Larry Roberts, Shevy Akason, and Milaad Forootan are hosting a first-time homebuyer presentation at 6:30 Wednesday, September 28, 2011, at the offices of Intercap Lending (9401 Jeronimo, Suite 200, Irvine, CA 92618).
The venue is a classroom with limited seating, so please RSVP to reserve your place. sales@idealhomebrokers.com
The first presentation was well received, and we filled the room to capacity. An attendee had this to say:
Astute Observation by Pascal
2011-08-24 09:29 PM
I just attended this, though I’m already familiar with the home buying process.
It was great, and I highly encourage anyone who was reluctant to go this time for whatever reason, to attend the next one.
And there will be free cookies.
We will provide bottled water and snacks. We look forward to seeing you there.
Due to strong demand for more information regarding investing in Las Vegas cashflow properties, I am hosting a small group workshop at 8:00 Wednesday, September 28, 2011, at the offices of Intercap Lending (9401 Jeronimo, Suite 200, Irvine, CA 92618).
The purpose of the small group setting is to provide more opportunity for attendees to ask questions and get individual attention. I will stay as late as necessary to speak individually with everyone. The venue is a classroom with limited seating, so please RSVP to reserve your place. sales@idealhomebrokers.com
realtors scamming their lender clients is becoming epidemic in America. Banks are overwhelmed by the volume of distressed sales, and realtors are taking advantage of them.
I first covered the flopping phenomenon a few months ago in Flopping: unscrupulous realtors deceive lender clients and profit from fraud. Apparently, the occurrence is common enough the story is gaining traction in the mainstream media. The main reason I am covering it again is because a reader posted a property that looks like a particularly egregious case of flopping. I'll let you decide.
In 'flopping,' a home is purchased by insiders at a steep discount, then immediately sold for a big profit.
By Melinda Fulmer of MSN Real Estate
Real-estate agent Lynne Wright thought she had found the perfect home for her clients. The quiet house on a cul-de-sac in one of the most prestigious gated communities in Bakersfield, Calif., was offered in a short sale for $40,000 less than similar homes on the market.
Wright and the couple moved quickly and made an offer higher than the asking price, but were outmaneuvered by a husband-and-wife real-estate team in Wright's brokerage office who wanted to buy it for their own use. She didn't think much of it, until she saw that the property sold for $40,000 less than the $342,000 her clients had offered.
When she asked the listing agent why, she was told to “leave it alone.”
I wonder if she had to resist the temptation to punch them in the face.
Wright says she is still not sure if the servicer or owner of the property ever saw her clients' much higher offer.
Undoubtedly, the lender did not see the better offer. Why wouldn't they act on it if they did?
All she knows is that two agents picked up a luxury property for $80,000 less than market value, the banks took a big loss and the listing agent got both sides of the commission, representing his colleagues.
The realtors must consider that a win-win-win. They got a bargain, the listing commission, and the buyer's commission. They win three ways, and their client — the one they are supposed to have a duty to serve — is the loser.
“It's just robbery,” she says.
Yes, it is. It is brazen theft by a fiduciary.
“And I don't know how to stop the robbery.”
Apparently the nation's mortgage servicers don't, either. Suspicious real-estate transactions have surged in the past two years, analysts say, along with the number of short sales, in which a house is sold for less than the amount of its remaining mortgage.
Short sales are supposed to be “arms length” transactions without any relationship or collusion among the parties, all of whom must sign affidavits to that effect. But the parties often are connected.
The paper trail should make these crimes easy to prosecute if a district attorney wanted to. A few high profile cases should be prosecuted to set an example for others. Today's $900,000 flop would be a good candidate. If anyone knows the DA in Newport Beach or Orange County, please forward them a link to this post.
Many times, this fraud is committed through limited-liability companies to make it hard for servicers to see who is buying the property, says Robert Hagberg, associate director of mortgage-fraud investigations for Freddie Mac.
In some cases, this type of mortgage fraud involves buyers scooping up distressed properties for a portion of their value, either for themselves or to give back to a friend or relative.
The rest involve “flopping,” where an investor – with the help of an agent or middleman – persuades the bank to agree to a much steeper discount than it should, and immediately resells the property to another buyer for a significant profit without having made any improvements. The FBI says it has found numerous instances in which organized-crime groups were involved in short-sale fraud.
Isn't there something in the realtor code of ethics against this behavior?
According to a recent study by CoreLogic, short sales that were resold the same day averaged a 34% gain (or $54,947) between sale prices.
The gain from today's featured flop was over 50% after commissions.
One in every 52 short-sale transactions in the first half of last year appeared to be one of these “suspicious” resales, CoreLogic said. This year, it expects lenders, servicers and investors to incur more than $375 million in unnecessary losses from these shady deals, as the number of short sales surges an additional 25%.
“Short-sale fraud and other servicing-related fraud is definitely the fraud du jour and our greatest area of focus at the moment,” Hagberg says. In 2011, more than 50% of Freddie Mac's investigations were related to short sales.
Investigations are fine, but there should be prosecutions at the end of the investigations for any deterrent effect.
Who are the perpetrators?
For the most part, these deals involve insiders, from the underwater borrowers themselves to investors, listing agents, brokers providing valuations and so-called “facilitators,” or middlemen negotiating with the banks and buyers trying to flip the properties.
There is no way this can go on without collusion among insiders. In an arms-length transaction, the listing agent would have to be a complete idiot to miss the comps by over 30%… well, maybe some of these sales are flopping….
Banks, with a huge backlog of distressed properties, are under pressure to do a lot of transactions and to do them as quickly as possible, says Ann Fulmer (no relation to the reporter), vice president of industry relations for Interthinx, a company that helps lenders reduce their fraud risk.
Knowing this, these insiders are able to work the system and push through bogus valuations to set the price of the sale or fend off higher offers.
When lenders are overwhelmed, there is nobody carefully watching over their agents to double-check valuation. With no cross-verification in the system, fraud is bound to result.
Fulmer has seen listing agents involved in these scams post properties in multiple-listing services in the wrong city to avoid competition. Some post pictures of a completely different, junk-filled property. Or they stipulate that only people from the real-estate office will take offers on the property, so they can control the transaction.
In Wright's case, which was reported to the state but has not been prosecuted, real-estate agents controlled every aspect of the deal. An agent in her office was the distressed borrower; the listing agent who represented the property and buyer sat just desks away, as did the real-estate team who eventually wound up with their own luxury property for a song.
Everyone was in on the fraud. For them, it was just another day at the office.
“The thing that really bothered me was the lack of ethics,” Wright says. “Sure I can find my clients another house; what I couldn't explain to them very well was how (something like this) can happen.”
Gary Crabtree, an appraiser in the area, said he got calls from several agents whose offers were rebuffed for the rock-bottom inside bid.
“It set an all-time low for that neighborhood,” he says.
How much more compelling does the evidence need to be before prosecutors will act?
Price manipulation
To realize a big profit from this type of fraud, an investor, agent or middleman must first push down a home's price. That means driving down the broker price opinion (BPO), the estimate of value that servicers get agents to provide for short sales.
While the vast majority of these estimates are probably free of influence, many aren't. Short-sale facilitators or other middlemen often contact these agents with lowball comparable sales that they would like to see used in the valuation, such as mobile homes or major fixer-uppers. In one case, Hagberg says, he was told of a negotiator leaving two envelopes for the agent coming up with the BPO: One contained the comparables to be used in the valuation; a second contained two $100 bills.
Direct cash payoffs. That is flagrant.
Another way to drive down the price of a short sale and pack more profit into the flip is by making the house look as though it is in worse shape than it is. Borrowers or negotiators brought in by the borrower will submit false repair bills for shoddy pipes, wiring or lead paint.
“A lot of times these repairs are for things Realtors are not qualified to assess,” Hagberg says.
What are most realtors qualified to assess?
Hagberg has even seen cases of “anti-staging” or “reverse staging” in which a house is sabotaged to look weather-beaten, vandalized or smelly.
How can someone gain access to do this? Many times, an underwater borrower will give his negotiating rights – and access to his home – to a short-sale negotiator who will conduct all communications with the lender and allow other investors to manipulate the sale for a kickback.
Everyone involved is usually getting some kind of cash payoff.
“Many times, borrowers don't know about the flip” that's coming, Hagberg says. “And frankly I don't know if there's a whole lot of concern on their part. They are seeing the same loss anyway.”
Particularly now that borrowers are not on the hook for losses from the short sale, they don't care at all. Some of them were probably in on the deal as well trying to get a cash payoff after the short sale.
There haven't been very many indictments for this type of short-sale fraud. But such fraud can be punishable by up to 30 years in prison.
Sentencing a few to prison would certainly help.
To catch a thief
Servicers are slowly trying to improve their systems and give paperwork more scrutiny to prevent short-sale fraud, Fulmer says. Prevention is more practical than prosecution, given the limited resources of law enforcement.
And, in the past, it has been hard for investigators to get servicers to cooperate in efforts to crack down on this fraud.
Glenn Gulley, a real-estate fraud investigator with the district attorney's office in California's Stanislaus County – one of the nation's hot spots for mortgage fraud – recalls calling servicers repeatedly about fraudulent deals and never getting a call back.
“In 4½ years, I've never had a bank call me and say we've been defrauded,” he says, though he adds that they're slowly starting to respond as they put more staff in charge of mitigating these losses.
Wow! Law enforcement was being proactive by investigating these cases, and the lender's couldn't be bothered to call back. I wonder how many asset managers at the banks are in on the scam.
Instead, most of the calls he gets about this type of fraud are from thwarted homebuyers who read published sales transactions in the newspaper.
“I'm getting people calling and saying, 'I offered $300,000 for a house that sold for $200,000.'”
And those are the ones who actually make an offer. Many more people are discouraged from bidding when the listing agent for a short sale puts it up on the MLS at 9 a.m., only to list it as “sale pending” at 9:01.
“Then you know the same agent double-ended it” and is bringing in his own buyer, Gulley says.
So much for getting the best price for their client. Most lenders discourage listing agents from double ending deals, but it doesn't stop them from referring to friendly agents for a significant kickback.
Indeed, Hagberg says, some resales from the short-sale buyer to a third party actually close before the deal is negotiated with the bank, giving them the money to satisfy the lender on the short sale. In some cases, the buyer used a proof-of-funds letter generator found on the Internet to vouch for his ability to close the deal, Hagberg says, without actually having the money at the time.
Now we see how buyers are brought into the scam. If a broke buyer is facing a $30,000 bill for a spent HELOC, getting a $30,000 cash payment to pay off the debt is very enticing.
Of course, some lower-priced short sales are legitimate, pitting cash deals against homeowners with financing or repair demands.
The whole problem could be solved if lenders had a better idea what properties were worth, Gulley says. Fulmer and others say they aren't sure that BPOs should take the place of full-fledged appraisals.
“There are no real standards for how to pick the comps to establish the value that you receive,” Fulmer says. “You can pick the lowest of the low balls and skew the results.”
Any transaction is supposed to have an independent third-party appraisal. Since appraisers cannot have cozy relationships with realtors anymore, this is less of a problem.
Whom does it hurt?
After the recent mortgage meltdown, few are shedding tears for lenders over these short-sale losses. Fulmer says that when she talks about this type of fraud, a common reaction is, “So what?”
But people should care, she says, because we're all ultimately paying the tab for it.
“A lot of these loans are insured by the Federal Housing Administration or bought by Fannie (Mae) and Freddie,” Fulmer says. “These excess losses are translating into losses that taxpayers are going to have to make up for.”
Yes, we are going to pay for much of this fraud through bailouts.
Moreover, this type of fraud pushes down neighborhood values, potentially putting more people underwater on their loans. In other cases, the fraud is part of a larger network of schemes that leaves the house sitting empty and open to theft and vandalism.
“Once a neighborhood gets caught up in fraud, it can get recycled in fraud indefinitely,” Fulmer says. “I saw one house that was flipped and foreclosed, flipped and foreclosed for 10 years.”
Flopping is an amazing opportunity for unscrupulous realtors. They have opportunity to make thousands of extra dollars by double-ending commissions and getting kick-backs from the buyers getting a great deal. In fact, many of these agents probably list the flip and make a second commission on the deal for good measure. With the lack of oversight by overwhelmed banks, this scam will be rampant over the next several years.
Is this flopping?
Today's featured property looks suspicious. The property sells on July 8, 2010 for $1,800,000 — supposedly the highest price the market would bear — and then it goes pending less than a month later for $2,885,000. How does the first listing agent miss the market price by over a million dollars? Somebody please give me a plausible explanation other than fraud.
Property History for 1967 PORT RAMSGATE Pl
Date
Event
Price
Appreciation
Sep 22, 2010
Sold (Public Records)
$2,885,000
893.9%/yr
Sep 22, 2010
Sold (MLS) (Closed)
$2,885,000
—
Sep 10, 2010
Pending
—
—
Aug 06, 2010
Pending (Backup Offers Accepted)
—
—
Jul 15, 2010
Listed (Active)
$3,199,000
—
Jul 08, 2010
Sold (Public Records)
$1,800,000
10.4%/yr
Jul 01, 2010
– Delisted (Withdrawn)
—
—
Feb 16, 2010
– Pending
—
—
Feb 05, 2010
– Delisted (Hold)
—
—
Feb 05, 2010
– Price Changed
*
—
Feb 05, 2010
– Pending
—
—
Feb 04, 2010
– Listed (Active)
*
—
Dec 27, 2000
Sold (Public Records)
$700,000
—
In my opinion, this property should be investigated further by the authorities. Prosecution of a $1,000,000 flopping case would be high profile and serve to deter others.
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This property is not available for sale via the MLS.
Completed in 2007, this impeccably maintained home was designed and finished with the finest materials and forethought for a Port Street family. The custom built home with 5,450 Sq. Ft. of living space includes 5 bedrooms, 5 1/2 baths, dedicated office with built-ins, and a full height subterranean basement. It is ideally located inside the Harbor View community just a few houses from the central greenbelt and a block away from the community pool and highly acclaimed Andersen Elementary School. The home features an exquisite kitchen any chef would admire with Wolf range, Sub-Zero refridgerator, freezer, crisper drawers, and center island adjacent to family room that opens up to a covered patio and fireplace in the back yard. Other features of the home include large laundry room with 2nd refriderator, oversized garage w/ storage loft, reclaimed beams, custom millwork throughout, a downstairs bedroom, and much much more. This home is truly unique and must be seen to be appreciated.
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Proprietary IHB commentary and analysis
refridgerator? refriderator?
Resale Home Price …… $2,885,000
House Purchase Price … $1,800,000
House Purchase Date …. 6/8/2010
Net Gain (Loss) ………. $911,900
Percent Change ………. 50.7%
Annual Appreciation … 35.9%
Cost of Home Ownership
————————————————-
$2,885,000 ………. Asking Price
$577,000 ………. 20% Down Conventional
4.10% …………… Mortgage Interest Rate
$2,308,000 ………. 30-Year Mortgage
$574,978 ………. Income Requirement
$11,152 ………. Monthly Mortgage Payment
$2500 ………. Property Tax (@1.04%)
$0 ………. Special Taxes and Levies (Mello Roos)
$601 ………. Homeowners Insurance (@ 0.25%)
$0 ………. Private Mortgage Insurance
$600 ………. Homeowners Association Fees
============================================
$14,854 ………. Monthly Cash Outlays
-$1657 ………. Tax Savings (% of Interest and Property Tax)
-$3267 ………. Equity Hidden in Payment (Amortization)
$833 ………. Lost Income to Down Payment (net of taxes)
Today's featured article is a commentary from Housing Wire's Kerri Panchuk. Apparently, she does not accept the arguments I made in the following posts:
For a variety of reasons, I believe strategic default is a wise course of action for underwater loan owners who are paying more to own than the cost of rental. Let's read the counter-arguments to check their validity.
by KERRI PANCHUK — Tuesday, September 20th, 2011, 2:33 pm
Every American upset with the state of mortgage lending should read the Fox Business News article on strategic default in order to meet the “New Face of Foreclosure.”
Strategic defaulters are underwater borrowers who intend to remedy their “upside-down situation” by simply walking away from their mortgages.
The Fox Business article paints a clear picture of a 67-year-old strategic defaulter who is walking away from a $166,000 loan.
So is this man a distressed borrower who lost his job, fell ill or landed on unexpected hard times? No, not really. Those situations tend to garner sympathy, and rightfully so.
Instead, this man admits he collects two pensions, Social Security and generates additional income through a small business.
The defaulter also has the ability to make his payments, but lost his drive to do so when home values dropped, leaving him $45,000 underwater.
Isn't it also sad that he is $45,000 underwater? The unemployed didn't want to lose their jobs, which is sad, but the loan owner didn't want to see his house drop in value. Shouldn't that event also be a sad story deserving of sympathy?
The only difference between the two is the capacity to repay a lender — a lender who was part of a collective insanity in lending which created the valuation problem we are now correcting. The house this man bought at an inflated price would not have been so expensive if not for the behavior of lenders. Prices didn't fall because of the recession. Prices fell because they were too high, and the result was a recession.
The borrower's attitude recently changed in other ways. He now wants to live in the city, but he can't sell his home in this economy. Even if he could, it's impossible to get back what he paid.
The economy had nothing to do with his inability to sell the home. As I stated above, the lender-induced price inflation was the problem. The fact he can't get back what he paid is sad.
It's a type of new-car syndrome, but on a large scale.
Yet rather than sticking it out, the homeowner called a firm that readily advises homeowners on how to strategically default on their mortgages.
Why should he stick it out? Because some lender wanted to profit from his loan? Because of a moral obligation? LOL!
If the borrower gets his heart's desire, he will simply walk away from the mortgage, sending the home into foreclosure while remaining cash-rich and free to move on.
Good move, right?
Absolutely. It's the wisest course of action given his circumstances.
Of course, his neighbors won't be so lucky. They will now be living next to an REO.
So what? This guy is supposed to suffer so his neighbors can continue to sustain the illusion of home equity? The REO will sell at market value, and if that is lower than what the neighbors believe their house to be worth, the neighbors need to re-adjust their perception of value.
Call it the strategic default phenomenon, if you will, but it's more than a trend. It's a threat to the power of contracts
People fail to keep the promises in contracts all the time. Good contracts spell out the consequences of failure to perform. Rather than forcing lenders to sue borrowers on a Promissory Note and wait for recovery, lenders compel borrowers to sign a mortgage agreement which allows the lender to call a public auction for the sale of the property. Mortgages exist because lenders needed to spell out the contractual consequences of non-performance by borrowers.
Failing to pay a mortgage note is not a threat to contracts. On the contrary, foreclosures are the enforcement of contracts. If you want to see what is a threat to contracts, look at new regulations concerning loan modifications and restrictions on foreclosures, those are threats to the power of contracts.
and an attack against all Americans who are paying for the mortgage crisis in the form of tax dollars that supplement housing initiatives and maintenance on foreclosures.
Strategic default is not an attack against all Americans by usurping their tax dollars; bank bailouts are.
Not to mention that declining home values and tighter lending standards that are keeping new homeowners on the sidelines.
Declining home values and tighter lending standards are wonderful for those sitting on the sidelines. It means properties are getting less expensive, and money is only being loaned to people who will pay it back.
Mind you, we are not talking about those who are truly in distress. Foreclosures from unexpected life changes are a different beast altogether.
Why? I don't believe capacity to pay makes any difference at all. Both parties should be foreclosed on immediately and their properties recycled into the market. The notion that the two groups are separable gives rise to the idea that squatting is okay as long as the squatter is unemployed. Do you believe that?
While businesses should not be excused for unethical practices, the idea that homeowners are committing a permissible sin by not paying affordable debt is not admirable.
No, a loanowner who is sacrificing their family's future in order to pay off a loan they should never have been given is not admirable. The needs of the family outweigh the needs of a bank to make profits.
In fact, it's an insult to borrowers who never bought in the bubble and to other homeowners who keep paying on underwater mortgages despite their frustrations.
No, it should be a wakeup call to loanowners who are underwater on their mortgage. The slap in the face should be a sobering realization that they are being chumps for continuing to pay.
The fact that lenders inflated a housing bubble and taxpayers have to cover the losses is a slap in the face to everyone who didn't buy in the bubble, both homeowners and renters.
A few months ago, an attorney working in default raised the following question: What if the strategic defaulter had made money on the same house? If he bought the home for $144,000 and gained a $20,000 profit, could the originator then call the borrower and ask him to split the earnings?
No. That's exactly why lenders should be careful not to inflate housing bubbles by using 100% financing. Lenders all know now that borrowers will default and leave them holding the bag. If lenders did not fear this, they would repeat the mistakes of the housing bubble. The call option has always been embedded in a loan contract. It's only when down payments are eliminated that the cost of this option becomes so low that borrowers are foolish not to gamble with the banks money.
F. Scott Fitzgerald's famous American novel, “The Great Gatsby,” dealt with a similar phenomenon in his time. While Fitzgerald's rant against the “careless people” of society in Gatsby was interpreted as an assault against rich aristocrats. Fitzgerald's rant was more about carelessness in general. And the principal goes across class boundaries. In his worldview, those who are careless make decisions without consequences. They enjoy the fruits of the high-rolling times and let others pick up the tab when things go bad.
So who is she criticizing here, banks or borrowers? It is the lenders who were careless and abdicated their responsibility to loan to only borrowers who could repay their loans in amounts they could afford to repay. This abdication of responsibility is what inflated house prices and created the incentive for strategic default. Lenders are more culpable than borrowers.
Certainly in the mortgage crisis there were many people and companies who were careless. But the idea that strategic defaulters are common heroes pushing back against a rigged system is the biggest slap in the face to all homeowners who bought into the American Dream only to be stung by the mortgage crisis.
Strategic defaulters are common heroes pushing back against a corrupt system. This is not a slap in the face to homeowners, it is a slap in the face to foolish lenders. Lenders are the ones who ruined the American Dream.
I get the impression from the emotional tone of the article above that the author is underwater on her mortgage and lashing out at the injustice she sees as strategic defaulters are benefiting from their decision. Perhaps I am wrong, but she doesn't feel the outcomes she is witnessing are just, and if I were a loan owner still paying, I might feel the same.
Strategic default is about resolving conflicting values
The essence of the strategic default debate revolves around two conflicting values. First, there is the value of keeping one's word and following through with the terms of an agreement, and second, there is the value of providing a viable economic future for one's family. For those who are severely underwater and paying more than a comparable rental, they can't have both. They must chose.
There is no right or wrong, black or white, in cases of conflicting values. Each person must weigh what they believe to be more important. Whatever choices each of us might make does not give us the right to judge others by our standards. Personally, I would chose my family. Some would endure the pain to keep their word. Who's to say which is right or wrong?
They believe they got a good deal
The sellers of today's featured property followed a good buying strategy when they purchased. They found a motivated seller who had given up on the sale, and they negotiated a price well below their recent asking price. Based on what they are asking today — after three and one half years of falling prices — they must believe they got a good deal because know they believe they can sell for a profit.
View: Canyon, Fields, Hills, Mountain, Panoramic, Park/Green Belt, Tree Top
Year Built: 1979
Community: Turtle Rock
County: Orange
MLS#: U11003957
Source: SoCalMLS
On Redfin: 1 day
——————————————————————————
HIGHLY CUSTOMIZED VIEW HOME AT A QUIET CUL-DE-DAC IN PUPULAR HIGHLAND GARDENS WITH SWEEPING VIEW OF HILLS, TREES, SHADY CANYON AND TURTLE RIDGE. ELEGANTLY REMODELED WITH CATHERDRAL CEILINGS, TWO FIREPLACES, MARBLE FLOOING; FAMILY ROOM WITH WET BAR AND A TEMPERATURE CONTROLLED WINE STORAGE; GOURMET KITCHEN WITH TOP OF THE LINE APPLIANCES, GRANITE COUNTER AND BREAKFAST BAR, CHERRY WOOD CABINETRY AND GARDEN PICUTURE WINDOW. NEWER DOUBLE PANED WINDOWS AND ROOF. SOLAR TUBES, BUILT-IN MURPHY BED, RECESS LIGHTING. PROFESSIONALLY DECORATED, STAINED GLASS WINDOW, OPEN FLOOR PLAN, LIGHT AND AIRY. EXTRA SPACIOUS MASTER SUITE WITH PRIVATE BALCONEY; DUAL VANITY GRANITE COUNTER, SOAKING TUB. VIEW FROM ALL ROOMS WITH PRIVACY AND INDIVIDUAL D COR. FULLLY FENCED YARD WITH MANY FRUIT TREES. COVERED PATIO FOR INDOOR-OUTDOOR ENTERTAINING AMANITIES INCLUDING ASSOICATION POOL, SPA, PARK, CANYON TRAILS, CHILDREN PLAY GROUNDS AND MUCH MORE NO MELLOW ROOS AND LOW HOA FEES. THIS IS A MUST SEE!
Millions more borrowers are going to default. Most of these defaults will be a direct result of the excessive debts they cannot handle. Some of these will be truly strategic, but most will be a stress-induced strategic default. The borrower probably could continue to struggle and make onerous payments, but they no longer see a point, so they will default. Are those strategic? Lenders would probably say so, but how much distress are borrowers supposed to endure?
However you want to classify these defaults, they are coming. Until that debt is cleared out, the housing market will struggle, and so will our economy.
by JON PRIOR — Tuesday, September 20th, 2011, 10:39 am
Roughly 10.4 million mortgages, or one in five outstanding home loans in the U.S., will likely default if Congress refuses to implement new policy changes to prevent and sell more foreclosures, according to analyst Laurie Goodman from Amherst Securities Group.
At the end of the second quarter, more than 2.7 million long-delinquent loans, others in foreclosure and REO properties sat in the shadow inventory, more than double what it was in the first quarter of 2010 (Click to expand the chart below). With the market averaging roughly 90,000 loan liquidations per month, it would take 32 months, nearly three years, to move through the overhang.
And that number is contingent on no other loans going into default.
Mainstream media reports on the months of shadow inventory miss this fact. The shadow inventory problem is not behind us. Borrowers are going delinquent in large numbers.
It is better than it was before, but it is still bad. We are still adding loans to shadow inventory at a high rate, mostly due to strategic default. People know they can squat for a couple of years, so fewer are willing to struggle with their large underwater mortgages.
“Many analysts looking at the housing problem mistakenly assume it is limited to loans that are currently non-performing (or 60-plus days past due). Such borrowers have a high probability of eventually losing their homes. However, the problem also includes loans with a compromised pay history; these are re-defaulting at a rapid rate,” Goodman told a Senate subcommittee Tuesday.
Cure rates are abysmal, and they will continue to be. People can't afford the debt, and restructuring a super-sized debt to make it payment affordable does not solve the problem. That merely leaves debtors underwater and trapped in their homes.
Under a reasonable estimate, which is calculated with more conservative market conditions than what is currently being experienced, Goodman found nearly 2 million re-performing mortgages would default again and another 3.6 million already troubled loans to default as well.
The rest of the 10.4 million estimate is made of always-performing loans at various stages of negative equity. Of the 2.5 million always-performing mortgages with loan-to-value ratios above 120%, nearly half will default. Even 5% of the always-performing mortgages that have some equity left will default, as well, Goodman said.
Most of those defaults will be strategic. Underwater loanowners who are paying more on their mortgage than the cost of a rental are truly throwing their money away. It's ironic that the same crowd who belittles renters as throwing their money away on rent have no problem with throwing twice as much money away on loan interest. Pretty stupid, really, particularly when they are obtaining no equity.
In August, the Obama administration asked the housing industry for ideas on how to more efficiently sell or unload this overhang, and the Senate heard testimony from various housing players Tuesday.
There are people that still deny shadow inventory is a problem. If it weren't why is the Obama administration seeking answers on how to deal with it?
Each, including Goodman, said the government should target private investors.
Yes, they should.
Robert Nielsen, chairman of the National Association of Homebuilders, said government programs should be revamped to assist small and local businesses in rehabbing and unloading these properties.
Nielsen said Fannie, Freddie and the FHA should avoid bulk sales to large investors that have no stake in the neighborhoods in which these properties are located.
“Local and small businesses that have a stake in the future of the affected communities should be the driving force behind the disposition of the REO inventory. This will result in the creation of jobs and the stabilization of neighborhoods,” Nielsen said.
Bulk sales will be a bad idea. These funds will merely act as middlemen selling off individual homes to small investors and owner occupants. The profits made by bulk buyers is money the government could have acquired for itself if it merely continues with its current disposition efforts.
NAHB also urged Congress to extend the current conforming loan limits for Fannie Mae, Freddie Mac and the FHA, which are due to be lowered on Oct. 1.
Homebuilders want to sell homes to their FHA and GSE buyers at higher price points. Nearly half of their sales come from the FHA, and if those buyers can't obtain financing, the homebuilders cannot sell homes.
Stan Humphries, chief economist for Zillow, said the rental market is currently booming and would be able to handle a mass conversion of foreclosures into rentals by investors, but the government, he said, would be wrong in upsetting this dynamic.
“Investors smell a distinct opportunity in this situation: The chance to buy an asset cheaply and rent it out dearly. In fact, close to one-third of the purchases of existing homes this year have gone to all-cash buyers, the bulk of whom are real estate investors,” Humphries said. “Any plan that may upset this balance – such as Fannie and Freddie getting into the rental market and creating competition – will have a chilling effect on private investment in the one segment of the housing market that is performing well.”
Obviously, I agree with his assessment — and not just because I want to buy rentals. If the government starts renting instead of selling, this merely delays the necessary market clearing. These rentals would eventually need to be converted back to for-sale product unless Uncle Sam wants to become a permanent landlord on millions of single-family homes. When these properties are returned to the market, it will put renewed pressure on pricing and extend the housing crash.
How long do we want to prolong the pain? Are we looking to see if we can duplicate what happened in Japan?
But with a Congress currently gridlocked on nearly every issue, none of the panelists so clearly described the looming housing problem and the consequences of continued inaction like Goodman.
“To solve the housing crisis you must create 4.1 million to 6.2 million units of housing demand over the next six years,” she said.
So how do you create that much housing demand? Job creation would certainly help. Does anyone think the US will create that many jobs over the next six years? I doubt it.
That only leaves one viable alternative. Let house prices crash until cashflow investors absorb them. The surest way to create housing demand is to lower prices enough to attract cashflow investors. Many markets are already at those price levels, and unless the government does something really stupid — like renting properties out instead of selling them — the low resale prices relative to rents will prompt buying by cashflow investors. If the government starts renting these properties out, it will depress rents and thereby reduce the demand for properties from investors. If investors stop demanding these properties, the supply will take much, much longer to clear.
Owner occupants are not the answer. There are not enough wage earners with good credit to buy all the distressed properties. Cashflow investors must be part of the solution.
10% appreciation since October 2010?
We're going to see many property profiles like this one over the next few years. The owner buys in the bear rally, watches the market crumbe around him, but he still puts it on the market at a price that will give him room to negotiate and pay the commissions.
It won't work.
If this guy is going to sell this property, he is going to lose money. Prices are down year over year, and old Irvine condos are no exception. In fact, from what we have observed here, condo prices are still groping for a bottom.
Anyone think he can get $575,000 for this property?
This gorgeous garden patio home is located in the highly desirable community of Orangetree in Irvine , just minutes away from John Wayne Airport, Newport Beach, Irvine Spectrum shopping center, Oak Creek Golf Course, Irvine Valley College and Fashion Island. A gorgeous Leaded insert front door opens into well lit living area with impressive vaulted ceilings and beautiful wood laminate floors. The large updated kitchen includes all stainless steal appliances surrounded by custom cherry wood cabinets and recessed lighting. Both kitchen and bathrooms feature attractive and easy to clean granite counter tops with custom cherry wood cabinets. Three private bedrooms are carpeted in neutral colors. Home includes a fabulous landscaped patio with stamped concrete surrounded by a stunning custom redwood fence and gate. Enjoy the beautiful lush green belt located adjacent to the property for year around serenity. The property is extraordinary well maintained and includes an attached, oversized two car garage for extra storage. This home is located within minutes of Southern California's most desirable destinations and excellent Irvine schools.
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Proprietary IHB commentary and analysis
Resale Home Price …… $575,000
House Purchase Price … $515,000
House Purchase Date …. 10/14/2010
Net Gain (Loss) ………. $25,500
Percent Change ………. 5.0%
Annual Appreciation … 11.1%
Cost of Home Ownership
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$575,000 ………. Asking Price
$115,000 ………. 20% Down Conventional
4.18% …………… Mortgage Interest Rate
$460,000 ………. 30-Year Mortgage
$117,958 ………. Income Requirement
$2,244 ………. Monthly Mortgage Payment
$498 ………. Property Tax (@1.04%)
$0 ………. Special Taxes and Levies (Mello Roos)
$120 ………. Homeowners Insurance (@ 0.25%)
$0 ………. Private Mortgage Insurance
$185 ………. Homeowners Association Fees
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$3,047 ………. Monthly Cash Outlays
-$368 ………. Tax Savings (% of Interest and Property Tax)
-$642 ………. Equity Hidden in Payment (Amortization)
$171 ………. Lost Income to Down Payment (net of taxes)
Astute Observation by Pascal
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Three private bedrooms are carpeted in neutral colors. Home includes a fabulous landscaped patio with stamped concrete surrounded by a stunning custom redwood fence and gate. Enjoy the beautiful lush green belt located adjacent to the property for year around serenity. The property is extraordinary well maintained and includes an attached, oversized two car garage for extra storage. This home is located within minutes of Southern California's most desirable destinations and excellent Irvine schools. 
