Turn on your heartlight Let it shine wherever you go Let it make a happy glow For all the world to see Turn on your heartlight In the middle of a young boy’s dream Don’t wake up too soon Gonna take a ride across the moon You and me He’s lookin’ for a home Cause everyone needs a place A home’s the most excellent place of all
The lyrics to this song appeal to me on many levels. Wishful thinking and kool aid intoxication resonates in the boyhood reverie of days of boundless abundance when prices were shooting to the moon because we are running out of land, because everyone needs a place, and because Orange County is the most excellent place of all….
Don’t wake me up too soon….
If we could only recapture that moment. Have you ever awoke from a fantastic dream and wished you could quickly fall back asleep and pick up where you left off? Isn’t all of Orange County hoping they will wake up one day and realize it was all a bad dream and prices really haven’t gone down?
Irvine’s Auction Market
The failure of the Great Housing Bubble will ultimately be recorded on the auction block. Amend, extend, pretend cannot continue forever; lenders will foreclose and boot out the money renters who occupy the lender’s property. I recently heard Christopher Thornberg quip, “A rolling loan gathers no loss.” Lenders will modify who they can, short sale some for expediency, and foreclose on the rest — the rest being a plethora of properties.
I am focusing more attention on the auction market in preparation for an upcoming in-depth look here on the blog.
Today’s featured property is scheduled for auction February 4, and a number of high end homes clog the pipeline (I am defining high-end as Irvine over $800,000) as you can see from the list below:
Fifty-four properties over $800,000 are scheduled for auction over the next few months and another 39 are in preforeclosure. No catastrophic supply problem, but this does not include the shadow inventory of those who have stopped making payments but the lenders have not served with a Notice of Default. When the NODs begin in earnest, they will show up here in the auction market. The over $800,000 market will become more active because borrowers in these price ranges have few refinance options, and they are not eligible for loan modification programs. Borrowers with debts over the $729,000 conforming limit are basically screwed.
$1,150,000 Approved Short Sale
The bank doesn’t want to buy this property at auction. It was in escrow, but fell out, so the lender is praying someone will pony up $1,150,000 before they have to take their chances at auction. There have only been two auction prices over $1,150,000 in the last 6 months.
Trustee Sale Discount
Cash is king. If the lender does not find a buyer at $1,150,000, this property will probably go to auction on February 4 (At this point, they have given up on the borrower, so why would they postpone it further?)
Often properties go at a significant discount in the auction market as compared to the resale market where financing abounds. Fifteen percent, even twenty percent or more can be saved; however, for what are obvious reasons, desirable properties listed on the MLS with few unknowns like today’s featured properties get discounted the least. I haven’t researched the comps to have an opinion on the auction value of this property, although a cursory glance suggests it may sell between $1,050,000 and $1,100,000, unless the lender bids it up to $1,150,000 and takes the property.
If this sells at auction for $1,050,000 it will represent nearly a 30% drop from the original purchase price of $1,464,500 back in 2006. Is 30% off the bottom for Irvine’s high end? I don’t know, but it is certainly closer to the bottom than to the top.
Beds 5 Baths 4 baths Home Size 3,531 sq ft ($326 / sq ft) Lot Size 5,494 sq ft Year Built 2006 Days on Market 112 Listing Updated 1/14/2010 MLS Number S590545 Property Type Single Family, Residential Community Woodbury Tract Wdmf
According to the listing agent, this listing may be a pre-foreclosure or short sale.
JUST FELL OUT OF ESCROW. NOW APPROVED AT $1,150,000!!! Absolutely gorgeous 5 bedroom, 4 bath home in prestigeous neighborhood in Woodbury at an amazing price! Rare, premium corner lot! Granite counters, huge tumbled stone shower in master bath plus soaking tub, custom outdoor BBQ kitchen, 2 bonus rooms,and lots more upgrades! This home is priced to move fast! Please see private remarks for restricted viewing hours.
prestigeous?
That price is so good it warrants four exclamations points — not three — no, three exclamation points does not convey the incredible excitement that erupts from every buyer’s bones when they see $1,150,000!!!! I need a cold shower….
ET bought a home on here earth, and he has recently been spotted lightening up and enjoying earthly pleasures — his finger is in high demand.
If you want to investigate bidding on today’s featured property or properties like it, contact us at sales@idealhomebrokers.com. It is up for auction on February 4.
I hope you have enjoyed this week, and thank you for reading the Irvine Housing Blog: astutely observing
the Irvine home market and combating California Kool-Aid since
September 2006.
Have a great weekend,
Irvine Renter
Come back again I want you to stay next time Cause sometimes the world ain’t kind When people get lost like you and me I just made a friend
I was born with the wrong sign In the wrong house With the wrong ascendancy I took the wrong road That led to the wrong tendencies I was in the wrong place at the wrong time For the wrong reason and the wrong rhyme On the wrong day of the wrong week I used the wrong method with the wrong technique
“As with regulatory policy, we must discern the lessons of the crisis
for monetary policy. However, the nature of those lessons is
controversial. Some observers have assigned monetary policy a central
role in the crisis. Specifically, they claim that excessively easy
monetary policy by the Federal Reserve in the first half of the decade
helped cause a bubble in house prices in the United States, a bubble
whose inevitable collapse proved a major source of the financial and
economic stresses of the past two years. Proponents of this view
typically argue for a substantially greater role for monetary policy in
preventing and controlling bubbles in the prices of housing and other
assets. In contrast, others have taken the position that policy was
appropriate for the macroeconomic conditions that prevailed, and that
it was neither a principal cause of the housing bubble nor the right
tool for controlling the increase in house prices. Obviously, in light
of the economic damage inflicted by the collapses of two asset price
bubbles over the past decade, a great deal more than historical
accuracy rides on the resolution of this debate.“
If policy makers draw the wrong conclusion from history, it is likely they will implement the wrong policies and take the wrong corrective measures. This debate is important. Back to the speech,
“… U.S. house prices began to rise more rapidly in the late 1990s. Prices
grew at a 7 to 8 percent annual rate in 1998 and 1999, and in the 9 to
11 percent range from 2000 to 2003. Thus, the beginning of the run-up
in housing prices predates the period of highly accommodative monetary
policy. Shiller (2007) dates the beginning of the boom in 1998. On the
other hand, the most rapid price gains were in 2004 and 2005, when the
annual rate of house price appreciation was between 15 and 17 percent.
Thus, the timing of the housing bubble does not rule out some
contribution from monetary policy.”
This is accurate. It is difficult to blame low interest rates for the problem when prices began to rise unsustainably before interest rates went up, and it doesn’t explain why prices are not still at peak levels now that the Federal Reserve has lowered mortgage interest rates to unprecedented levels.
In his rebuttal to Ben Bernanke, John Taylor made the following statements:
“The evidence is overwhelming that those low interest
rates were not only unusually low but they logically were a
factor in the housing boom and therefore ultimately the bust, … It had an effect on the housing boom and increased a lot
of risk taking,” said Taylor, 63, who was attending the
American Economic Association’s annual meeting.”
If you read what Taylor said carefully, you see that he said the rates were “a
factor in the housing boom and therefore ultimately the bust.” Well, duh, I knew that. It is one thing to be a “factor” and quite another to be the “cause.” Bullets are a factor in shooting deaths, but people pulling the trigger is the cause.
Bernanke goes on:
“With respect to the magnitude of house-price increases: Economists who
have investigated the issue have generally found that, based on
historical relationships, only a small portion of the increase in house
prices earlier this decade can be attributed to the stance of U.S.
monetary policy. This
conclusion has been reached using both econometric models and purely
statistical analyses that make no use of economic theory.”
It is the same conclusion I reached in The Great Housing Bubble:
“The catalyst or precipitating
factor for the price rally was the Federal Reserve’s lowering of
interest rates in 2001-2004.
Many mistakenly believe the lower interest rates themselves were
responsible by directly lowering mortgage interest rates. This is not
accurate. Mortgage interest rates declined during this period, and this
did allow borrowers to finance somewhat larger sums with the same
monthly loan payment, but this was not sufficient to inflate the
housing bubble. The lower Federal Funds rate caused an expansion of the
money supply, and it lowered bank savings rates to such low levels that
investors sought other investments with higher yields. It was this
increased liquidity and quest for yield that drove huge sums of money
into mortgage loans.
…
The expansion of credit took four forms: lower interest rates,
lowering or eliminating qualification requirements, different
amortization methods, and higher allowable debt-to-income ratios. Lower
interest rates expand credit by allowing larger sums to be borrowed
with the same payment amount. In 2000, the interest rate on a 30-year
mortgage was 8.05%, and in 2003, it was 5.83%. This reduction in
interest rates accounts for 20% to 50% of the increase in house prices
experienced during the bubble. “
“In response to the question of whether the Fed’s low interest rate policy is responsible for
the bubble, most respondents point instead to regulatory failures of one type or another. Ben Bernake has also made this argument.
However, I don’t think it was one or the other, I think it was both.
That is, first you need something to fuel the fire, and low interest
rates provided fuel by injecting liquidity into the system. And second,
you need a failure of those responsible for preventing fires from
starting along with a failure to have systems in place to limit the
damage if they do start.”
The real debate Bernanke and Taylor are having has little to do with housing and everything to do with how the Federal Reserve is setting interest rate policy. Taylor disagrees with Bernanke’s actions as he has failed to adhere to the Taylor rule, so Taylor is pointing to every ill in our society as a result of Bernanke’s failure to do what he wants. It makes for interesting headlines, but with respect to housing, it is a tempest in a teacup.
Beds 3 Baths 2 full 1 part baths Size 1,878 sq ft ($287 / sq ft) Lot Size n/a Year Built 2006 Days on Market 7 Listing Updated 1/4/2010 MLS Number P715845 Property Type Condominium, Residential Community Woodbury Tract Wdgp
According to the listing agent, this listing may be a pre-foreclosure or short sale.
***APPROVED SHORT SALE!!!!*** Highly Upgraded Kitchen With Granite Cunter Top, Laminated Hardwood Flooring Trough Out, Charming Fieplace In Living Room. Walk to Woodbury Community Park, Pool, Spa & Playground. Close to shopping & Freeway and More!
What does it mean to be an approved short sale? The lender has pre-approved full asking price? Big deal. And why all the asterisks and exclamation points?
Cunter? I am not going to touch that one….
Trough Out. I probably would have made that one compound, but perhaps that is just me.
Fieplace?
With our low interest rates, someone will jump on this one quickly. There are not many resales in Woodbury under $300/SF… yet.
“The system of banking we have both equally and ever reprobated.
I contemplate it as a blot left in all our Constitutions, which, if not
covered, will end in their destruction, which is already hit by the
gamblers in corruption, and is sweeping away in its progress the
fortunes and morals of our citizens. Funding I consider as limited,
rightfully, to a redemption of the debt within the lives of a majority
of the generation contracting it; every generation coming equally,
by the laws of the Creator of the world, to the free possession of the
earth he made for their subsistence, unincumbered by their
predecessors, who, like them, were but tenants for life.”
California borrowers have created a culture of maximizing and servicing debt that makes them tenants for life. Thomas Jefferson would not recognize the concept we routinely accept as “ownership,” but he would have recognized the corruption of our lending gamblers sweeping away the fortunes and morals of our citizens.
Count Thomas Jefferson’s vision among those littering the Boulevard of Broken Dreams.
A Conceptual History of Real Estate Ownership
In a pioneer society, people go out and stake a claim to real estate by using it and occupying it. If property is not capable of producing food (income) and providing shelter, it has no value, and people do not compete to own it. Canadian and Siberian tundra is a modern pioneer expanse of thinly populated land of little value. Owning is occupying and making use.
With socienty comes division of labor, and fewer people live a subsistence life. Ownership becomes more complex and people enter into agreements where they exchange stored wealth (money) for shelter. Ownership is a special right of ongoing use, whereas rental is a contractual right of finite use followed by a reversion to owner. In societies of inherited multi-generational wealth, real estate is the best vehicle for transferring wealth because it provides a perpetual cashflow. With exception of low-yield savings accounts, no other asset class provides this feature.
One of the key features of true ownership is a lack of encumbrances. The more restrictions a property has on it, the smaller the bundle of rights an owner controls. For instance, if you pioneer a property in Northern Canada, nobody is going to review and approve your cabin’s front elevation or limit your exterior color choices as they will here in Irvine. We give up many individual freedoms for the harmony of society, and the ever-dwindling bundle of property rights is among them. Historic properties are at the extreme as owners often feel as if the property actually owns them.
One of the most common encumbrances on property is the mortgage lien, and it is among the most restrictive. For instance, if you own a property not encumbered with a mortgage lien, you could demolish any structures on the property (within legal and practical constraints) and nobody will care; it is your property. Once a property is mortgaged, the “owner” no longer has the right of demolition because a lender has claim to the real estate and has interest in preserving its value. In fact, the lender will even require a borrower to carry insurance to prevent loss. If the lenders is not the owner, how can they require insurance, and why do they care?
Lenders want to protect the value of their collateral, the property they may force sale of at auction. At a public auction, the lender, standing in first lien position, bids the property up to their outstanding balance in an attempt to regain their loan balance from a cash buyer. If the house is worth less at auction than their loan balance, lenders often buy the property at auction and sell in the resale market were prices are usually 15% higher. In short, through a complicated chain of events, lenders know the collateral may become their house, so lenders make borrowers care for collateral as if the lender owned it even though the lender doesn’t…
legally…
Hey, if it walks like a duck and quacks like a duck….
Since lenders behave like owners of a borrower’s real estate, and since lenders have right to force sale if a borrower defaults, lenders are owners, and owners are money renters.
“That we are overdone
with banking institutions …, that these have
withdrawn capital from useful improvements and employments to nourish
idleness, … for the emolument of a small proportion of our society
who prefer these demoralizing pursuits to labors useful to the whole,
the peace of the whole is endangered and all our present difficulties
produced, are evils more easily to be deplored than remedied.”
Thomas Jefferson
Money Rentership (Loanership)
Over the years, the slow erosion of property rights has made the distinctions between owning and renting less dramatic, particularly in renter-friendly cities in California. Owners have few rights renters don’t, and with exception of equity participation, owners obtain few benefits to outweight the burdens of ownership, and over the last few years, equity participation has not been a bonus.
The mortgage encumbrance gets to the core of the unnoticed change in people’s concept of property ownership; people who have little or no equity stake in a property have no ownership despite what legal documents may say. What they have is money rentership and the illusion of home ownership. Emotionally, they still feel like homeowners; they still behave and believe like homeowners, but they’re not home owners. They own a loan; they’re loan owners.
At some level, people know this, and we observe high default rates once borrowers fall underwater. Despite the Government’s best efforts, people are walking away because once they no longer own, they see money rentership for what it is, and unless the cost is less than a comparable rental — which it rarely is — then people walk.
Money rentership — the antithesis of owning — is the California conception of home ownership. Ownership implies freedom while loanership delivers slavery. Californians deliver themselves into money rentership each day, and many who do so over the next few years will see their ownership stake shrink as prices decline.
I will borrow money when I buy; a lot of it, but I recognise that building equity for the next decade is going to require paying down debt, and that will be my focus, and I want it to be yours. True ownership only comes through retiring debt. I suggest using accelerated amortization, and shortening your time to payoff. Realizing the real American Dream means abandoning debt addiction and California kool aid.
“Educate and inform the whole mass of the people… They are the only sure reliance for the preservation of our liberty.“
Beds 2 Baths 1 full 1 part baths Size 1,125 sq ft ($311 / sq ft) Lot Size n/a Year Built 1983 Days on Market 4 Listing Updated 1/7/2010 MLS Number P716504 Property Type Condominium, Residential Community Woodbridge Tract St
This is move in ready! Sweet condo that feels Big. Almost new designer floors with newer ceramic floor tiles in Kitchen, Dining area and Entry. The kitchen & master bath have newer Granite counters. Front of unit faces green belt area between units. Back patio is enclosed and pet friendly. Patio opens to covered carport plus guest parking. Good sized bedrooms w/bath in master. Located in Woodbridge with all the amenities including over 40 parks, pool, shuffle board ,volley ball, fitness, tennis, horseshoes, 2 lakes and all kinds of social clubs. Close to Irvine’s great schools and Universities. Note the romantic fireplace that sets off the light and bright livingroom. Hurry, This may not last. Covered parking is #30 and owner gets 2 spaces adjacent to unit.
“Our greatest happiness does not depend on the
condition of life in which chance has placed us, but is always the
result of a good conscience, good health, occupation, and freedom in
all just pursuits.“
The first time I saw the scene below from What’s Eating Gilbert Grape, my analytical mind, completely missing the emotional content of the moment, wondered if they could burn down their house and walk away. As long as their are no claims against the real estate, there is no legal reason you cannot burn down your house; although, contrary to the movie, you would need to get a burning permit even in rural America.
I don’t want this responsibility And don’t use me because I don’t agree
Why lie, do or die? Why lie, do or?
Responsibility? What’s that? Responsibility? not quite yet Responsibility? What’s that? I don’t want to think about it; we’d be better off without it
You think I’m so simplistic I’m onto you and your tricks Responsibility — MxPx
Nobody wants to admit or take responsibility. Politicians are masters of deflecting responsibility, and now borrowers are deflecting responsibility in unprecedented numbers. Behaving like children who get to play but refuse to do their homework, borrowers are throwing payment tantrums. When children misbehave, how much responsibility for the child’s behavior belongs with the parent? How do you apportion blame between parent and child? You should apportion blame between lender and borrower the same way because the relationship between lender and borrower is very similar to the relationship between parent and child.
Ranging from Southern California’s Cultural Pathology to the numerous HELOC abuse stories, many of my posts are critical of the behavior of borrowers because their behavior has been atrocious, but like children who are spoiled by entitlement, borrowers are enabled by their lender parents. Today, I am going to explore the similarities between the parent-child relationship and the lender-borrower relationship and affix blame where blame is due.
“Who is responsible for the Great Housing Bubble? It is one thing to
identify who or what caused the bubble, but it is another to assign
responsibility and blame. Borrowers, lenders, investors, and the
FED are all responsible; it is only a matter of degree. Irresponsible
borrowers are like children, if you offer them something they want, no
matter the terms, they will take it. The federal government realized
this basic fact years ago when they passed predatory lending laws. This
does not make the borrower any less responsible, but by definition,
subprime borrowers are irresponsible. If they took responsibility for
their debts, they would not be subprime. [ii] So if a large amount of
money is lent to the most irresponsible among us, it is reasonable to
expect them to spend it irresponsibly and not worry about paying it
back. In this case, past performance is an indicator of future performance. It should come as no surprise that the subprime experiment ended badly.
Despite the low expectation of subprime performance, people need to
be held accountable for their actions….
The borrowers are certainly at fault; if for no other reason than
they signed the papers and took the money. The lenders are also at
fault because they should have known better than to give borrowers
loans they could not afford, provide loans with no income
documentation, and ignore proven guidelines for loan-to-value and
debt-to-income.”
Barry Ritholtz in Bailout Nation listed those he blames for the housing bubble, and lenders are higher up the list than borrowers. Mr. Ritholtz goes on,
“Regardless of how low rates got, the fact remains that many borrowers took out mortgages regardless of their own ability to repay the monthly principal and interest. This was simply reckless behavior, and should be recognized as such. Innumeracy is no excuse.
Ultimately, banks have a fiduciary responsibility to their shareholders and depositors to lend money only to qualified borrowers. Hence, they have a greater liability in the lending crisis. This is especially true of the “lend to securitize” originators who knew they would be causing future foreclosures.
However, the lenders’ irresponsible behavior does not exonerate those people who failed to do basic math. It is incumbent upon borrowers to know what they can afford each month–and to not get themselves into financial trouble. Perhaps it is time to teach basic financial theory in public schools.”
Although these issues are complex, Barry and I agree that both parties bear responsibility, but the scales of justice tilt toward blaming lenders more than borrowers. If you listen to community activists trying to prevent foreclosures, you would think lenders are 100% responsible and borrowers are blameless. People who are really upset by HELOC abuse want to make the borrower 100% responsible because the conduct is so reprehensible. The truth is somewhere in between.
A discipline in psychology called Transactional Analysis provides a useful tool for assigning blame.
Transactional Analysis
Transactional analysis involves looking at the roles people assume when they communicate. The balance of power in a conversation or relationship changes depending on the roles of the parties. The parent-child interactions are useful to understand because the relationship of lender to borrower closely matches the relationship between parent and child.
In the parent-child relationship, the parent has greater power and with it a greater responsibility. Children want things, and parents must decide yes or no. The parent must exercise judgment to make sure the object of the child’s desire is good for them or appropriate, and it is the parent who makes the decision and bears much of the responsibility for the outcome. How is lending any different?
Borrowers want money, and lenders must decide yes or no. The lender must exercise judgment to make sure the borrower will pay them back, and it is the lender who bears much of the responsibility for the outcome of the loan. The parent-child relationship is the lender borrower relationship.
Confucius Say…
If the borrower-lender relationship is like the parent-child relationship, there is much we can learn about how lenders and borrowers should relate to one another. From Wikipedia,
“Life is subdivided into Five Relationships:
Father to Son – There should be kindness in the father, and filial piety in the son.
Elder Brother to Younger Brother – There should be gentility (politeness) in the elder brother, and humility in the younger.
Husband to Wife – There should be righteous behavior in the husband and obedience in the wife.
Elder to Junior – There should be consideration among the elders and deference among the juniors.
Ruler to Subject – There should be benevolence among the rulers and loyalty among the subjects.
All of these practices are the physical, or outward, expression of Confucian ideals. These are the observable behaviours of the members of society. Confucius; however, believed that in order for society to truly follow li, one must also adhere to and internalize these practices. The mentality involved in performing these rituals in society must not exist only there, it must be a part of the private life of the person. This is known as rén.
Rén is not a concept that is learned; it is innate, that is to say, everyone is born with the sense of rén. Confucius believed that the key to long-lasting integrity was to constantly think, since the world is continually changing at a rapid pace.”
In each of these imbalanced power relationships, there is a series of reciprocal duties. Confucius didn’t start with the idea that all are created equal, he explored the reality of our daily lives and came up with a series of rules and precepts for accepting and living within the power imbalances in our lives.
Candy Store Analogy
To illustrate the power imbalance, imagine yourself taking children to a candy store, and you are the only person there with money. What would happen? The children would quickly scoop up candy and present it to you for purchase; you would be responsible for saying yes and no by providing the money. This classic parent-child interaction when shared in a group is what lenders face all day — a steady stream of borrowers wanting money for whatever, and lenders having to determine who gets what. Most borrowers, like most children, will take whatever is give to them whether it is good for them or not.
Similar Relationship Imbalances
There are other relationships between parties that closely resemble the lender-borrower dynamic; (1) dealer-addict and (2) landlord-tenant.
How is the dealer-addict relationship similar? Addicts want drugs like borrowers want money. Dealers strike a bargain with addicts that look like normal transactions except that addicts will do nearly anything to get their drugs so the balance of power is certainly not 50/50. Dealers get to decide who gets what drugs based on whatever criteria they choose (usually money, but not always). I don’t know if there is a point to this other than you know the regard I hold lenders who created a society of HELOC addicts.
The landlord-tenant relationship is the closest to the lender borrower relationship. Landlords control whether or not a tenant gets to live in a house, and lenders control whether or not a borrower gets to live in a house. If a tenant quits paying rent, the landlord evicts the tenant. If the borrower quits paying the rent on money, the lender (money landlord) forecloses on the borrower. Both landlords and lenders evaluate customers based on their ability to pay, and both want the property occupants to care for the property.
In fact, the only real difference between the lender-borrower relationship and the landlord-tenant relationship is who has to deal with the ups and downs of real estate values and how certain expenses are allocated. Tenants miss the volatility in real estate prices whereas owners do not.
In Orange County since 2002, and particularly since 2006, when you consider the cost of housing and what was obtained for that cost, it has been better to be a tenant. Only in delusional mid- to high-end areas has the appreciation gained since 2002 compensated for the additional cost of ownership paid at 2002’s moderately inflated prices. Everywhere else, prices are at or below 2002 levels. Late buyers paid more rent for money from a lender than tenants paid rent for houses from a landlord. With equity positions unchanged, it is hard to argue owners had a better deal financially, emotionally perhaps, but not financially. Timing Does Matter.
Beds 5 Baths 2 full 1 part baths Size 2,750 sq ft ($400 / sq ft) Lot Size 7,236 sq ft Year Built 1996 Days on Market 5 Listing Updated 1/5/2010 MLS Number S600409 Property Type Single Family, Residential Community Westpark Tract Vin
Quiet & private end of cul-de-sac interior location. Huge yard on the greenbelt with a new fence & built in BBQ. Georgous and highly upgraded with new wood floors, plantation shutters, beautiful granite counter tops, built in entertainment center & office, designer berber carpet & light fixtures, mirrored wardrobes with closet organizers, built in surround speakers, ceiling fans in every bedroom, recessed lighting, tinted windows custom paint, alarm system, custom drapes, vaulted ceilings & main floor bedroom with full bath. Shows like a model. Close to great schools, shopping entertainment and more. Won’t last!
Georgous. This guy earned the graphic, but failed to spell the word correctly.
Won’t last. $400/SF homes are not selling particularly fast….
When I first read the article Principal Cuts on Lender Menus as Foreclosures Rise, I thought my head might explode. The idea of forgiving principal, or worse yet paying off mortgages with taxpayer money, enrages me.
The linked article is long, and it makes many of the arguments in favor of forgiving principal. I want to examine these arguments and try to decipher the truth.
The start of this article smells like a Treasury Department leak,
“Efforts by U.S. banks to help
distressed homeowners have focused mainly on temporary fixes
such as interest-rate reductions that may only put off the day
of reckoning, despite policy makers wanting them to do more.
Banks may be forced to resort to a remedy they’ve been
trying to avoid — principal reductions — as another wave of
foreclosures looms and payments on risky loans rise, Bloomberg
BusinessWeek magazine reports in the Jan. 18 issue.
Who said policy makers want them to do more than they do now? Banks may be forced? How? Another wave of foreclosures will not force them to do anything. It might force policymakers to appoint a Foreclosure Czar or some other useless symbolic act, but if forces banks to do nothing.
Negative equity leads to default
The article goes on, ““The evidence is irrefutable,” Laurie Goodman, senior
managing director of Amherst Securities Group in New York,
testified before the U.S. House Financial Services Committee on
Dec. 8. “Negative equity is the most important predictor of
default.””
I covered that one in Cure Rates. Policy makers have reason to look at this relationship because increasing equity is the only way to prevent more foreclosures. Everyone in power already knows this which explains why the US Government is now acting conservator of the GSEs, sustaining the new home market through FHA, and working together with the Federal Reserve to buy the GSE debt at inflated prices. They are working to create equity through payment affordability, but they can only go so far. The hopelessly underwater will only make it through principal reductions. In short, we have to give them money.
“The 25 percent plunge in residential real estate prices
from their 2006 peak has left homeowners underwater by $745
billion, according to research firm First American CoreLogic –a
number that tops the government’s $700 billion bailout for
banks. That’s why Federal Deposit Insurance Corp. Chairman Sheila Bair is considering incentives for lenders to cut the
principal on as much as $45 billion of mortgages acquired from
seized banks. “We’re looking now at whether we should provide
some further loss-sharing for principal writedowns,” says Bair.”
First, look at the enormity of the problem — $745
billion. How much of that was mortgage equity withdrawal? How much HELOC abuse are you willing to subsidize?
Second, if Ms. Bair is going to spend $45 billion to reduce mortgage balances, what exactly is gained? If there is a foreclosure or a principal reduction, the final result is a homeowner in a property they can afford. By reducing principal to avoid a foreclosure, we are rewarding the foolish homedebtor who previously outbid the prudent renter by using toxic financing. Now that the prudent renter is ready to deploy their downpayment with a stable loan to acquire the house — a house they should have rightfully had to begin with — the Government wants to step in and take the prudent renter’s tax money and pay off the mortgage of the foolish homedebtor squatting in the prudent renter’s home. Screw that.
“Some lenders may be coming around to the idea of principal
reduction. “If you can right-size the mortgage and return to an
equity situation, the incentive is to stay,” says Micah Green,
an attorney at Patton Boggs in Washington and a lobbyist for a
coalition of mortgage bond investors. Banks can either forgive
principal outright or defer it. In deferrals the borrower must
pay back the full amount on the original mortgage when he sells
the property; if the ultimate sales price doesn’t cover the
principal, the homeowner has to pay the difference, making it a
less effective tool.”
First, no lender anywhere is coming around to the idea of principal reduction. Principal reduction inevitably leads to moral hazard and the collapse of banking, and lenders know this. When banks start giving money away, they are no longer banks; they are charities.
Second, notice how we have a need to “right-size” the mortgage? This is a wonderful choice of language. You almost forget to ask, why weren’t the mortgages right-sized to begin with? And shouldn’t those who “wrong-sized” these mortgages fix the problem?
“As much as it pains me to write this, there is a short to medium
term solution to the foreclosure problem: convert part of the mortgage
to a zero coupon bond.
For those of you not steeped in finance, a zero coupon bond is a bond
which does not make periodic interest payments. Think of it a zero
amortization loan. You don’t pay either the interest or the principal,
and both accumulate for the life of the loan. The loan would be due
upon the sale of the house.
Here is how it would work for our typical homedebtor: Assume our
financial genius utilized 100% financing and took out a $500,000
interest-only mortgage with a 2% teaser rate that is due to adjust to
6%. Let’s further assume his real income (not what he reported on his
liar loan) could support a $1,500 payment on a $250,000 conventional
30-year mortgage at 6%. The bank could convert $250,000 to a
conventional mortgage, and convert the other $250,000 to a zero coupon
bond at 6% due on sale. The homedebtor can now make their payment, and
they get to keep their house. But here is the catch: when they sell
their house, they will owe the bank a lot of money. If they sell the
house in 20 years, they will owe $800,000 on the zero coupon bond note. In other words, all the equity gain on the value of the home will go to the bank.”
Do you understand how this mechanism works? The effect of loan deferment is identical to Option ARMs; you add to the mortgage balance, and you pay compound interest on this new balance. If you want to fully understand why this is such a bad idea, go back and read How Homedebtors Could Avoid Foreclosure.
Losing is winning
“Banks that negotiate principal reductions have seen positive
results. Principal forgiveness can be more than twice as
effective in slowing re-defaults than reducing an interest rate,
according to a December study by the Federal Reserve Bank of New
York. Cutting a homeowner’s principal would be especially
powerful in Florida, Nevada and Arizona, markets likely years
away from recovery, said Joseph Tracy, executive vice president
of the New York Fed and coauthor of the study.”
When the author wrote that first sentence, I wonder if he giggled? Banks lose money, but it is positive. I am amazed that a VP at a FED bank would write something so laughably stupid.
“Lenders are going to eat the losses at some point in
time,” Tracy said. “There’s a real chance to recognize the
loss by forgiving principal today instead of waiting.”
Is this a sales pitch to get lenders to act; lose now or lose later? How does a bank benefit from taking this loss today, particularly when most believe they can hold on and take a smaller loss later? Do you see why we are building a shadow inventory?
Wells Fargo is forgiving loan principal!
Every Wells Fargo customer should feign poverty and get a principal reduction. Is your spouse out of work? Perhaps your spouse should quit work while you negotiate a principal reduction?
Last year, Wells Fargo & Co. cut $2 billion of principal on
delinquent loans. After the modifications, the six-month re-
default rate on those loans was roughly 15 percent to 20
percent. That’s less than half the industry average. “We are
very comfortable with what we’ve been doing,” says Franklin
Codel, chief financial officer of the bank’s home-lending unit.
“We offer a principal reduction if that makes sense for that
individual borrower’s situation.”
Wells Fargo has publicly announced they are forgiving principal on home loans. What are you waiting for?
Back to the article, “When principal reductions were granted for pay-option
adjustable-rate mortgages — loans with high default rates
because they enabled borrowers to pay less than the cost of
interest as the principal increased — the re-default rate after
60 days fell to 6 percent, according to Mortgage Metrics.”
Loan Modifications don’t work
OMG! Six percent of modified loans cannot even make two payments, and this is touted as a success? And how much principal reduction are we talking about? Remember last weeks post Option ARMs Leave Borrowers No Good Options where I showed a sample property where the payment was about to increase from $1,939 to $3,708? Is the owner of that property entitled to keep it making a $1,939 payment? If that is all they can afford, a principal reduction program should set out to reduce the payment to that level.
The more ridiculous the teaser rate and the more risk a borrower took on, the more they will be rewarded by a principal reduction. People who used Option ARMs crowded out the prudent, and now the prudent get to subsidise them. Is everyone excited about that?
The conflicting interests of mortgage lenders and home-
equity lenders is a roadblock to doing principal reductions.
Banks, credit unions and thrifts held $951.6 billion in home-
equity loans as of Sept. 30, according to Federal Reserve data.
Mortgage lenders don’t want to cut principal unless the
home-equity lenders agree to take a hit. Typically, though, the
home-equity lenders are reluctant; much of the value of their
loans would be wiped out. That could drive more banks into
insolvency, says Joshua Rosner, an analyst at investment
research firm Graham Fisher in New York.
Maybe there is a silver lining in this after all. If principal reductions serve to wipe out HELOC lenders, then I say, bring them on.
Renter’s Tax Credit
Anyone who rented during the 00s and failed to participate in the Ownership Society is now being asked to bail out the disaster created by everyone else. Renters are blameless, and if they saved during the 00s, they are being asked to pay the most and are obtaining the least for their efforts. Owners got a free ride on the HELOC gravy train, pampering themselves with fancy meals and the ultimate in entitled extravagance — clothing poodles.
I have a solution. I want the Federal Government to pass a Renter’s Tax Credit that grants everyone who did not claim a home mortgage interest deduction a tax credit — a direct government gift. The tax credit amount should be equal to the average loan balance forgiven. For instance, if homeowners get an average principal reduction of $12,000 (some will need hundreds of thousands), then renters should get a $12,000 tax credit. After all, if the most foolish overextended and imprudent homeowners, are going to get a payment, give me my equal payment — bribe me — then I will be OK with it.
Isn’t that what this is about? The government takes our money and gives it to the constituency with the most clout. Do pissed-off renters have enough pull to get a $12,000 direct payment sent to them? Homeowners think they do.
Principal Reductions are a bad idea
Diana Olick has a post last week, Are Principal Writedowns the Answer to Housing Crisis? She aptly stated, “I would honestly rather see my home’s value go down than see the guy next door (figurative: my neighbors are lovely and fiscally responsible) who made a poor/negligent financial decision get a mulligan at my expense.”
I could go on, but the case against principal reductions is pretty strong. Of course, underwater borrowers — and there are many of them — think principal reduction is a great idea. They may have enough political clout to get policy makers to consider the idea, but there is no way this comes to pass. Over the next several months, Congress is going to turn its attention to regulation of our financial markets. Dumb ideas like this one will be touted by grandstanding legislators while the lending industry quietly lobbies to kill it. If you are hoping for a reduction in your loan principal, don’t hold your breath.
Beds 1 Baths 1 full 1 part baths Size 1,348 sq ft ($260 / sq ft) Lot Size 1,348 sq ft Year Built 1980 Days on Market 3 Listing Updated 1/7/2010 MLS Number P716438 Property Type Condominium, Residential Community Woodbridge Tract Ct
According to the listing agent, this listing may be a pre-foreclosure or short sale.
Gracious and large 1 bedroom + 1 den unit demonstrates pride of ownership throughout the property! The unit surrouds a private atrium with brick fountain and waterfall! The living room is dramatized by the vaulted ceiling, recessed lightings and a fireplace. The den is currently used as a guest bedroom with folding doors and a private deck overlooking the atrium. Attached 2 car garage with automatic roll up garage door and laundry hookups. This property locates in an award winning Woodbridge community features two ‘landmark’ lakes and swimming lagoons, two beach clubs (with boat docks), 24 tennis courts, 16 pools plus many other recreational amenities for use by the residents!
surrouds? Other than that misspelling and the occasional exclamation point, this description is not bad.
Notice this property has only appreciated at 2.7% since 1990. Property values go up to match wages which have gone up 4.4% annually since the 1970s. This property was purchased at the peak of the previous bubble, and it has not fallen to its eventual bottom of this bubble. Many markets in California will show zero appreciation between the 1990 peak and the 2012 trough.
The 1990 owner was not the current one. The current owner was a grade D HELOC abuse who managed to triple his debt.
One of the key features of true ownership is a lack of encumbrances. The more restrictions a property has on it, the smaller the bundle of rights an owner controls. For instance, if you pioneer a property in Northern Canada, nobody is going to review and approve your cabin’s front elevation or limit your exterior color choices as they will here in Irvine. We give up many individual freedoms for the harmony of society, and the ever-dwindling bundle of property rights is among them. Historic properties are at the extreme as owners often feel as if the property actually owns them.
