Monthly Archives: April 2011

Delinquent mortgage squatter is given free home by lender

A mortgage servicer in Florida has given a house to the delinquent borrower. What were they thinking?

Irvine Home Address … 80 MODESTO Irvine, CA 92602

Resale Home Price …… $429,500

Well, I ain't been home to see my baby,

in ninety nine and one half days.

'Bout time I see her,

Wait a minute something's wrong here

The key won't unlock the door.

Jimi Hendrix — Red House

Wait, there's something wrong here. The key will unlock the door.

Bank gives man foreclosed Jacksonville house for free

Posted: April 10, 2011 – 12:00am — By Roger Bull

Perry Laspina was in the middle of foreclosure with the possibility of losing the house he owned in Jacksonville. Then the mail came one day in late January telling him that the house was his.

Despite the $72,000 mortgage that he barely paid anything on, despite the foreclosure … the house was his.

In the middle of foreclosures gone wild, of a system overloaded by sheer volume, judicial investigations and allegations of corners cut, Laspina ended up with the house.

Despite the fact that he didn't have an attorney in the foreclosure proceedings, the mortgage holder simply gave up and walked away.

If they are giving away free houses to delinquent borrowers, there will be a lot of happy people.

Guys like Darrel above are just the kind of borrower lenders should give a free house to.

Or perhaps we should give free houses to the hard working middle-class people below.

“I've never seen anything like this in my life,” he said.

It's a tale populated with many of the major players in the national foreclosure drama: The law firm of David Stern, the Mortgage Electronic Registration Systems (better known as MERS) and a mortgage packaged with others and sold into a securitized trust.

Here's how it happened.

Back in 2006, Laspina, a used-car dealer based in South Florida, had some extra money and decided to buy some real estate that he could resell quickly at a profit. It was, after all, the height of the housing boom with prices skyrocketing and mortgage money easily available.

“Since everyone else was making money flipping houses, I figured I would, too,” he said.

He wasn't familiar with Jacksonville, but his brother owned a house in Fernandina Beach and found the house on Oakwood Street in the Panama Gardens neighborhood of Jacksonville off North Main Street.

It's an old neighborhood where most of the houses are still well-maintained.

Laspina bought the house for $80,000, putting $8,000 down and taking out an adjustable rate mortgage with EquiFirst for the remaining $72,000 with an interest rate of 9.5 percent.

EquiFirst, based in Charlotte, N.C., was one of the nation's leading sub-prime lenders in 2006. But it soon fell victim to the housing and mortgage industry collapse and it closed in 2009.

EquiFirst kept few of the mortgages it wrote; most were packaged and sold to securitized trusts which were owned by investors.

Laspina wasn't worried about the interest rate.

“It didn't matter,” he said. “I figured I'm going to flip this house within six months, maybe three months.”

That plan sounds foolish today, but for several years during the bubble, people could buy houses at full retail price, hold them briefly, do minor cosmetic changes, and sell for a reasonable profit. Today, that is only possible for people buying at auction and obtaining a huge discount from resale. Appreciation isn't a realistic expectation.

He also figured he'd get about $120,000 for it after he did a bit of work on it, mostly tearing up the carpet and stripping the paint that covered the hardwood floors.

“But right after I put it on the market, the crash came,” he said. “I couldn't sell it, I couldn't rent it.”

Real estate is not liquid. People forget that inconvenient fact when times are good and prices are rising, a condition most believe is a permanent state.

Hang in there, Shawn. You may get a free house.

By 2008, the increases on his payments kicked in, going from an initial payment of $605 to $894 and then $1,058 in less than a year. He quit making payments, and in September of that year, a foreclosure notice was filed against him. The plaintiff was the U.S. Bank National Association, which was simply acting as the trustee for an unnamed trust that now owned the mortgage.

The court file says that Laspina lost his foreclosure case in February 2009. A sale date was set, then postponed and then canceled, all at the plaintiff's request, later that year.

But the next year, the plaintiff requested that it all be vacated – the suit, the judgment, all of it. In October, Circuit Judge Waddell Wallace signed the order.

Why would a lender vacate the judgment and give away the property?

In December, officials for MERS, which acted as the mortgage holder, signed and filed the documents saying it “has received full payment and satisfaction … and does hereby cancel and discharge said mortgage.”

Laspina had paid less than $1,000 toward the principal on his $72,000 loan.

That's what happened. But there are questions about why.

You think?

“This is crazy,” attorney David Goldman said as he looked over the files at the Times-Union's request.

“They won,” he said referring to the mortgage holder. “They're standing at the goal line, and they just need to sell the house.”

Maybe they will let him keep it?

“One possibility is that they did it by mistake,” said Chip Parker, an attorney who specializes in foreclosure defense. “There are just so many cases out there.”

I think this is the most likely explanation. Someone manages the mortgage-backed securities pool that owned this bad loan along with many others. They probably have many cases pending against properties that get cured or sold, so they may vacate judgments filed on many such properties. This one was merely put on the wrong list.

The other possibility is deliberate mischief by a clerk or a manager who knowingly processed this paperwork to harm the MBS pool or the firm managing it.

One issue possibly complicating the case is that the plaintiff's attorney was David Stern, whose Southeast Florida law firm became the poster child for foreclosure mills. In 2009 alone, it handled 70,000 foreclosure cases, according to news reports, and employed more than 1,000 people.

But after questions were raised about the practice, the Florida attorney general announced an investigation of possibly fraudulent paperwork at Stern and two other firms. Fannie Mae and Freddie Mac, along with many banks, dropped him as their primary foreclosure attorney.

Stern's firm quit its foreclosure work at the end of March.

He made so much money, he probably doesn't care. It was a good run for him. If he hadn't become the poster child for this problem, he would still be adding to his fortune. Now someone else just like him is doing this same work. Perhaps the GSEs will add more vendors to its lists, but the foreclosures will grind on.

MERS itself has been the subject of plenty of controversy. The electronic registration and tracking system helps banks package, buy and sell mortgages without the time and money that used to be required to record each transaction.

MERS is named the nominee on these loans, but it now faces lawsuits across the country seeking unpaid recording fees that normally go to local governments, and several courts have rejected MERS' role in bringing foreclosures.

Parker also theorized that the mortgage owner simply made a business decision.

“The lender was faced with retaining new counsel,” Parker said. “Maybe it looked at the value of the property, realized it's way, way underwater and simply not worth it.“

That appears to be the case, though the mortgage holder provided few details when contacted.

An asset manager is not going to be concerned with any debt on the property. An asset manager is going to either keep the asset and manage it for cashflow or dispose of it and get whatever capital recovery he can. Any positive capital recovery is better than nothing. The house in question here clearly still has resale value. I doubt an asset manager determined is wasn't worth it to sell this property and get the money.

The loan was being serviced by America's Servicing Co., a subsidiary of Wells Fargo.

“The investor on the loan, the bondholder on the trust, decided to write off the loan balance,” said a Wells Fargo spokesman, “because of the significant decreased value of the property.“

Fine. They wrote off the loan balance. That doesn't mean you give away the house. Is the cost of sale really going to result in a negative recovery? This makes no sense.

He declined to give more details or further explanation.

The home — two bedrooms, one bath and 1,120 square feet — is structurally solid, Laspina said. But many of the interior walls are covered with mold ever since the coils were stolen from the air conditioner.

It's appraised at $46,000 by the Duval County appraiser's office in a neighborhood that has inconsistent values.

The house next door sold for $65,000 in January after selling for $91,000 in 2003. A house across the street sold for $153,500 in 2008. But another a couple of houses away was purchased from a bank for $23,000 a year ago after selling for $140,000 in 2006.

A few commenters thought the North Las Vegas neighborhood from a recent post was suspect. Wait until you read this description.

“It's a good neighborhood,” said Jackie Painter, whose family first moved to Panama Gardens in 1958. She spent most of the past decade in Michigan, but when she wanted to move back south, she moved to the neighborhood where her younger sister and 99-year-old mother still live.

“Some of the houses were in really bad shape for awhile,” she said. “But people have come in and fixed them up. They're good neighbors. We get a little riff raff, a few prostitutes will walk down the street, but when they see us watching, they scatter.”

I wonder what she does to make the drug dealers scatter?

Goldman cautioned about anyone expecting to duplicate Laspina's good luck.

“I don't think it's representative,” he said. “Someone won the lottery here. There's a lot of people out there saying they can get you your house free, but they're just selling you something. It's a one-in-a-million thing.”

False hope is a fertile field for scoundrels and villains. Scam artists will use false hope to steal from individuals. The collective theft of false hope is borne by those who make oversized payments waiting for peak values to make them whole. Lenders are the beneficiaries of stories like this one because it serves to motivate the masses to cling to their properties in any way they can. Someday, they might own it, right?

As for Laspina, he plans to clean the mold, mow the lawn and try to sell the house.

“I could certainly use the money,” he said.

roger.bull@jacksonville.com, (904) 359-4296

Well, maybe they won't want to own it…

Perhaps those HELOCs weren't a good idea

The debate in Washington is focusing on the terms of first mortgages, but the real problems in the housing bubble were the second mortgages and HELOCs. Subordinate loans were the free-money vehicle of choice for most.

The owner of today's featured property paid $298,000 on 1/25/2002. She used a $238,000 first mortgage, a $29,700 second mortgage, and a $30,300 down payment.

On 4/30/2004 she went Ponzi and refinanced with a $274,000 first mortgage and a $100,000 HELOC. She enlarged the HELOC to $185,000 on 8/24/2007. There is no way to be certain she spent that last $185,000, but she did stop paying the first mortgage.

Foreclosure Record

Recording Date: 04/04/2011

Document Type: Notice of Default

It seems likely this woman could afford the first mortgage without the second mortgage debt. However, adding to the first mortgage and piling on a huge HELOC put her over the edge. Now this will be a distressed sale.

Irvine House Address … 80 MODESTO Irvine, CA 92602

Resale House Price …… $429,500

House Purchase Price … $298,000

House Purchase Date …. 1/25/2002

Net Gain (Loss) ………. $105,730

Percent Change ………. 35.5%

Annual Appreciation … 4.0%

Cost of House Ownership

————————————————-

$429,500 ………. Asking Price

$15,033 ………. 3.5% Down FHA Financing

4.87% …………… Mortgage Interest Rate

$414,468 ………. 30-Year Mortgage

$93,949 ………. Income Requirement

$2,192 ………. Monthly Mortgage Payment

$372 ………. Property Tax (@1.04%)

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

$89 ………. Homeowners Insurance (@ 0.25%)

$477 ………. Private Mortgage Insurance

$352 ………. Homeowners Association Fees

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

$3,582 ………. Monthly Cash Outlays

-$359 ………. Tax Savings (% of Interest and Property Tax)

-$510 ………. Equity Hidden in Payment (Amortization)

$28 ………. Lost Income to Down Payment (net of taxes)

$74 ………. Maintenance and Replacement Reserves

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

$2,815 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$4,295 ………. Furnishing and Move In @1%

$4,295 ………. Closing Costs @1%

$4,145 ………… Interest Points @1% of Loan

$15,033 ………. Down Payment

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

$27,767 ………. Total Cash Costs

$43,100 ………… Emergency Cash Reserves

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

$70,867 ………. Total Savings Needed

Property Details for 80 MODESTO Irvine, CA 92602

——————————————————————————

Beds: 2

Baths: 2

Sq. Ft.: 1346

$319/SF

Property Type: Residential, Condominium

Style: Split-Level, Spanish

View: Mountain

Year Built: 2001

Community: Northpark

County: Orange

MLS#: S653991

Source: SoCalMLS

Status: Active

——————————————————————————

Bright and airy, large 2 Bedrooms, 2.5 Bathrooms condo in most desirable guard-gated, resort-like Northpark Community. Formal dining room. Seperate living room with over 12 feet high ceiling. Upgraded entry, kitchen and bathrooms floor with Slade stone. Custom window treatment with plantation shutters. Spacious kitchen with built-ins. Two large bedrooms upstairs each has its own bathroom. Balcony off the Master bedroom with hills view. Hugh patio outside of front door. Walk to the Del Mar Garden. Close to shops, school, Tustin Market Place and much more. ..

Seperate? Hugh patio?

Have a great weekend,

Irvine Renter

The right-to-rent a foreclosure would encourage strategic default

The right-to-rent proposal floating around Washington would crash house prices as loan owners everywhere strategically default to lower their monthly payments and stay in their houses.

Irvine Home Address … 40 DESERT WILLOW Irvine, CA 92606

Resale Home Price …… $995,000

Man, living at home is such a drag

Now your mom threw away your best porno mag (Bust it!)

You gotta fight for your right to party

Beastie Boys — (You Gotta) Fight Your Right (To Party)

The idea of a right to rent has been floated by Dean Baker of the Center for Economic and Policy Research. His proposal is to give every loan owner the right to stay on in their foreclosure for five years paying market rents.

I first covered this issue in The Right to Rent Would Flatten the California Housing Market. I noted the following:

Dean Baker of the CEPR was one of the early public voices who called the housing bubble. He accurately noted the disparity between rent and payments and concluded housing prices were not sustainable. Like me, he was a renter looking to buy as prices were ramping up, and like me, he noted that since it didn't make sense for him personally to buy, it didn't make sense for anyone else either. Being an economist at an influential think tank, he was in a position to research and write about the issue and be heard.

I really like Mr. Baker's proposal, but I have been afraid to write about it because I don't think lawmakers fully understand what passing his legislation would do to the housing market. I would very much like to see it become law, but if it does, every inflated housing market in the country would crash very hard as loan owners accelerate their defaults.

My position on this issue hasn't changed. I would like to see it be made a policy because of the impact it would have on the housing market and the economy in the long term. Short term, it will crush the banks as the remaining inflated markets crash under waves of strategic default.

Commentary: Right-to-Rent Would Ease Foreclosure Mess

By Dean Baker — April 11, 2011, 1:14 PM ET

Developments asked Dean Baker, co-director of the left-leaning Center for Economic and Policy Research in Washington, D.C., to weigh in on the housing market. Mr. Baker first proposed the right-to-rent idea in 2007.

While the rate of foreclosures may have finally peaked, it is not going to come down quickly. We are virtually certain to see at least a million foreclosures in 2011 and comparable numbers in 2012 and 2013. Many more homeowners will lose their homes through distressed sales.

This is a crisis for both the homeowners themselves and also for the communities where these foreclosures are concentrated. There is considerable research showing that foreclosed properties are a blight on neighborhoods, bringing down property values and creating eyesores and safety risks. For these reasons, there is a strong argument for taking measures to reduce the pace of foreclosures.

I think some of those arguments are spurious. In my opinion, foreclosure is the best form of principal reduction, and foreclosures are essential to the economic recovery. But assuming Dean Baker is right and

I am wrong, the impact of his proposal on the housing market would be catastrophic for lenders.

However, few would argue for yet another round of the federal Home Affordable Modification Program. HAMP has proven bureaucratic and ineffective. Only a small share of threatened homeowners have received permanent modifications and a large portion of this select group is expected to re-default.

I’ve said it before, and I’ll say it again: There is a simple alternative that involves no government money and no new bureaucracy. We could temporarily change the rules on foreclosure to allow homeowners the right to stay in their home as renters for a substantial period of time (e.g., 5 years) following a foreclosure.

During this period, they would pay the market rent as determined by an independent appraiser. They would have the same rights and responsibilities as other tenants, with the exception that they could not be evicted without cause. The lender would own the property and would be free to sell it, although the former homeowner would still have the right to remain as a tenant even if the home is sold.

If every loan owner in America had the right to stay in their current house and pay only market rents rather than an inflated house payment, then every underwater loan owner with a loan payment exceeding rent would have less of a dis-incentive to strategically default. The only thing stopping most loan owners from defaulting is the fact that they have to leave their houses when they do. If you take away that punishment, many more people will strategically default.

This policy accomplishes several important goals. First and foremost it provides housing security for homeowners who got caught up in the middle of the bubble. These people can be blamed for having made a mistake by buying homes at bubble-inflated prices. But this mistake is small compared with the mistakes made by the banks that made hundreds of billions of dollars of bad and often deceptive loans.

I agree with his assessment that banks made the bigger mistake and lenders are more culpable than borrowers when it comes to lending issues. However, borrowers can't be given a free pass if our system of lending is to function.

We were willing to give these banks trillions of dollars of loans at below market rates. Allowing foreclosed homeowners to stay in their homes as renters seems a rather small concession in comparison. This right-to-rent provision can also be narrowly structured so that it only applies to owner-occupied homes of less than the median value that were bought during the bubble years. This will ensure that it is not exploited by wealthy homeowners or investors.

I like that provision, but those just above the median won't feel quite as good about it. I am delighted that his proposal would not help HELOC abusers stay in their homes.

By changing the balance of power between lenders and homeowners, the right to rent provision would give lenders more incentive to voluntarily arrange modifications that allow homeowners to stay in their house as owners. This would be the best possible outcome.

The fact that foreclosed homes remain occupied will prevent the sort of neighborhood blight that has devastated many communities across the country. Tenants with security in their home will have an incentive to keep the property looking respectable.

I don't think that is true. Holdover owner tenants will not spend anything to maintain the property during the period of bank ownership. In fact, the tenant demands on the landlord for routine maintenance will undoubtedly get out of control. Loan owners will quickly realize they can have the benefits of renting (owner pays for maintenance) at a lower cost, and they will likely be given a chance to repurchase again in the future. Does anyone really think strategic default would not become the norm?

Finally, the right to rent could free up money that is currently going to mortgage payments on homes where owners never accrue any equity. In some of the former bubble markets the difference between mortgage payments on a house purchased near the peak of the bubble and the market rent can be more than $1,000 a month. The money saved by former homeowners is money they will spend in the communities where they live.

I argued the same in foreclosures are essential to the economic recovery. Californian's gain no long term benefit from making oversized mortgage payments. The money they currently send to a lender is a drain on the local economy. Only fresh borrowing and a return to Ponzi living can make the old system work.

So there you have it: A simple policy that requires no taxpayer dollars and no new bureaucracy.

I love his idea, but realistically, it will never happen because the resulting strategic default would make the foreclosure problem much worse for the banks. It would be a great thing for society because every inflated market would immediately crash down to cashflow levels and stay there. Lenders would be forced to limit house payments to comparable rents because that is all they can recover if the borrower defaults. The days of payments exceeding comparable rents would be over. I think that would be great.

Would the right-to-rent replace the choice-to-squat?

I first profiled today's featured property back in August of 2009 when it was a short sale advertised at $750,000. Even then I noted they had been squatting for a while.

Foreclosure Record

Recording Date: 08/25/2008

Document Type: Notice of Default

Not much has changed since then.

Foreclosure Record

Recording Date: 03/02/2010

Document Type: Notice of Sale

These owners have been squatting in this million dollar home for almost three years. Should we let them stay on for another 5 years at market rents?

I would rather see them move out so a family who can afford the property can move in. Just because a lander have them a dodgy loan and allowed them to occupy a property they cannot afford does not mean we should go to heroic efforts to keep them in a property while displacing a family who could legitimately afford it.

Irvine House Address … 40 DESERT WILLOW Irvine, CA 92606

Resale House Price …… $995,000

House Purchase Price … $1,306,500

House Purchase Date …. 2/9/2006

Net Gain (Loss) ………. ($371,200)

Percent Change ………. -28.4%

Annual Appreciation … -5.2%

Cost of House Ownership

————————————————-

$995,000 ………. Asking Price

$199,000 ………. 20% Down Conventional

4.87% …………… Mortgage Interest Rate

$796,000 ………. 30-Year Mortgage

$180,432 ………. Income Requirement

$4,210 ………. Monthly Mortgage Payment

$862 ………. Property Tax (@1.04%)

$542 ………. Special Taxes and Levies (Mello Roos)

$207 ………. Homeowners Insurance (@ 0.25%)

$0 ………. Private Mortgage Insurance

$160 ………. Homeowners Association Fees

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

$5,981 ………. Monthly Cash Outlays

-$1023 ………. Tax Savings (% of Interest and Property Tax)

-$980 ………. Equity Hidden in Payment (Amortization)

$373 ………. Lost Income to Down Payment (net of taxes)

$144 ………. Maintenance and Replacement Reserves

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

$4,495 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$9,950 ………. Furnishing and Move In @1%

$9,950 ………. Closing Costs @1%

$7,960 ………… Interest Points @1% of Loan

$199,000 ………. Down Payment

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

$226,860 ………. Total Cash Costs

$68,900 ………… Emergency Cash Reserves

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

$295,760 ………. Total Savings Needed

Property Details for 40 DESERT WILLOW Irvine, CA 92606

——————————————————————————

Beds: 5

Baths: 4

Sq. Ft.: 3168

$314/SF

Property Type: Residential, Single Family

Style: Two Level, Modern

View: City Lights

Year Built: 2006

Community: Columbus Grove

County: Orange

MLS#: P776945

Source: SoCalMLS

Status: Active

——————————————————————————

Short Sale!!!! This is a lovely home, well kept, great curb appeal, Big kitchen with island, large master suit with jacuzzi tub and seperate shower, One Bedroom and one Bathroom Downstairs, Hardwood like floors Downstairs, Carpet upstairs, Beautiful Back Yard for entertainment or Family gathering. Laundry room with sink, large community park and association pool. Original Oweners Put over $150,000 in upgrades!! Too much to mention, please bring your fussy Buyers they will absolutely fall in love with this home.

Nevada foreclosure sales rise sharply in March

Today I discuss the latest happenings in the Las Vegas housing market. Foreclosure sales to third parties were up dramatically in March. I know. I was there (virtually).

Las Vegas Home Address … 6349 BLUSHING WILLOW St North Las Vegas, NV 89081

Resale Home Price ………….. $86,900

You Just slip out the back, Jack

Make a new plan, Stan

You don't need to be coy, Roy

Just get yourself free

Hop on the bus, Gus

You don't need to discuss much

Just drop off the key, Lee

And get yourself free

Paul Simon — 50 Ways to Leave Your Lover

There must be 50 ways to leave your lender. Strategic default is now a way of life in Las Vegas. With most properties underwater and little prospect for recovery, most loan owners are wisely walking away.

On 3-22-2011 I noted that Nevada has 167,564 empty houses. In that post, I made the following observation:

The number of properties pushed through the Las Vegas auction site in March to third parties has been remarkable. I picked up five this month. Any rumors of an end to the foreclosure problems in Las Vegas will be dashed when the March foreclosure numbers are announced. Remember you heard that here first.

Guess what?

Nevada foreclosure sales rise sharply in March

By Hubble Smith

LAS VEGAS REVIEW-JOURNAL

Posted: Apr. 12, 2011 | 11:50 a.m.

Nevada foreclosure sales jumped sharply in March, rising 109.5 percent from February on a daily average basis, Discovery Bay, Calif.-based ForeclosureRadar.com reported Tuesday.

Notice of default filings rose 9.7 percent from February overall, but decreased 10.4 percent on a daily average basis after adjusting for additional days in March. Notice of trustee sale filings increased 24.9 percent month-over-month, but just 3.1 percent on a daily average basis.

More significantly, real estate-owned, or bank-owned, sales skyrocketed 159.8 percent and sales to third parties jumped 143.8 percent from February 2011.

February was awful. The lists each morning were thin, and the bidders on the site anxious to deploy their capital were bidding properties up to stupid numbers. March was a different story. Being patient through February was difficult.

Even when viewed on a daily average basis, those increases were dramatic with a 53.4 percent increase for sales back to bank and a 50.3 percent increase for properties sold to third parties.

One of the reasons foreclosures fell in February was a lower-court ruling against ReCon Trust, a major trustee for Bank of America, said Mark Skilling, chief operating officer of ForeclosureRadar. The order was later lifted by a federal court.

“This month, we see a little yo-yo action going on because sales are back up dramatically,” Skilling said. “You're kind of back to normal in terms of sales back to the bank.”

Las Vegas saw 2,120 homes go to foreclosure in March, the largest gross count in more than a year, he said.

Lenders are loading up the MLS for the prime selling season.

Average time from notice of default to foreclose rose to 322 days in Nevada, up 16.3 percent from the prior month and longer than anywhere else in ForeclosureRadar's coverage, Skilling noted.

Clark County REO sales soared 166 percent over February and third-party sales rose 140 percent. However, foreclosure filings also rose 10.47 percent for notices of default and 27.11 percent for notices of sale. Inventories in the county changed less than 10 percent from last month.

In Washoe County, REO sales rose 126 percent and third-party sales were up 160 percent over last month. Filings rose less than 10 percent and bank-owned inventories rose only 5 percent.

Anna-Lena Thomas of Windermere Real Estate in Anthem Hills wants to know why banks aren't foreclosing on more homes. Are the homes tangled in title issues or are the banks just going to put one house on the market at a time to make more money?

Anna, they are putting houses on the market one at a time to make more money. Lenders will own real estate for decades.

She found 64 homes with more than 2,400 square feet in the Green Valley Ranch subdivision that had received a notice of default, some as early as 2008. Only four are listed as short sales and none of them show up as notice of trustee sale, or foreclosure.

“The rest are just sitting out there, vacant or not, but no one is making the payments,” Thomas said. “It's OK to not make your payments. Banks don't want to sell cheap. Our market bottom looks really long. People are afraid of deficiency judgments and don't want to short-sell.”

The market bottom in Las Vegas will be very, very long.

Skilling of ForeclosureRadar said the Realtor is “dead on” with what's happening. Actual REO inventory hasn't increased that much in Las Vegas and there's no greater pressure on banks to release them than there's always been, he said.

“The dilemma the bank faces is they may have to recognize losses if they sell REOs. The servicers that are working for them are making money, so there's not a lot of pressure to move that inventory into the market,” Skilling said.

Contact reporter Hubble Smith at hsmith@reviewjournal.com or 702-383-0491.

There is no reason to believe lenders will speed things up. It doesn't serve them. Prices in Las Vegas are so low because there is simply too much supply for the available demand. Affordability is NOT an issue there, and it won't be for quite a while.

The ebbs and flows of auction bidding

One of the key functions I serve to my investment fund is selecting properties to bid on each day. It's a task that requires patience and discipline in order to be successful.

Each day when I have money to deploy, I obtain the list of properties where opening bids are below an estimation of market value. My task is to pull comps for twenty or thirty properties a day and establish what I believe to be a more accurate resale value. I back out my costs and arrive at my maximum bid. If this number is above the opening bid, I put it into the market and see what happens.

The margin I demand varies from property to property based on its location, condition, and rental desirability, but I consistently apply my methodology irrespective of the prices paid at the auction site. Over time, I have noticed how the margins go up and down depending on how many bidders are active and how aggressive they are.

For instance, I had a few closings, so I had $350,000 to go shopping last week. Monday last week was a zoo. Jacki reported there were three times as many people at the auction site, and it showed.

After the auction, I like to evaluate the auction price relative to my bid. It gives me an indication of bidder aggressiveness. On Monday, many properties were sold for more than 10% higher than what I was willing to pay. And remember, it takes two aggressive bidders to push prices up. At 10% more than I paid, the best case scenario for those buyers is to break even. Many houses purchased last week will turn into losers.

As the week wore on, the aggressive bidders were getting properties, and transaction prices began to get closer and closer to my bids. It told me the more aggressive bidders were spent, and I would soon be getting properties.

On Monday I picked up one, and on Tuesday (yesterday) I picked up two more. I'm spent for a few days until my next closing.

It takes patience to put so many bids in the market and resist the temptation to chase, but overpaying and not making any money doesn't help, so patience is mandatory.

The foolish ways flippers lose money

Having observed the auction market for some time now, I have noticed a variety of ways people lose money. The following is my shortlist of ways auction participants lose money:

Buying occupied properties

You probably remember Vicente the Fox. Occupied properties are nothing but problems.

In retrospect, what I see as the biggest problem with occupied properties with holdover tenants is the idle money. When I have money tied up in a property, that is capital not available for me to buy another profitable flip. It becomes a drag on returns. The further unpredictability of damage during eviction can turn the inconvenience of idle capital into the tangible pain of loss.

If I have experienced these issues, others have too. Occupied properties have greater apparent margins. For those chasing margins through occupied properties, it's only a matter of time before these problems emerge.

Automated valuation models are wrong

Some bidders use automated valuation models to establish what they believe they can resell the home for. In fact, there are some operators out there who believe they have invented a better mouse-trap. They are wrong.

Automated valuation models all have weaknesses. There is no automated model that will provide the accuracy of a human being with market knowledge and the power of discernment.

Bidders who rely on these models usually end up buying those properties where their model was wrong and grossly overstated the value. The winner at auction is the bidder with the most aggressive assumptions. If their automated valuation model spits out overly aggressive assumptions, they are certain to end up with those properties. Have at it. The pattern of losses will fascinate the programmers.

Failing to recognize their costs

Many bidders don't know what it really costs them to prepare a house for sale, nor do they realize all the taxes and fees in the transaction. It's common for newbies to overpay and obtain little or no margin because unknown costs eat up their profits.

On one of mine, I underestimated the HOA settlement price by $3,000 on a deal where I obtained full asking price. Unlike here in California where HOA debts are wiped out, HOA debts survive foreclosure in Nevada, and collection has become a racket. I have one statement where the HOA turned a $380 late fee into a $3,600 collection due. In fact, it was that one that blew out my budget. I learned to budget for a back HOA fee on any property with an HOA, and I triple any recorded lien amount. It's still a guess.

Many buy properties with no idea what they need to do to prepare them for sale. What home sales background do they have? What about homebuilding experience? It isn't rocket science, and intelligent people can figure it out, but without guidance and experience in these areas, prospects for success are limited.

To prepare for sale, it's very difficult to spend less than $1,500 on any property, and $3,500 to $6,000 is the norm. For older properties it can be much more. Many foolishly budget zero. And when they realize they have a problem — nobody wants to buy their house — they have no idea how to solve it. I hope they like the house because they will own it a while.

People will bid thin until they buy a few with missing kitchens (it's happened to me. You can't always see the interior. I budgeted for it.) The few that blow up their costs blow up their venture. I always budget for a full renovation unless I have either (1) interior pictures from an occupied MLS house, or (2) interior pictures of empty houses taken through the windows on the morning of the auction. If the pictures show I won't need certain costs, I can tighten up my bid number and still get my margins. I need to be aggressive when I safely can if I want to keep getting properties.

Failing to recognize the value of certain costs

Sometimes it is wiser to spend a few more dollars to obtain better service.

I know one bidder who is attempting to deploy several million at the site. He is paying someone with little or no training to pull comps and bid on properties, and he has gone to a $300 listing agent to sell them. As you might imagine, he as overpaid for most of the properties because he usually ends up with the ones where his inexperienced agent blew the comps. Also, since he is not paying for any assistance with the listings, he is managing all his own escrows and he has problems with deals closing on time. He is penny wise and pound foolish.

I use a bidding service to obtain data on the properties I buy. This service is expensive. There are competing services in the area. However, I witnessed one of these competing services buy a house with no kitchen because they were looking at old pictures. Overpaying for the wrong properties due to bad data can be costly. Despite the higher cost of the better service, it provides value in excess of its cost.

Not viewing the activity as a business

The primary reason amateurs fail at the auction site is that they don't look at the activity as a business. People go there as if buying property were a spin at the roulette wheel. Most believe they can buy anything, broom it out, and buyers will eagerly snap it up for a huge profit — and my previous post probably fed into that misconception. The reality is flipping houses is like navigating a minefield where one misstep can be a disaster.

Processing properties is akin to homebuilding. It requires a steady pipeline of properties moving through. The process needs to be managed with the urgency of an ongoing enterprise rather than a speculative wait-and-see. Those that wait-and-see in this business rarely like what they find.

Trying to hit home runs

Related to the last point, those who operate as a business try to hit many singles. Amateurs try to hit home runs. It's not uncommon for flippers to buy a property put it on the market and be unwilling to lower the price to sell it. Whatever they thought it was worth doesn't matter. The market is never wrong. Those that fail to cut their losses in a declining market end up with very large losses.

Buying expensive properties

Properties prices over the median are enticing at auction because the apparent margins can be very large. The buyer pool with $1,000,000 cash on any given day is pretty thin. I try to keep less than $100,000 in cash at all times. Idle money is a drag on returns. The thin buyer pool makes for lower bids and wider margins.

The problem with these apparent margins is the speed at which it can be converted back to cash. It's rare to get full asking price offers the first day of a $1,000,000 listing. And if it happened, the property was probably priced too low. The sales velocity at the high end is low in any market, but it is excruciatingly slow in distressed markets. Flipping in that market can mean holding a property for six months or more to find a buyer willing to pay top dollar. Since the high end is in decline nearly everywhere, holding out for a high price may take years, decades even.

So how will I fare on this property?

House Address … 6349 BLUSHING WILLOW St North Las Vegas, NV 89081

Resale House Price …… $86,900

House Purchase Price … $61,700

House Purchase Date …. 3/18/2011

Net Gain (Loss) ………. $19,986 **

Percent Change ………. 32.4%

Annual Appreciation … 490.1%

Cost of House Ownership

————————————————-

$86,900 ………. Asking Price

$3,042 ………. 3.5% Down FHA Financing

4.90% …………… Mortgage Interest Rate

$83,858 ………. 30-Year Mortgage

$17,789 ………. Income Requirement

$445 ………. Monthly Mortgage Payment

$75 ………. Property Tax (@1.04%)

$18 ………. Homeowners Insurance (@ 0.25%)

$122 ………. Homeowners Association Fees

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

$660 ………. Monthly Cash Outlays

-$42 ………. Tax Savings (% of Interest and Property Tax)

-$103 ………. Equity Hidden in Payment (Amortization)

$6 ………. Lost Income to Down Payment (net of taxes)

$11 ………. Maintenance and Replacement Reserves

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

$533 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$869 ………. Furnishing and Move In @1%

$869 ………. Closing Costs @1%

$839 ………… Interest Points @1% of Loan

$3,042 ………. Down Payment

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

$5,618 ………. Total Cash Costs

$8,100 ………… Emergency Cash Reserves

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

$13,718 ………. Total Savings Needed

Property Details for 6349 BLUSHING WILLOW St North Las Vegas, NV 89081

——————————————————————————

Beds: 3

Baths: 2

Sq. Ft.: 1505

$058/SF

Property Type: Single Family Residential, Detached

Year Built: 2006

County: Clark

MLS#: 1129694

Source: GLVAR

Status: Exclusive Right

On Redfin: 24 days

Cumulative: 24 days

——————————————————————————

MOVE IN READY! Not a Short Sale or REO. Quick Response from Seller. 2-Story Home, 3 Bedroom, 2-1/2 Bath in a newer gated community in a nice area of North Las Vegas. Neighborhood includes lots of grass, park, and jogging trails.

** the net gain or loss numbers in the post do not represent what I net on the deal. Other expenses usually cut the apparent margin above in half. If I obtained full asking price for this property, the fund will make about $8,000, not the $19,986 my post spreadsheet formula put out. My normal daily posts don't include other costs of preparation for sale. A 30% gross yields a 10% net.

What's it worth?

The following were the comps I used to value this property. They are all recent sales within the subdivision of model-match properties. Those last two sales aren't good for the comps…

Comparable Resales Resale Date Amount
2007, 3/3, 1505 SF, $80000, $53.12/SF, 6307 BLUSHING WILLOW ST, CENTENNIAL BRUCE WEST 40-UNIT 3/8/11 $80,000
2006, 3/3, 1505 SF, $80000, $53.12/SF, 1022 SHADES END AV, CENTENNIAL BRUCE WEST 40-UNIT 2/22/11 $80,000
2005, 3/3, 1505 SF, $88000, $58.43/SF, 1016 APPALOOSA HILLS AV, CENTENNIAL BRUCE WEST 40-UNIT 2/18/11 $88,000
2005, 3/3, 1505 SF, $89998, $59.75/SF, 1033 APPALOOSA HILLS AV, CENTENNIAL BRUCE WEST 40-UNIT 1/24/11 $88,649
2005, 3/3, 1505 SF, $84900, $56.37/SF, 1243 MAPLE PINES AV, CENTENNIAL BRUCE WEST 40-UNIT 12/23/10 $82,000
2007, 3/3, 1505 SF, $86900, $57.7/SF, 923 SHADES END AV, CENTENNIAL BRUCE WEST 40-UNIT 12/22/10 $85,000
2004, 3/3, 1505 SF, $89000, $59.09/SF, 1158 MAPLE PINES AV, CENTENNIAL BRUCE WEST 40-UNIT 12/2/10 $90,000
Comparable Rentals Lease Date Amount
6216 STANDING ELM ST — 3 bed 3 bath 1505 SF — 2004 List: $995 12/20/10 $950
932 APPALOOSA HILLS AV — 3 bed 3 bath 1505 SF — 2005 List: $995 12/8/10 $995
1017 SUNNY ACRES AV — 3 bed 3 bath 1505 SF — 2007 List: $980 11/23/10 $980
923 APPALOOSA HILLS AV — 3 bed 3 bath 1505 SF — 2005 List: $1000 9/23/10 $950
1232 N APPALOOSA HILLS AV — 3 bed 3 bath 1505 SF — 2005 List: $1000 6/16/10 $1,000
6217 BLUSHING WILLOW ST — 3 bed 3 bath 1505 SF — 2008 List: $1000 8/30/10 $1,000
906 APPALOOSA HILLS AV — 3 bed 3 bath 1505 SF — 2006 List: $995 8/1/10 $995

If there are many more transactions in the low 80s, it may be difficult to get an appraisal for a higher asking price. That uncertainty is the business risk in a transaction like this one.

How does it work as a rental?

I pull rental comps to see if properties are desirable as rentals if local owner-occupants don't step up. This one is a fairly good one even for a retail buyer paying full asking price.

Mortgage Purchase Financial Analysis 15-Year 30-Year
5 Mortgage Interest Rate 4.5% 5.1%
6 Actual Monthly Cashflow $(0) $139
7 Cashflow after Financing $3,093 $4,306
8 Initial Capital Investment (down payment) $18,083 $16,780
9 Cash-On-Cash Return = Cashflow / Investment 17.1% 25.7%
Notes: Rental Income Terms Calculations
10 Gross Rent $1,000
11 Vacancy and Collection Loss 5.0% $50
12 Monthly Rental Income $950
Operating Expenses Terms Calculations
13 Property Tax 2.67% $189
15 Homeowners Insurance 0.50% $35
16 Maintenance and Replacement Reserves $45
17 Homeowners Association Fees $79 $79
18 Property Management Fees (% of Gross Rent) 10.0% $100
19 Monthly Cash Expenses $448
20 Net Operating Income $502
21 Monthly Payment (based on maximum loan) $362
22 Actual Monthly Cashflow(assuming impounds) $139
Net Operating Income $502
23 Interest Expense (subtract from NOI to obtain P&L) $282
24 Total P&L After Expenses and Debt(loan amortization plus excess) $219

This is a solid rental property providing positive cashflow with a 30-year mortgage.

How large is the Irvine land premium?

Irvine is a premium Orange County Community, but how large is the premium for the land? Today we will take a look.

Irvine Home Address … 14132 MOORE Ct Irvine, CA 92606

Resale Home Price …… $559,900

We never lost control

You're face to face

With The Man Who Sold The World

Nirvana — The Man Who Sold The World

Has any man sold more homes than Donald Bren? I don't know, but I doubt it. He and his Irvine Company are planning to sell a few more. Any takers?

Irvine Co.: 1,350 homes sold, more coming

April 8th, 2011, 3:00 pm — Jon Lansner

The Irvine Co. — fresh from a remarkable 2010 where their Irvine villages were a top-selling new-home project in America — will officially launch four more North Irvine projects Saturday.

The company has sold 1,350 homes in North Irvine communities since January 2010 —

Perhaps the Irvine Company is not used to having fact checkers follow them around, but the sales numbers they throw out are not accurate. And I strongly suspect the sales numbers are intentionally exaggerated to create false urgency to sell more homes.

From January 2010 to February 2011, they closed on 642 home sales. The numbers they are reporting are double what really sold. Perhaps if I were dependent upon the Irvine Company for advertising revenue, perhaps I would let transparent lies pass by, but since I don't fear them pulling ad revenue from me, I will provide accurate numbers.

and officially launches 12 model homes in four neighborhoods (DETAILS HERE!) in the Stonegate neighborhood. All told, the four new projects — click on sketches above for larger images and details — consist of 486 homes from one-bedroom, 1,129-square-foot flats to 2,974-square-foot, 5-bedroom detached homes. Prices? From the mid-$300,000s to high-$700,000-plus.

Dan Young, Irvine Co.’s homebuilding chief, continues to credit detailed market research for the company’s success — a distinct rarity in a homebuilding world that elsewhere runs near historic lows.

He's right in pointing out that the Irvine Company is leading the way out of the home building recession. They restricted sales so much in 2008 and 2009, they didn't overbuild and saturate the market with product they couldn't move. The activity in 2010 stands in stark contrast to the rest of the industry.

“It’s got to be about the house,” he says of the projects continued focus, which he admits sounds simplistic — but it is not.

The Irvine Co.’s ongoing research found that the key buying group are young professionals who are picky — “they grew up in great homes” — and want something different than their parents’ house — “their expectations are higher.”

The long-vanished real estate boom, in Young’s eyes, made house selling so easy that bad homebuilding habits were born so that homes were “engineered not designed,” and that “took a lot of the romance out of the product.”

Having worked in architectural firms as a land planner for a number of years, I can attest to what Mr. Young is saying. When architects are busy, they are more concerned with putting out drawings and getting paid than they are about the nuances of the product. Plus, overly cost conscious builders end up stripping down the design to it's simplest and easiest to build form.

The new research helped the Irvine Co. plan homes that trade housing traditions — like a formal dining area– for large, kitchen-linked “great room” with a built-in “home management” area plus a covered, outdoor “California room” dining area. Buyer feedback has also led to further innovations, such as building bigger and more functional kitchen islands that are sculpted “more like a piece of furniture.”

It didn’t hurt the homebuilding endeavor that the Irvine Co. was blessed with a well-financed owner, billionaire Don Bren, who was able to put his own cash at risk on new homes when other builders still scramble for construction financing. ”We were in a position, financially, to take the large risk,” adds Young, who notes that the homebuilding effort has met or exceeded every financial plan including, “a good profit.”

The should be able to make a good profit considering they likely have less than $100/SF into the house itself, and the land basis is near zero.

The Irvine land premium

When the Irvine Company developed the Ranch, through good land planning and a commitment to quality, they have managed to create an enormous premium for Irvine compared to other inland Orange County communities. Only the beach communities carry a higher premium on the land.

I created the chart above by taking the median home prices and dividing it by the median lot size. Similar to a $/SF for houses, this reflects the value of the underlying land.

Irvine has always had a price premium, but when you factor in the fact that lots are also 20% to 30% smaller than surrounding communities, the $/SF of lot value is extraordinarily high. Creating this premium from nothing is the real genius and accomplishment of Donald Bren and the Irvine Company.

If you compared Irvine to the remainder of Orange County, how large is the Irvine land premium? How much more do buyers in Irvine pay on a per-square-foot basis than the Orange County median? Quite a bit.

From 1988 to 1994, the premium hovered around 50%, but in 1995 it began to climb. From 1995 to 2009, the Irvine premium hovered between 50% and 80%. When land values in the subprime areas crashed and took down the Orange County median, the Irvine land premium rose to unprecedented levels.

IMO, the elevated Irvine land premium reflects the fact that prices have not fallen in Irvine compared to surrounding communities. Perhaps Irvine has taken another step up from the crowd and the Irvine premium will remain above 80% permanently.

I doubt it.

It seems far more likely to me that resale asking prices in Irvine will continue to fall. Perhaps the Irvine Company will be able to hold pricing on its new product, but they may find sales goals elusive as the substitution effect drags down the high end and brings the Irvine land premium back into its historic stable range.

That check won't be very big

Sometimes when I comb through the property records, I feel like I am spinning the wheel of fortune. Some of these owners didn't spend their equity, so they leave the closing table with big equity checks. Most have some degree of Ponzi borrowing. My observation is that well over half have increased their mortgage. Some borrow a lot and some borrow a little, but most borrow something.

The owner of today's featured property borrowed enough to put a major dent in their closing check. At least they won't be a short sale.

Todays featured property was purchased on 7/22/1994 for $235,000. The owners used a $188,000 first mortgage and a $47,000 down payment. At first they behaved well, and when they first refinanced in 1997, they paid down the first mortgage to $186,000. However, on 12/10/2001, they opened a $50,000 HELOC and went Ponzi.

On 10/3/2002 they refinanced with a $232,500 first mortgage and got another $25,000 HELOC. They had gone Ponzi, and there was no looking back.

On 8/24/2004 they obtained another $75,000 HELOC, and they increased it to $100,000 on 4/18/2005.

On 7/26/2005 they refinanced with a $350,000 first mortgage, and finally on 4/24/2008 they obtained their final $100,000 HELOC. There is no way to be sure if they spent it. Either way, they already nearly doubled their initial mortgage and Ponzi borrowed at least $165,000 — money that won't be in their closing check.

Irvine House Address … 14132 MOORE Ct Irvine, CA 92606

Resale House Price …… $559,900

House Purchase Price … $235,000

House Purchase Date …. 7/22/1994

Net Gain (Loss) ………. $291,306

Percent Change ………. 124.0%

Annual Appreciation … 5.2%

Cost of House Ownership

————————————————-

$559,900 ………. Asking Price

$111,980 ………. 20% Down Conventional

4.84% …………… Mortgage Interest Rate

$447,920 ………. 30-Year Mortgage

$113,830 ………. Income Requirement

$2,361 ………. Monthly Mortgage Payment

$485 ………. Property Tax (@1.04%)

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

$117 ………. Homeowners Insurance (@ 0.25%)

$52 ………. Homeowners Association Fees

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

$3,015 ………. Monthly Cash Outlays

-$401 ………. Tax Savings (% of Interest and Property Tax)

-$554 ………. Equity Hidden in Payment (Amortization)

$208 ………. Lost Income to Down Payment (net of taxes)

$70 ………. Maintenance and Replacement Reserves

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

$2,337 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$5,599 ………. Furnishing and Move In @1%

$5,599 ………. Closing Costs @1%

$4,479 ………… Interest Points @1% of Loan

$111,980 ………. Down Payment

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

$127,657 ………. Total Cash Costs

$35,800 ………… Emergency Cash Reserves

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

$163,457 ………. Total Savings Needed

Property Details for 14132 MOORE Ct Irvine, CA 92606

——————————————————————————

Beds: 4

Baths: 2

Sq. Ft.: 1910

$293/SF

Property Type: Residential, Single Family

Style: One Level, Contemporary

Year Built: 1975

Community: 0

County: Orange

MLS#: S653562

Source: SoCalMLS

Status: Active

On Redfin: 4 days

——————————————————————————

Immaculately maintained open plan single story detached home in the Colony. STANDARD SALE! Master and 2 bedrooms on ground floor level, permitted addition includes loft currently used as 4th bedroom. Large family room and bay window views of a private, tree-lined, greenbelt. Peaceful cul de sac street. Adjacent to all shopping and the 5 freeway on/off-ramps. Many upgrades including: quiet, dual pane custom Anderson windows, 6 panel doors, Travertine 16' tiles and carpeting, landscaped bricked yard with built in grill. Roof is 2 yrs new Eaglelite Concrete tile, All appliances-insured and inspected plus replaced AC, Heat, Vents about 6 years ago. Annual Termite inspections. The Colony has the lowest HOA fees in Irvine-$52.00/month-NO Mello Roos, includes free clubhouse use w/ bbqs, pool/lifeguard/swim team, basketball, tennis, volleyball, serene tree-lined park with large tot-lot playground. Many community events. 4 Blocks-Irvine HS; 6 Blocks-College Pk. Elementary; 10 Blocks-Venado Middle.

Reverse mortgages are causing widowed seniors to lose their homes

Underwater reverse mortgages in concert with a change in government policy is causing widowed seniors to lose their homes.

Irvine Home Address … 72 NAVARRE Irvine, CA 92612

Resale Home Price …… $390,000

Don't bet your future,

on one roll of the dice

Better remember,

lightning never strikes twice

Huey Lewis and the News — Back in Time

I have made mistakes in my life that made me want to go back in time and undo them. Sometimes you can, but sometiimes you can't go back and reverse the damage. Taking on a reverse mortgage is one mistake that is very difficult to undo.

I don't like reverse mortgages. I don't like many forms of debt, but reverse mortgages are one of the worst forms out there.

According to the Department of Housing and Urban Development:

A reverse mortgage is a special type of home loan that lets you convert a portion of the equity in your home into cash. The equity that built up over years of home mortgage payments can be paid to you. But unlike a traditional home equity loan or second mortgage, no repayment is required until the borrower(s) no longer use the home as their principal residence or fail to meet the obligations of the mortgage.

If you don't have to make any payments, it shouldn't be too difficult to meet the obligations of the mortgage. Also from the HUD website:

What's the difference between a reverse mortgage and a bank home equity loan?

With a traditional second mortgage, or a home equity line of credit, you must have sufficient income versus debt ratio to qualify for the loan, and you are required to make monthly mortgage payments. The reverse mortgage is different in that it pays you, and is available regardless of your current income. The amount you can borrow depends on your age, the current interest rate, and the appraised value of your home, sales price or FHA's mortgage limits, whichever is less. Generally, the more valuable your home is, the older you are, the lower the interest, the more you may borrow.

Reverse mortgages provide seniors with plenty of equity and limited income the ability to tap their equity to meet the needs of daily life. Basically, they didn't want grandmothers to eat dog food if they had a lifetime of filet mignon tied up in home equity.

As you might imagine, loaning seniors money when they have no ability to repay has potential for abuse and predatory lending. Fortunately, the market is heavily regulated by HUD.

Good News for Spouses of Reverse Mortgage Holders

By RON LIEBER — April 7, 2011, 6:28 pm

In the face of a lawsuit from the AARP Foundation, the Department of Housing and Urban Development has backed off an apparent policy change that was putting some widows and widowers on the brink of foreclosure.

The dust-up involves reverse mortgages, financial products that allow older Americans with a decent amount of home equity to tap some of that equity if they are at least 62 years old. Unlike a home equity loan, where you have to pay the money back, with a reverse mortgage the bank pays you, say in a lump sum or in monthly payments. Once you no longer live in the home, you or your executor (if you’re dead) sells it and pays the bank back.

The foundation and Mehri & Skalet, a law firm, sued HUD in the wake of a policy letter in 2008 that seemed to state that widows or widowers who were not listed on a spouse’s reverse mortgage would have to repay the full amount of the deceased spouse’s mortgage. They’d have to do so even if the home was worth less than the outstanding loan.

Not long after, some surviving spouses found themselves unable to pay off the loans or get a new mortgage for the outstanding balance on the old reverse mortgage. As a result, they ended up in foreclosure proceedings. The foundation had sued on behalf of three of them.

This really is outrageous that HUD would foreclose on an underwater widow. Whoever made this policy didn't think it all the way through.

In a letter it released this week, HUD rescinded the 2008 letter. And while this week’s letter didn’t say so specifically, Jean Constantine-Davis, a senior attorney for AARP Foundation Litigation, reports that the lenders will now halt foreclosure proceedings against its three plaintiffs for the time being. A HUD spokesman did not return a call seeking comment.

The lawsuit is not over, though. The foundation hopes that a judge will confirm that HUD cannot ever force a widow, widower or heir to pay a reverse mortgage lender more than a home is actually worth, whatever the balance may be on the mortgage.

It also wants to establish surviving spouses’ right to stay in the home if they so choose, even if they weren’t party to the original reverse mortgage. That might mean that the lender is on the hook for the reverse mortgage loan longer than it expected to be. But Ms. Constantine-Davis said she thought that as the guarantor, HUD ought to buy the loans from the lender if this became a problem for the lender.

If that becomes too burdensome, HUD might make new rules that could, say, require that both spouses always be listed on the mortgage, while making some kind of provision for people who get married after one of them has gotten the reverse mortgage loan and wants to add a spouse to the mortgage.

Meanwhile, Ms. Constantine-Davis notes that HUD does not currently require both spouses to undergo counseling when only one of them applies for a reverse mortgage. (One spouse may apply alone because the monthly payout from the lender is usually higher if just the older spouse applies.) Without explicit counseling, spouses who are not on the mortgage may not know that they could end up in a situation like those of the plaintiffs in this case.

One easy fix might be for HUD to make both spouses come for counseling no matter what. Another, as I mentioned in a column a few weeks ago, is much simpler and doesn’t require more regulation: Don’t ever take yourself off the loan, even if it does mean that the payout is lower.

This issue will rightfully embarrass HUD, but it will quickly fade from the headlines.

Why I don't like reverse mortgages

First, needing a reverse mortgage is, IMO, a result of poor financial planning. The goal of good retirement planning should be to acquire assets that provide stable cashflow. Obtaining wealth without the ability to turn it into spendable cash is a big mistake. You can't eat gold or diamonds, and you can't sell part of your house.

The real reason I don't like reverse mortgages is because they are a Ponzi virus seniors take on which invariably leads to distress and the unceremonious fall from entitlement. Do you remember the story of the old widow from that post?

The aging socialite

A reader emailed me about the property that became the post HELOC abuse Hollywood Style. The property was purchased in the early 70s in Hollywood for about $150,000. The property was owned by a frugal couple that paid down their debts. The husband died in the late 90s leaving the wife with a beautiful and historic property with millions in equity.

I can imagine the husband's state-of-mind and heart on his deathbed; he knew he provided well for his family, and although his wife might outlive him for quite some time, he was leaving her comfortably and securely set up for life. The inner peace he felt is something I covet for my own death. So should we all.

If there is an afterlife, and if we have the ability to look in on loved ones after we pass, I hope for this man's spirit that he resisted the temptation and rests in peace. Watching his wife either through foolish choices or bad advice spend the family fortune and be forced to abandon the family home — a home that had millions in equity at the moment of death — watching that from afar with no ability to intervene is more akin to hell than to heaven.

For the widow, she must move out of her stately mansion, destitute and alone with only memories of her life of entitlement and glamor to comfort her, or torture her, as she lives out her life in relative obscurity after her unceremonious fall from entitlement. …

Reverse mortgages have limitations on mortgage equity withdrawal that make them less dangerous than HELOC abuse, but the basic dynamic is the same. Once people start tapping their equity, lenders and their compound interest will consume most or all the equity in the home before the senior dies.

Compound interest grows like cancer. if there are no payments, as there aren't in a reverse mortgage, if given enough time compound interest consume everything. Would you like to spend your retirement worried about running out of money? Let's imagine a few scenarios and see how you feel about this.

I could've used that money

Imagine your late 60's, your children are stable and prosperous, so you decide you are going to blow a little of their inheritance. It's your money, you can do what you want with it; besides, the kids don't need it.

So you take out a reverse mortgage, or worse yet a HELOC, and you spend a little money. You don't go overboard and spend your house like the socialite in the story above, but you do spend enough that you feel worried that you might need it for yourself someday, so you stop using it.

After a while you forget about the loan since you aren't making payments, and you go about your life. Years go by, and your in your mid 80s, and you want or need some elective medical procedures that require you to come out of pocket. You remember the old credit line and you dig for a statement. You open one up and realize the debt grew as fast as your house went up in value. You still have a little equity, but the debt cancer consumed everything you once had. You can't afford your operation and you languish in discomfort in your final days — all because you took on that invisible Ponzi debt early in your retirement.

Riding the equity wave onto the rocks

Or imagine you are of retirement age, and you rationalize how you worked hard all your life so you deserve a few indulgences. You become a Ponzi accustomed to your great new life. This works great as long as you manage your debt in a sophisticated manner, right?

You do well until house prices crash again, your credit lines are cut off, and you lose your home. If your lucky one of your children is welcoming. If they're not, your life really sucks.

Recognizing the cancer debt

At some point, seniors who take on reverse mortgages recognize them for what they are: a malignant financial cancer. These debt tumors grow until they crowd out home equity. There is no cure, and the tumor cannot be removed without selling the house. The only cure is prevention.

It's worse than gambling

Nearly everyone who has gambled in Las Vegas has had a time when they lost more than they wanted to. Depending on how irrational you get, the financial pain can be mild or extreme. But when you lose in Las Vegas, your done. It's over. The loss doesn't get any worse. Your mistake doesn't haunt you for the rest of your life.

Reverse mortgages are different. If you make a mistake and take on a reverse mortgage, the losses of equity due to compound interest go on and on and get bigger and bigger.

It must be horrible to realize you have a financial leak you can't plug without going back to work or selling the house to pay off the debt. Your debt will continue to grow until you die.

Don't get a reverse mortgage

I apologize if i have belabored the point, but I really don't like these loans.

Here's the funny part: after this post comes out, we will probably be contacted by reverse mortgage companies wanting to buy links in our sidebar.

HELOC Abuse grade A

Today, i want to recognize a special mortgage achievement. The owners of today's featured property paid $190,000 back on 6/5/1999. They used a $75,000 first mortgage and a $125,000 down payment. Who does that? Why didn't they borrow $500,000 and buy a big house?

Perhaps they wanted to pay it off.

There is no other mortgage activity since 1999. During the housing bubble while their neighbors were going crazy, these owners paid down their mortgage. Kudos.

Irvine House Address … 72 NAVARRE Irvine, CA 92612

Resale House Price …… $390,000

House Purchase Price … $190,000

House Purchase Date …. 5/6/1999

Net Gain (Loss) ………. $176,600

Percent Change ………. 92.9%

Annual Appreciation … 6.0%

Cost of House Ownership

————————————————-

$390,000 ………. Asking Price

$13,650 ………. 3.5% Down FHA Financing

4.84% …………… Mortgage Interest Rate

$376,350 ………. 30-Year Mortgage

$79,289 ………. Income Requirement

$1,984 ………. Monthly Mortgage Payment

$338 ………. Property Tax (@1.04%)

$125 ………. Special Taxes and Levies (Mello Roos)

$81 ………. Homeowners Insurance (@ 0.25%)

$395 ………. Homeowners Association Fees

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

$2,923 ………. Monthly Cash Outlays

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

-$466 ………. Equity Hidden in Payment (Amortization)

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

$49 ………. Maintenance and Replacement Reserves

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

$2,206 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$3,900 ………. Furnishing and Move In @1%

$3,900 ………. Closing Costs @1%

$3,764 ………… Interest Points @1% of Loan

$13,650 ………. Down Payment

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

$25,214 ………. Total Cash Costs

$33,800 ………… Emergency Cash Reserves

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

$59,014 ………. Total Savings Needed

Property Details for 72 NAVARRE Irvine, CA 92612

——————————————————————————

Beds: 1

Baths: 2

Sq. Ft.: 1263

$309/SF

Property Type: Residential, Condominium

Style: Two Level, Villa

Year Built: 1978

Community: 0

County: Orange

MLS#: S653803

Source: SoCalMLS

Status: Active

On Redfin: 2 days

——————————————————————————

RARE ON MARKET! Desirable Two Story TOWNHOME, With Direct Access to TWO CAR ATTACHED GARAGE in one of the most PRESTIGIOUS neighborhoods of Irvine. No one above or Below! This Beautiful TURNKEY Home Features a BRIGHT OPEN FLOORPLAN with CATHEDRAL/VAULTED CEILINGS & Lots of NATURAL LIGHT. Completely REMODELED KITCHEN overlooks PRIVATE COURTYARD & BBQ Area. HUGE MASTER BEDROOM SUITE, with His & Hers Closet & Mirrored doors. Plus Large LOFT that could be used as an OFFICE/DEN OR 2ND BEDROOM. PREMIUM CORNER LOCATION with Upgraded Brick Floors on Front Porch, Custom MARBLE FIREPLACE & Foyer, Plantation Shutters, Crown Molding & More! . .. RESORT-LIKE Living at community POOL and SPA. Conveniently located by The Racket Club of Irvine, Rancho San Joaquin Golf Course, William R. Mason Regional Park, John Wayne Airport, Freeway Transportation, Shops, Restaurants, UCI and Highly Acclaimed Irvine AWARD-WINNING Schools. MUST SEE TODAY!!!

What does graffiti say about your community?

Some time ago I was looking at Google Earth images from my hometown. As I took a virtual drive down main street, I noticed the storefront from the old grocery store had been tagged by local high-school students.

Small towns have economic challenges. That's why they are still small towns. This grocery store was one of two locally-owned grocery stores put out of business when a big chain moved in. Today this site is a sand volleyball court for the adjacent bar and bowling alley, currently it's the highest and best use.

Despite the limited financial prowess of towns like this, the residents are happy and exhibit community pride. In other communities, abandoned buildings are often tagged and vandalized by disgruntled locals who rage against the economic depravity. In this community, the teenagers mark their territory with “We love A-F.”

Irvine is a more economically prosperous place than small-town Wisconsin, but it does seem to share the same good feelings about the local quality of life. I spotted the graffiti below in the tunnel below Long Meadow street on the Jeffrey Road entrance to Woodbury. It's probably still there.