In a recent housing market analysis, PIMCO's Rod S. Dubitsky concludes long-term drags on housing demand will persist beyond the current crisis with distressed supply.

Irvine Home Address … 1703 ELK Grv Irvine, CA 92618

Resale Home Price …… $385,000

Coming over the airwaves

The man says I'm overdue

Sing along, send some money

Join the chosen few

Well mister I'm not in a hurry

And I don't want to be like you

And all I want from tomorrow

Is to get it better than today

Step by step, one by one, higher and higher

Step by step, rung by rung climbing Jacob's ladder

Huey Lewis & The News — Jacob's Ladder

Yesterday I lampooned a writer who didn't want to understand the problems with housing. Today, I am featuring an article from someone who does understand what ails the housing market.

Are There Any Rungs Left on the Housing Ladder?

Rod S. Dubitsky — PIMCP — July 2011

• It appears that limited mortgage availability and vulnerable consumer health are restraining demand.
• Also weighing on the market is regulatory uncertainty over the future structure of mortgage finance and the resolution of foreclosure overhang.
• We believe the housing market, considered to be a key driver of the economic recovery, will generally remain weak for the foreseeable future.

While the housing market is well off its bubble-era peak, the pending distressed supply has been frequently mentioned as creating additional headwinds, thereby preventing the housing market from mounting a meaningful recovery. Perhaps less discussed, we believe demand-side drivers are just as important.

Additional headwinds contributing to what we see as a dramatic cyclical and secular decline in housing demand will likely continue to weigh on the housing market for the foreseeable future. In spite of what may be considered good affordability (driven by dramatically reduced prices and low interest rates), it appears that limited mortgage availability and vulnerable consumer health across the income and age spectrum are restraining demand and may continue to do so. Also weighing on the market is regulatory uncertainty over the future structure of mortgage finance and the resolution of foreclosure overhang. For all of these reasons, we believe the housing market, considered to be a key driver of the economic recovery, will generally remain weak for the foreseeable future.

Demand will remain weak. It will take time for the armies of the foreclosed to regain their credit. If the standards for a qualified residential mortgage make people save for 20% down payments, it will take a very, very long time for demand to return. It's difficult to save 20%, and with the debt loads most people carry with student loans and credit cards, saving 20% of the price of a house is practically unreachable.

The down payment barrier will create significant demand for non-conforming products and second mortgages, but these will carry a stiff price tag. Private mortgage insurance is very expensive, and in today's market second mortgages are not available. It will take many years before the cost of these down payment proxies come down. In the meantime, the amount people will be able to borrow will be significantly reduced.

We may see real dollar-backed demand once people's FICO scores improve and the are eligible for loans, but the amounts these recycled borrowers will be offered will be paltry, and house prices will need to reflect that for sales to occur.

Affordability vs. Availability

Housing affordability in many markets may be considered compelling relative to historical levels, but it appears to be increasingly difficult to get a mortgage. We believe tighter mortgage underwriting criteria and the generally weakened financial state of the average consumer is reducing demand. For example, the Federal Housing Administration (FHA), which allows a 3.5% down payment for the best borrowers, has significantly increased its annual mortgage insurance premiums and halved the closing costs that can be financed in the loan balance (which effectively means more cash up front to cover closing costs). Recently it was reported that the FHA is considering tightening its debt to income ratio standards. This, plus general credit tightening by the FHA, suggests that what once was considered the nation’s affordability loan product may no longer be as widely available or as affordable as it once was.

FHA loans will continue to become more expensive because the FHA is losing money. Risk will be appropriately priced or the government will be pouring money down a rathole forever.

For conventional mortgages, Government-Sponsored Enterprises (GSEs) such as Fannie Mae and Freddie Mac have imposed Loan Level Pricing Adjustments requiring a 25% down payment in order for the most qualified borrowers to get advertised rates. Those with credit blemishes and/or less cash to put down could face up to 3.25 additional points in fees (or an additional 65 basis point annual cost assuming a five-year life), according to Fannie Mae.

In addition to GSE and FHA tightening, lenders and mortgage insurers often have even tighter criteria imposing more stringent underwriting, additional fees and rate adjustments on top of the GSEs (FHA lenders in particular are generally requiring stricter underwriting than FHA’s guidelines).

The GSEs are tightening for the same reason the FHA is: losses. We will eventually plug that hole as well, but it will require continued tightening of credit standards.

For those expecting private mortgage money and the jumbo market to save the day, those lenders don't want to lose money either. Jumbo standards are already very tight, and as GSE loans become more scarce, portfolio loans will increasingly become the standard. This is good for the market in the long term, but the transition will be painful for those who want to see higher prices.

Saving for the traditional 20% down payment may increasingly become an insurmountable hurdle. To help gauge how much of a hurdle the 20% down payment can be (which outside of FHA loans is becoming the de facto standard), we estimated how long it would take the typical consumer to save for a down payment on a median-priced home, which was $158,700 as of 1Q 2011, according to the National Association of Realtors. Liquid assets held by consumers under 45 years old available for a housing down payment average $22,600, according to the Federal Reserve Board’s Survey of Consumer Finances. In order to cover a 20% down payment and 5% closing costs for the median-priced home, consumers need $39,667. Therefore the amount needed for a 20% down payment on the median home (and likely a modest home at that) was nearly two times the average savings rate.

Think about how much more difficult it is in Orange County. With a median home price north of $400,000, a buyer here needs to save $80,000. Orange County residents are not famous for high savings rates. Realistically, the only way an Orange County resident is going to come up with enough money is if they first buy a home with an FHA mortgage of 3.5%, and that house goes up enough that they can sell and obtain the 20% equity for the next house. It will take a long time before the move-up property ladder provides that kind of equity.

Looked at another way, factoring in the personal savings rate from after-tax income as reported by the Bureau of Economic Analysis, we can arrive at a “saving duration rate” expressed in years. We have applied this methodology to calculate the saving duration on a 20% down payment mortgage, which seems to be what the country is migrating towards as the standard mortgage down payment. Based on the current savings rate of 5.1% and after-tax income of $48,300 (as of 1Q 2011), it would take 16 years for buyers to save the 20% down payment based on the national median–priced home and well over 20 years in many coastal cities where prices are higher. This metric assumes a complete depletion of savings and no retirement savings and other simplifying assumptions. The dramatic spike in sales that occurred as a result of the recently expired housing tax credit shows that relatively nominal assistance in purchasing a home can have an impact on home purchases and affordability. This is a direct reflection of the sparse savings most potential homeowners have available.

People jumped on the tax credit because without it, they feared they would never be able to save enough to buy a house. For many this was probably true. Of course, most didn't realize prices would drop to the new level of affordability, but all those underwater bear rally buyers are very aware of that fact now.

Next Generation Balance Sheets

The hypothetical balance sheet of the next generation of would-be homebuyers looks grim. Average student debt for a bachelor’s degree reached $23,118 in 2008 [and it is projected to go higher (see Figure 1)]…

This younger age group will likely constitute the bulk of potential new entrants to the housing market, and whether a corresponding demand in housing will materialize hinges largely on their ability to save. Although some of these grim statistics can be considered a function of recent economic weakness, we believe that some amount of the reduction in graduate earnings power and rise in debt is a longer-term phenomenon that could serve to limit college graduate home purchasing power for the foreseeable future.

With the enormous debt loans students now have coming out of college. how are they supposed to pay off their student loans and save for the down payment on a house? The generation that came before them was handed the keys to any house they wanted without any sacrifice whatsoever. The current generation is being asked to endure an austerity never before witnessed. How many of them will endure a decade of austerity to own a home?

Retirement Budget Housing Ramifications

A growing percentage of the population appears to be approaching a limited resource retirement, whether due to inadequate retirement resources or doubts about whether “promised” resources will materialize (e.g. state and municipal retirement plans are under threat).

… We expect most will be hesitant to spend these precious savings on a home, given the destruction in housing net worth and potentially limited income generated from DC plans. This could continue to curtail demand for trade-ups, retirement homes, etc.

My parents recently retired. Their financial plan does not include buying a new primary residence as the one they have now is paid off. They are not alone.

The days of buying a house to retire on the Ponzi borrowing are over.

Regulatory Headwinds Abound

In addition to these affordability constraints, a number of legislative and regulatory developments could potentially squeeze availability of mortgage loans:

• Mortgages: Though it is highly uncertain what the future structure of the mortgage market will look like, one thing is probable: The mortgage market of the future will have less government and more private sector involvement, though this may take several years. This will likely result in rising mortgage rates in general and more risk-based pricing in particular as the private sector increases rates to weaker GSE-eligible borrowers.

Borrowing costs for houses cannot get any lower relative to incomes. We are at 4.5% interest rates. The only way house prices can go up is if income rise, and with 9% unemployment and grim prospects for an employment recovery, Bernanke will need to print a lot of money to get wages to rise.

• Basel III: Among other changes potentially impacting the mortgage market, Basel III imposes increased capital charges on retained mortgage servicing, which further increases the cost of securitization as servicers who retain the servicing will be subject to more onerous capital charges. Currently, 100% of the value of mortgage servicing rights is applied to Tier I capital. Under Basel III, the capital benefit of mortgage servicing rights will gradually be phased down to 15% of equity capital.

I had not heard of this. It's another issue that will increase the cost of lending and thereby drive up interest rates.

• Dodd-Frank: Among the elements of Dodd-Frank that could suppress mortgage supply are the risk retention rules that require securitizers to retain 5% of securitizations for loans not meeting Qualifying Residential Mortgages (QRM) criteria. Among other elements, QRM mortgages stipulate a minimum 20% down payment and a maximum mortgage debt ratio of 28%. The comment period has ended on these proposals and the rules are expected to become final within 60 days of the end of the comment period (e.g. 60 days from June 10, 2011).

With the uproar over 20% down payments, the more important 28% debt-to-income limitation has gone under the radar. If implemented, the restricted income requirement will greatly drive up lending costs on those who stretch the most.

This could further impair the use of securitization to help stimulate the supply of mortgages. Though the GSEs are exempt from the risk retention rules, given that the future mortgage market will likely be less reliant on the GSEs (and the degree of GSE involvement will be heavily dependent on the political landscape), the securitization market is considered critical to offsetting the dwindling capacity of the GSEs. With a potentially declining presence of the GSEs and a minimalist securitization market, there simply does not appear to be enough bank capital (and banks are the most likely source of alternatives to GSE and securitization funding) to adequately support mortgage lending. …

There will be no shortage of mortgage money, but it will become more scarce at high debt-to-income ratios. That is a good thing. It will drive up costs to the most foolish borrowers, and drive down prices on homes those borrowers would have otherwise purchased.

Conclusion: Appearances Can Be Deceiving

A basic concept of personal finance is that as long as borrowers have sufficient funds for a down payment and a stable source of income, the next rungs up on the housing ladder should be within reach. For the typical American homeowner, these requirements have traditionally been satisfied by solid employment for young graduates, reasonable pricing and availability of mortgage credit, accumulation of funds that allow trade-up purchases of larger homes and finally by the view of housing wealth as a potential income supplement during retirement.

However, we believe the challenging economic situation today has dramatically altered this progression. At the bottom of the ladder, dismal employment prospects and the debt situation of young graduates may be impeding their ability to save for a down payment. In the middle of the spectrum, negative equity is effectively preventing many homeowners from advancing (i.e., Core Logic estimates that over 23% of homeowners have negative equity in their homes preventing them from buying a new home). And at the top of the ladder, the erosion of retirement income could result in downscale housing investments and may push retirees to consign themselves to the status of lifetime renters.

Every rung on the property ladder is effected for different reasons, but they are all under siege.

Instead of serving as a potential wealth builder, housing has in some cases become a potential millstone that can drain limited remaining liquidity and retirement funds. Hence, even buyers who can climb on to the home ownership ladder may opt out of home ownership in favor of what is often times the more flexible, available rental option.

The change in buyer psychology resulting from a multi-year price decline will be difficult to overcome. In fact, I believe this will be the worst problem created by the false rally of 2009-2010. Because the government meddling sent a false buy signal and burned a group of cautious buyers, many will question the real bottom when it materializes. This uncertainty will make the ensuing recovery tepid for all but the most undervalued markets.

Tight mortgage lending standards, pending GSE reform and weak economic conditions across the demographic spectrum render the prospects for housing demand increasingly grim. Though there will be some rebound in demand as the economy finally achieves escape velocity and income and employment growth return to normal levels, we are arguing that post-recovery demand will be more tempered than it has been in the past. Further, people need to live somewhere, and investors will likely step into the breach (and have already, as a large percentage of today’s home sales are all-cash sales to investors) as more housing becomes rental housing. The implication is that we could see further home price declines as we move from a nation of owner occupants to a nation of renters/investors.

Though much has been made of the distressed supply overhang, we believe the demand side of the housing equation could more than overwhelm the impact of distressed housing supply. Absent a significant economic rebound or more dramatic policy response, housing demand will likely remain a drag on the housing market for the foreseeable future.

There is no reasonable policy response to jack up house prices. Everything attempted so far has been a dismal failure. There is neither the political will nor a viable plan to counter the economic drag created by falling home prices. With banks weakened by balance sheets full of toxic assets they cannot sell without becoming insolvent, new debt is not likely going to provide a strong economic stimulus that could boost housing.

Let's hope Bernanke prints enough money to make everything better… not.

2003 Rollback

The low end of the Irvine housing market continues to tumble. We are firmly back in 2003 pricing, and these owners are in danger of losing money on their purchase from eight years ago.

The owners of today's featured property used 100% financing back in early 2003, but they were restrained in their borrowing thereafter. They only added $14,000 to their mortgage debt during a time when everyone around them was going nuts. Good for them.

——————————————————————————————————————————————-

This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707

949.769.1599

sales@idealhomebrokers.com

Irvine House Address … 1703 ELK Grv Irvine, CA 92618

Resale House Price …… $385,000

Beds: 2

Baths: 2

Sq. Ft.: 1200

$321/SF

Property Type: Residential, Condominium

Style: Two Level, Contemporary

Year Built: 2000

Community: Oak Creek

County: Orange

MLS#: S666332

Source: SoCalMLS

Status: Active

On Redfin: 2 days

——————————————————————————

IMMACULATE MEDITERRANEAN-STYLE TOWNHOME with PREMIUM QUIET LOCATION in upscale gated Oak Creek featuring two bedrooms, two & one-half baths, private patio, and two-car garage! IMPECCABLE THROUGHOUT this beautiful residence with ceramic tile entry, upgraded hardwood laminate flooring on both levels, cozy fireplace with custom tile surround, mirrored wardrobe in secondary bedroom, convenient inside laundry room, dramatic archways and niches! SPARKLING KITCHEN features Honey Maple cabinetry, dishwasher, gas oven, and stainless steel refrigerator! SPACIOUS MASTER SUITE with romantic balcony, dual vanities, oval bath, and walk-in closet. ENJOY AWARD-WINNING SCHOOLS and RESORT-STYLE pools, spas, tennis, sport courts, tot-lots, private Oak Park gym, upscale shopping, dining, and more!

——————————————————————————————————————————————-

Proprietary IHB commentary and analysis

hardwood laminate? Is that a genuine imitation?

Resale Home Price …… $385,000

House Purchase Price … $356,000

House Purchase Date …. 5/30/2003

Net Gain (Loss) ………. $5,900

Percent Change ………. 1.7%

Annual Appreciation … 1.0%

Cost of Home Ownership

————————————————-

$385,000 ………. Asking Price

$13,475 ………. 3.5% Down FHA Financing

4.48% …………… Mortgage Interest Rate

$371,525 ………. 30-Year Mortgage

$80,488 ………. Income Requirement

$1,878 ………. Monthly Mortgage Payment

$334 ………. Property Tax (@1.04%)

$90 ………. Special Taxes and Levies (Mello Roos)

$80 ………. Homeowners Insurance (@ 0.25%)

$427 ………. Private Mortgage Insurance

$283 ………. Homeowners Association Fees

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

$3,092 ………. Monthly Cash Outlays

-$301 ………. Tax Savings (% of Interest and Property Tax)

-$491 ………. Equity Hidden in Payment (Amortization)

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

$68 ………. Maintenance and Replacement Reserves

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

$2,390 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$3,850 ………. Furnishing and Move In @1%

$3,850 ………. Closing Costs @1%

$3,715 ………… Interest Points @1% of Loan

$13,475 ………. Down Payment

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

$24,890 ………. Total Cash Costs

$36,600 ………… Emergency Cash Reserves

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

$61,490 ………. Total Savings Needed

——————————————————————————————————————————————————-

Have a great weekend,

IrvineRenter

Richard T. Cirelli, President of RTC Mortgage Corporation, has proposed a series of self-serving policies to make his company more money, inflate house prices, and pass the risk on to US taxpayers. Needless to say, I disagree with his ideas.

Irvine Home Address … 9 OAKDALE Irvine, CA 92604

Resale Home Price …… $595,000

I used to flee safe

in the realm i did create

now i am all alone and cold

all my integrity has vanished

replaced with all the darkness

that's crawling inside

i realized that i had failed

pain, death, and deceit

Entrapped in a realm of insanity

The Sins of Thy Beloved — Partial Insanity

realtors aren't the only ones in the real estate industry who like to propose self-serving bullshit. Today a mortgage company executive is doing the same.

A Partial Solution to the Housing Crisis

July 14, 2011 — Richard T. Cirelli, President of RTC Mortgage Corporation

I think we can all agree on two things…

1. The economy won’t recover without a recovery in housing and 2. Underwriting guidelines are too tight.

No, actually we don't agree on those two things. Underwriting standards are not too tight. Lending is returning to prudent standards under which borrowers can make their payments and sustain ownership. Gone are the standards that were used to inflate a massive Ponzi scheme.

What follows is a series of proposals designed to put unqualified borrowers into loans by passing the risk onto the US taxpayer. It is the only way to sustain current pricing. What I think we can all agree on is that current pricing cannot be sustained by the number of borrowers who meet conservative lending guidelines. Where we disagree is on what should be done about it.

I don't believe we should try to sustain current inflated pricing by moving to an origination model where lenders have no risk and endlessly lobby the government to lower GSE and FHA standards so they can make more money from riskless originations. Supply and demand must come back into balance at price levels sustainable by private lenders who have evaluated the business risk and set interest rates and qualification standards. This must be private money that does not rely on government guarantees.

The result of the following proposals would be a completely government-backed housing mortgage market with significant taxpayer risk which supports a faulty origination-based business model that will inevitably inflate another Ponzi scheme and collapse when borrowers default. Only this time, the government will be liable for all the losses that should be absorbed by private lending.

Much has been said about underwriting guidelines being too tight. Fed Chairman Ben Bernanke admitted it in his press conference last month.

No, Bernanke did not admit that underwriting guidelines were too tight. Guidelines are tightening, and that is making mortgages harder to obtain, but that does not mean standards are too tight, it merely means standards have not tightened enough yet and we are still in the tightening process.

The majority of the U.S. senators said it in a letter to the U.S. House Committee on Financial Services in an effort to stop the proposed Qualified Residential Mortgage (QRM) bill that would make underwriting guidelines even tighter (there has been no ruling on QRM yet).

It’s been estimated that between 25% and 33% of the loans that are declined are “near misses” – people that fall just outside the guidelines but are otherwise qualified.

Aren't loans failing to meet government guidelines on the fringes supposed to create opportunity for private lending? Isn't that a good thing? Lenders should be cheering each tightening of government standards because it creates opportunities for them to make a loan on the fringes were risk is the smallest. In fact, the tightening of government standards and the resurgence of private lending is what we all want to see happen to stabilize the housing market. We must eliminate the system of government guarantees backstopping 98% of the loans in America.

Here are my thoughts on what’s wrong and how it can be improved without costing the government or the taxpayers more money.

Every one of these ideas will shift risk to the US taxpayer away from private enterprise which will cost the government and taxpayers more money. That is the nature or risk. Over time, the assumption of risk costs money. Just ask anyone in the insurance industry.

It’s my list of underwriting guidelines that are hindering the recovery and contributing to the continued slide in home prices

Before you read on, understand that I.m not advocating a return to the ridiculously loose days of no money down, no-income documentation, subprime loans.

Advocating loans just below the extremes of stupidity is still wrong. The free market must find the appropriate level of risk and price it accurately. What he is advocating is for the government to get behind the stupidest loans imaginable without going all the way back to the bubble peak. In other words, he wants to partially inflate the Ponzi scheme.

I’m suggesting some common sense ideas and tweaking of the existing guidelines that would enable more qualified people to buy and refinance their homes to help the economic recovery.

The age old appeal to common sense. Bullshit. Common sense is that you and I and every taxpayer does not want to pay the bill when some irresponsible borrower can't pay the mortgage.

• Eliminate Loan Level Price Adjustments (LLPAs)

These are adjustments to the cost or rate of a loan according to certain risk factors. Fannie Mae and Freddie Mac created these additional cost factors shortly after the government’s seizure of the agencies in late 2008. The most common LLPAs are for credit score and equity but others may also apply. The problem is that the borrowers that are most marginally qualified have to pay the highest rate, thereby creating a handicap right from the start.

The most marginal buyers should pay the highest rates because they are the ones most likely to default and cause losses. Has anyone noticed how high FHA insurance has become? FHA is the new subprime, and rather than raise the interest rate, they charge a 1.15% insurance fee that effectively raises the interest rate to over 6%. This is what should be happening to properly price risk.

It affects first-time homebuyers the most since they usually have the lowest down payments. It also affects homeowners that would like to refinance into a lower rate thereby making their home more affordable and the owner more likely to stay even if they have lost their equity. Instead, they may be forced into a higher rate simply because they had to increase their use of credit cards during a difficult period which lowered their credit scores while their equity diminished due to the economy.

Nobody had to increase the use of their credit cards. People could have made a choice to cut back on their entitlements. If they didn't choose to cut back on their spending, they are the most likely to default on their loan if the going gets really tough.

In short, loan level price adjustments are a good idea as it matches risk and cost.

• Prohibit Overlays

Overlays are restrictions or additional guidelines that some lenders impose that are stricter than the standard Fannie Mae/Freddie Mac guidelines. They often apply to the borrowers Debt-to-Income ratio thereby eliminating some borrowers that meet the industry guidelines but fall just outside of the guidelines of the particular lender that they unknowingly chose. Many lender-imposed overlays are seemingly minor adjustments, but collectively they prevent many potential homebuyers or refinancing homeowners from qualifying simply because they inadvertently chose a lender with an overlay that disqualified them. I’m in favor of requiring all lenders to offer the Fannie Mae/Freddie Mac guidelines without overlays.

Lenders have the right to impose whatever restrictions they want. If they are more conservative than they need to be to comply with the GSE standards, then competition should drive business away from them to lenders who are closer to the GSE standard. These should not be prohibited as the free market should make them go away in time on their own.

• Loosen Condominium requirements

A condominium project with less than a 51% owner occupancy rate or with more than 15% of the homeowners delinquent in their HOA dues is disqualified from Fannie Mae and Freddie Mac financing. So, what happens when the project no longer meets the guidelines? It instantly prevents all potential buyers from buying, sellers from selling and existing homeowners from refinancing. That in turn forces the value lower for all units in the project. And, more unit owners are likely to walk rather than make their payments as they become increasingly further under water. There may be qualified investors willing to buy the backlog of inventory in many condo projects if they can finance them now and later re-sell them to someone that can obtain a mortgage. Wouldn’t it be better to have a project with 40-50% investors or 16% delinquency than one with 100% of the units unmarketable?

No matter how loose you make the requirements, some projects are not going to meet the standard. To characterize these as 100% unmarketable is bullshit. These units are still marketable to cash buyers. in fact, these communities are a special opportunity for cash buyers who are willing to come in and clean up the mess. What bothers the author is his inability to generate a loan commission while cash buyers do their thing.

• Regulate or License the Underwriters

Does it seem strange that the underwriters charged with the responsibility of making the decision as to who qualifies do not need to be regulated or licensed? Mortgage Brokers have to be licensed and pass rigid state and federal exams and background checks. But those that are responsible for approving or denying a loan don’t. In my experience, the underwriters that have the least amount of experience or confidence will create the largest number of conditions when underwriting a loan. If the borrower can jump through enough hoops or provide enough documentation to compensate for an underwriter’s lack of ability, the loan might be approved. I’m sure all lenders have their own internal system for monitoring their underwriter’s performance but this most-important part of the process is not consistent. (Note-FHA underwriters do have to be licensed but Fannie Mae/Freddie Mac underwriters don’t).

I'm not sure what this will accomplish. It sounds like he wants them licensed so they will be requried to approve more of his dodgy loans.

• Extend temporary loan limits to 729,750 indefinitely

Congress temporarily increased the loan limits for certain high-priced markets such as Orange County from $417,000 to $729,750. While these temporary limits were extended last year, they are set to expire again and be reduced to $625,500 on September 30, 2011. While there are some jumbo lenders, their rates are higher than those offered with Fannie Mae/Freddie Mac eligible financing. Down payment requirements are usually higher too. Let’s keep the limits as they are until the housing market recovers.

Obviously, I think this is a really, really bad idea. Since when is a $729,750 house a candidate for affordable housing subsidies? These limits should never have been raised from $417,000 to begin with. The era of riskless origination must end. Fortunately, the government is not going to do this.

• Allow Special Circumstance Refinances

Many responsible people lost a job or had a major hardship due to the economy and are now perhaps able to get back on their feet. Yet, these people may be prevented from qualifying for a mortgage for many years. I’d like to see some rules written to allow consideration for those who that had a temporary setback for reasons outside of their control.

Another bogus example to lowering standards to help this guy underwrite loans to people who aren't qualified. It may be sad that people fell on hard times, but that doesn't entitle them to some special government subsidy.

• Permit Short Refinances Without layers of LLPAs

We have programs allowing underwater homeowners to refinance up to 125% of the value of their home if their loan is owned by Fannie Mae or Freddie Mac.

Those programs are a bad idea and should be eliminated. It allows lenders to push their loans most likely to go bad from strategic default onto taxpayers.

But, most lenders have imposed an “overlay” that limits these refinances to just 105% or less.

Lenders do this because they know these people will default, and if they push too many bad loans onto the GSEs, the GSEs will quit taking their loans. That's why we have loan level price adjustments.

And, there are Loan Level Price Adjustments that drive up the rate or cost due to the owner’s lack of equity. Let’s allow these homeowners to take advantage of the program designed by the government to help them take advantage of lower interest rates and payments. And, prohibit the Overlays and LLPAs mentioned above. Wouldn’t a rate reduction from say 6% to 4.5% enable many homeowners to stay rather than add their home to the inventory of future foreclosures?

Allowing borrowers to refinance into lower rates would cost the GSEs billions of dollars in revenue at a time when they are already costing taxpayers billions of dollars. The GSEs will lose less money on foreclosures than they would if they allowed everyone to refinance.

• Penalize Servicers for Taking Too Long for Loan Modifications and Short Sales

The biggest problem with Loan Mods and Short Sales is that they take too long. After waiting months and sometimes more than a year for the current servicer of a loan to approve a transaction, the buyer has given up and the seller is deeper in debt. And, the government pays a reward of $1,000 for a servicer to complete a transaction. Take away the reward and charge them a penalty for not completing or denying a request within a reasonable period of time. The reward certainly hasn’t been enough incentive to entice the servicer to complete the transaction. It will greatly speedup the process and reduce the number of homes and people in distress.

Actually, I favor this idea, but not for the reason he suggests. If there was a penalty, the denial and amend-extend-pretend would come to an end, and lenders would finally get on with the serious business of foreclosing on the delinquent mortgage squatters.

Remember the reason for the bank bailouts and the stimulus programs? It was to AVOID A FORECLOSURE CRISIS.

No. It wasn't. The bailouts were designed to mask the insolvency of our banking system, and the stimulus was designed to inject money into the system at a time when lenders could not. It was hoped lenders could earn their way back to solvency, but it is taking much longer than anyone anticipated — except us bears that understood the problem.

Did the banks that were “too big to fail” use those funds to help avoid a foreclosure crisis? No. They used those funds to get richer – not to help the people.

Yes, they did. That's why people were opposed to the bailouts to begin with. The banks should have been allowed to go down with the people who borrowed money.

And the government continues to let them impose unnecessary restrictions on homebuyers and homeowners trying to refinance.

Nonsense.

Along with jobs, housing is the key to an economic recovery. Home values must be stabilized and foreclosures must be avoided.

Wrong again. Foreclosures must be encouraged. They are the key to economic recovery.

Let’s lighten up on the unnecessary and mostly unregulated guidelines I mentioned. It won’t solve the entire problem but I think it would help millions of people without adding to this country’s deficit or the potentially growing inventory of foreclosed homes.

These dumb ideas won't solve anything, but they will help him originate some more riskless loans while temporarily inflating another housing bubble.

Richard T. Cirelli is a 35-year veteran of the mortgage industry. He is the owner of RTC Mortgage Corporation, a full-service mortgage company based in Laguna Beach. He is a Certified Mortgage Planning Specialist. RTC Mortgage offers all types of residential and commercial real estate financing. Contact him at 949.494.4701 or Rick@RTCmortgage.com. Visit www.rtcmortgage.com.

I think its fair to say, I strongly disagree with this man's ideas.

A profit from early an 2008 sale?

When I saw today's featured property on the MLS, it seemed familiar. I profiled it back in late 2007 when the current owner bought it. As always, the old comments are an interesting look into the view of market participants back in 2007. We had blog tolls back then too.

Back in November of 2007, this property was listed for $620,000. The property records say they paid $520,000, but the price is unconfirmed. If they managed to negotiate $100,000 off the asking price, they are pretty savvy. I suspect they paid more. In either case, they only borrowed $416,000 originally, and they refinanced for $417,000 in 2009, so this is not a distressed sale.

——————————————————————————————————————————————-

This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707

949.769.1599

sales@idealhomebrokers.com

Irvine House Address … 9 OAKDALE Irvine, CA 92604

Resale House Price …… $595,000

Beds: 3

Baths: 2

Sq. Ft.: 1440

$413/SF

Property Type: Residential, Single Family

Style: One Level, Contemporary

Year Built: 1977

Community: 0

County: Orange

MLS#: S666592

Source: SoCalMLS

Status: Active

——————————————————————————

Here is the one-story, single-family detached home you've been looking for in Woodbridge! Cathedral ceilings and designer colors greet you as you enter this charming 3-bedroom home. Step down into the formal living room awash with natural light streaming in from the many dual-pane upgraded, energy saving windows. The cozy dining area with its tasteful chandelier and tile floor connects the living room and galley-style kitchen that features expansive, decorator tile countertops and plenty of cabinet storage. A gorgeous master suite includes a large bathroom with dual-sink vanity. Relax with family and friends in the comfortable wraparound backyard while a private patio serves one of the secondary bedrooms. Central air conditioning plus ceiling fans with handheld remote controls in all bedrooms and the living room insure your summer time comfort while saving energy. Highly-rated Irvine schools. * * * LOW HOA DUES * * * NO MELLO ROOS * * * STANDARD EQUITY SALE * * * NOT A SHORT SALE * * *

——————————————————————————————————————————————-

Proprietary IHB commentary and analysis

Resale Home Price …… $595,000

House Purchase Price … $520,000

House Purchase Date …. 1/25/2008

Net Gain (Loss) ………. $39,300

Percent Change ………. 7.6%

Annual Appreciation … 3.9%

Cost of Home Ownership

————————————————-

$595,000 ………. Asking Price

$119,000 ………. 20% Down Conventional

4.48% …………… Mortgage Interest Rate

$476,000 ………. 30-Year Mortgage

$103,122 ………. Income Requirement

$2,406 ………. Monthly Mortgage Payment

$516 ………. Property Tax (@1.04%)

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

$124 ………. Homeowners Insurance (@ 0.25%)

$0 ………. Private Mortgage Insurance

$82 ………. Homeowners Association Fees

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

$3,128 ………. Monthly Cash Outlays

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

-$629 ………. Equity Hidden in Payment (Amortization)

$197 ………. Lost Income to Down Payment (net of taxes)

$94 ………. Maintenance and Replacement Reserves

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

$2,389 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$5,950 ………. Furnishing and Move In @1%

$5,950 ………. Closing Costs @1%

$4,760 ………… Interest Points @1% of Loan

$119,000 ………. Down Payment

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

$135,660 ………. Total Cash Costs

$36,600 ………… Emergency Cash Reserves

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

$172,260 ………. Total Savings Needed

—————————————————————————-

IHB and Global Decision have teamed up to do an analysis of Irvine house prices versus Coto de Caza. We are featuring the property of Vicky and Donn Gunvalson of OC Housewive's fame.

Irvine Home Address … 7 SHIRE Coto de Caza, CA 92679

Resale Home Price …… $2,395,000

Who's to know if your soul will fade at all,

The one you sold to fool the world.

You lost your self esteem along the way.

And just fake it, if you're out of direction.

Fake it, if you don't belong here.

Seether — Fake It

Today's post is a detailed comparison of Irvine and Coto de Caza. I have joked about the posers and pretenders in Irvine, but by comparison, it looks like Coto de Caza has Irvine beat. Despite having far fewer homes built during the bubble, Coto is experiencing greater price declines due to foreclosures. Excessive Ponzi borrowing is the most likely culprit.

Over the last few weeks, the IHB has been proud to present Jaysen Gillespie of Global Decision. His advanced statistical analyses of the market include An accurate view of the Irvine housing market by Global Decision and IHB, A detailed look at Irvine Village premiums by Global Decision and IHB, and The market value of Irvine home features by Global Decision and IHB. If you haven't read those posts, I highly recommend them to anyone who wants to understand what is really going on in the Irvine housing market. Jaysen has also performed a more detailed analysis of the Coto housing market at the Coto Housing Blog.

Today he is back with a look at how Irvine and Coto de Caza have compared since 2000. Some of the results may surprise you.

A presentation by Jaysen Gillespie of Global Decision

info@globaldecision.com

Global Decision is an analytics consulting firm. While our methods are not industry-specific, our engagements are skewed towards specific industries in Southern California, such as real estate (along with online gaming and restaurant chains). We specialize in applying both foundational and advanced analytics to better understand business and economic issues.

Today continues our series on using the Global Decision Hedonic Price Model to determine how homes values are trending and the underlying factors that create such value. A large part of the value of homes in Irvine is location-driven. While we’ve explored the relative market values of various areas within Irvine (such as Woodbury vs. College Grove vs. Quail Hill), we’ve not yet compared Irvine to non-Irvine locations. Such comparisons are harder to do because a well-formed model has to be constructed for each comparison city. Nonetheless, real estate is highly substitutable across cities, and prices trends in nearby areas are very likely to impact price trends in Irvine.

To that end, we being with a comparison of price trends – based on hedonic indexes – for Irvine and Coto de Caza. Why Coto de Caza you may ask? Coto was chosen for a number of reasons. First, it’s a manageable set of data that we could easily assemble. Second, it’s a very homogeneous area that lends itself to a hedonic model (though you may need to exclude high-end custom homes on 1.5+ acres of land). Third, schools rank 9 or 10 on GreatSchools, keeping it on par with Irvine in terms of numerical ratings. It’s hard to model intangibles such as teacher quality and parent involvement). Fourth, safety is assured by gates and guards, and crime is minimal.

Finally, the actual physical parameters of the homes are substantially different from Irvine. Coto homes are much larger, with a median size of 3400-4000 square feet in a given quarter. Coto living also involves a longer commute and has a more rural feel. These differences are likely to mean that Coto buyers and Irvine buyers may put different value on different characteristics, and a hedonic model can help untangle how those values differ.

Based on the Global Decision Hedonic models for each city, it’s clear that Coto prices have fallen much more rapidly than prices in Irvine. In addition, Coto’s housing bubble – while significant, was about 10% smaller (peak vs. trough) than what was experienced in Irvine.

An interesting way to compare the performance of the Coto and Irvine markets is to plot the ratio of the Irvine Hedonic index to the Coto Hedonic index. This ratio was between 0 and 10% during the formation and peak of the housing bubble (years 2000-2006). However, because prices in Coto have deflated at a much faster rate than prices in Irvine, the ratio has moved sharply higher in the last two years.

Irvine and Coto can also be compared to known regional indicators, such as the Case-Shiller LAOC indexes. Case-Shiller publishes five indexes for the LAOC area (High/Mid/Low Tiers, Aggregate, and Condos). In the case of markets like Irvine and Coto, the LAOC High Tier would be the most representative Case-Shiller index. We plot the Case-Shiller LAOC Mid Tier above also for reference.

As discussed before, Coto’s bubble was not quite as large as Irvine’s – and Irvine’s upward path aligns quite closely with the Case-Shiller LAOC High Tier trajectory. Since the peak values, Coto pricing has declined 33%; Case-Shiller LAOC High Tier is down 29%; and Irvine is down 19%. Lower-value areas, as represented by the Case-Shiller LAOC Mid and Low tiers have suffered even larger declines. In the above graph, the Mid Tier is down about 40%.

The above data begs the question: is Coto trading at a temporary discount to Irvine? Is Irvine trading at a temporary premium to Coto? Or has something in the underlying valuation structure changed that has tilted the value ratio away from Coto and towards Irvine? With just two cities, we can’t provide much evidence to say whether Coto or Irvine is the “outlier.”

As more hedonic models become available, it will become clearer which cities are following trend and which have either (temporarily or permanently) escaped from their previous trajectories. We caution that such “permanent” escapes from typical parameters are often not as permanent as initial data would imply.

Some insight regarding buyer preferences can be gleaned by looking at the underlying factors in each model. Directionally, the impact of most changes in the property point in the same direction. Adding a car spot to the garage adds value; using three stories to create square footage detracts from value. However, there are a few interesting differences between Coto and Irvine buyer valuations.

Beds, Baths, and Beyond

As we’ve seen from the Global Decision Irvine Hedonic model, the addition of bedroom (with all else equal) does not add value to a SFR property. In Coto, the same is true – only the impact is larger. Simply adding a bedroom creates a slight decline in value (1.1%). Conversely, the positive impact of adding a bathroom is not nearly as big in Coto as it is in Irvine. We theorize that these results stem from the fact that homes with many bathrooms (4, 4.5, and 5) are quite common in Coto – but rarer in Irvine. Moving from 2 to 3 baths creates significant utility. Moving from 4.5 to 5.5 baths is nice but not as useful (see: diminishing marginal utility).

Another very significant difference is seen the value of additional square footage. A 10% increase in the size of an Irvine house creates a “flow-through” to value of about 5.1%. For Coto properties, we find this number to be an astounding 8.3%. The 8.3% is a very high flow-through ratio and indicates that Coto buyers really are all about the size of the structure. 8.3% also indicates a lower value to the underlying land, vs. the 5.1% seen in Irvine. The typical Irvine relationship between square footage and PPSF (price per square foot) creates decreasing PPSF as properties get larger. In Coto, we see very little of this impact – with properties selling for a near constant PPSF even as size increases.

IrvineRenter's Commentary

When Jaysen and I first discussed looking at Coto de Caza, I was drawn to the idea because it is a ideal substitute market for Irvine. As Jaysen pointed out at the beginning of the post, Irvine and Coto de Caza share many characteristics in common, and the things that set Coto apart are unavailable here in Irvine. To be quite honest, having grown up in a town of 2,000 people in a county of 15,000, the rural feel of Coto de Caza makes me feel at home. It is certainly a market I would consider as an alternative to Irvine, and I know I am not alone. As the prices have crashed in Coto much more so than Irvine, the substitution pull becomes even stronger. At some price point, even the most patient buyers devoted to Irvine will take a look at this market.

I'm sure our resident bulls will claim the true Irvine premium is revealing itself. It's a comforting belief for homeowners, but the substitution effect is very real, and eventually premiums established in the last few years will revert to the mean. A housing crash does not suddenly and permanently make one place 35% more desirable than another.

Having looked at MLS properties in Coto de Caza, I was not surprised that Jaysen's analysis revealed what I see browsing; prices have fallen more in Coto than in Irvine. Since most of Coto was finished before the housing bubble, there is only one explanation that makes sense; the posers who emulate the Orange County Housewives borrowed and spent their homes, and now foreclosures are ravaging the place. Awgee from the Coto Housing Blog has noted that buyers always seem to step up and purchase the properties that do get pushed through to auction, but the downward trajectory of prices speaks for itself. There are more posers than buyers, and there are many more delinquent mortgage squatters biding their time in shadow inventory.

I want to thank Jaysen again for his great analysis. And don't forget to check out a more detailed analysis of the Coto housing market at the Coto Housing Blog.

Keep you in the dark

You know they all pretend

Keep you in the dark

And so it all began

Send in your skeletons

Sing as their bones go marching in… again

The need you buried deep

The secrets that you keep are ever ready

Spinning infinity, boy

The wheel is spinning me

It's never-ending, never-ending

Same old story

Foo Fighters — The Pretender

The Real Land Barons of Orange County

For those of you uninterested in statistics and heady analysis of housing markets, the rest of this post is a profile of the crumbling property empire of OC Housewife Vicki Gunvalson and her X (or soon to be) husband Donn. The property records show Donn and Victoria Gunvalson owning three properties:

7 SHIRE Coto de Caza, CA 92679

2 Altimira, Coto de Caza, CA 92679

25 Vermillion, Irvine, CA 92603

There is one thing we can be certain of based on the analysis presented above by Global Decision and IHB, the value of the Gunvalson property empire is going down.

2 Altimira, Coto de Caza, CA 92679

This is a property I find personally appealing. It's a big property adjacent to the golf practice facility. Hopefully, it's not so close that golf balls pelt the place.

According to Wikipedia,

In Season 3, Gunvalson and her husband are empty nesters and purchase a smaller home in Coto with the goal to downsize and simplify their lives. However, they still reside in their large residence and Gunvalson expresses anxiety of moving to the smaller home because of her perceived connection between financial failure and downsizing her home's square footage. She explains to the camera, “What will people think?” and eventually decides to sell her smaller house.

I am assuming 2 Altimira is the smaller house, and according to public records, they still own it, probably because nobody will pay them anywhere near what they owe on it.

They purchased the property for $1,650,000 on 4/6/2007 using a $1,320,000 Option ARM, a $165,000 HELOC, and a $165,000 down payment. This purchase came 10 days after they obtained a $300,000 line of credit (HELOC) on their primary residence. Coincidence? Or was this the source of the down payment?

Since property values have fallen more than 30% since early 2007, it's safe to say they are at least $320,000 underwater, depending on whether or not they used the HELOC as purchase money (What would you guess?)

Vicki seemed very worried about what people will think. So what do you think? ~~ giggles to self ~~

25 Vermillion, Irvine, CA 92603

Vicki and Donn picked up this property on 12/21/2004 for $712,500. They used a $460,950 first mortgage, a $106,300 second mortgage, and a $145,250 down payment. Interestingly enough, they opened a HELOC on their primary residence for $400,000 three weeks prior to purchasing this one. Was Ponzi borrowing the source of their down payment?

Based on the price drops experienced in Irvine, they are probably just above water. No ongoing HELOC abuse here, just another poorly timed purchase.

7 SHIRE Coto de Caza, CA 92679

The primary residence is the cornerstone of family life. Perhaps people will take risks on investment properties, but surely they won't do anything foolish and risk the family home, right?

This property was purchased on 12/10/2001 for $1,100,000. They used a $825,000 first mortgage, a $55,000 second mortgage, a $55,000 HELOC, and a $165,000 down payment. This $165,000 down payment is the only equity not accounted for by other borrowing. It was the seed of their entire Ponzi empire.

On 12/17/2003 they refinanced the first mortgage for $842,000 and obtained a $75,000 HELOC. This is less than the total of their previous mortgages suggesting they either did not use the original $55,000 HELOC, or they actually paid down the mortgage. Total property debt at this point is $917,000 assuming the $75,000 HELOC was fully utilized.

On 11/30/2004, three weeks prior to the purchase of 25 Vermillion, Irvine, CA 92603, they obtained a HELOC on 7 Shire for $400,000. That is overkill for the $145,250 down payment they needed to obtain their investment property, so perhaps they did not borrow it all? ~~ giggles to self again ~~

On 6/28/2006 they obtained a 7-year fixed ARM from Countrywide for $1,500,000. That's some serious cash out. At this point, they have added $565,000 to their first mortgage.

On 3/27/2007, about 10 days prior to buying 2 Altimira, Coto de Caza, CA 92679, they obtained a $300,000 HELOC. Again this is overkill for a $165,000 down payment they needed to buy the property.

Finally, on 9/14/2007 they obtained a $500,000 HELOC on 7 Shire. If they used this HELOC, then their total property debt is $2,000,000. With their current $2,395,000 asking price and their underwater property at 2 Altimira, this couple has no housing equity. If they liquidated all these holdings today, they would obtain nothing from their Orange County real estate.

The Real Houswives of Orange County is very instructional. The characters they find set perfect examples of how we all DON'T want to live.

——————————————————————————————————————————————-

This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707

949.769.1599

sales@idealhomebrokers.com

Irvine House Address … 7 SHIRE Coto de Caza, CA 92679

Resale House Price …… $2,395,000

Beds: 5

Baths: 5

Sq. Ft.: 5400

$444/SF

Property Type: Residential, Single Family

Style: Two Level, French

View: Hills

Year Built: 1995

Community: Coto De Caza

County: Orange

MLS#: S653043

Source: SoCalMLS

On Redfin: 113 days

—————————————————————————

BEAUTIFUL ESTATE HOME ON 1.0 ACRE OF LAND IN THE WOODS OF COTO DE CAZA! THIS GORGEOUS HOME FEATURES HIGH CEILINGS AND OVERSIZED BEDROOMS THROUGHOUT, WITH ONE SUITE AND LAUNDRY ROOM DOWNSTAIRS. HOME BOASTS BRAND NEW WOOD FLOORS ON THE NEWLY RENOVATED DOWNSTAIRS LEVEL AND A DRAMATIC MASTER SUITE WITH OVERSIZED BALCONY. FAMILY ROOM WITH WET-BAR THAT OVERLOOKS A $500,000, RESORT STYLE PALM TREE STUDDED POOL FEATURING A HUGE ROCK SLIDE AS WELL AS A 5 SEAT SWIM UP BAR. THIS HOME TRULY IS AN ENTERTAINERS DELIGHT WITH ITS OWN OUTDOOR KITCHEN INCLUDING A BUILT IN BARBEQUE, MINI FRIDGE AND RECESSED GROTTO WITH TV AND FULL BATH. THE POOL AREA ALSO FEATURES BUILT IN GAS AMBIENT HEATERS AS WELL AS A ROUND FIREPIT WITH SEATING. THIS HOME IS A MUST-SEE WITH TOO MANY UPGRADES TO LIST!! THE ESTATE IS FEATURED ON BRAVO'S HIT TELEVISION SHOW, 'THE REAL HOUSEWIVES OF ORANGE COUNTY. ' THIS HOME SHOWS WELL AND WILL SELL FAST!

——————————————————————————————————————————————-

Proprietary IHB commentary and analysis

Resale Home Price …… $2,395,000

House Purchase Price … $463,500

House Purchase Date …. 10/3/2003

Net Gain (Loss) ………. $1,787,800

Percent Change ………. 385.7%

Annual Appreciation … 21.1%

Cost of Home Ownership

————————————————-

$2,395,000 ………. Asking Price

$479,000 ………. 20% Down Conventional

4.48% …………… Mortgage Interest Rate

$1,916,000 ………. 30-Year Mortgage

$415,086 ………. Income Requirement

$9,685 ………. Monthly Mortgage Payment

$2076 ………. Property Tax (@1.04%)

$67 ………. Special Taxes and Levies (Mello Roos)

$499 ………. Homeowners Insurance (@ 0.25%)

$0 ………. Private Mortgage Insurance

$216 ………. Homeowners Association Fees

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

$12,543 ………. Monthly Cash Outlays

-$1627 ………. Tax Savings (% of Interest and Property Tax)

-$2532 ………. Equity Hidden in Payment (Amortization)

$793 ………. Lost Income to Down Payment (net of taxes)

$319 ………. Maintenance and Replacement Reserves

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

$9,496 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$23,950 ………. Furnishing and Move In @1%

$23,950 ………. Closing Costs @1%

$19,160 ………… Interest Points @1% of Loan

$479,000 ………. Down Payment

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

$546,060 ………. Total Cash Costs

$145,500 ………… Emergency Cash Reserves

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

$691,560 ………. Total Savings Needed

——————————————————————————————————————————————————-

Today we have some creative cartooning and analysis from our favorite lender, Soylent Green is People.

Irvine Home Address … 4 SHARPSBURG Irvine, CA 92620

Resale Home Price …… $729,000

Out of the ruins

Out from the wreckage

Can't make the same mistake this time

We are the children

the last generation

We are the ones they left behind

And I wonder when we are ever gonna change

Living under the fear till nothing else remains

We don't need another hero

We don't need to know the way home

All we want is life beyond the thunderdome

Tina Turner — We Don't Need Another Hero

The following cartoon strip and commentary is the orginal writing of Soylent Green is People. My commentary will pick up at the end.

Soylent Green Is People's take on the falling conforming limit

Will the 2011 Real Estate market hit a tipping point with the reduction in loan limits, or are we seeing much made out of nothing? It’s a bit of both I’d say.

Numbers don’t lie.

Let’s assume that current spreads between Portfolio Jumbo financing and Standard Conforming mortgage rates runs a half percentage point. For a $729,750 mortgage, that translates into an increase of $219.92 per month. Some might say that’s an acceptable change in terms. Others will have this increase weigh heavily on their commitment to buying. Quantify this expense not as a mortgage payment, but food, entertaining, air conditioning, gasoline. $219.92 is real money to most prudent buyers when viewed in context.

During the hyper bubble period payments rose primarily because of price inflation, not higher rates. The market counteracted this trend with expanded “No Ratio”, Stated Income loans, and ever lower rates, culminating in the Option ARM origination explosion of late 2006. The days of zero underwriting standards have passed. We’re already back to historic low rates. The only unconventional loan product left are Interest Only ARM’s. Will we see a flood back into these products when fixed loans become more expensive? From what I’m seeing now, the answer is no. ARM loans still comprise a very small portion of new loan origination and is not trending higher for now.

The impact on qualifying?

A buyer able to purchase a $912,000 priced home with 20% down needed an annual income close to $120,000. With Portfolio Jumbo loans tighter debt to income ratios come into play. The income needed to purchase now swells to $150,000 per year. The reason? Debt to Income ratios can be pushed to 45% for Conforming loans, higher in some select cases. Ratios for Portfolio Jumbo loans have crested in the high 30’s to low 40’s. Is that a bad thing? Not in the long run. Weaning the Government out of the mortgage standardization business is a good thing, but will come at a high price for some.

A real time price pressure example:

18811 Tabor Drive was purchased in 2007 for $895,000, closing with an ARM first loan and a second mortgage. The total indebtedness appears to be $805,000. It’s listed for sale at $875,000 as an “Equity Sale” however after you subtract for commissions due, whatever equity remains is becoming razor thin. After August 1st, the income required to purchase this home, assuming 20% down, jumps from $123,000 per year to $145,000 per year. What price fits a buyer pool with incomes at $123,000? It would need to sink below $830,000. A $45,000 price reduction to overcome a $22,000 income gap, caused by a one half percent increase in rate. At this point the home becomes either a delisted property or a short sale. Homes in this position are the first fruits of the unintended consequences created by years of lending policies gone amok.

$875,000 — 18811 TABOR Dr Irvine, CA 92603

It’s the guidelines, stupid.

Prior to August 1st, Temporary Loan Limit Conforming loans and Jumbo FHA loans offered extraordinarily generous qualifying guidelines:

45% to 55% Debt To Income Ratios

Credit scores to 620

3.5% down payment minimums.

2 Months Standard Cash Reserve Requirements.

County by County Loan Limits.

In this new lending landscape, the rules of the road have changed quite a bit:

40% debt to income ratios on average.

Credit scores minimums from 700 to 720.

20% down payments required..

12 to 24 month cash reserves needed.

Zip Code by Zip Code loan limits.

5% reduction in ratios, 80 point increase in FICO scores, 17% increase in down payments, and a geometric increase in cash reserves are simply minor tips of the greater iceberg. Normally a buyer could shop for their loans based on rates and fees. That will not longer be the case. Company ABC may have the best rates in town, but what if your score is 719? Some companies won't finance you without a 740 score so there goes your great rate. I've seen starting FICO score requirements as high as 760 from some brokers!

Want to buy a home with a $1,000,000 loan in Newport Beach? Along Newport Coast you can, but in some cases not by the Airport in Newport Heights. Lenders are beginning to look carefully at price trends not by County, but drill down even to the Zip Code. Buyers then will need to go from company to company comparing qualifying conditions first, perhaps then to settle on a terrible rate just to buy the home they want. Will most buyers subject themselves to this high level of scrutiny and effort prior to purchasing? My guess is yes, but only the hardy ones will take on that task.

There are some who believe that smaller banks will rise to the occasion, that bigger banks, hedge funds, and insurance companies will recognize an unmet need and fill the gap created when Auntie Agency changed the rules. What this thinking is based on remains a mystery to me. Lenders aren't in the good will business. Their are in the risk avoidance business plain and simple. Does it seem rational to pour good money into a depreciating asset class, where the buyer profile tends to consider strategic default over bill paying as a first option? No one said bankers were rational, but it defies logic to think once the lending market vapor locks, bankers will be there to rescue this section of the market.

Circling back to our home on Tabor, prior to August 1st a buyer had to provide only $10,000 to $15,000 in post closing cash reserves. Now that amount is over $50,000. You would think that most high net worth buyers have a huge retirement plan or some cash in the bank substantial enough to meet this criteria. I can tell you from experience that is often not the case. Once a 20% down payment is offered, many buyers simply have run out of spare cash – if there is really such a thing! A $50,000 post closing cash level requires a 401k to have about $85,000 in available funds. Why is that? Lenders will use only 60% of the accounts value assuming the penalties incurred should you need to tap into these funds. Do you have $85,000 in a retirement account? Congratulations! Your in the minority for the most part.

Negative feedback loops and buyer psychology.

When the limit changes take place, they will coexist with seasonal factors. Sales volume usually drops off starting in September. Any new loan limit reduction will take some time to impact the market, and buyers are already beginning to realize this. When the Main Stream Media begins reporting slow sales, buyers who have started to wait all the way back in August now will have more reason to stay on the sidelines. Lower sales volume, lower prices, higher qualifying guidelines, fewer buyers. Lower sales volume, lower prices….ad infinitum. Some comments seen on-line:

“…we are also thinking of waiting…There are reasons why prices may come down (not counting on it), but none for them to go up. The pool of qualified buyers is decreasing. Those of us who are here and do not have a home we need to sell in order to buy another one, have been waiting a long time for prices to return to normalacy. We can wait awhile longer for the right place” – EastBay1st (Redfin Forums)

“if you would be personally negatively affected by jumbo loan changes, waiting makes sense for me. prices are generally lower in NOV +, IMHO…” – Lexa (Redfin Forums)

“So my guess is that you'll see properties in the >$925k range get fewer offers (less competition), and you'll see more transactions in the $800k-$900k range fall out of escrow because the buyer can't remove the loan contingency” – Prechter (Redfin Forums)

Financial advisors have started the drum beat of “wait and see”

“So, for those buyers who are willing to wait for a deal, this fall may be a golden buying opportunity, with both prices and interest rates going lower (as discussed in my prior blog). Keep saving up in the mean time.” – Michael Cheng (Trulia)

With Realtors trying to get ahead of the coming slow down….

“If you are a seller, and especially if your home is worth over $700,000 I would recommend that you put your home on the market as soon as possible, even if it means putting it on in Aug, price it aggressively, and get it sold before it becomes much harder for a buyer to qualify for your home making it depreciate in market value”. – Marcy Moyer (Trulia)

So once the tap is turned, how bad might it get? It won’t be Armageddon. It's not a mass extinction event. It won’t even impact the market very much in the next 90 days. Come October 2nd, 2011 there will still be money to lend. There will still be deals to be made. There just won’t be as many of them. Trend lines both in transaction numbers and prices won’t favor the sellers or their Realtors, but buyers should be rewarded in time. The silver lining out of all of this remains clear: less government intervention will hasten the rebalancing of prices, begin the process of reforming the market, and finally confine Aunty Agencies influence on the financial industry more than ever than before.

(end of Soylent Green is People commentary)

Banks gearing up to fill looming gap in jumbo loans

Fannie Mae, Freddie Mac and the FHA are facing an upcoming cutback in mortgage limits, but banks say they're planning to expand their jumbo loan business in high-cost housing markets.

By Kenneth R. Harney — July 10, 2011

How big a deal is the upcoming cutback in mortgage limits for Fannie Mae, Freddie Mac and the Federal Housing Administration? Will buyers and sellers who depend on jumbo-sized loans find themselves in a financing squeeze after Oct. 1, when the limits plunge in key markets around the country?

Housing and realty lobbies are pushing hard on Capitol Hill for a continuation of the $729,750 high-cost area maximum, but one industry is delighted by the prospect and is gearing up to fill the gap.

From small community banks to megabanks, the message is the same: Bring on the switch to lower limits. We plan to expand our jumbo loan business wherever market demand requires. There will be no financing squeeze for anyone who needs a mortgage too big for Fannie, Freddie or the FHA, provided the applicant is creditworthy and has enough of a down payment.

Creditworthiness and sufficient down payment are the problem, particularly after a long recession when many people lost thier homes, their credit, and their savings.

… On Oct. 1, the maximum loan at each of the three federal mortgage giants will fall to $625,500. Though the upper-limit decline is only $104,250 below where it is today, some realty and business analysts worry that buyers who need big mortgages — especially in California, New York, New England, Florida and Washington, D.C. — will be forced to make much heftier down payments, pay higher interest rates or be prevented from purchasing the house they want.

Bankers say those worries are way overblown. Cam Fine, president and chief executive of the Independent Community Bankers Assn., says his 5,000-plus members plan to take up the slack in the jumbo arena and have the financial capacity to do so. Community banks, which generally range in size up to $20 billion in assets, “are very adept at creating products that fit the needs of customers,” Fine said.

Matt Vernon, national mortgage sales executive for Bank of America — the country's largest by assets — said his institution has been aggressive in the jumbo segment for more than a year, and is planning to pick up the pace even more in the coming months. Bank of America funded $4.1 billion in jumbos during the first quarter of this year alone.

Meanwhile, interest rates on jumbos are near their lowest levels ever — in the 5% range for 30-year fixed-rate loans, around 3% for some hybrid adjustables. Spreads between conventional-sized loans and jumbos have narrowed from 200 to 250 basis points (2% to 2.5%) three years ago to just above half a percentage point today. On loans of $400,000, Bank of America is offering “5/1” adjustables at 3% plus 0.875 point. A 5/1 loan's interest rate is fixed for the first five years, then converts to a one-year adjustable. A 5/1 loan of $800,000 goes for 3.5% with 0.875 point. Other big banks have competitive rates.

And interest rates on jumbos are falling.

Big Mortgages Are Back

By ANNAMARIA ANDRIOTIS — July 16, 2011

So-called jumbo loans—generally those bigger than $417,000—are a better bargain now than they have been in years. The average rate on a 30-year jumbo mortgage is 5.15%, down from 6.41% two years ago, according to mortgage data firm HSH Associates. That means the monthly payment on a 30-year $600,000 home loan is now about $3,280, some $480 less than the cost of the same loan two years ago, for an annual savings of nearly $5,800.

Not only are jumbo loans cheap relative to historical rates, they are cheap relative to smaller “conforming” loans, which are backed by Fannie Mae, Freddie Mac and federal agencies. The difference between the rates on a jumbo mortgage and a conforming loan is just 0.43 percentage point, the narrowest spread since 2007.

The interest rate spread may be narrowing, but it is still quite significant. Further, it isn't just the cost of the money that's the problem, the amount of down payment required is going to be a real barrier, and with the huge losses lenders are taking on subordinate loans, I don't see a second mortgage market springing up any time soon to fill the gap.

Depending on location, jumbo loans typically require a down payment of 20% to 30%, says Keith Gumbinger, vice president of HSH Associates—double or triple the typical 10% down payment for a smaller loan. Buyers also need to be able to document their income, assets and net worth, including two years of tax returns and recent brokerage and bank statements, he says. They also will need high credit scores, at least 740 to 760 on the FICO-score range.

But borrowers should act quickly. Since lenders won't be able to sell as many jumbo loans to government-backed agencies—thereby unloading risk—they may not originate as many, says Mr. Gumbinger. What's more, the added risk means they likely will raise their interest rates. The upshot: buyers could have fewer choices and face pricier loans.

Many lenders will have to stop originating mortgages over the $625,500 limit by the end of July for home purchases and by mid-August for refinances, Mr. Gumbinger says, since mortgages can take up to two months to close.

I received an email from a reader who told me Bank of America has already stopped processing loans above the conforming limit for sale to the GSEs. The word on the street is there is no chance of the government changing their mind on the drop of the conforming limit.

All of this could make it harder for home buyers to get financing, possibly leading to fewer home sales and pushing down prices.

Still, some housing analysts say that with the government out of the way, more lenders will eventually start competing against one another—perhaps as early as next year. The renewed competition could result in easier lending standards over time.

Credit standards will tighten further for a while, but then the pendulum will swing back the other direction, and slowly and methodically, lenders will forget every lesson they learned in the housing bubble and start giving out loans to people who will default. Don't count on this happening until the foreclosure debris is cleaned up. Default losses from poor lending practices are only disguised in an appreciating market, and we won't have one of those until the foreclosures are gone.

Did they use that HELOC?

Today's featured property is one of the many that will fall in the new jumbo loan category. With 20% down, the GSEs could cover it, but with only 10% or less down, it's not going to happen. The buyer pool to pay off the huge debt on this property just got smaller.

These owners refinanced with a $700,000 Option ARM from Downey Savings, and JP Morgan-Chase was dumb enough to give them a $150,000 HELOC on top of the Option ARM. Think about that for a minute… some banker thought it was a smart idea to put a second mortgage on top of a huge Option ARM. I doubt lending standards will ever get that stupid again, will they?

If they maxed out the option ARM like most debtors, they managed to get over $200,000 in HELOC booty. If not, the only got about $65,000 plus negative amortization. Either way, this is going to end up a short sale. JP Morgan-Chase

——————————————————————————————————————————————-

This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707

949.769.1599

sales@idealhomebrokers.com

Irvine House Address … 4 SHARPSBURG Irvine, CA 92620

Resale House Price …… $729,000

Beds: 4

Baths: 2

Sq. Ft.: 2699

$270/SF

Property Type: Residential, Single Family

Style: Two Level, Colonial

Year Built: 1979

Community: 0

County: Orange

MLS#: S666058

Source: SoCalMLS

Status: Active

On Redfin: 3 days

——————————————————————————

* * TURNKEY EXECUTIVE HOME IN ONE OF THE BEST FAMILY ORIENTED NEIGHBORHOODS OF NORTHWOOD. OFFERS LIVING ROOM WITH HIGH CEILINGS AND SKYLIGHTS, LARGE FAMILY ROOM, LARGE AND OPEN KITCHEN, FORMAL DINING ROOM, & SPACIOUS DOWNSTAIRS MASTER SUITE. 3 BR AND A LARGE LOFT UPSTAIRS. INSIDE LAUNDRY ROOM, & NEWER TILE ROOF. NEWLY REMODELED WITH GORGEOUS HARDWOOD FLOORS THROUGHOUT DOWNSTAIRS, NEW WINDOWS, NEW FRONT DOOR, STONE SHOWER AND BATHTUB, STAINLESS KITCHEN APPLIANCES, NEWLY INSTALLED AIR DUCTS, NEWER TILE COUNTERTOP IN KITCHEN, RECESSED LIGHTING & CUSTOM INTERIOR PAINT. LARGE BACK YARD, 2 CAR ATTACHED GARAGE, 1 COVERED CARPORT. LOCATED IN A QUIET CUL-DE-SAC, WALKING DISTANCE TO NEIGHBORHOOD PARKS. NO MELLO ROOS & NO MONTHLY ASSOCIATION DUES. AWARD-WINNING IRVINE SCHOOLS.

——————————————————————————————————————————————-

Proprietary IHB commentary and analysis

It's rare that a listing hits so many realtor buzzwords.

How does a $2,900 cost of ownership compare to a rental on a 2,699 SF 4/2? I haven't seen too many like this under $3,000 per month.

Resale Home Price …… $729,000

House Purchase Price … $635,000

House Purchase Date …. 12/11/2003

Net Gain (Loss) ………. $50,260

Percent Change ………. 7.9%

Annual Appreciation … 1.8%

Cost of Home Ownership

————————————————-

$729,000 ………. Asking Price

$145,800 ………. 20% Down Conventional

4.48% …………… Mortgage Interest Rate

$583,200 ………. 30-Year Mortgage

$126,346 ………. Income Requirement

$2,948 ………. Monthly Mortgage Payment

$632 ………. Property Tax (@1.04%)

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

$152 ………. Homeowners Insurance (@ 0.25%)

$0 ………. Private Mortgage Insurance

$0 ………. Homeowners Association Fees

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

$3,732 ………. Monthly Cash Outlays

-$492 ………. Tax Savings (% of Interest and Property Tax)

-$771 ………. Equity Hidden in Payment (Amortization)

$241 ………. Lost Income to Down Payment (net of taxes)

$202 ………. Maintenance and Replacement Reserves

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

$2,913 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$7,290 ………. Furnishing and Move In @1%

$7,290 ………. Closing Costs @1%

$5,832 ………… Interest Points @1% of Loan

$145,800 ………. Down Payment

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

$166,212 ………. Total Cash Costs

$44,600 ………… Emergency Cash Reserves

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

$210,812 ………. Total Savings Needed

——————————————————————————————————————————————————-

Potential home buyers are aware of the resumption of falling prices, and many are wisely choosing to wait and see what fall and winter brings. Will affordability bring out the contrarians?

Irvine Home Address … 4591 KIMBERWICK Cir Irvine, CA 92604

Resale Home Price …… $549,000

You've got a lot of money

but you can’t afford the freeway


The road to Orange Country

leaves an awful lot of leeway


Where everyone’s a doctor

or a specialist in retail (realtor) 


You got a lot of money

but you can't afford the freeway

Aimee Mann — Freeway

Up until this summer, I had not seen any evidence of kool aid intoxication wearing off. The masses were still overly eager to buy houses from fear of being priced-out or from greed to get the free HELOC money. With the economy no longer officially in recession and unemployment declining, there was a slim possibility of a spring rally picking up where the tax credits left off. Unfortunately for sellers, that isn't what happened.

Credit is still tightening because lenders have not stopped losing money or underwriting bad loans. With each tightening standard, more potential buyers are either eliminated from the buyer pool or forced to lower their bids and their expectations. However, it isn't tightening credit and inflated prices that seem to be stopping the kool aid from flowing. It looks like buyers simply stopped drinking the stuff.

Buyers have stopped buying by choice.

People realize that prices are too high, credit will continue to tighten, and if they wait, they will get a better home at a lower price. There is little other explanation for the dismal spring rally and the dramatic decline in sales volumes when sales should be rising. This slowdown has hit every sector of the housing market, but it has been particularly brutal on homes selling for over $500,000. This really shouldn't be a surprise. Buyers can't afford them.

I have heard from multiple sources, including a report from a local company that tracks sales, that the Irvine Company has experienced a dramatic decline in sales from May 15 onward. Rumor is that many outside experts and consultants have been brought in, and nobody can figure out what the problem is.

Is it product design? Is it marketing? Is it the economy? Is it financing? The truth is actually pretty simple: the prices are too high. Local wages don't support them. Attempts to elicit a herd-following response from clueless foreign cash buyers have failed. I even heard that one buyer backed out of a sale based on what they read on this blog, not that the source of truth matters much. Don't be shocked if the Irvine Company mothballs Laguna Altura like they did Orchard Hills. Further, their plan to build several thousand rentals will blunt any potential rental rate increases, keep rental parity calculations down, and further weaken housing demand.

Without the lure of mortgage equity withdrawal, buyers are reconsidering the value of home ownership. Buyers are no longer willing to stretch to absurd extremes to buy properties they can't afford, and even if buyers were willing, lenders are not ready to play along. The result is a continuing slump in sales and a full-scale buyer revolt with many choosing to sit on the sidelines.

In the long term, this is a good and necessary step for the market. When the housing bubble popped, the market needed to make a psychological adjustment to reality and abandon the fantasies of unlimited free spending money coming from their house. This psychological adjustment would correspond to a pricing adjustment as people stopped stretching.

When the market finds its new equilibrium, it will be back on a stable footing and ready to appreciate again. But this time, the appreciation will be slow and measured by the growth in local incomes. And until unemployment abates, that growth in income will be very tepid.

We aren't out of the woods yet, but when the double dip starts to wane, prices below rental parity will be common, and I will become much more bullish, albeit in a different way than the lunatics from the housing bubble.

Southland housing market warms up in June

The number of sales of new and previously owned homes in rises 11.6% from May, and the median price increases 1.8% to $285,000.

By Alejandro Lazo, Los Angeles Times — July 13, 2011

First-time buyers and investors looking for deals helped the Southland's housing market gain ground from May to June as it struggles to overcome the effects of stubborn joblessness and a large share of borrowers who owe more than their homes than they're worth.

Sales rose 11.6% last month from May, nearly twice what is typical for a June, with a total of 20,532 newly built and previously owned homes changing hands, according to San Diego research firm DataQuick. Housing has fought to recover from the expiration of popular tax credits for buyers last year, which temporarily boosted the market out of the worst downturn since the Great Depression.

That sounds really bullish. Unfortunately, May was one of the worst on record, and June was still well below historic norms. This was a statistical blip.

Although declining home prices and low mortgage rates have made homes much more affordable than during the boom years, potential buyers are still worried that buying a home is a poor short-term investment, said John J. Blank, deputy chief economist for the Los Angeles County Economic Development Corp. Many people who are in a position to buy are waiting out the market, he said.

“The stadium is filled with people watching this game, and nobody wants to play,” he said. “There are always buyers, sellers and people in the stands, and right now it is filling up with more and more spectators.”

People have good reason to wait. Prices still haven't fallen below rental parity in many locations, and with little reason to fear being priced out, many prudent buyers are waiting for prices to fall further. And prices will fall further.

While June is typically one of the strongest months for home sales, last month's tally nevertheless represented a 14% decline from June 2010, the last month that buyers could qualify for the popular federal tax credit that had been driving sales. After that government stimulus ended, Southland sales plunged and have remained weak.

The median sales price for the region followed a similar pattern. The median, the point at which half the homes sold for more and half for less, was $285,000 last month, a 1.8% increase from May, although it was still down 5% from June 2010.

Notice the order in which data is being presented. The minor good news is followed, and downplayed, by more serious bad news. This presentation was very common at the beginning of the housing collapse.

The closely watched measure, which can vary depending on the type and location of homes that are sold, was 15.4% above the most recent bottom of $247,000, hit in April 2009 during the throes of the financial crisis. A separate measure, the Standard & Poor's Case-Shiller index, also showed that home prices in Los Angeles and Orange counties remain above their recession-era lows.

“The housing market remains dysfunctional and lopsided, just somewhat less so than it was a few months or a year ago,” DataQuick President John Walsh said. “The market mix indicates that a lot of potential buyers are either stuck, for lack of equity, or spooked and are waiting things out.“

John Walsh embraces his perceived role as market cheerleader. How does the market look less dysfunctional that it did a year ago? Everyone was cheering the rally a year ago. It wasn't until the tax credits expired and prices resumed their downward momentum that market cheerleaders suspected anything was wrong.

Typically a rising housing market helps propel the economy out of a recession. But this time, the high unemployment rate and large numbers of borrowers “underwater,” or owing more on their homes than what they could get for selling them, is holding back the market.

Los Angeles County led the state in job losses in May, shedding a net 11,400 jobs, while the county's unemployment rate stood at 11.9% in May, the most recent numbers released. And 23.8% of all properties in the L.A. metro area with a mortgage, or 365,128, were in negative equity at the end of the first quarter, according to Santa Ana research firm CoreLogic.

Sales of so-called distressed properties — those whose owners are in some state of default — made up more than half of the Southland resales last month, DataQuick said. Roughly 1 in 3 homes resold was a foreclosure, while almost 1 in 5 was a short sale, in which the mortgage holder accepts a sale price that is less than the outstanding debt on the property.

Sales of foreclosed homes — properties foreclosed on in the previous 12 months — accounted for 33% of resales last month, down from 33.2% in May, but up from 32.8% in June 2010.

Notice how well the lenders are managing their inventory. Despite the fact they have an enormous shadow inventory, they foreclose on and resell nearly 33% of resales every month, and they rarely deviate from that percentage even by a fraction of a percent.

The number of foreclosure filings has dropped in recent months in the region and statewide, as well as nationally. Analysts attribute the declines to major banks slowing down the process as they try to negotiate a settlement with state and federal regulators over foreclosure practices.

Analysts who believe any slowdown in foreclosures is related to any news event are wrong. Lenders are managing the percentage of sales of foreclosed home. They know if they push through any more than a third of the total sales, prices drop. They are trying to liquidate while protecting the value of their assets.

Short sales in June , made up an estimated 17.7% of the market last month, the same as in May but down from 20.5% in June 2010.

Kathryn Davis, a real estate agent in Corona, said that short sales were becoming more streamlined, and many homeowners, now facing long stretches of unemployment, were becoming increasingly willing to cut their losses and submit themselves to such sales.

Another realtor who doesn't know what's going on. There is nothing streamlined about the short sale process. Short sales are extended negotiations between the second lien holder and the seller. The second mortgage holder has nothing of value, but they have learned to play chicken with borrowers to try to get them to sign side agreements to pay at least part of the debt.

Borrowers are not becoming more amiable to short sales because they are unemployed. Borrowers are trying short sales because it is the only way to sell their homes. Many others simply walk away. At least those who short sell have some limited control over when they leave their houses. Those that drag out the process can get free housing for quite a while.

“They don't qualify for a modification — and a modification is a joke anyway,” she said.

She is right about modifications being a joke.

“The homeowners who are short-selling are becoming a little easier to work with, whereas before they were so bitter it was tough to get the bank-required documents in time from them. Now that we are almost three or four years into it, people are aware, so it's not like pulling teeth.”

New home sales continue to struggle, with only 1,395 transactions throughout the region last month, a 36% drop from June 2010 and the lowest new-home total for a June since DataQuick began tracking sales in 1988.

See comments on the Irvine Company above.

Michael Novak-Smith, a real estate agent specializing in selling foreclosed homes in the Inland Empire, said that prices were also being dragged down by a lack of buyers as well as tougher financing criteria. These days a home has to be in good shape in order for a bank to make a loan, and many credit-worthy buyers can't get financing.

realtors are now experts on who is creditworthy? If people can't get financing, then by definition, they are not creditworthy. Anyone who was breathing was considered creditworthy five years ago, and now people need real income and proven ability to make payments.

“It is very difficult to get a loan,” he said. “There is no end in sight to how bad it is and how long it is going to take to get out of this. It seems like it could be years.”

alejandro.lazo@latimes.com

There is end in sight. The market will drag along the bottom for another three years. The lowest tier of the market will strengthen first, then the chain of move ups will finally give strength to the upper tier last. The window of opportunity for affordability is starting to open now in Orange County, and it will remain open for the next three to five years.

Single family detached below rental parity in Irvine

We have seen many undesirable condos trading at or below rental parity, but finding single family detached homes at those price levels has been elusive. As one might expect, these prices levels will be seen first in the least desirable neighborhoods with low HOA or Mello Roos. Today's featured property is in El Camino Real which has no HOA or Mello Roos.

In my opinion, the front elevation on this house is remarkably ugly. However, the inside is well done (although that center island is completely out of place). What jumped out at me about this property was the low cost of ownership. For a buyer putting 20$% down and avoiding private mortgage insurance, this property only costs $2,200 per month to own. There aren't many four-bedroom homes in Irvine renting for $2,200 or less, and none with a nice interior like this one.

Someone will buy this property even knowing prices are likely to go down because owning this one is less expensive than a comparable rental, particularly if they know they are going to stay put for five years or more.

Renting should cost a premium over ownership. Renters have freedom to move and no maintenance responsibility. Only kool aid intoxication makes people pay a premium to own. Once the premium for renting gets high, many will opt to purchase to save money even in a declining market. Such is the power of rental parity. Contrarians who buy because it's cheaper to own than to rent will buy and cause prices to bottom.

The owner's of this property bought it back in the 1980s. I estimated their purchase price from their tax bill, but it may be a bit less than I show. They have doubled their mortgage to $417,000, but they didn't go so overboard as to make this a short sale.

——————————————————————————————————————————————-

This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707

949.769.1599

sales@idealhomebrokers.com

Irvine House Address … 4591 KIMBERWICK Cir Irvine, CA 92604

Resale House Price …… $549,000

Beds: 4

Baths: 2

Sq. Ft.: 1623

$338/SF

Property Type: Residential, Single Family

Style: One Level, Bungalow

Year Built: 1972

Community: El Camino Real

County: Orange

MLS#: S666246

Source: SoCalMLS

Status: Active

On Redfin: 2 days

——————————————————————————

Irvine living with no HOA and no Mello-Roos? Here it is. Beautiful single story home within walking distance to schools on quiet cul-de-sac. Lovely 3 or 4 bedroom tastefully enlarged from original to 1605 sq ft with permits. Huge open kitchen/family room area, living room with fireplace, 4th bedroom converted to office. Relaxing rear yard and front patio. Large decorative and retractable awning over the front patio. Large lot. Close to shopping, Freeways, Airport.

——————————————————————————————————————————————-

Proprietary IHB commentary and analysis

Resale Home Price …… $549,000

House Purchase Price … $200,000

House Purchase Date …. 10/20/1986

Net Gain (Loss) ………. $316,060

Percent Change ………. 158.0%

Annual Appreciation … 4.1%

Cost of Home Ownership

————————————————-

$549,000 ………. Asking Price

$109,800 ………. 20% Down Conventional

4.48% …………… Mortgage Interest Rate

$439,200 ………. 30-Year Mortgage

$95,149 ………. Income Requirement

$2,220 ………. Monthly Mortgage Payment

$476 ………. Property Tax (@1.04%)

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

$114 ………. Homeowners Insurance (@ 0.25%)

$0 ………. Private Mortgage Insurance

$0 ………. Homeowners Association Fees

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

$2,810 ………. Monthly Cash Outlays

-$370 ………. Tax Savings (% of Interest and Property Tax)

-$580 ………. Equity Hidden in Payment (Amortization)

$182 ………. Lost Income to Down Payment (net of taxes)

$157 ………. Maintenance and Replacement Reserves

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

$2,199 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$5,490 ………. Furnishing and Move In @1%

$5,490 ………. Closing Costs @1%

$4,392 ………… Interest Points @1% of Loan

$109,800 ………. Down Payment

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

$125,172 ………. Total Cash Costs

$33,700 ………… Emergency Cash Reserves

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

$158,872 ………. Total Savings Needed

——————————————————————————————————————————————————-