The GSEs are picking up the pace of liquidations by offering incentives and lowering prices. The banking cartel who is still withholding inventory will be left with devalued REO.

Irvine Home Address … 30 SPARROWHAWK Irvine, CA 92604

Resale Home Price …… $361,900

Just take me as I am,

or have nothing at all.

Mary J. Blige — Take Me As I Am

Last September I noted the GSEs were expediting their foreclosures and REO sales and this behavior was going to threaten the banking cartel. The GSEs are still at it, and they are undercutting bank REO pricing to sell their inventory. Take the property as is, or take nothing at all.

Foreclosures for sale, all homes sold as is

By Kenneth R. Harney, Friday, June 24, 8:21 AM

From what I have observed pulling comps on closed sales, the GSEs are making deep-discount giveaways. Anyone looking to be an owner-occupant on a lower cost property should look at the GSE portfolio. These must-sell properties are the best deals in the market today. And given the huge shadow inventory the GSEs have not begun to process, the deals will only get better.

Federal shadow housing inventory is getting bigger

Posted by Tracy Alloway on Jun 21 12:20.

A housing milestone, of sorts.

Federally-backed loans already make up a majority of the mortgages classified as ‘seriously delinquent’ in the US financial system. In other words, there are more soured loans held or backed by the US’s giant GSEs — Fannie Mae and Freddie Mac — plus the Federal Housing Administration (FHA), than those held by banks and in private-label securitisations.

But when it comes to Real Estate Owned (REO) property, some reckon the federal share of so-called shadow housing inventory (foreclosed properties) looks set to surpass the private sector’s too.

Here’s Goldman Sachs, including economists Alec Phillips and Jan Hatzius:

The federal share of REO property is also rising. For 1Q, RealtyTrac estimates that total REO property held by lenders totaled 872,000. Of this, we know from monthly or quarterly financial statements that Fannie Mae, Freddie Mac, and the FHA hold roughly 300,000 of these properties on their books, and that this inventory has been rising by more than total REO inventories over the last year. Over the next few quarters, the federally backed entities are likely to see their inventories of REO property become a larger share of the total. The chart below shows the accumulation of REO property by the GSEs and FHA, which was on a trend to overtake private sector activity until it declined in 4Q, most likely due to legal irregularities in foreclosure processing (the chart relies on filings from the federal entities and assuming that the difference between this number and total REO filings reported by RealtyTrac are related to private label securities or bank portfolios).

Now, Goldman reckons the government could use its newly-acquired shadow inventory in a couple ways — one of which, notably, is to help prop up house prices by not doing anything with it, really.

So far, the GSEs are not withholding inventory from the market. If prices continue to crater, they may change their minds, but for now, REO is being cleared out as fast as it comes in.

Here’s Goldman again:

As the GSEs and FHA begin to take on a larger and larger share of seriously delinquent loans and, ultimately, foreclosed properties, how policymakers approach the operations of these entities could become an important factor for home prices, since these entities could in theory be used to hold supply off of the market in an effort to support prices. As shown in the chart below, distressed property sales appear to be weighing on home prices, with solid gains over the last couple of months in the CoreLogic HPI that excludes distressed sales, compared with weakness in the index that includes them.

However, the federally backed entities have not shown much sign of trying to hold properties back from the market. The FHA may be particularly constrained by costs, since it has been trying to raise its capital level after concerns last year that it would fall below required minimums. But the Treasury is providing temporarily open-ended financial support to the GSEs, so they do not have the same constraint. (though the administration would probably prefer to avoid further losses at the GSEs if possible). Despite federal support, the GSEs have not made any significant new attempts to hold supply off the market.

Indeed, Goldman says the first quarter of this year was the first since 2009 that the GSEs and FHA acted as a combined net supplier of foreclosed properties to the market. They expect the agencies to assume ownership of as many as 180,000 properties per quarter, or 700,000 over the next year.

Which would mean — if the federal entities decide to keep selling as they’ve been doing so far — there would be a whopping 30 per cent increase in the number of properties feeding into the market.

We’ll say it again – the supply! The supply!

Here comes the REO

Ever since the housing bust became headline news, housing bears have been predicting a flood of inventory that would push prices lower. Lenders successfully withheld product from many markets, and the GSEs were not foreclosing in earnest for several years as they attempted various loan modification programs. With the complete and utter failure of all loan modification programs, the GSEs are now shifting toward foreclosure processing. The lenders who are attempting to withhold product are going to sit and watch as the GSEs devalue the holdings of lenders and make them wish they hadn't waited.

Irvine is an unusual market. Relatively little of our inventory was financed by the GSEs because our price points were generally above the conforming limit during the bubble. Some will take that to mean that Irvine will escape the problems of GSE liquidation. Not true. As the GSEs liquidate their properties in nearby communities and lower prices there, the substitution effect will steal buyers away from Irvine. That will lower sales rates even more, and the few must-sell properties that come to market will push prices lower. In other words, the GSEs will cut the Irvine market down at the knees. The price correction will take longer, but it will still occur, just as we are seeing now.

Conservative revisionist history

One of the more annoying lies to come from the housing bubble is the revisionist history the conservatives in the Republican party have been peddling concerning the role of the GSEs. The GSEs did not inflate the housing bubble:

The worst junk mortgages that inflated the housing bubble to extraordinary levels were not bought and securitized by Fannie and Freddie, they were securitized by Citigroup, Merrill Lynch, Goldman Sachs, Lehman and the other private investment banks. These investment banks gobbled up the worst subprime and Alt-A garbage that sleaze operations like Ameriquest and Countrywide pushed on homebuyers.

The trillions of dollars that the geniuses at the private investment banks funneled into the housing market were the force that inflated the bubble to its 2006 peaks. Fannie and Freddie were followers in this story, jumping into the subprime and Alt-A market in 2005 to try to maintain market share. They were not the leaders.

Conservatives are peddling the lie about the GSEs because they want to see them dismantled. I agree with their policy ideas. The GSEs should be dismantled, but not because they inflated the housing bubble. The GSEs are no longer necessary. We have a robust secondary market for securitized loans without the GSEs. At this point, the GSEs are being used to keep mortgage interest rates low through their explicit government guarantee. The government has no place assuming the risk of private enterprise — and pay the billions in losses — and for that reason, the GSEs should be eliminated.

The folly of the GSEs is apparent in properties like today's featured property. The GSEs came in at the end of a long series of Ponzi borrowing and bought an Option ARM the former owners took out. As Dean Baker noted in the quote above, they were followers in the story, and they bought loans like this one in 2005 to maintain market share. In other words, they gambled with money they didn't have and now you and I are paying for it.

Regular housing ATM users (HELOC addicts)

• The owner of today's featured property paid $171,500 on 2/4/2000. They used a $162,925 first mortgage and a $8,575 down payment.
• On 12/5/2000, less than a year after buying the property, they pulled out their first $35,000+ in mortgage equity withdrawal with a new $199,138 first mortgage. They went Ponzi.
• On 10/15/2001, less than a year after their first big payday, they pulled out another $15,000+ with a $215,847 first mortgage.
• On 6/7/2002, less than 9 months later, they refinanced with a $209,600 first mortgage and a $52,400 second mortgage which gave them another $35,000+ cash infusion.
• On 7/10/2003 they were back for $25,000+ more obtaining a $275,500 first mortgage.
• On 6/18/20004 they refinanced with a $290,500 first mortgage. They only got $15,000+ on that year's trip to the housing ATM. I imagine they were disappointed.
• On 7/27/2005 they obtained an Option ARM with a 1.37% teaser rate for $337,500. The $45,000+ they got in 2005 must have made them feel better after the poor take from 2004. This was the loan Fannie Mae bought.
• On 12/6/2007 they went back for one final trip to the ATM and obtained a $37,187 HELOC.
• Total property debt was $374,687 plus negative amortization.
• Total mortgage equity withdrawal was $211,762.

We joke about the housing ATM, but it was very real for loan owners during the housing bubble. These people went back for income supplementation every year. They would still be doing it today if it weren't for the collapse of the housing bubble.

How many people in California want to buy a house because they think they will be able to do what these people did? With the government now insuring nearly the entire housing market, if we allow this behavior to resurface, all taxpayers will be subsidizing this theft.

Irvine House Address … 30 SPARROWHAWK Irvine, CA 92604

Resale House Price …… $361,900

House Purchase Price … $171,500

House Purchase Date …. 2/4/2000

Net Gain (Loss) ………. $168,686

Percent Change ………. 98.4%

Annual Appreciation … 6.5%

Cost of House Ownership

————————————————-

$361,900 ………. Asking Price

$12,667 ………. 3.5% Down FHA Financing

4.49% …………… Mortgage Interest Rate

$349,234 ………. 30-Year Mortgage

$75,747 ………. Income Requirement

$1,767 ………. Monthly Mortgage Payment

$314 ………. Property Tax (@1.04%)

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

$75 ………. Homeowners Insurance (@ 0.25%)

$402 ………. Private Mortgage Insurance

$310 ………. Homeowners Association Fees

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

$2,868 ………. Monthly Cash Outlays

-$284 ………. Tax Savings (% of Interest and Property Tax)

-$461 ………. Equity Hidden in Payment (Amortization)

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

$65 ………. Maintenance and Replacement Reserves

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

$2,210 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$3,619 ………. Furnishing and Move In @1%

$3,619 ………. Closing Costs @1%

$3,492 ………… Interest Points @1% of Loan

$12,667 ………. Down Payment

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

$23,397 ………. Total Cash Costs

$33,800 ………… Emergency Cash Reserves

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

$57,197 ………. Total Savings Needed

Property Details for 30 SPARROWHAWK Irvine, CA 92604

——————————————————————————

Beds: 3

Baths: 2

Sq. Ft.: 1240

$292/SF

Property Type: Residential, Condominium

Style: Two Level

Year Built: 1900

Community: 0

County: Orange

MLS#: F11061161

Source: CRISNet

Status: Active

——————————————————————————

End unit condo in excellent community. This 3 bedroom + 1.5 bathroom home occupies approx. 1220 sq. ft. and includes kitchen with appliances. Outside brick patio with cover. Tile downstairs with carpet upstairs. Upstairs bedrooms include mirrored closets. Community includes tennis court, green belts with pool/spa and playground for kids.

Visit msnbc.com for breaking news, world news, and news about the economy

The California Association of realtors acknowledges that a lower conforming loan limit will further damage our already weakened housing market.

Irvine Home Address … 51 CEDARLAKE #84 Irvine, CA 92614

Resale Home Price …… $695,000

We're not scared to lose it all

Security throw through the wall

Future dreams we have to realize

A thousand sceptic hands

Won't keep us from the things we plan

Unless we're clinging to the things we prize

Howard Jones — Things Can Only Get Better

Are falling house prices good or bad? I suppose it depends on who you ask. According to homeowners and realtors, falling house prices are the end of the world (see below). For those who want to buy a house, falling house prices means things can only get better.

House prices are currently falling, and they are expected to do so for the foreseeable future. Despite the whining by realtors that lending standards are too tight, these standards will continue to tighten as the market is weaned off government supports.

In 2008, the conforming limit was raised from $417,000 to $729,750 in high priced markets like Irvine. Apparently, bureaucrats felt high wage earners needed government subsidies to afford the ridiculously priced housing in places like Irvine. The real motivation was to prop up prices and shift the losses from private lenders to the government-backed GSEs. To some degree, they were successful.

I have made the case on two separate occasions that lowering the conforming limit will lower house prices in Irvine, particularly on those properties that required conforming loans in the $625,000 to $729,750 range. This argument has been dismissed by some in the astute observations.

In February, I reported that Lowering GSE and FHA loan limits will lower house prices.

However, if they do lower the jumbo conforming limit from $729,750 to $417,000 or below, the meat of the Irvine market would suddenly have to pay jumbo rates. We would be among the first markets in the country to experience the transition from public to private financing. Jumbo rates are somewhere between half-a-point and one point higher than conforming rates. If future buyers are facing higher interest rates, their hopefully higher incomes will not be leveraged as much, and the loan balance will not be larger.

Markets where jumbo conforming loans ($417,000 to $729,750) are prevalent, the market impact will be the most noticeable. If you combine that with the possibility that loans that large will no longer be tax deductible, and borrowing huge sums to take a position in real estate doesn't seem quite so appealing. Future take-out buyers will not be so leveraged.

I followed up with the post Conforming mortgage limit falls to $625,500 October 1, prices to follow.

This change strikes at the heart of the Irvine single-family detached market. Many Irvine properties have loans between $729,750 and $625,500. Every buyer contemplating a loan in that range will face an interest rate half a percent higher. As a result, buyers will either need to come up with 10% more income to afford the same mortgage, or the loan they will qualify for will be 10% smaller. Since most Irvine borrowers are maxed out, loan balances in this price range will likely decline by 10%, and the houses they were intended to finance will similarly drop in price.

Market prices are set on the margins, and if the current balance of supply and demand is not sustaining prices, what happens when demand is curtailed even a little bit? Obviously, the market will find a new equilibrium, most likely at a lower price.

For those that dismiss this upcoming drop in the conforming limit as meaningless, why has the California Association of realtors raised the alarms and come out opposing this change? i think we all know the answer to that one.

Pending conforming loan limit decrease puts California on edge

With the conforming loan limits expected to drop in October, the California Association of Realtors warned of the impending harm to homeowners, while the only private-label securitizer left notified investors of more opportunities.

Have you ever noticed that realtors only defend the interests of homeowners? Aren't buyers half of their income and market? Why do realtors consistently want to screw buyers in favor of sellers?

The conforming loan limit determines the maximum mortgage amount the Federal Housing Administration, Fannie Mae and Freddie Mac can buy or guarantee. Without congressional action, the limit will drop to $625,500 from $729,950 for the majority of counties nationwide on Oct. 1.

These three agencies currently fund 95% of the mortgage market, and housing finance reformers point to lowering this limit as a first step to usher in private capital.

The lowering of the conforming limit back to $417,000 is the first step toward returning to a private market. Private loans without government backing will have risk, and providers of the capital for these loans will want to be compensated appropriately for the risk they are taking on. This will increase borrowing costs and thereby reduce loan balances which will in turn lower prices.

However, according to CAR, more than 30,000 Californian homeowners will face higher down payments, higher mortgage rates and stricter loan qualification requirements when the limits drop.

Notice the choice of words above. It isn't California homeowners who will face those problems, it is California home buyers. This will hurt current homeowners trying to get their inflated prices, so CAr has conflated homebuyers with homeowners and chosen sides to favor owners over buyers.

Further, CAr is acknowledging that the new lower conforming limit will dampen demand. Of course, they portray that as a bad thing because it doesn't benefit homeowners. However, it's great for homebuyers, and I think it's fantastic.

The $104,450 decrease in most counties will not be felt in some California counties. In fact, it will be steeper.

CAR analyzed the effect of dropping the limit across several specific counties in California. In Monterey County, for instance, the government-sponsored enterprise limit will drop a total of $246,750, followed by a $151,250 drop in San Diego, and $141,550 in Sonoma County.

The FHA conforming loan limit will fall $201,450 in Merced County and $164,650 in Riverside.

“By reducing the conforming loan limit, thousands of California homebuyers will be shut out of homeownership,” CAR President Beth Peerce said.

Bullshit. It really annoys me when I read that nonsense. Nobody will be shut out of ownership. Sellers will have to lower their prices in order to sell. Period. If sellers chose not to lower prices, they won't sell. Since so much of the market is must-sell distressed inventory, sellers will lower their prices, and properties will become more affordable.

“The higher mortgage loan limits are critical to providing liquidity in today’s housing market and are essential to our housing recovery.

More bullshit. A higher conforming limit is essential for prices to stabilize at higher levels, but no government guarantees are required to stabilize pricing or for housing to recover.

We urge Congress to maintain the current limits and make them permanent to provide homeowners and homebuyers with affordable financing and help stabilize local housing markets.”

She forgot to add the words “at inflated price levels” to the end of her statement.

Redwood Trust, a real estate investment trust based in California and the only firm to issue a residential mortgage-backed security since the financial collapse in 2008, said the conforming loan limit decrease could drop more loans into its grasp. Redwood already plans to issue two more RMBS by the end of the year.

If risk is properly priced, and if the buyer pool meets the qualification standards, the private market will pick up the slack. It will just do it at a lower price point. The return of the private market is what we want.

If annual residential mortgage originations return to $1.5 trillion and jumbo loans — which served as the collateral in its RMBS deals — account for 20% of that, originations of jumbo loans could reach $300 billion, Redwood said in its first quarter report to investors.

“With GSE reform, the portion of the mortgage market that could potentially be available to Redwood could be substantially larger if the conforming loan limits are reduced (as the Obama administration has indicated it intended to do) during the reform transition period, and perhaps still larger if, as part of GSE reform, the concept of conforming limits is eliminated,” Redwood said.

Write to Jon Prior.

Follow him on Twitter @JonAPrior.

There is no question in my mind that a lower conforming limit will lower prices on desirable single-family detached homes in Irvine. It's only a matter of how much and how soon the impact is felt. With the other market headwinds, during the fourth quarter of 2011 when the new standards will be in effect could be pretty ugly.

Did the former owners buy this at auction as a flip?

This property was emailed to me by a reader who thought the transaction appeared a bit fishy. The property was originally purchased by a realtor and another party on 4/27/2004 for $715,000. They used a $515,000 first mortgage and a $200,000 down payment. They refinanced up to a $600,000 mortgage, but that still left $115,000 of their own money in the property, which they lost.

Perhaps with the lowered income everyone in real estate has been dealing with, the payments became burdensome. The property was allowed to go into foreclosure.

Foreclosure Record

Recording Date: 02/02/2011

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 11/01/2010

Document Type: Notice of Default

The property was purchased at auction for $570,000 by SD Growth Fund LLC. In a strange coincidence, the initials of the last names of the former owners are S and D. Another reader (an attorney) looked into this coincidence, and there is no connection to the former owners.

The SD Growth Fund LLC is expecting a healthy profit from this property. With 20% down, the mortgage wouldn't be in the new jumbo range, but if it doesn't sell by October 1 when the new lower limits kick in, I suspect they will face some competition from nicer properties looking for those few buyers that remain.

Irvine House Address … 51 CEDARLAKE #84 Irvine, CA 92614

Resale House Price …… $695,000

House Purchase Price … $570,000

House Purchase Date …. 4/25/2011

Net Gain (Loss) ………. $83,300

Percent Change ………. 14.6%

Annual Appreciation … 125.1%

Cost of House Ownership

————————————————-

$695,000 ………. Asking Price

$139,000 ………. 20% Down Conventional

4.49% …………… Mortgage Interest Rate

$556,000 ………. 30-Year Mortgage

$120,594 ………. Income Requirement

$2,814 ………. Monthly Mortgage Payment

$602 ………. Property Tax (@1.04%)

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

$145 ………. Homeowners Insurance (@ 0.25%)

$0 ………. Private Mortgage Insurance

$280 ………. Homeowners Association Fees

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

$3,841 ………. Monthly Cash Outlays

-$469 ………. Tax Savings (% of Interest and Property Tax)

-$734 ………. Equity Hidden in Payment (Amortization)

$231 ………. Lost Income to Down Payment (net of taxes)

$107 ………. Maintenance and Replacement Reserves

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

$2,976 ………. 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

$45,600 ………… Emergency Cash Reserves

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

$204,060 ………. Total Savings Needed

Property Details for 51 CEDARLAKE #84 Irvine, CA 92614

——————————————————————————

Beds: 3

Baths: 2

Sq. Ft.: 2200

$316/SF

Property Type: Residential, Condominium

Style: Two Level, Other

Year Built: 1984

Community: 0

County: Orange

MLS#: S659826

Source: SoCalMLS

Status: Pending

——————————————————————————

Fantastic! The best ways to describe this wonderfully refreshed lake community home. With this ideal location you receive the best of all worlds. Quiet, tranquil neighborhood, tennis courts, pools, lake amenities, shopping, walking trails, and amazing schools makes it a joy to come home everyday. The home itself has a floor plan that not only speaks but yells out functionality, and elegance. Formal dining area, large vaulted living room cascading with natural light and cozy gas fireplace, functional kitchen and eating nook, and generous sized family room give the nuts and bolts to this interiors main floor that provide the perfect setting for all occasions. From day to day living, cozy family movie night, intimate dining and large family and friend gatherings you will not be disappointed. Three bedrooms upstairs give plenty of room for everyone to have their own space, including the master bedroom that boasts it's own reading enclave, gigantic walk-in closet, and spa like bath.

a floor plan that not only speaks but yells out functionality? Give me a break.

Have a great weekend,

Irvine Renter

From loan owners caught up in the frenzy to renters being forced to wait for lower prices, the housing bubble and crash has caused everyone psychological harm in one form or another.

Irvine Home Address … 3131 MICHELSON Dr #304 Irvine, CA 92612

Resale Home Price …… $380,000

There's no way we can sell our house now

so we'll just have to stay.

Suppose we found a buyer

so we could go our separate ways.

Loudon Wainwright III – House

When house prices were going up, real estate was very liquid, and everyone who played the game was making lots of money. realtors, mortgage brokers, homebuilders and ordinary homeowners all enjoyed the false prosperity of a debt-driven boom. Even those who did not sell their properties for a profit were given the ability to extract their equity and spend as they pleased. It was the best of all possible worlds.

Then the crash came.

Everyone who prospered as prices went up began to suffer as prices went down. Transaction volumes were the first to plummet, so everyone who made a living off real estate transactions began to suffer. They are still struggling today. As loan owners saw the housing ATM shut off, their entitled lives began to fall apart, and the crushing weight of their bubble debts started to take a toll.

There were a few responsible renters who foresaw the crash, and many more who decided to wait for prices to bottom once the downtrend became apparent. These wouldbe homeowners were forced to wait, and when the government and lenders conspired to keep prices artificially high, these people were forced to wait even longer. And in areas like ours, we are still waiting.

IrvineRenter says renting sucks

I have enjoyed the financial freedom and lower cost of housing renting has afforded me over the last decade, but I used to be a home owner, and I would like to own again someday. Renting lacks an emotional quality of belonging that is difficult to replicate. Intellectually, I tell myself it shouldn't be that way, but emotionally, I know it to be true.

Back when I owned my own house, I maintained many house plants, and I always enjoyed keeping up with the landscaping. Having grown up in a rural area surrounded by nature, I liked the spiritual connection to the earth and life that maintaining plants can bring. For the first four or five years of renting, I killed a dozen or more plants. It didn't dawn on me why this kept happening. I thought it was because my transitory living kept me too busy. The reality was, I didn't feel connected. My spirit was withering, and my house plants were the outward sign of my distress.

I gave up on growing house plants, but my longing for connection remains. I find other outlets, and my connection to Irvine comes through this daily writing, but on a deeper emotional level, I am still a detached observer who's just passing through. It's difficult to feel rooted when you know you aren't. There is an emotional quality of ownership you just can't replicate in a rental.

Ownership in a declining market sucks too

Perhaps it goes without saying, but owning property that is declining in value sucks too. Overpaying for property so the cost of ownership exceeds a rental can only be compensated for by increasing values. When the cost of ownership is too high and the value of the house is declining, it is the worst of both worlds.

Few who strategically default make that decision lightly, and few who go through short sale or foreclosure want that outcome. Leaving a family home and losing money is a double whammy. For as much as I find renting emotionally unsatisfying, owning an overpriced and declining asset is far more emotionally damaging. I don't regret my decision to rent, and I suspect many who are facing the perils of ownership in today's declining market wish they could trade their problems for mine.

Denial is dead

The double dip in home prices has forced loan owners to give up their denial and accept their fate. Every foolish belief that prompted buying during the bubble has been thoroughly discredited. Real estate does not always go up. Financing will not always be made available. Everyone does not want to live here. We are not running out of land. Home equity is not free money. Appreciation is not income. Credit is not savings. And debt is not wealth.

With the death of denial comes a new era. Market participants are fearful, and many have capitulated and either sold or walked away. Over the next couple of years, the pain of the market declines will lead to widespread despair. When kool aid is really dead, the market will bottom, and the cycle will start all over again.

Does gathering gloom raise risk of double dip?

With recovery limping along, pessimism could begin weighing on growth

John W. Schoen Senior producer

msnbc.com

updated 6/17/2011

This month marks the second anniversary of an economic expansion that began at the end of what is now being called the Great Recession. But for millions of small businesses and households, the economic recovery has yet to arrive.

Frank Goodnight, owner of Diversified Graphics, a Salisbury, N.C., printing company with 12 employees, is among them. In 37 years, he has survived some tough economic times. But never like this.

“This recession is equal to the other four doubled,” he said. “Business has just been so bad for so long that right now we’re just hunkered down trying to survive.”

Everyone I know in the homebuilding industry — what's left of it — is hunkered down trying to survive. Over half the industry is unemployed, and many with jobs are underemployed making a fraction of what they were five years ago.

Consumer sentiment worsened more than expected in June on renewed concerns about the outlook for the economy, a survey released Friday showed . It was just the latest in a series of surveys that have pointed to a marked downward shift in the outlook for jobs, housing and the stock market. …

“If you think things are going to get bad and you stop buying, things will get bad,” said Goodnight, the printing company owner. “And that’s where we are right now. Everyone is afraid of the deficits. They’re afraid of the new regulations that are coming down fairly soon. They’re afraid about health care. And no one’s going to make a major investment when there’s this much uncertainty in the air.”

You don’t have to look far to find the source of all this gloom. A solid economic expansion slowed to a sluggish 1.8 percent annual growth rate in the first quarter. After posting healthy gains for most of this year, the job market stalled badly in May. The rising cost of gasoline has taken a big bite out of household budgets, though pump prices have recently begun to back down from a peak of nearly $4 a gallon. After stabilizing last year, home prices have begun falling again.

Since the housing bubble burst in 2006, about $10 trillion in household wealth has been wiped out. Some 12 million homeowners with mortgages — roughly one in four — owe more than their home is worth. That means they’ll be cutting into future savings to pay off a debt that will leave them with little to show for it once they’re done. …

The pain is very real. Unfortunately for the herd, the more people who need a market to move in a certain direction, the less likely the market is to comply. If everyone is bullish, they have likely already purchased. With no buyers, prices are certain to go down. We see that in the housing market right now as the tax credit pulled forward what little demand their was, and the buyer pool is seriously depleted. Everyone is on the wrong side of the trade, so prices are likely to fall further.

“We are forecasting that real household net worth should take a major hit in the second quarter of this year because the stock market is not doing well and there’s going to be no relief from housing,” said Chris Christopher, an economist at IHS Global Insight. “When people take a loss on their financial assets they’re going to step back on their spending.“

The recovery has also been weakened by sluggish wage gains and fears that future paychecks aren’t going to grow.

“There’s not really much impetus for spending other than wages,” said Franco. “And what we’re seeing is that a lot of the profits that companies have made over the last several quarters have not filtered down to the consumer’s bottom line.”

In a healthy economy, there shouldn't be much impetus for spending other than wages. Money isn't free. As the debt addicted abandon their entitlements and adjust to living within their means, the economy will slowly improve and be put back on stable footing.

U.S. Housing Crisis Taking Strong Psychological Toll on Many Families

Alex Finkelstein — 06/06/11

The value of single-family homes in the U.S. has been dropping like a stone in the last four years of the Great Recession. And it hasn't hit bottom yet.

The continuing decline in housing values is changing the lives of numerous Americans for ever, The Wall Street Journal finds in a recent informal survey with various sources.

The most frightening aspect of the falling-prices phenomenon the WSJ finds is that prices now stand at 2002 levels. That means, the WSJ reports, “Nearly a decade's worth of appreciation has been wiped out.

“If you bought anytime in the last 10 years, chances are your house is worth less than you paid. You're trapped in a loss.“

That has to be disheartening. It's worse in Las Vegas. If you bought any time in the last 16 years, your house is worth less than you paid. There is little joy in that reality.

The WSJ states “the housing funk is even seeping into popular culture. In his new album, called “10 Songs For the New Depression,” Loudon Wainwright sings to a wife seeking divorce in the tune “House:” “There's no way we can sell our house now so we'll just have to stay.”

He also ponders: “Suppose we found a buyer so we could go our separate ways.”

How would you like to be in that situation? Trapped in a marriage you can't escape because you can't sell your house. Yikes!

The WSJ states Wainwright has captured the moment. The economy has wreaked havoc on personal lives, transforming decision-making in the household.”

Psychologists say the phenomenon is more than just a musical expression of home-sweet-home.

“More and more divorced couples are forced to remain in their homes while their houses are for sale, which creates extreme stress on the couple and their children,” Margo Meeker, a clinical psychologist, tells the WSJ.

“Having to live under one roof post-divorce and then having to stage and show the house while the family is going through such a major transition and loss creates even more anguish in an already stressful situation.”

People get divorced because they often can't stand one another. Imagine being forced to live with someone you may have grown to hate. The distress of losing large amounts money is bad enough without adding more anguish to the situation.

The WSJ reports a recent survey by the National Foundation for Credit Counseling concluded that “financial distress was having an impact on our marriages, our roles as parents, our jobs, health and even sleeping patterns.”

Just 6% of respondents said financial distress wasn't a factor in their daily lives.

Contrast that with the carefree feelings people had in 2006 when house prices were going up, everyone had nearly unlimited spending money, and projections were for them to be able to live that lifestyle forever.

The ripple effect has become larger partly because so many Americans have tied up their wealth in housing, the WSJ reports. In 1985, 12% of personal disposable income came from savings, while just 1% came from home-equity lines, according to the Federal Reserve and Congressional Budget Office.

“By 2007, 10% of personal disposable income came from housing credit: second mortgages, home-equity lines and so on,” notes the WSJ. Less than 1% came from savings.

Wow! I find that statistic truly remarkable. People really did believe credit was savings and home equity was a personal piggy bank.

“Today, Americans are saving more and spending less”, the WSJ states. “Their homes are no longer piggybanks or sources of free money. That's a good thing, but we spend less when we're saving. Falling home prices have failed to translate into demand. People who want to buy homes still can't afford them.”

In another National Foundation for Credit Counseling survey, the WSJ found nearly half of respondents said they could never come up with a down payment for a new home. Another 17% said they would have to borrow from family or friends. And 21% said they would need to get a low down payment if they used their own funds.

“The confluence of sellers unable to sell and buyers unable to buy has created what Meeker calls a “housing trap.”

If sellers can't sell and buyers can't buy, it isn't a housing trap; it's a recipe for continued low sales volumes and a major decline in prices.

“People who anticipated home prices rising-or at least staying level-can't afford the economic hit even if they choose to move to a place that is less expensive.”

People anticipating higher home prices was the root cause of the foolish buyer behavior that inflated the bubble. Lenders provided the air in the form of stupid loans, but buyers had to borrow that money, buy houses and drive up prices. Many knew they couldn't afford the house without mortgage equity withdrawal, yet they went through with the purchase anyway. Those foolish buyers are suffering right now. The sad truth is, they deserve it.

How to lose $75,000+ per year for 5 consecutive years.

Some people who bought at the peak are suffering worse than others. The owner of today's featured property bought in the North Korea towers (Marquee at Park Place) in 2006. The description claims the property is not a short sale, so the buyer is losing well over $400,000 of their own money (purchase price plus upgrades).

This one has to hurt.

Irvine House Address … 3131 MICHELSON Dr #304 Irvine, CA 92612

Resale House Price …… $380,000

House Purchase Price … $778,000

House Purchase Date …. 3/31/2006

Net Gain (Loss) ………. ($420,800)

Percent Change ………. -54.1%

Annual Appreciation … -13.4%

Cost of House Ownership

————————————————-

$380,000 ………. Asking Price

$13,300 ………. 3.5% Down FHA Financing

4.49% …………… Mortgage Interest Rate

$366,700 ………. 30-Year Mortgage

$79,536 ………. Income Requirement

$1,856 ………. Monthly Mortgage Payment

$329 ………. Property Tax (@1.04%)

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

$79 ………. Homeowners Insurance (@ 0.25%)

$422 ………. Private Mortgage Insurance

$840 ………. Homeowners Association Fees

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

$3,526 ………. Monthly Cash Outlays

-$298 ………. Tax Savings (% of Interest and Property Tax)

-$484 ………. Equity Hidden in Payment (Amortization)

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

$68 ………. Maintenance and Replacement Reserves

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

$2,834 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$3,800 ………. Furnishing and Move In @1%

$3,800 ………. Closing Costs @1%

$3,667 ………… Interest Points @1% of Loan

$13,300 ………. Down Payment

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

$24,567 ………. Total Cash Costs

$43,400 ………… Emergency Cash Reserves

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

$67,967 ………. Total Savings Needed

Property Details for 3131 MICHELSON Dr #304 Irvine, CA 92612

——————————————————————————

Beds: 2

Baths: 2

Sq. Ft.: 1369

$278/SF

Property Type: Residential, Condominium

Style: One Level, Contemporary

View: Park/Green Belt

Year Built: 2006

Community: Airport Area

County: Orange

MLS#: S653854

Source: SoCalMLS

Status: Active

——————————————————————————

This is NOT a short sale! Beautiful condo in Irvine's finest highrise at the Marquee in Park Place. Resort style living! Located on the 1st residential level in the West tower, with garden view, facing away from the freeway. Original owner with totally custom re-modeling with Black granites thru-out, black carpet, black sink, Jacuzzi tub, custom black drapery. .. etc. If you love black, you will fall in love with this place! Enjoy the amenities: pool, spa, fitness center, BBQ area, billard room, and conference rooms. State-of-the-art security including 24/7 concierge service, guard-gated access, keyed elevator access, and security cameras. Conveniently located, close to John Wayne Airport, renowned restaurants, beaches, shopping and tollroad/freeways. Unbelievably priced for quick escrow! A must see!

totally custom re-modeling

This interior might appeal to someone, but I suspect it is a turn off to most.

Do you think this owner cooks much with those paintings on the stove?

Is that a statue of the Borg? Is that fine art included in the purchase price?

The Astoria at Central Park West in Irvine has given up on sales and is converting to rentals until the next housing bubble.

Irvine Home Address … 401 ROCKEFELLER #805 Irvine, CA 92612

Resale Home Price …… $625,000

And when I lost my grip

And I hit the floor

Yeah, I thought I could leave

But couldn't get out the door

Aerosmith — Amazing

The investors who financed the Astoria at Central Park West lost their grip on financial reality. When prices hit the floor, they wanted to leave with their money, but they couldn't find the door. Now, they are stuck with a loser investment, and they have few good options to get out.

High density real estate costs

High density residential construction costs are the biggest variable in determining the type of construction a specific project can support. The income must be sufficient to provide a return relative to those costs for a project to go forward.

The first major cost barrier comes when a project goes from three stories built on grade to four stories over parking (aka podium construction). A typical apartment complex like those built by the Irvine Company are usually three stories of wood-frame construction built on grade. This is the most cost-effective method of producing housing units. Unfortunately, it is difficult to get more than 28 units per acre using this method of construction, so land values are limited.

Podium construction, typically four stories over a two-story underground parking garage, is the next step up the cost and density scale. Villa Siena and the Village at Irvine Spectrum Center are examples of this kind of construction. Densities exceeding 30 units per acre are achievable, but costs jump significantly. Projects must have significantly higher revenue potential to justify this kind of construction.

True high rise construction, defined here as five stories or higher, take another major step up in cost and require a commensurate increase in revenue to justify their existence. These units are generally confined to city centers in major urban hubs — not in low-density Orange County.

When prices rose so high so fast, rather than consider this price action to be a housing bubble — which it was — developers saw an opportunity to build high-rise condos. If prices had held at their 2006 levels, they would have made money. The developers of the North Korea towers did. The developers of the Astoria; well, they weren't quite so lucky.

The Astoria at Central Park West

I last wrote about the Astoria on February 11, 2010 in Free Wine, Food and Gifts Plus a Tour of an Epic Real Estate Disaster. Lennar was gearing up to sell units in this project with a big party. I thought I would give them some additional press coverage. I heard the turnout was good.

Lennar attempted some creative financing, but buyers didn't go for it:

Builders often buy-down the interest rate to artificially lower the payments for early years. Personally, I think the practice is egregious differing in no way from the subprime 2/28 programs that proved so disastrous. Lennar and their partner obviously do not care about the long-term viability of ownership of buyers; any who use their advertised financing will not be living there 7 years from now. The the builder bought down the interest rate on an ARM which is taken out at the bottom of the interest rate cycle; this interest rate is going to rise, and it is going to make future payments unaffordable. I suppose these will appreciate so much over the next 7 years that it won't matter, right? Bubble thinking is not dead.

I first wrote about the Astoria at Central Park West in August of 2009:

When you look back on the towers built along the Jamboree corridor, you see differing groups of winners and losers. The developers of the North Korea Towers (Marquee at Park Place) were winners. They sold the property out at peak prices and made a fortune. The buyers and the lenders who bankrolled the purchases there are the big losers. The other condos that came a little later have a mixed bag of winners and losers with both the developers and the buyers suffering.

Today's featured property, Astoria at Central Park West has a clear loser — the ownership entity that developed this property (Lennar has only a small investment). None of these units sold at the peak, and now that we are nearing a long, flat bottom, these units are hitting the market. The early buyers will be knife catchers, but in a couple of years, some of these units will be good buys — at about $300,000 to $350,000.

As today's featured property attests to, about half a dozen knife catchers did purchase units in Astoria in the 500s. With competition across the street at the North Korea towers selling in the 300s, rather than lower their price to sell more units, Lennar has chosen to convert this community to rentals.

Luxury Irvine condo towers go rental

By MARILYN KALFUS — June 21, 2011

The luxe new high-rise condos at Astoria in Irvine's Central Park West are no longer for sale — they're for rent.

In leasing the units, the upscale project follows the path of the 25-story Skyline at MacArthur Place in Santa Ana’s South Coast Metro district, which turned to apartments last year as the market for buying high-end condos eroded.

Several other less pricey O.C. condo projects also launched before the housing crash have gone the same route.

The apartments at Astoria, once priced to sell from $415,000 to $779,000 — along with homeowner association (HOA) dues ranging from $915 to $965 a month — now rent beginning at $2,590. The most expensive unit is a 14th-floor, 2-story, 3,185-square foot corner penthouse that can be leased for $20,000 a month.

At present, there is no rent-to-buy program, said Alicia Scott, national business development director for Alliance, the company brought in to manage and rent the units by Lennar Corp., the builder.

The 240-unit towers aren't entirely without owners. Six condos were sold as of February, according to a report we did then.

Astoria is alongside the I-405 freeway, but with the windows shut and the air on in one unit, there was no noise. In another unit, with no air on and one window open, some traffic was audible.

Last November, LuxeListHome.com CEO David Doyle told ocregister.com in a podcast interview that luxury apartments are a growing business even as the economy — and other housing markets — slowed. He credited people of means who don’t want to commit to home ownership in unsettling times, an affinity for resort-like living and renters who just aren't interested in owning.

Astoria’s highlights include:

• A concierge
• Free valet parking for guests
• Limestone and marble flooring
• Fisher & Paykel stainless steel appliances
• Electrolux appliances in penthouse
• Units with built-in surround sound and fireplaces
• A swimming pool, spa and fitness center, with access to Central Park West's junior olympic-size pool, and an 8,000-square foot recreation center with an additional gym
• A wine tasting room and 55-degree wine vault with more than 120 cages
• Pets are ok (but not all)

Prospective renters include international and bicoastal business people as well as Los Angeles residents who spend time in Orange County and want to cut down on commuting, Scott says.

Rent pending another housing bubble

I heard through industry sources that Lennar projected sales of these units for about $750,000 back in 2006. With values in the North Korea towers at about half that price, how long do you think it will take for Lennar to hit their numbers? Forever is my guess.

These high rises should never have been built. The economics simply do not support it. The housing bubble sent a false price signal and builders responded. At $750,000 per unit, high-rises justify their construction costs. At $350,000 per unit, they don't. Twenty years from now — or sooner if we inflate another housing bubble — these units might make sense, but today, forget about it.

Renting these units out is admitting failure, but it is probably the wisest course of action in today's markets for real estate and money. The investors whose capital is tied up in this loser project can take a 50% haircut, or they can rent the properties out and get a 3.5% return. Given the options for competing returns, keeping their money tied up in this property is the best use of the money.

Perhaps if competing returns making 10% were widely available, dumping the property and putting the money to work in a better investment might be wiser, but since good investment returns are hard to find, making a small premium over Treasury bills with the potential for future appreciation is a gamble worth taking. Quite honestly, both of their options suck.

Greater fool wanted

Today's featured property makes a nice study in value based on rental parity. We know from the article above that Lennar is going to rent identical units for $2,590 and up. Even with the super-low interest rates and owner-occupant tax deductions, this property costs $3,291 to own. Why would anyone do that?

What would an owner get for the additional $600 per month in their cost of ownership? The potential to lose more value as prices continue to decline?

Sign me up for two….

Irvine House Address … 401 ROCKEFELLER #805 Irvine, CA 92612

Resale House Price …… $625,000

House Purchase Price … $555,000

House Purchase Date …. 5/21/2010

Net Gain (Loss) ………. $32,500

Percent Change ………. 5.9%

Annual Appreciation … 10.2%

Cost of House Ownership

————————————————-

$625,000 ………. Asking Price

$125,000 ………. 20% Down Conventional

4.49% …………… Mortgage Interest Rate

$500,000 ………. 30-Year Mortgage

$108,448 ………. Income Requirement

$2,530 ………. Monthly Mortgage Payment

$542 ………. Property Tax (@1.04%)

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

$130 ………. Homeowners Insurance (@ 0.25%)

$0 ………. Private Mortgage Insurance

$865 ………. Homeowners Association Fees

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

$4,067 ………. Monthly Cash Outlays

-$422 ………. Tax Savings (% of Interest and Property Tax)

-$660 ………. Equity Hidden in Payment (Amortization)

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

$98 ………. Maintenance and Replacement Reserves

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

$3,291 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$6,250 ………. Furnishing and Move In @1%

$6,250 ………. Closing Costs @1%

$5,000 ………… Interest Points @1% of Loan

$125,000 ………. Down Payment

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

$142,500 ………. Total Cash Costs

$50,400 ………… Emergency Cash Reserves

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

$192,900 ………. Total Savings Needed

Property Details for 401 ROCKEFELLER #805 Irvine, CA 92612

——————————————————————————

Beds: 2

Baths: 2

Sq. Ft.: 1583

$395/SF

Property Type: Residential, Condominium

Style: One Level, Modern

View: City Lights, City, Hills, Mountain, Panoramic, Yes, Faces North

Year Built: 2009

Community: Airport Area

County: Orange

MLS#: S657365

Source: SoCalMLS

Status: Active

——————————————————————————

Astoria is Irvine's preferred newest High-Rise Luxury Urban Living. This dual master suite is located on the 8th floor with unobstructed 180 degree City and Mountain views, and a terrace for entertaining. The Gourmet kitchen features stainless steel appliances and granite counter tops. Dual full baths include pristine marble throughout, dual-vanity sinks, glass showers and separate soaking tubs. Over $85,000 in private upgrades: fully integrated 12-speaker home entertainment system with component/amplifier tower, 3 wall mounted touch screens, Lutron lighting & remote window shades! Resort-style landscaping featuring an elevated terrace with pool & spa, a private wine tasting room and wine vault, business center, grand fitness center, outdoor entertaining areas, Concierge service & 24hr valet parking. Live in Orange County's newest and most luxurious resort-style master planned community. .. Central Park West

Delinquent mortgage squatters living in shadow inventory are obtaining the benefits of ownership while paying none of the costs.

Home Address … 1 STARLIGHT Isle Ladera Ranch, CA 92694

Resale Home Price …… $1,100,000

Racing faster.

Escape disaster.

Partners in crime will leave their mark.

We make our own way.

No thoughts of yesterday.

Black hearts of chrome and battle scars.

Black Veil Brides — The Legacy

Strategic default is often the wisest course of action for a family to take. Lenders are hoping to escape disaster while borrowers and attorneys partner to leave their mark on lender's balance sheets. In the future, the threat of strategic default should make lenders more reluctant to make stupid loans with payments greatly exceeding comparable rents (more on that soon).

However, after a strategic default, what is the borrower to do? I think they should get out and move on with their lives because once they quit paying, it is only a matter of time before they must leave. This lingering uncertainty takes an emotional toll on families that isn't necessarily offset by the savings.

Most borrowers in default don't move into a rental and move on with their lives. Those borrowers are intent on gaming the system for as long as possible to obtain the financial benefit of no housing costs. These delinquent mortgage squatters are the legacy of stupid lending in The Great Housing Bubble.

Backlog of Cases Gives a Reprieve on Foreclosures

By DAVID STREITFELD

Published: June 19, 2011

Millions of homeowners in distress are getting some unexpected breathing room — lots of it in some places.

In New York State, it would take lenders 62 years at their current pace, the longest time frame in the nation, to repossess the 213,000 houses now in severe default or foreclosure, according to calculations by LPS Applied Analytics, a prominent real estate data firm.

Clearing the pipeline in New Jersey, which like New York handles foreclosures through the courts, would take 49 years. In Florida, Massachusetts and Illinois, it would take a decade.

Ponder those statistics for a moment. At the current rate of resolution, states with judicial foreclosure will have lingering problems for decades.

In the 27 states where the courts play no role in foreclosures, the pace is much more brisk — three years in California, two years in Nevada and Colorado — but the dynamic is the same: the foreclosure system is bogged down by the volume of cases, borrowers are fighting to keep their houses and many lenders seem to be in no hurry to add repossessed houses to their books.

“If you were in foreclosure four years ago, you were biting your nails, asking yourself, ‘When is the sheriff going to show up and put me on the street?’ ” said Herb Blecher, an LPS senior vice president. “Now you’re probably not losing any sleep.”

Borrowers can obtain free housing if they merely stop making their payments. Strategic default is bound to expand under such circumstances. If given the option to obtain shelter for a huge payment or for no payment, many will chose no payment, particularly if they can stay in the property indefinitely.

When major banks acknowledged last fall that they had been illegally processing foreclosures by filing false court documents, they said that any pause in repossessions and evictions would be brief. All of the major servicers agreed to institute reforms in their foreclosure procedures. In April, the Office of the Comptroller of the Currency and other regulators gave the banks 60 days to draw up a plan to do so.

But nothing is happening quickly. When the comptroller’s deadline was reached last week, it was extended another month.

New foreclosure cases and repossessions are down nationally by about a third since last fall, LPS said. In New York, foreclosure filings are down 85 percent since September, according to the New York State Unified Court System.

Mark Stopa, a St. Petersburg, Fla., specialist in foreclosure defense, has 1,275 clients, up from 350 a year ago. About 75 clients have won modifications, dismissals or sold their properties for less than they owed. All the other cases are pending.

“Banks aren’t even trying to win,” said Mr. Stopa, who charges his clients an annual fee of $1,500.

An annual fee? WTF? This guy has stumbled upon a great business plan to take advantage of the amend-extend-pretend policy of lenders. The longer this process drags on, the more money he makes. Right now, he has 1,200 clients paying him $1,500 per year. That's $1,800,000 per year he is making from assisting squatters.

J. Thomas McGrady, the chief judge of Florida’s Sixth Circuit, which includes St. Petersburg, agreed. “We’re here to do what we’re asked to do. But you’ve got to ask. And the banks aren’t asking,” he said.

A spokesman for Bank of America said, “Any suggestion that we have a strategy to delay foreclosures is baseless.”

LOL! I watch the foreclosure market nearly every day. Each day 90% or more of the scheduled auctions are postponed or canceled to prevent too much product from entering the market. Further, the percentage of delinquent mortgage squatters that have not made payments in over two years continues to grow. Lenders are clearly executing a strategy of delaying foreclosures, and assertions to the contrary don't pass the giggle test.

A Wells Fargo spokeswoman blamed changes in state laws governing foreclosure for any slowdown. A GMAC spokeswoman said it was following “regulatory and investor expectations.” JPMorgan Chase declined to comment. Servicers said some of the decline in foreclosures could be traced to an improved economy.

Bullshit by any other name would smell as sweet.

There are many reasons that foreclosure, which has been slowing ever since the housing bubble burst, has been further delayed in many states.

The large number of cases nationally — about two million, plus another two million waiting in the wings — have overwhelmed many lenders and the courts.

Lenders, who service loans they own as well as those owned by investors, tried to circumvent the time-intensive process by using “robo-signers” who mass-produced documents, many of which made inaccurate claims. When the bad practices were discovered last fall, the lenders were forced to revisit hundreds of thousands of cases.

Over the last two years, most defaulting homeowners were people who had lost their jobs. Housing analysts say these homeowners are more likely to hire a lawyer and fight repossession than borrowers who had subprime loans that swelled beyond their ability to pay.

The link to unemployment is nonsense. Homeowners are hiring lawyers to game the system because it works. Paying a lawyer $1,500 a year is certainly cheaper than paying $1,500 a month in rent after a foreclosure. If the lawyer gains the squatter even one month of free housing, it was a good investment for the borrower. If it gets them a year of free rent, the payback is twelve fold. With such a good return on the money, it shouldn't be too surprising borrowers and attorneys are teaming up to screw the banks.

Judges these days are also more inclined to scrutinize requests for eviction rather than automatically approve them. The so-called foreclosure mills — law firms that handled many of the suits for the banks — are in retreat under law enforcement pressure. And some analysts suggest that banks are reluctant to take too many houses onto their books at any one moment for fear of flooding a shaky market.

Fear of flooding the market with REO is the primary reason lenders are not foreclosing and processing as fast as they can.

In New York, lenders seeking to repossess face additional hurdles. The legislature has mandated that borrower and bank meet to discuss terms under the auspices of the court, but these conferences have turned out to be anything but brief or simple. Instead of one conference, 10 are often needed, court officials say.

Borrowers are not going to be in a hurry to resolve anything since they are getting free housing. I imagine many borrowers and their attorneys have difficultly fitting these conferences into their busy schedules, and when they make no progress, they reschedule another one for six months from now. A requirement for conferences is guaranteed to add significant time to the process to the benefit of the squatter and the detriment of the bank.

And many foreclosure lawyers seem unable to meet a requirement, made last October by the New York Chief Judge Jonathan Lippman, to affirm the accuracy of their documentation.

“The affirmation has had a pretty chilling effect,” said Ann Pfau, New York’s chief administrative judge. “The attorneys for the banks tell us they can’t get through to the right people at their clients who can verify the information.”

Last September, before the documentation crisis, nearly 1,500 New Yorkers lost their houses as a result of foreclosure, according to LPS. The average over the last six months: 286. That is far lower than at any point since the recession began.

I discussed the problem of foreclosure delays in New York in the recent post: Free housing: the new bankster entitlement in New York City.

Similar foreclosure cases can have different fates. To increase their odds of staying put, the foreclosed who can afford it are hiring lawyers, a move that can drastically slow down a case.

Mr. Stopa, the Florida lawyer, said he divided his clients into three groups. Some are unemployed or disabled and just getting by. Others are able to save money and improve their financial situation as their case drags on. The third group are those who have strategically defaulted. They can afford to pay but are taking advantage of the banks’ plodding pace. Often the members of this group rent out the foreclosed home and keep the proceeds.

For as reprehensible as this behavior is, as long as this behavior is disclosed to the renter, I don't have a problem with it. Lenders created this situation, and they could stop it by foreclosing and taking the property back as REO. If the renter knows what they are getting into, then everyone is making choices based on full knowledge and disclosure. If the renter doesn't know, then I have a real problem with what the owners are doing.

Though delays in foreclosure might seem like a gift to those behind on their mortgage, the foreclosed themselves do not necessarily feel that way.

Margaret Bellevue waited nervously in a Miami courtroom early this month. She and her husband, Roland, an architect, are among 97,000 households facing foreclosure in Dade County, where the average time to foreclose is 738 days and climbing, according to LPS data.

Ms. Bellevue was on her third lawyer in a case that has stretched on as many years. “A friend of mine got her mortgage lowered through a modification,” Ms. Bellevue said. “I’d like to do that too.”

I imagine she would. The woman overpaid for her house, but she wants to keep it by having her debt reduced. When she and millions of others made a foolish and irresponsible purchases, they drove up prices and crowded out more prudent buyers. They should be forced to move out of their properties so there are some consequences for what they have done. Lenders are more culpable than borrowers, but it doesn't mean borrowers should have no consequences at all.

When her case came up, the judge told the lawyers they should try to work out a deal. They huddled outside the courtroom and agreed to meet again.

What is there to work out? The lender needs to foreclose, and the delinquent mortgage squatter needs to get out. It should be any more complicated than that.

Squatting is not just for the little guy

When you read stories about delinquent mortgage squatters, there is an implicit assumption that it involves lower income subprime borrowers. Nothing could be further from the truth. Many posers levered themselves into beautiful high-end mansions, and when the Ponzi borrowing ran out, they simply stopped making payments and squatted.

I can understand why they stay. Who would move out of a multi-million dollar property they can stay in for free and find another where it would cost $5,000 or more in rent? What is shocking is how long lenders have let this go on.

Lenders have made the argument that leaving occupants in a property prevents it from deteriorating. I call bullshit on that one. Properties deteriorate more quickly if they are being used and improperly maintained. What possible incentive does a delinquent mortgage squatter have to invest any money to upkeep a property? When they accidentally knock a hole in the drywall, will they spend money to patch it? At least a renter is going to call the landlord if there is a problem. A delinquent mortgage squatter will let small festering problems grow into large repairs rather than spend their own money fixing up the place.

Today's featured property is not in Irvine. The owner paid $2,265,462 on 8/24/2006 — the peak of the bubble. He used a $1,811,696 first mortgage from Countrywide, a $226,462 HELOC, and a $226,842 down payment. The owner had another property at the time in Aliso Viejo with several hundred thousand dollars of mortgage equity withdrawal.

A reader called this property to my attention. The haircut is enormous and newsworthy on its own, but what's more interesting is that the lender has allowed this owner to live there for over three years now without making any payments, and they don't appear to be in any hurry to foreclose.

Foreclosure Record

Recording Date: 06/23/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 12/03/2008

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 06/24/2008

Document Type: Notice of Default

The first NOD was filed in June of 2008 which means this owner stopped making payments sometime before March of 2008. He has been living there ever since and enjoying his entitlements.

While you were making your onerous house payments or paying your rent, this owner has been living for nothing in what was a $2M+ house. His neighbors must feel like chumps for continuing to pay their mortgages, particularly as his short sale pummels their property values.

Irvine House Address … 1 STARLIGHT Isle Ladera Ranch, CA 92694

Resale House Price …… $1,100,000

House Purchase Price … $2,265,000

House Purchase Date …. 8/24/2006

Net Gain (Loss) ………. ($1,231,000)

Percent Change ………. -54.3%

Annual Appreciation … -14.9%

Cost of House Ownership

————————————————-

$1,100,000 ………. Asking Price

$220,000 ………. 20% Down Conventional

4.49% …………… Mortgage Interest Rate

$880,000 ………. 30-Year Mortgage

$190,869 ………. Income Requirement

$4,454 ………. Monthly Mortgage Payment

$953 ………. Property Tax (@1.04%)

$708 ………. Special Taxes and Levies (Mello Roos)

$229 ………. Homeowners Insurance (@ 0.25%)

$0 ………. Private Mortgage Insurance

$400 ………. Homeowners Association Fees

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$6,744 ………. Monthly Cash Outlays

-$1062 ………. Tax Savings (% of Interest and Property Tax)

-$1161 ………. Equity Hidden in Payment (Amortization)

$365 ………. Lost Income to Down Payment (net of taxes)

$158 ………. Maintenance and Replacement Reserves

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$5,045 ………. Monthly Cost of Ownership

Cash Acquisition Demands

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$11,000 ………. Furnishing and Move In @1%

$11,000 ………. Closing Costs @1%

$8,800 ………… Interest Points @1% of Loan

$220,000 ………. Down Payment

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$250,800 ………. Total Cash Costs

$77,300 ………… Emergency Cash Reserves

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$328,100 ………. Total Savings Needed

Property Details for 1 STARLIGHT Isle Ladera Ranch, CA 92694

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Beds: 5

Baths: 6

Sq. Ft.: 5882

$187/SF

Property Type: Residential, Single Family

Style: 3+ Levels, Colonial

View: Canyon

Year Built: 2006

Community: Ladera Ranch

County: Orange

MLS#: S624677

Source: SoCalMLS

Status: Pending

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Fantastic 3 stories including very large 13,000 Square foot lot. Gated courtyard has casita with separate entrance. Wolf appliances, Subzero fridge, Wood floors, gourmet kitchen w/ butlers pantry, granite countertops, built-ins, intercom and security system. Property includes high ceilings a large driveway, and plenty of bedrooms. Large basement with great area for a home entertainment.