declines in 2007 and 2008.

The savvy buyer who picked up this great investment undoubtedly expected double-digit appreciation from his starting point. This should be reselling for a $1,000,000 by now. instead it's REO hoping for a quarter of that.

Irvine Home Address … 2306 SCHOLARSHIP Irvine, CA 92612

Resale Home Price … $254,900

Home Purchase Price … $478,500

Home Purchase Date …. 6/12/06

Net Gain (Loss) ………. $(238,894)

Percent Change ………. -49.9%

Annual Appreciation … -13.0%

Cost of Ownership

————————————————-

$254,900 ………. Asking Price

$8,922 ………. 3.5% Down FHA Financing

4.82% …………… Mortgage Interest Rate

$245,979 ………. 30-Year Mortgage

$51,703 ………. Income Requirement

$1,294 ………. Monthly Mortgage Payment

$221 ………. Property Tax

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

$42 ………. Homeowners Insurance

$310 ………. Homeowners Association Fees

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

$1,867 ………. Monthly Cash Outlays

-$121 ………. Tax Savings (% of Interest and Property Tax)

-$306 ………. Equity Hidden in Payment

$16 ………. Lost Income to Down Payment (net of taxes)

$42 ………. Maintenance and Replacement Reserves

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

$1,499 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$2,549 ………. Furnishing and Move In @1%

$2,549 ………. Closing Costs @1%

$2,460 ………… Interest Points @1% of Loan

$8,922 ………. Down Payment

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

$16,479 ………. Total Cash Costs

$22,900 ………… Emergency Cash Reserves

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

$39,379 ………. Total Savings Needed

Property Details for 2306 SCHOLARSHIP Irvine, CA 92612

——————————————————————————

Beds: 1

Baths: 1

Sq. Ft.: 0738

$345/SF

Lot Size: –

Property Type: Residential, Single Family

Style: One Level, Modern

Year Built: 2006

Community: Airport Area

County: Orange

MLS#: P774302

Source: SoCalMLS

Status: Active

On Redfin: 2 days

——————————————————————————

REO Bank Owned – New complex near John Wayne Air Port between Irvine and Newport Beach. Excellent amenities include tennis courts, pool, spa, BBQ area, basketball court A rare opportunity Make you best offer.

Today's featured article looks at how Americans are changing their views on the rent-versus-buy decision.

Irvine Home Address … 4162 SALACIA Irvine, CA 92620

Resale Home Price …… $699,990

Back when real estate always went up — or at least when that was a commonly accepted as fact — the rent-versus-buy decision wasn't primarily financially or investment oriented. Most often people would chose to rent instead of own because they valued mobility, didn't want the liability and responsibility of home ownership and maintenance, or a variety of other reasons. Until the market crashed, renters did not consider losing their down payment and more if they need to sell unexpectedly. Much to the chagrin of realtors, potential buyers now know crashes are possible.

Buy? Nah, Rent. Nah, Buy.

Deciding used to be simple—buying a home always made sense. Then the bubble burst.

By Alina Tugend — Wednesday, March 16, 2011

Jean Sica-Lieber owned homes all of her life—when she was married and divorced, when her children were young and when they were grown. But recently, after selling her Rochester, N.Y., town house at a loss, she decided to rent. Sica-Lieber assumed it would be for a year and then she would buy a small place with a garden. But now, she’s rethinking that plan.

“Part of me, and I think this exists in most Americans, wants to be a property owner, despite the fact that unless we buy outright, the bank really owns most of it,” the 58-year-old publishing specialist said.

There are some people who get it. Equity is ownership. Negative equity is an oxymoron invented by the lending industry who preferred a nonsense term that made money-renters feel like home owners.

“But when it came right down to it, I’m single and don’t have children to do chores. How do I want to spend my time? Would I rather do more travel or pay property taxes?”

She recognizes the opportunity cost of loan ownership. Without HELOC money to supplement income, high debt-to-income ratio living is a real drag.

So Sica-Lieber decided to hold off on buying that little house, and she renewed her lease on her town house for at least another year.

For Kelly Stettner, 41, who had rented all her adult life, buying a house brought unexpected joy. When their landlord put the duplex she and her husband were renting up for sale, they ended up purchasing a 1929 bungalow on an acre in Springfield, Vt. They, their two children, and their dog couldn’t be happier.

“Budgeting is different, but we’re exploring many options that we never had considered while renting—a solar panel, a vegetable garden, [do-it-yourself] landscaping, and much more,” said Stettner, an administrative assistant. “But the emotional end is what I couldn’t imagine. There’s a self-esteem from the responsibility of owning it. We’re responsible for keeping it energy-efficient, keeping it clean. We get to do what we want, when we want, on our own terms, and we directly benefit from it. That was something I hadn’t really anticipated.”

Those are the emotional payoffs of home ownership — or at least the perception of home ownership minus the inconvenient reality of debt. When people feel ownership of something, they tend to take better care of it.

For example, I recently moved to a different rental (I am still Irvine Renter), and this property has beautiful wood floors. I so enjoy the beauty of these floors that I take care of them as if i were an owner. I am caring for the floors because I appreciate their beauty. I get the benefit of use, so I feel and act like an owner even though I merely rent. I take better care of the floors in my rental because I feel that emotional sense of ownership.

I haven't owned my primary residence for over 10 years now. I never thought that would happen, and I do miss many aspects of home ownership. Unfortunately, the reality of local price declines and the still staggering cost makes me stay on the sidelines. I can see the stars and moon aligning sometime in the next two or three years. I feel no urgency.

To buy or to rent? That was never much of a question for most Americans. Buy as soon as possible, of course, to show that you’ve grown up and made good. Paying rent, the thinking went, is just throwing money away; owning a house is an investment in the future.

It amazing how much those myths are embedded in our culture.

Until the past few years, that is, when too many Americans who bought homes with too little down and at too high a price discovered that they couldn’t pay the mortgage and couldn’t sell either. That unaffordable house became an albatross. So now, potential homeowners are more likely to seriously consider renting. But which makes more economic sense in the short- and long-term?

It depends.

In nearly three-fourths of the nation’s top 50 cities, it is better to buy than to rent, according to the real-estate website Trulia.com. The site, one of the most popular for real-estate research, offers a “Rent versus Buy” calculator that compares the costs of two-bedroom apartments, condominiums, and town houses. The data for January show that cities where the housing bubble burst with a vengeance—Miami; Las Vegas; Arlington, Texas; Mesa and Phoenix, Ariz.; and Jacksonville, Fla., in that order—were the best places to buy instead of rent.

Renting was a far better deal in New York City; Seattle; Kansas City, Mo.; San Francisco; Memphis, Tenn.; and Los Angeles—less because of cheap rent than the continued high cost of buying in those cities despite the recession, according to Tara-Nicholle Nelson, Trulia’s consumer educator.

The website considers a home to be fairly valued, Nelson explained, if buying it costs about 15 times a year’s rent. So if you pay $10,000 a year to rent, you should be wary of paying more than $150,000 to purchase an equivalent piece of property.

The comparative advantages of buying versus renting aren’t easy to figure, though. Numerous websites offer calculators that have the user enter the requisite data and supposedly learn which course to pursue. But Russell James, who teaches personal finance at Texas Tech University, has researched these online tools and found them unreliable. When he plugged the same information into the top 10 online calculators, eight advised him to buy and two told him to rent. “At one extreme, I was told buying would save me around $61,500,” he reported, “and at the other end, I was told renting would save me $15,000.”

We developed the IHB calculator because most of the online calculators are intentionally misleading. Most rent-versus-buy calculators were not designed to give people accurate information. Most of these calculators were designed by realtors with the intention to present buying in a favorable light no matter the truth. It part of the ongoing campaign by realtors to dupe buyers into action — even if buying is harmful to the buyer — to generate sales commissions.

We are planning an upgrade to the IHB calculator this year. We may go high tech. I believe it can be a very useful tool if it can be streamlined for easier use and to present accurate information as clearly as possible.

James also warned that online calculators may be particularly misleading for lower-income buyers, who are more likely to purchase older homes that need repairs and are less energy-efficient. These buyers are also less likely to itemize their tax deductions, losing the advantage of the federal tax break for mortgages.

Whether you rent or buy, some costs may not be obvious. Home­owners must pay property taxes, private mortgage insurance (if they plunked down less than 20 percent when they bought), home insurance, and all utilities—some of which landlords may have paid before. They’re also responsible for buying any needed big-ticket items such as lawn mowers, snowblowers, and washer/dryers. Renters, Nelson said, face the “opportunity cost” of lost equity and the prospect of never owning a home free and clear; they also could pay substantially higher taxes if their income is large enough to deduct property taxes and mortgage interest. And any improvements a tenant makes to a rental property belong to the landlord, of course. Tenants might also face unexpected rent hikes and evictions.

The sad reality is most new homeowners underestimate their monthly costs by 20% to 30%. The most difficult period for most first-time buyers is the first year or two when they adjust to what their house really costs.

Real-estate experts warn that it’s important for potential homebuyers to plan ahead. The common wisdom is that a buyer should anticipate staying in a house for seven to 10 years to recover all the costs. Yet these days, most people expect to be more mobile, in pursuit of new jobs and careers. “The two things are working in opposition,” Nelson said, “the mobility of the job market versus how tough it is to recoup housing costs.”

An astute observer noted I have stated several times — perhaps too many times — people should expect to hold for seven to ten years to break even. Fair enough, but it is a message worth repeating, because most in Orange County real estate are still telling people rapid appreciation awaits those who buy today.

For buyers, times are very different than they were before the housing crash triggered the Great Recession. Then, the saying went, you just needed a pulse to get a mortgage. Now, you need a pristine credit score (in the high 600s, at least) and history without any outstanding debt or defaults, according to broker Allyson Bernard, the owner of Real Estate Professionals of Connecticut. And expect to put down at least 10 percent.

Many people who want prices to go back up quickly have complained about the tightening credit. I believe credit will tighten further and become more expensive going forward. The comment above reflects the current “bar” people must reach to buy a home. A FICO in the high 600s and 10% down is not onerous by historic standards.

Many in the lending industry have equated lower lending standards with progress. We are somehow going back to the stone ages of the 1970s by raising lending standards. Progress should not measured by how stupid banks can be with giving out free money to people who won't pay it back. Relaxed lending standards do not reflect progress, they reflect regression and stupidity.

Lenders, she noted, also demand a strong employment history: “[They’re] not just looking at your stability, but at the stability of the market you work in.” The restrictions are toughest, Bernard said, on the increasing numbers of self-employed, who find it harder and harder to obtain a “non-verified” mortgage. Bernard noted that she owns her home, but that if she didn’t, as a self-employed real-estate agent, “I couldn’t even get a mortgage.”

When stated-income became the easiest conduit for Wall Street money, those programs were doomed. In many instances, we have probably thrown out the baby with the bath water when it comes to stated-income loans.

Some version of stated-income can be underwritten successfully. There are many ways the self-employed can demonstrate income, and programs using these sources as documentation will eventually return. However, right now, if you don't get a W-2, it is very difficult to provide lenders with income documentation they will accept. We should never return to the days of signature mortgages, but programs that accommodate alternate sources of income can and will return to the market in time.

Still, now that housing prices are down and interest rates are low, many economists and most real-estate agents say that if you can find the credit, this is the time to buy. But Elizabeth Weintraub, a Sacramento agent who writes on the subject for the website About.com, isn’t so sure. “People think owning a home is their destiny, but maybe you’re not cut out to be a homeowner,” she said. “You’re making a commitment to buy more than four walls and a roof. You need to think, ‘Do I have a maintenance account set up? Will the tax consequences be significant? Can I afford to make improvements?’

“It’s OK to give yourself permission not to own a home,” Weintraub concluded.

That is the most important statement in the article. Prior to the collapse of the housing bubble, renting was universally derided as a sub-standard way of life. A tremendous amount of emotional baggage is attached to our desires to be home owners. Sometimes people just need to be given permission, the comfort of the herd, to make a change. The whole point of this article was to prepare people to emotionally accept the statement above.

By some accounts, the traditional stigma against renting is easing. There is even a small movement, Nelson of Trulia.com pointed out, of people who call themselves renters by choice.

Perhaps Irvine Renter is the start of a small national movement?

Texas Tech’s James, however, said he doesn’t expect any significant shift, partly because of Americans’ long-standing love for homeownership and partly because of the law. In Europe, where longtime renting is far more common, he noted, “there’s a totally different attitude.” Renters have strong legal protection—too strong, some argue—against eviction and dramatic rent increases. But in the United States, except in places (such as Manhattan) with a semblance of rent control, the cost of renting is unstable, he said, and therefore less appealing over the long haul.

That truism is only factual when borrowers use fixed-rate mortgages. ARM borrowers do not gain the certainty of costs lower than renting that fixed-rate mortgage borrowers gain.

Still, in deciding whether to rent or buy, the numbers matter only so much. Kelly Stettner regards owning a home in her Vermont town as good not only for her family but for the community, too. “It really does make us better citizens,” she said. “We’re responsible for keeping up good relations with our neighbors and making sure that our house looks good from the street.”

What does it say about her that she is a lesser citizen when she rents?

Upstate New York renter Jean Sica-Lieber thinks that the decision depends on where you are in life and what you want out of your future. “There’s a freedom that goes with owning,” she said. “And there’s a freedom that goes with not owning.”

The author writes the ShortCuts column for The New York Times. Her book, Better by Mistake, is being published this month. She’s at twitter.com/@atugend.

Freedom is renting. Given my new line of work, I strongly considered moving to Las Vegas. Since I rent, that is an option for me. A quarter to a third of home owners in America do not have the same freedom, and many of those people will not regain their freedom for a very long time.

Irvine Home Address … 4162 SALACIA Irvine, CA 92620

Resale Home Price … $699,990

Home Purchase Price … $260,000

Home Purchase Date …. 8/23/96

Net Gain (Loss) ………. $397,991

Percent Change ………. 153.1%

Annual Appreciation … 6.8%

Cost of Ownership

————————————————-

$699,990 ………. Asking Price

$139,998 ………. 20% Down Conventional

4.82% …………… Mortgage Interest Rate

$559,992 ………. 30-Year Mortgage

$141,984 ………. Income Requirement

$2,945 ………. Monthly Mortgage Payment

$607 ………. Property Tax

$150 ………. Special Taxes and Levies (Mello Roos)

$117 ………. Homeowners Insurance

$0 ………. Homeowners Association Fees

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

$3,818 ………. Monthly Cash Outlays

-$714 ………. Tax Savings (% of Interest and Property Tax)

-$696 ………. Equity Hidden in Payment

$258 ………. Lost Income to Down Payment (net of taxes)

$117 ………. Maintenance and Replacement Reserves

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

$2,784 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$7,000 ………. Furnishing and Move In @1%

$7,000 ………. Closing Costs @1%

$5,600 ………… Interest Points @1% of Loan

$139,998 ………. Down Payment

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

$159,598 ………. Total Cash Costs

$42,600 ………… Emergency Cash Reserves

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

$202,198 ………. Total Savings Needed

Property Details for 4162 SALACIA Irvine, CA 92620

——————————————————————————

Beds: 4

Baths: 3

Sq. Ft.: 2550

$275/SF

Lot Size: 6,200 Sq. Ft.

Property Type: Residential, Single Family

Style: Two Level, Ranch

Year Built: 1970

Community: Northwood

County: Orange

MLS#: S651772

Source: SoCalMLS

Status: Active

On Redfin: 2 days

——————————————————————————

Premiere Location on Cul de Sac Street-3 Bedrooms, 2.5 Baths w/ Approx. 1915 S. F. , Wood Floors, Vaulted Ceilings, Sunny Kitchen w/ Newer Appliances, Tile Counters, Wood Floor, Garden Window, Breakfast Nook w/ Pantry, Spacious Family Room w/ Double French Doors & Sidelights Opens to Private Backyard, Built-In Entertainment Unit, Brick Fireplace & Recessed Lights, Formal Living Room & Dining Room, Master w/ Walk-In Closet & Window Shutters, Master Bath w/ Dual Vanity, Tile Floor & Tiled Shower, Private Backyard has Hardscape w/ Brick Accents & Grassy Area, Walk to Tot Lot & Large Grassy Area Behind Home, Walk to Award Winning Schools including Prestigious Northwood High, Enjoy Resort-like Association Amenities w/ Pools, Huge Spa, Tennis Courts, Volleyball Courts, BBQ's & Remodeled Clubhouse, No Mello Roos, Low Tax Rate, Assoc. Dues $83/Month

I play too much Wii Golf

I really enjoy playing Wii Golf. I have the Tiger Woods golf game, and it is more realistic, but Wii Golf captures the essence of golf. The thrill of golf. Sometimes you are forced to cope with unfair bounces and bad breaks. Wii Golf is more like real life. Golf has always been a metaphor for life, for dealing with capricious fate. Wii Golf is an instructional spiritual practice.

Wii Golf was designed by gamers who were interested in good gameplay. Some of the architectural devices they use (trees in fairways, ridiculous green slopes, and others) are a turn-off to many seeking the golf course experience. I love these features because they force you to overcome them.

Wii golf is broken down into groups of three holes, a par 3, a par 4, and a par 5. Once you become proficient at the game, you expect to birdie nearly every hole. The par 5s offer an opportunity for an eagle 3 if the wind is favorable. Practically speaking, the best you can achieve on each three-hole group is -4 (four under par). I will usually be either -2 or -3 for each three-hole group. Most often I will shoot between 6 and 9 under par for a nine-hole round, but sometimes, when everything comes together, I can get to -10 or better. The round above was perfection.

I will spare you the shot-by-shot description of my brilliant play. No need to go into detail about the masterful judgment of ball physics and creative shotmaking only a golfing genius could ever attain. No, I won't recount the amazing three wood I sliced onto the third green to within 10 feet. but i have to share the final hole.

The par 5 ninth has always been a nemesis. It's set up to be reachable in two only if the wind is behind. No backwind, no chance for eagle. The green is severe with mounds and plateaus on the left side and a steep gradient on the right. There are many difficult pin placements and few easy ones.

I got my favorable backwind, and I judged my tee shot perfectly between a large central pine tree and the nearby left rough. it provides a hilltop driver “from the deck” that lands in a small patch of fairway between two greenside bunkers. Too short, and the ball is in the water, and too long, and it hits the green and bounds over the back. If you don't hit this tiny square, your ball does not end up on the green.

After managing to get on in two, I pinpointed the cup on the other side of the green — the side you can't access with your second shot. I faced this 50+ foot putt with a swinging left-to-right break of great severity.

I stopped to laugh to myself about the degree of difficulty for a perfect score. The game was not making it easy for me. I used all my experience to try to pick a line and speed I believed would rattle the cup from three-putt land. As I watched it arc into the hole with perfect speed and break (I think the Wii helps you out sometimes), I felt a sense of satisfaction as deep as any experience I have enjoyed on a golf course. In some ways, more so.

Today I have a guest author who came to share his insights into what happens after mortgage delinqency.

Irvine Home Address … 3 East ALBA Irvine, CA 92620

Resale Home Price …… $610,000

I've never been so poor.

I bought something I can't afford

Most people can relate with a new car

but this is more value by far

Bankruptcy — Antifreeze

Joe Weber is a local bankruptcy attorney, a daily reader of the IHB, and a frequent astute observer. (I won't tell you who he is.) I have gotten to know Joe over the last year, and I asked him to share his perspective with the broader IHB readership.

From Joe's website, www.bkrights.com, “Attorney Joseph A. Weber has represented thousands of people and businesses in bankruptcy. He is a graduate of St. Leo University, the American College of Law, and has been a member of the Orange County Bar Association, The National Association of Chapter 13 Trustees, The National Association of Consumer Bankruptcy Attorneys, and the Orange County Bankruptcy Forum. He is the author of Credit Limits, a book about the proliferation of bankcards.”

Joe sees what happens at the end of the line. When Ponzis implode, most of them end up in Joe's office. He is privy to the gory details of Ponzi debt as he sees it every day in his practice. He has seen the credit bubble inflating and taking over consumers lives for decades now.

Joe Weber's observations on debt, foreclosure, and bankruptcy

When I first saw a person with six figure credit card debt I was shocked. That was in the middle 80s. Now I see it every day. Since the 1960s, non-rich people having large lines of unsecured credit became commonplace. Since the 80s, my law partner and I have filed thousands of Bankruptcy cases. Almost all of them have significant credit card debt, in addition to the traditional medical and store debt. I wrote the book “Credit Limits” in the early 90s about this phenomenon. In the nearly 20 years since then, more people have universal (e.g. Visa, Master Card, Discover) cards than ever before. Kids still in or just out of high school have them, many with credit lines of 5K or more.

After the housing bubble burst and many banks failed, credit tightened up. Of the folks we saw coming in for Bankruptcy consults, many had had their credit limits cut, and the interest rates on their cards sharply raised. Like the housing bubble, this created a “musical-chair” effect: monthly payments increased, but those who regularly took advances to meet installment payments on other accounts couldn’t do that anymore. And those who regularly took 30-40K out of their home “equity” to pay down the credit cards, couldn’t do that anymore as this particular ATM was shut down too. Then, many of those who would work longer hours or take a second job to service their debt found it impossible, as overtime and employment opportunities also dried up.

As 2011 starts I’m seeing more people in debt who are unemployed or grossly underemployed than any time in my career, even compared with the early 90s. I just don’t believe that government statistics accurately give the true picture- almost every day I talk with someone who is not only unemployed or underemployed, but who has just given up looking for work altogether, living back with parents or crashing on a friend’s couch.

As IHB has clearly laid out, people with low income can’t qualify for large mortgages when liar loans and other “alternative financing” aren’t available. I believe that many more people have to become employed or better employed before things go back to normal.

All Bankruptcies concern debt and assets and how they are treated. Natural persons (unlike “paper” entities like corporations and LLCs) get their debts discharged or wiped out in Chapter 7. Natural persons get their debts reorganized in Chapter 13. The two big housing-related issues I’m seeing now are: 1) Junior lien deficiencies during or after foreclosure; and 2) Homeowners behind on their mortgage payments reorganizing mortgage back payments in Chapter 13.

During the Great Housing Bubble, many people bought houses with 80/20 loans. In California, if the house later goes down in foreclosure and the junior lien (2^nd mortgage) was never refinanced, then the lender cannot collect money from the former homeowner. If that loan was acquired AFTER the original purchase, (non-purchase money), then whoever signed the note could be liable for any money not realized from the foreclosure sale. These days, what usually happens is the holder of the 1^st Deed of Trust forecloses and becomes the owner of the property, the lien of the 2^nd TD is extinguished; the holder of the 2^nd never gets a dime, then they look to the former homeowner for whatever the balance was. This can be devastating, as the balance could easily be in six figures and most people can’t just write a check for it.

If the person files a Chapter 7 Bankruptcy and receives a Discharge, this obligation is then wiped out. Another strategy Bankruptcy clients employ is to file a case under Chapter 7 and delay foreclosure- once a case is filed a “stay” goes into effect, preventing collection actions including foreclosure. If back mortgage payments aren’t brought up to date and the bank wants to continue with the foreclosure, they have to apply to the Bankruptcy judge for permission to continue, or what is called “Relief from the Automatic Stay.” If the creditor moves at top speed they can get relief in as little as 5-6 weeks. Some mortgage holders/servicers elect to do nothing, and wait for the Chapter 7 case to end, typically 4-5 months after it was first filed. This affords the debtor/homeowner even more time to stay in the property without making payments.

In Chapter 13 Bankruptcy a person can propose a Plan to the court to make up back mortgage payments over time, usually 60 months. And in Chapter 13, junior liens (2nds, 3rds, etc.), if there is no value to secure them, can be stripped off the house, leaving only the 1^st mortgage.

(Joe Weber is a Bankruptcy attorney in Costa Mesa. His site is www.bkrights.com)

[end of commentary]

As a follow up question, I asked Joe:

I have believed from the start that foreclosure followed by bankruptcy was going to be the ultimate resolution for those who succumb to mortgage distress. Right now that is shaping up to be millions and millions of bankruptcies. What do you see as the ultimate resolution for those who stop paying their mortgages?

His response was:

Foreclosure. I've seen too many people pay too much for a house they never could afford in the first place. And many of them STILL can't afford that house, even after saving it through Chapter 13 restructuring or non-Bankruptcy loan modification. A large percentage of homes nationwide have negative equity. We've yet to understand, then see the long-range effect of this.

Unfortunately, I see more foreclosures “cleansing” the market and bringing prices back in line to true value.

Thank you, Joe.

The impact we don't see

Many flamboyant spenders during the bubble are quietly contemplating their options. Joe only sees borrowers who have decided to do something about their problem. But many more are in denial, ignoring creditor queries, and hoping the problem will simply go away. Perhaps the lender will forget they were owed money, right?

Usually it isn't until the collection calls get overwhelming that people realize they have to act. With so many bad loans and bigger issues to deal with, following up with collections on old bad debts has not gotten the attention it will over the next several years. Also, since lenders are pretending many non-performing loans will still be paid, they are ignoring the problem too, probably hoping for another government bailout.

In the end, these debtors will be coaxed out of hiding, and they will be forced to work out something with their creditors. For an increasingly large number, the only workout is a bankruptcy.

The trend of increasing bankruptcies will likely continue. Bankruptcy reform in 2005 was supposed to reduce the number of bankruptcies permantenly. As the number of bankruptcies continues to rise, the failure of this legisltation will be apparent.

Gold in shadow inventory

There is a group of delinquent borrowers in shadow inventory that don't concern the bank: squatters with equity. The owner of today's featured property hasn't made a payment in a couple of years.

Foreclosure Record

Recording Date: 10/30/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 07/21/2009

Document Type: Notice of Default

However, the bank is in no hurry to foreclose? Why is that? Well, as long as they property has equity, the bank is merely adding to the principal balance the lost interest, penalties, and every fee they can dream up.

From a banks perspective, shadow inventory can be divided up into two broad categories: 1. those delinquent borrowers with equity where they can recover their capital in foreclosure, and 2. those delinquent borrowers with no equity that will cause a huge loss. The bank has no urgency to foreclose on the first group, the ones with equity, because its actually better than if the loan were performing. Not just are they booking the interest as income, they are also getting fees and penalties.

Banks will not move aggressively to foreclose on squatters with equity because they are a hidden cash cow. The probably watch reports to see if the remaining equity is getting low enough that they may not recover their capital in a foreclosure. When a borrower's equity runs dry is when their foreclosure will be bumped to the front of the queue.

Banks are in no hurry to foreclose on the group with no equity because of the losses it will cause. Basically, the only people the bank feels any urgency to act on are those with marginal equity. These are the delinquent borrowers who consumed their equity with non-payment. As soon as equity is gone, they are a prime target because the bank has extracted all they can, and any further delay costs them money.

Today's featured owners were minor Ponzis. They did consistently add to their mortgage, but it was very small amounts that shouldn't have been a source of financial distress. Unemployment is a likely culprit here.

Irvine Home Address … 3 East ALBA Irvine, CA 92620

Resale Home Price … $610,000

Home Purchase Price … $236,000

Home Purchase Date …. 7/21/97

Net Gain (Loss) ………. $337,400

Percent Change ………. 143.0%

Annual Appreciation … 7.0%

Cost of Ownership

————————————————-

$610,000 ………. Asking Price

$122,000 ………. 20% Down Conventional

4.82% …………… Mortgage Interest Rate

$488,000 ………. 30-Year Mortgage

$123,731 ………. Income Requirement

$2,566 ………. Monthly Mortgage Payment

$529 ………. Property Tax

$150 ………. Special Taxes and Levies (Mello Roos)

$102 ………. Homeowners Insurance

$139 ………. Homeowners Association Fees

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

$3,486 ………. Monthly Cash Outlays

-$436 ………. Tax Savings (% of Interest and Property Tax)

-$606 ………. Equity Hidden in Payment

$225 ………. Lost Income to Down Payment (net of taxes)

$102 ………. Maintenance and Replacement Reserves

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

$2,771 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$6,100 ………. Furnishing and Move In @1%

$6,100 ………. Closing Costs @1%

$4,880 ………… Interest Points @1% of Loan

$122,000 ………. Down Payment

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

$139,080 ………. Total Cash Costs

$42,400 ………… Emergency Cash Reserves

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

$181,480 ………. Total Savings Needed

Property Details for 3 East ALBA Irvine, CA 92620

——————————————————————————

Beds: 3

Baths: 3

Sq. Ft.: 1915

$319/SF

Lot Size: 3,825 Sq. Ft.

Property Type: Residential, Single Family

Style: Two Level, Contemporary

View: Park/Green Belt

Year Built: 1980

Community: Northwood

County: Orange

MLS#: S651655

Source: SoCalMLS

Status: Active

——————————————————————————

Premiere Location on Cul de Sac Street-3 Bedrooms, 2.5 Baths w/ Approx. 1915 S. F. , Wood Floors, Vaulted Ceilings, Sunny Kitchen w/ Newer Appliances, Tile Counters, Wood Floor, Garden Window, Breakfast Nook w/ Pantry, Spacious Family Room w/ Double French Doors & Sidelights Opens to Private Backyard, Built-In Entertainment Unit, Brick Fireplace & Recessed Lights, Formal Living Room & Dining Room, Master w/ Walk-In Closet & Window Shutters, Master Bath w/ Dual Vanity, Tile Floor & Tiled Shower, Private Backyard has Hardscape w/ Brick Accents & Grassy Area, Walk to Tot Lot & Large Grassy Area Behind Home, Walk to Award Winning Schools including Prestigious Northwood High, Enjoy Resort-like Association Amenities w/ Pools, Huge Spa, Tennis Courts, Volleyball Courts, BBQ's & Remodeled Clubhouse, No Mello Roos, Low Tax Rate, Assoc. Dues $83/Month

Thank you for reading the Irvine Housing Blog.

Astutely observing the housing market and combating California Kool-Aid since 2006.

Have a great weekend,

Irvine Renter

Ireland experienced a housng bubble even larger than ours, and they are facing many of the same problems.

Irvine Home Address … 24 Wayfarer Irvine, CA 92614

Resale Home Price …… $695,000

Life's backwards

People turn around

The house is burned

The house is burned

Sinead O'Connor — Fire on Babylon

The day investors stopped using toxic loans as a conduit to inflate prices, credit crunched, and the fate of the housing market was sealed. It was only a matter of how long and painful the journey back to reasonable valuations was going to be.

Many with a vested interest in real estate refuse to face that the value of the house is burned. Owners don't want to face it, banks don't want to face it, and the government isn't forcing them to face it. Lenders have life backwards: they have a value on their books that determines what they need to get for their bad loans or its underlying collateral. Markets don't work that way.

Irish Banks Seek to Delay `Evil Day' as Home-Loan Losses Rise

By Joe Brennan – Mar 10, 2011 4:01 PM PT

Perched on a chair overlooking a wood panel-lined room in Dublin’s High Court, a bespectacled Judge Elizabeth Dunne has become all-too-used to hearing from the victims of Ireland’s economic meltdown.

Each Monday, Dunne presides over repossession hearings, with one in 10 Irish mortgages now in trouble. At the end of last year, more than 79,000 borrowers were behind on payments or had loan terms altered due to “financial distress,” the country’s central bank said on Feb. 28.

“Things are getting worse and worse,” said Dunne, as she weighed the case of a couple about 114,000 euros ($158,000) in arrears on a 558,938-euro home loan, one of 74 cases on her list on March 7. “Putting off the evil day is not going to help.”

I don't think the banks share her view on the evils of putting off the day of reckoning.

Our mortgage default rate runs at about 10% just like Ireland's, and their banks are delaying repossession just like ours are.

Irish mortgages account for more than a third of about 270 billion euros of loans that remain with the nation’s so-called viable lenders — Allied Irish Banks Plc (ALBK), Bank of Ireland Plc, Irish Life & Permanent Plc and EBS Building Society. The country’s new coalition parties are not convinced “that there has been proper transparency or full disclosure by the banks” on home-loan impairments, Alan Shatter told RTE Radio on March 7, two days before his appointment as Minister for Justice.

Wow! Someone in Ireland's government actually seems to care about what happens on banks balance sheets. No politician in the United States is questioning the accounting gimmicks currently being used by our major banks.

Historically, banks have always controlled the Republicans, but now with Democrats showing little or no spine when it comes to reigning in the banks, lenders are being allowed to post bogus accounting numbers on the idea that the market will come back and they will be made whole. That isn't gong to happen. There are far too many banks on the wrong side of the trade. They all have copious amounts of property, and they all need to dispose of it at top dollar.

“There has been a continual under-estimation of loan impairments in Irish banks over the past few years,” Ray Kinsella, banking professor at the Smurfit Business School at University College Dublin, said by telephone. “I am seriously concerned about mounting loan losses in their mortgage books.”

New Stress Test

The bad loans may be reassessed as early as this month when Ireland’s central bank concludes a third round of stress tests on the country’s lenders. The results will determine how much of a 35 billion-euro international bailout fund Ireland will need to draw down.

A year ago, Irish regulators stress-tested for a 5 percent loss rate on Irish mortgages. This year’s review “will take account of the deteriorating economic conditions and hence” loan-loss assumptions “may be higher,” said Nicola Faulkner, a spokeswoman for the central bank, by e-mail.

What a joke. Their real estate prices are going to halve over a five year period, and they will take forever to get back to the peak. Their 5% loss rate likely didn't factor in the market conditions created by their own inventory.

Ireland is suffering after a decade-long real estate boom collapsed in 2007. Already, the state has bought 72.3 billion euros of risky commercial property loans from the banks, at an average discount of 58 percent. Irish house prices, which quadrupled in the decade to 2007, have since plunged more than a third. Unemployment has tripled to 13.5 percent over the same period.

Who is lining up to buy their overpriced homes?

House Price Declines

This year’s tests may stress loan books against the unemployment rate rising to 16 percent, house prices falling 60 percent from their peak and “negligible” economic growth, said analysts including Jim Ryan and Michael Cummins of Glas Securities, the Dublin-based fixed-income firm, in a note to clients March 9. The central bank declined to comment.

That is classic. These private analysts portray the reality of what is going to happen to the economy and the housing market. Obviously, the central bank doesn't want to run that stress test (a realistic one) because it would show how totally screwed they really are.

More than 300,000 households, or about 40 percent of mortgages, may find their mortgages are worth more than their homes, so-called negative equity, before the property market bottoms out, said David Duffy, an economist at the Economic & Social Research Institute in Dublin, who estimates that house prices will fall by as much as half from peak to trough.

We currently have 25% of our mortgages underwater, but if prices drop another 10%, we could easily reach 40% of mortgages underwater at the bottom.

His estimate of a 50% drop in Ireland looks reasonable when you consider prices more than doubled in 7 years.

Prices in Ireland are probably near where they would have been if no housing bubble occurred. However, a housing bubble did occur, and after the collapse, the downward price momentum and problems with supply will continue to push prices lower and cause an overshoot to the downside.

Morgan Kelly, a University College Dublin economics professor dubbed “Doctor Doom” for his bleak assessments of Ireland’s housing market, wrote in the Irish Times on Nov. 8 that banks face “mass mortgage defaults” and a “wave of foreclosures.” Kelly declined to be interviewed.

Strategic default will ravage what's left of the market there just as it has in Las Vegas.

EU Bailout

Iceland, where almost 40 percent of residential mortgages were in negative equity by December, decided that month to write off mortgages and other household debt by as much as $858 million. Unlike Ireland and other western nations, the Nordic nation placed its biggest lenders in receivership in 2008 rather than offer taxpayer-funded capital injections.

Ireland has bolstered its banks with 46.3 billion euros of additional capital over the past two years. The nation was forced to agree to an 85 billion-euro bailout on Nov. 28, led by the European Union and the International Monetary Fund. That package includes 10 billion euros to recapitalize the banks up- front and a further 25 billion euros of “contingency” capital to be used if required.

“When the teams from the EU, ECB and IMF arrived in November, they probably thought they would find huge holes remaining in the banks’ loan books, but they did not,” said Alan Ahearne, who was economics adviser to Brian Lenihan, the former finance minister. “It’s not that there’s some black hole in the Irish banks that hasn’t previously been discovered.”

Actually, I think there is…

10 Billion Euros

Still, a previous regulatory target for banks to hold 8 percent core tier 1 capital, a gage of financial stability, “wasn’t enough to support confidence in the banks” given the economy’s problems, Ahearne said. Ireland agreed as part of the bailout to increase lenders’ capital levels to no less than 10.5 percent by the end of this month.

The 10 billion euros of initial capital destined for banks under the rescue package “pretty much covers our base case scenario” for remaining losses in Irish banks, said Ross Abercromby, a London-based analyst at Moody’s Investors Service, by telephone. “The additional 25 billion euros contingency fund would cover our stress scenario, which is pretty severe.”

Moody’s estimates that losses on Irish mortgages may be as high as 14 percent where the loan-to-value ratio is over 90 percent. That rises to 16 percent “in our worst case,” the ratings company said.

Household debt soared from 48 percent of disposable income in 1995 to 176 percent in 2009, catapulting Irish consumers into fourth place in 2008 in an international league table of personal indebtedness from 17th place in 1995, according to Ireland’s Law Reform Commission.

Are the analysts correct, or will Ireland's banks be looking for more bailouts?

Savings Rise

On the other hand, Irish households’ net savings as a percentage of disposable income rose from zero in 2007 to 12 percent in 2009, according to the Central Statistics Office. The savings rate should remain around the same level for this year and next, the ESRI said on Jan. 20.

That is impressive. Savings will provide the internal capital for Ireland to prosper again. Americans are not quite so thrifty.

Irish Life & Permanent Plc Finance Director David McCarthy said he doesn’t believe there are undiscovered losses in banks’ mortgage books. The group, which has 26.3 billion euros of Irish home loans, saw arrears of less than 90 days peak in mid-2010, McCarthy said on March 2, and they’ve “been falling, albeit quite slowly, since then,” he said.

Bank of Ireland spokeswoman Anne Mathews referred to CEO Richie Boucher’s Nov. 12 statement to analysts that there was “clear evidence” that arrears were “beginning to stabilize.” Allied Irish and EBS spokesmen declined to comment.

‘Different Phenomenon’

The Irish home-loan market is “a totally different phenomenon” to the commercial real-estate market, said John Reynolds, chief executive officer of Belgian-owned KBC Ireland.

“Irish banks have been hamstrung by a narrative that has been allowed to develop that all their lending was as mad as their real-estate lending,” said Reynolds. “The reality is that the Irish banks, when they didn’t do the real-estate stuff, which was a seductive drug, did bog-standard, criteria-driven lending.”

If that statement is accurate, Irish banks may be better off than we give them credit (pun intended). Our banks are hamstrung by real estate losses, but they are severely hampered by derivative losses and commercial losses. It wasn't housing that brought down Citi.

“Banks are exercising huge forbearance on borrowers in arrears,” partly because of pressure from the authorities “but also because they don’t want to repossess houses as there’s no second-hand market to sell them,” said Kinsella, the banking professor. Lenders only held 585 repossessed residential properties at end-2010, according to the central bank.

The new government said on March 6 it may bring in a two- year moratorium on repossessions “of modest family homes where a family makes an honest effort to pay their mortgages.” Currently, mortgage holders can enjoy 12-month protection from legal action if they are co-operating with lenders.

The coalition also pledged to fast-track changes in laws requiring bankrupted individuals to wait 12 years before they are discharged from their debts.

Wow! That really is different than what we are doing. Here in the United States, the GSEs have been moving to relax the waiting period so they can manufacture enough buyers to recycle their bad loans.

If Ireland does make it more restrictive to get a new loan, their housing market is really going to crumble. I believe this policy to be an empty threat to deter strategic default. Nice idea, but the defaults are going to occur anyway, and the policy will end up quietly being changed to get buyers back into the queue.

Rising Interest Rates

The issue of full recourse for mortgage loans is positive for banks, if not for borrowers in negative equity, said Abercromby. “If that level of recourse is watered down, by introducing less stringent bankruptcy laws, you could be looking at higher losses,” he said.

And if they don't relax those laws, they are sentencing an entire generation to debt servitude.

That's really the issue faced both here and abroad: increase bank losses and reduce the debt burden on the population, or limit the bank losses and force families to spend their entire working lives to pay for the mistakes of bankers. Each government through its own process will determine who the winners and losers are in the battle of the banks versus the people.

From what I am seeing here in the US, the banks will probably win. Prices will stay inflated, debt-to-income ratios will remain elevated, and everyone will be forced to put the maximum amount of income possible toward a house payment if they want to own something comparable to a rental. People will drink the appreciation kool aid, but with everyone already stretched to the max, prices won't go up any faster than inflation. What happens then?

There is also concern that rising interest rates will hit borrowers who have managed to remain out of trouble so far. ECB President Jean-Claude Trichet signaled on March 3 the bank may raise its benchmark rate from a record low of 1 percent as soon as next month.

Banks have already increased variable home loan rates from an average of 3.16 percent in mid-2009 to 3.87 percent by November, according to the ESRI. Lenders, including Irish Life and EBS, have hiked borrowing costs again since then.

Meanwhile, at least half of all Irish mortgages are so- called tracker products, with pricing linked to ECB’s key rate, according to the Irish Banking Federation.

More than fifty percent of Irish mortgage are ARMs underwritten at the bottom of the interest rate cycle. Hmmm… do you think they may have some payment shock to deal with over the coming years as interest rates rise?

Adjustable rate mortgages will separate the successful owners from the unsuccessful ones over the next decade. Those trying to save a few dollars today will pay a higher price when they refinance. If they roll over a series of 3-year ARMs, in nine years, they may be paying the same mortgage balance at 9% instead of the 5% or less borrowers are locking in today.

ARM holders are signing up to give ever-increasing payments to their lenders for the foreseeable future.

Tracker Rates

While banks may be able to contain bad-loan losses on their mortgage books, “a big and ongoing problem is that a large part of their mortgage books are based on ECB tracker rates, which banks are funding at a loss,” said Karl Deeter, operations manager with Dublin-based Irish Mortgage Brokers.

Back in the High Court, Dunne is listening to how a house builder from Co. Cavan, close to the border with Northern Ireland, is 67,000 euros in arrears on a 360,000 euro home loan taken out three years ago.

Times are hard out there, says the man, who has a plant hire and quarrying business, but is making partial remortgage payments. “I understand that well,” says Dunne. “I see that every Monday.”

To contact the reporter on this story: Joe Brennan in Dublin at jbrennan29@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

ireland had a real estate bubble very similar to ours, and they are grappling with the same issues we are in its deflation.

I wonder if you can pick up any good cashflow properties there now that prices have crashed?

That pesky comparable

It must be nice to believe a precious cottage still commands peak pricing. Well, good luck to these sellers with the appraisal because a model-match just sold last week for $488,000.

$488,000 9 SPRING BUCK Sold on Mar 09, 2011

0.05 miles 3 bd / 2.5 ba 1,571 Sq. Ft.

It's pretty hard for an appraiser to ignore a week-old model-match a few blocks away that just sold for $207,000 less. Perhaps he can bump up the value with the upgrades. Pehaps a price as high as $525,000 might be justifiable, if the appraiser were so inclined.

If these owners want to get $695,000, it better be an FCB with a lot of cash. The're going to need it.

For the record, these people were responsible borrowers. They only increased their mortgage once, and it certainly appears that money was put into the property.

Irvine Home Address … 24 Wayfarer Irvine, CA 92614

Resale Home Price … $695,000

Home Purchase Price … $236,000

Home Purchase Date …. 7/21/97

Net Gain (Loss) ………. $417,300

Percent Change ………. 176.8%

Annual Appreciation … 7.9%

Cost of Ownership

————————————————-

$695,000 ………. Asking Price

$139,000 ………. 20% Down Conventional

4.82% …………… Mortgage Interest Rate

$556,000 ………. 30-Year Mortgage

$140,972 ………. Income Requirement

$2,924 ………. Monthly Mortgage Payment

$602 ………. Property Tax

$150 ………. Special Taxes and Levies (Mello Roos)

$116 ………. Homeowners Insurance

$139 ………. Homeowners Association Fees

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

$3,931 ………. Monthly Cash Outlays

-$709 ………. Tax Savings (% of Interest and Property Tax)

-$691 ………. Equity Hidden in Payment

$256 ………. Lost Income to Down Payment (net of taxes)

$116 ………. Maintenance and Replacement Reserves

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

$2,904 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$6,950 ………. Furnishing and Move In @1%

$6,950 ………. Closing Costs @1%

$5,560 ………… Interest Points @1% of Loan

$139,000 ………. Down Payment

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

$158,460 ………. Total Cash Costs

$44,500 ………… Emergency Cash Reserves

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

$202,960 ………. Total Savings Needed

Property Details for 24 Wayfarer Irvine, CA 92614

——————————————————————————

Beds: 3

Baths: 3

Sq. Ft.: 1571

$442/SF

Lot Size: 3,024 Sq. Ft.

Stories: 0002

Year Built: 1980

Community: Irvine

County: Orange

MLS#: 11003979

Source: VCRDS

Status: Active

On Redfin: 1 day

——————————————————————————

A Beautiful 3 bedroom 2 1/2 a bath remodeled cottage home inside the loop in desirable Woodbridge. The kitchen features granite counter tops, new appliances, hardwood floors and new cabinets. Crown molding throughout the house. Remodeled bathrooms with granite counter tops and tile flooring. New paint throughout the home. Custom wood shutters, mirrored wardrobe doors. Painted garage floor. Dining room and family room opens to a beautiful landscaped private patio. New front landscape. Woodbridge offers community lakes as well as the community pools.

I would like to wish my visiting Irish mother-in-law a

Happy St. Patrick's Day!

The median home price declined on a year-over-year basis in February for the first time since October of 2009. Home sales hit a three-year low.

Irvine Home Address … 38 WILLOWGROVE Irvine, CA 92604

Resale Home Price …… $534,900

It's not

What you thought

When you first began it

You got

What you want

Now you can hardly stand it though

Prepare a list of what you need

Before you sign away the deed

'Cause it's not going to stop

No, it's not going to stop

Aimee Mann — Wise Up

Many buyers purchased for appreciation, and they got the property they wanted, but now that they are underwater, they can hardly see it through. Many walk away.

They make a list of what they need before they give back the deed because they know the pressure on prices is not going to stop.

Wise up! Record low sales, high rates of foreclosure and falling prices are not good signs for the real estate market.

Southland February Home Sales At 3-year Low; Investor Interest High

March 15, 2011

La Jolla, CA—Southern California’s housing market remained sluggish in February despite relatively strong demand from investors and others paying cash for homes. Prices appeared fairly flat as many potential home buyers stayed on the sidelines and waited – whether for a sign values have bottomed, job security has improved or credit has loosened, a real estate information service reported.

How do they know what motivates buyers? Aren't those statements really just bullshit? Dataquick has consistently cheerleaded for the realtor community, and it comes through in their press releases where they always have some positive spin they put on the data.

Last month 14,369 new and resale houses and condos sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties. That was down 0.6 percent from 14,458 in January, and down 6.4 percent from 15,359 in February 2010, according to DataQuick Information Systems of San Diego.

A small change in sales – up or down – between January and February is normal for the season. On average, sales have risen 0.6 percent between those two months since 1988, when DataQuick’s statistics begin.

In other words, rather than showing normal seasonal strength coming off a January low, the market actually deteriorated. Is this spin true “A small change in sales – up or down – between January and February is normal for the season?” Well, the OC Register did some digging, and according to them, “This early year decline is a bit of a rarity: It’s only the 9th time since 1988 that homebuying activity was lower in February in January.” 9 times out of 23 seems rather rare.

See those huge down spikes on the chart below? Those are January sales numbers.

See those huge up spikes back to the normal range? Those are February's typical gains.

The total number of homes sold last month was the lowest for a February since 2008, when 10,777 sold, and the second-lowest since 1995, when 12,459 sold. Last month’s sales fell 19.5 percent short of the Southland’s average February sales tally – 17,848 – since 1988.

We have more houses than we did in 1988. We have more people living in Southern California that we did in 1988. How is it that sales are not at least in proportion to the increase in the number of homes or the number of people? I think we all know the answer, but it is worth noting that sales rates are very low by any standard measure.

The 847 newly built homes sold in the region last month marked the second-lowest level on record for a February, behind 842 sales in February 2009. Builders continue to struggle to compete with prices on resale homes, especially distressed properties.

Irvine is different, right? New home sales continue to outperform, right?

Last month’s distressed sales – the combination of sales of foreclosed homes and “short sales” – accounted for well over half of the resale market.

Whenever the percentage of distressed sales exceeds 40%, prices generally fall.

Foreclosure resales – properties foreclosed on in the prior 12 months – made up 37.1 percent of resales last month, up from 36.8 percent in January but down from 42.4 percent a year ago. Over the past year foreclosure resales hit a low of 32.8 percent last June but since then they’ve trended higher. Foreclosure resales peaked at 56.7 percent in February 2009.

Short sales – transactions where the sale price fell short of what was owed on the property – made up an estimated 19.8 percent of Southland resales last month. That was up from an estimated 19.7 percent in January, 18.4 percent a year earlier, and 12.0 percent two years ago.

The abundance of distressed homes for sale continues to attract unusually high levels of investor and cash-only buyers.

People portray this as some kind of investor conspiracy trying to squeeze out the little guy. The reality is that investors are stepping into the void left behind by owner occupants who could not sustain ownership. If there were an owner occupant capable of sustaining ownership, their bids for properties would almost certainly be higher than an investor's bid. Investors do not crowd out owner occupants. To the contrary, as the economy improves, it will be owner occupants that bid up prices and crowd out investors.

Absentee buyers – mostly investors and some second-home purchasers – bought a record 26.1 percent of the Southland homes sold in February, paying a median $198,000. Since 2000, absentee buyers have purchased a monthly average of 16.2 percent of all homes sold. (Absentee data go back to 2000.)

Buyers who paid cash accounted for a record 31.7 percent of February home sales, paying a median $200,000. That was up from 30.4 in January and 30.1 percent a year earlier. The February cash level was the highest for any month in DataQuick’s statistics back to 1988. The 10-year monthly average for the percentage of Southland homes purchased with cash is 13.1 percent. Cash purchases are where there was no indication in the public record that a corresponding purchase loan was recorded.

“The January and February sales data can be interesting, but we always caution that historically they’ve been a poor barometer for the rest of the year. What the past two months do tell us is that lots of people have bet, often with cash, that housing at today’s prices will prove a solid investment,” said John Walsh, DataQuick president.

“This spring we’ll see an infusion into the market of more traditional buyers, who aren’t necessarily purchasing with an investor mindset. If the stars line up right – low prices, low mortgage rates, available credit, higher job growth and higher consumer confidence – we could see sales shoot back up to more normal levels. There’s pent-up demand out there. Lots of people have been waiting for the right time to buy. But they’ve got to feel more confident in their jobs, they’ve got to qualify for a loan and, for some, they need to be convinced prices are at or near bottom. One group will still be stuck on the sidelines, though: Those who owe significantly more on their mortgages than their homes are worth.”

Did you recover from that kool aid overdose?

The median price paid for a Southland home last month was $275,000, up 1.9 percent from $270,000 in January, and unchanged from $275,000 in February 2010. In January this year, the median fell slightly (-0.6%) from a year earlier, marking the first year-over-year decline since October 2009.

Notice that they buried a key piece of information in the middle of the article as if it wasn't important. I used this as a headline because it is important news.

The median’s low point for the current real estate cycle was $247,000 in April 2009, while the high point was $505,000 in mid 2007.

Wow! the median in Southern California declined more than 50% from peak to trough — assuming you believe that was the trough.

The peak-to-trough drop was due to a decline in home values as well as a shift in sales toward low-cost homes, especially inland foreclosures.

Do they have any more excuses for the market's poor performance?

At the county level last month, the overall median sale price fell on a year-over-year basis in four counties and was unchanged in two. Declines from a year ago were logged in Orange (-1.7 percent), Riverside (-1.0 percent), San Diego (-4.3 percent), and Ventura (-1.4 percent) counties, while the median was the same as a year ago in Los Angeles and San Bernardino counties.

The median paid for the largest home-type category – resale single-family detached houses – fell year-over-year last month in Orange (-3.1 percent), San Diego (-3.1 percent) and Ventura (-9.6 percent) counties. The other three counties recorded annual gains ranging from 2.6 percent in Los Angeles and Riverside counties to 3.6 percent in San Bernardino County.

The beaten down markets are bottoming and starting to recover while the previously immune markets are beginning to falter.

Government-insured FHA loans, a popular low-down-payment choice among first-time buyers, accounted for 32.2 percent of all mortgages used to purchase homes in February. That was the lowest level since August 2008, when 26.8 percent of purchase loans were FHA. Last month’s FHA level was down from 33.2 percent in January and 36.8 percent in February 2010. Two years ago FHA loans made up 36.9 percent of the purchase loan market, while three years ago it was just 6.5 percent.

Last month 18.1 percent of all sales were for $500,000 or more, down from a revised 18.3 percent in January and down from 18.5 percent a year earlier. The low point for $500,000-plus sales was in January 2009, when only 13.6 percent of sales crossed that threshold. Over the past decade, a monthly average of 26.8 percent of homes sold for $500,000 or more.

Viewed differently, Southland zip codes in the top one-third of the housing market, based on historical prices, accounted for 34.6 percent of total sales last month. That was up from 33.4 percent in January and up from 32.7 percent a year ago. Over the last decade, those higher-end areas contributed a monthly average of 37.1 percent of regional sales. Their contribution to overall sales hit a low of 26.2 percent in January 2009.

High-end sales still suffer from tight credit policies. Adjustable-rate mortgages (ARMs) and so-called jumbo home loans have been relatively difficult to get ever since August 2007, when the credit crunch hit.

And none of that is going to change. When you hear pundits describe this situation, they make it sound like a temporary overreaction. Happy days will not be here again soon.

Last month ARMs represented 7.8 percent of Southland purchase loans, up from 7.0 percent in January and 4.1 percent a year ago. Last month’s figure was the highest since August 2008, when it was 10.5 percent. Over the past decade, a monthly average of about 38 percent of purchase loans were ARMs.

It is good to know that only 7.8% of buyers are foolish enough to take out an adjustable rate mortgage at the bottom of the interest rate cycle. It's amazing that the market typically has 38% of its loans as ARMs. That will change as interest rates begin they cyclic climb.

Jumbo loans, mortgages above the old conforming limit of $417,000, accounted for 15.6 percent of last month’s purchase lending, up from 15.2 percent in January and 14.8 percent a year earlier. However, in the months leading up to the credit crisis that struck in August 2007, jumbos accounted for 40 percent of the market.

Jumbo loans will not be 40% of the market any time soon. Since these loans are not government backed, the interest rates are about 3/4 of a point higher. That translates into a significant loss of affordability once jumbo financing is required.

Last month the percentage of Southland homes that was flipped – bought and re-sold on the open market within a six-month period – was 3.2 percent. That was up from a “flipping” rate of 3.1 percent in January but down from 3.4 percent a year earlier. Flipping varied last month from as little as 2.4 percent in Ventura County to as much as 3.8 percent in San Diego County.

DataQuick Information Systems monitors real estate activity nationwide and provides information to consumers, educational institutions, public agencies, lending institutions, title companies and industry analysts.

The typical monthly mortgage payment that Southland buyers committed themselves to paying was $1,174 last month, up from $1,128 in January and down from $1,180 in February 2010. Adjusted for inflation, current payments are 48.1 percent below typical payments in the spring of 1989, the peak of the prior real estate cycle. They are 57.4 percent below the current cycle’s peak in July 2007.

Now we are seeing real payments based on real incomes. During both housing bubbles, toxic financing became common, and payments became detached from reality.

Indicators of market distress continue to move in different directions. Foreclosure activity remains high by historical standards but is lower than peak levels reached over the last two years. Financing with multiple mortgages is very low, and down payment sizes are stable, DataQuick reported.

	Sales Volume			Median Price
All homes	Feb-10	Feb-11	%Chng	Feb-10	Feb-11	%Chng
Los Angeles	5,034	4,736	-5.90%	$315,000	$315,000	0.00%
Orange	1,986	1,903	-4.20%	$417,000	$410,000	-1.70%
Riverside	3,199	2,842	-11.20%	$197,000	$195,000	-1.00%
San Bernardino	2,095	1,974	-5.80%	$150,000	$150,000	0.00%
San Diego	2,465	2,330	-5.50%	$322,000	$308,000	-4.30%
Ventura	580	584	0.70%	$350,000	$345,000	-1.40%
SoCal	15,359	14,369	-6.40%	$275,000	$275,000	0.00%

Source: DQNews.com Media calls: Andrew LePage (916) 456-7157

Copyright 2011 DataQuick Information Systems. All rights reserved.

Irvine Shadow Inventory

realtors have been consistently denying the existence of shadow inventory. It's always rather surprising to me to see people deny the obvious. Did they think the shadow inventory would never surface or never be identifiable?

Todays' featured property was first profiled on 7/30/2008. Back then, an asking price of $569,000 was one of those ridiculous short sale prices well below market. Today, that would represent a $70,000 profit from today's asking price — plus the lender has eaten two years worth of lost payments. Today's featured property was purchased by the bank as REO on 6/11/2009. What have they been doing with this property for the last two years? If that's how fast their renovation crews work, they need better help.

The former owners paid $745,000 on 3/2/2006 using a $633,250 first mortgage, and a $111,750 down payment — now gone. They refinanced on 6/25/2007 with an option ARM. They obtained a $78,000 HELOC, but it is unclear if they used it to withdraw their down payment. If they didn't, I bet they wish they did.

This house was in shadow inventory for the last two years. Perhaps properties like this are picked up on a report somewhere, but it was not for sale on the MLS, and it was not rented out. It sat there empty. It makes more sense for the property to sit empty rather than sell it and lower prices — at least that's what the banks believe.

Expect to see more properties like this, particularly if lenders believe there is some demand to sell into. It's these properties coupled with the ongoing distress still hanging over the market that will prevent any meaningful appreciation for the foreseeable future.

It's more than an abstract idea. You will see it happen house by house here at the IHB.

Irvine Home Address … 38 WILLOWGROVE Irvine, CA 92604

Resale Home Price … $499,900

Home Purchase Price … $745,000

Home Purchase Date …. 3/2/06

Net Gain (Loss) ………. $(275,094)

Percent Change ………. -36.9%

Annual Appreciation … -7.5%

Cost of Ownership

————————————————-

$499,900 ………. Asking Price

$17,497 ………. 3.5% Down FHA Financing

4.82% …………… Mortgage Interest Rate

$482,404 ………. 30-Year Mortgage

$101,398 ………. Income Requirement

$2,537 ………. Monthly Mortgage Payment

$433 ………. Property Tax

$150 ………. Special Taxes and Levies (Mello Roos)

$83 ………. Homeowners Insurance

$139 ………. Homeowners Association Fees

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

$3,342 ………. Monthly Cash Outlays

-$415 ………. Tax Savings (% of Interest and Property Tax)

-$599 ………. Equity Hidden in Payment

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

$83 ………. Maintenance and Replacement Reserves

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

$2,444 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$4,999 ………. Furnishing and Move In @1%

$4,999 ………. Closing Costs @1%

$4,824 ………… Interest Points @1% of Loan

$17,497 ………. Down Payment

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

$32,319 ………. Total Cash Costs

$37,400 ………… Emergency Cash Reserves

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

$69,719 ………. Total Savings Needed

Property Details for 38 WILLOWGROVE Irvine, CA 92604

——————————————————————————

Beds: 4

Baths: 3

Sq. Ft.: 2040

$262/SF

Lot Size: –

Property Type: Residential, Condominium

Style: Two Level, Mediterranean

Year Built: 1978

Community: Woodbridge

County: Orange

MLS#: S651660

Source: SoCalMLS

Status: Active

On Redfin: 1 day

——————————————————————————

LARGE ATTACHED SINGLE FAMILY HOME IN BEAUTIFUL WOODBRIDGE NEIGHBORHOOD. LIGHT AND BRIGHT FLOORPLAN WITH VAULTED CEILING IN LIVING ROOM WITH FIREPLACE; FORMAL DINING ROOM; LARGE KITCHEN WITH GRANITE COUNTERTOP; FAMILY ROOM WITH MEDIA NICHE; LARGE MASTER WITH VAULTED CEILING; TRIPLE CLOSET WITH MIRROR DOORS; NURSERY; 2 ADDITIONAL SPACIOUS BEDROOMS; ATTACHED DIRECT ACCESS GARAGE; LARGE BACKYARD FOR TOWNHOME; JACCUZZI. NEEDS NEW PAINT, CARPET AND MINOR REHAB. .. SOLD AS IS.

Follow up story

Remember the attorney advising his clients to break in and squat in their old homes?

He is being reprimanded by the State Bar.

Discipline Case Filed Against Lawyer Who Advised Clients to Break Into Their Foreclosed Homes

Posted Mar 14, 2011 5:13 PM CDT

By Stephanie Francis Ward

Updated: A California lawyer who advised clients to break into their foreclosed homes while he argued in state court that the foreclosures were illegal faces from the State Bar of California discipline for his remarks, the attorney regulatory agency announced today.

The complaint against Michael T. Pines, filed in the State Bar Court, seeks to lift his law license. According to a press release the state bar issued, Pines in February was arrested for threatening the occupants of a house that used to belong to his clients, and the following day was cited for trespassing on the property. Four days later, according to the release, he was cited for violating a temporary restraining order at the site. According to the state bar, Pines told his clients that he may break into the property again.

And in October, according to the release, Pines notified Newport Beach, Calif., police that he and a client were going to take possession of a house that the client lost in foreclosure.

“To remove a lawyer from active practice on an interim basis before formal charges are filed is a drastic remedy,” James Towery, the state bar’s chief trial counsel, stated in today’s release. “That remedy is justified by the established misconduct of Michael T. Pines. He has shown complete disrespect for the law, the courts and especially the best interests of his clients. Removing Mr. Pines from active practice is an important step in our mission of public protection.”

Pines’ alleged actions have been widely noted. In January, the he told a Ventura County judge he’d hire a locksmith himself to get a husband and wife he represents back into their home. Pines admitted to breaking into homes at least half a dozen times so his clients could live in them while he defended their foreclosure proceedings. Also, the Ventura County judge criticized Pines for skipping a contempt hearing, and filing federal and state court lawsuits that he later abandoned. And it was reported that Pines himself has at least six properties in foreclosure, after working as a real estate broker specializing in distressed investments.

Updated March 15 to correct a reference to Michael T. Pines.