Author Archives: IrvineRenter

Nearly one-third of Californian's wealth was a real estate illusion

in a recent report, the federal reserve measured the median wealth loss in California households at 27.7%. The Illusions of wealth are shattered.

Irvine Home Address … 13 HAWTHORN Irvine, CA 92612

Resale Home Price …… $419,000

World turns black and white

Pictures in an empty room

Your value starts fallin' down

Better change your tune

Yeah, you reach for the golden ring

Reach for the sky

Van Halen — Dreams

Most people during the bubble bought a house as an investment. The fantasy was perfect: the better and more expensive the house, the more free money the house provides as it goes up in value forever. Just by purchasing real estate and using the largest loan available, everyone was enabled to be or do whatever they desired with abundant debt.

Much of the wealth created during the bubble was an accounting trick. Prices were temporarily and unsustainably elevated, and the wealth created was ephemeral and illusory.

People can't lose what they never had. Only the lingering attachment to an old dream remains to torment the kool aid intoxicated.

Californians' wealth took one of the biggest hits in the recession

In California and other Western states, 67.5% of households saw their net worth fall, compared with 62.5% in the U.S. overall. The median decline in the West was 27%, well above the 18.1% national median.

March 24, 2011 — By Jim Puzzanghera, Los Angeles Times

The federal government has for the first time detailed the sharp drop in wealth that the Great Recession caused American households — and it shows that families in California and other Western states took the biggest and broadest hits by far.

The average net worth of U.S. households — the value of their homes, stocks and all other assets — fell 20% to $481,000 by mid-2009 from $598,000 in mid-2007, according to a Federal Reserve survey released Thursday.

In the Western states, 67.5% of households saw their wealth drop, compared with 62.5% for the nation overall. The median decline in wealth for households in the West was 27.7%, well above the 18.1% national median and nearly triple the 9.5% decrease for families in the Northeast.

While it's widely known that the recession slammed household wealth and that the housing market in the West took some of the hardest hits, the unusual Fed survey attempted to quantify the damage.

The central bank does a broad consumer finance survey of about 4,000 households every three years. But to gauge the effect of the recession, the Fed in mid-2009 began re-interviewing the same households it had surveyed in 2007.

The new data compare the state of those households just before the recession officially hit in December 2007 with how they were faring in the second half of 2009, after the recession technically ended and the economy began growing again.

Although about two-thirds of households saw their wealth fall, “a sizable fraction of households experienced gains in wealth, while some families' financial situation changed little,” the Fed said in its 37-page report, titled “Surveying the Aftermath of the Storm: Changes in Family Finances from 2007 to 2009.”

The banksters and above median home price squatters have done well as everyone else's wealth went negative.

Although overall wealth declined nationally, well-off families — those in the top quarter of net worth — saw their overall wealth increase by about 27%.

Still, the recession hit most households hard, leading to families in all income brackets to cut back spending so they would have “greater precautionary savings.“

That decline in spending “may act in some ways as a brake on reviving the economy in the short run,” the report said.

jim.puzzanghera@latimes.com

Frugality and savings accompany every recession. Some economists complain as if savings is a problem. Recessions end when people save, and that savings is loaned by banks into the economy. There is always a lag between when the money is saved and when it permeates the economy. The federal reserve seems to exist only to prevent the natural healing mechanisms of the market from working properly.

The credit bubble, the housing bubble, and illusions of wealth

The chart below illustrates the credit bubble that took our already burgeoning housing bubble and made it into an uber-bubble. For a more detailed analysis, please read the weekend post, Are large down payments supporting high-end home pricing?

Prices have stabilized along with aggregate loan balances at a level manipulated by government policy and federal reserve policy.

Note the average loan balance at the peak is very near current pricing. Banks are eager to hold prices at this level because any significant price decline would trigger strategic default as more and more owners submerge beneath their mortgage obligations. The loan balances are so large here that a cascade of strategic default similar to Las Vegas would cost lenders billions of dollars.

The false bottom of 2009 is most durable at the bottom of the market. Irvine has already double-dipped, and other premium communities in Orange County are facing similar circumstances.

What does the housing recession really look like?

At the peak, most cities in Orange County were trading at more than $400/SF. The Irvine premium was low by historic standards relative to surrounding cities. The crash has witnessed significant expansion of premiums between the highest value cities and the lowest value ones.

The current resale 311/SF is the lowest in seven and a half years. Anyone who bought since late 2003 and still owns is financially behind anyone who rented instead. When you factor in transaction costs, the additional cost of ownership (they paid more than rental parity in 2003), and the loss of buying power due to monetary inflation, and the money-pit of home ownership becomes apparent.

This spreading out of values could be attributed to savvy buyers recognizing a premium. I imagine the savvy buyers of the bear rally would embrace that idea.

In reality, the high end simply hasn't deflated yet. The distressed inventory is being withheld from the market, and the few buyers who are active are being forced to come up with huge down payments in order to transact.

Any way you slice it, the local housing market is facing significant headwinds, and with maximum foreclosure rates and a huge overhead supply, things will get worse before they get better.

Anyone want to guess where the HELOC money went?

The decor and staging are rather unique. Did you notice they didn't bother to hide the bong above?

Actually, it looks like this is a college rental. The owner is listed as having an Idaho address.

  • The property was purchased on 10/21/1997 for $190,000. The owner used a $133,000 first mortgage and a $57,000 down payment.

  • On 7/9/2001 they refinanced with a $310,000 first mortgage. Perhaps they took the $170,000 of mortgage equity withdrawal and bought the property in Idaho cash? I don't have a clue.

  • On 6/28/2004 they returned to the ATM and obtained a $382,525 first mortgage. They were just issued a NOD.

Foreclosure Record

Recording Date: 02/28/2011

Document Type: Notice of Default

They may not have paid the mortgage in a while considering this is listed as a short sale at $419,000. With renters in this place, it produces some income that could have gone toward making payments. Do you think they stopped charging the renters when they stopped paying the mortgage?

Irvine House Address … 13 HAWTHORN Irvine, CA 92612

Resale House Price …… $419,000

House Purchase Price … $190,000

House Purchase Date …. 10/21/1997

Net Gain (Loss) ………. $203,860

Percent Change ………. 107.3%

Annual Appreciation … 5.9%

Cost of House Ownership

————————————————-

$419,000 ………. Asking Price

$14,665 ………. 3.5% Down FHA Financing

4.84% …………… Mortgage Interest Rate

$404,335 ………. 30-Year Mortgage

$85,185 ………. Income Requirement

$2,131 ………. Monthly Mortgage Payment

$363 ………. Property Tax (@1.04%)

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

$87 ………. Homeowners Insurance (@ 0.25%)

$209 ………. Homeowners Association Fees

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

$2,791 ………. Monthly Cash Outlays

-$349 ………. Tax Savings (% of Interest and Property Tax)

-$500 ………. Equity Hidden in Payment (Amortization)

$27 ………. Lost Income to Down Payment (net of taxes)

$52 ………. Maintenance and Replacement Reserves

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

$2,021 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$4,190 ………. Furnishing and Move In @1%

$4,190 ………. Closing Costs @1%

$4,043 ………… Interest Points @1% of Loan

$14,665 ………. Down Payment

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

$27,088 ………. Total Cash Costs

$30,900 ………… Emergency Cash Reserves

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

$57,988 ………. Total Savings Needed

Property Details for 13 HAWTHORN Irvine, CA 92612

——————————————————————————

Beds: 3

Baths: 2

Sq. Ft.: 1539

$272/SF

Property Type: Residential, Condominium

Style: One Level, Contemporary

Year Built: 1974

Community: 0

County: Orange

MLS#: S643461

Source: SoCalMLS

Status: Active

On Redfin: 86 days

——————————————————————————

Single level home with no one above or below. Home is at the end of a cul de sac with an oversized driveway and a two car attached garage with direct access to the house. There are three large bedrooms and one has a secluded small patio/atrium. There is a large patio off the living area with plenty of room to entertain. The kitchen has an eat-in area and plenty of counter and cabinet space. This lovely home is surrounded by greenbelts and this family community has two pools, a club house, lots of walking trails and tot lots for the little ones to play in. Walking distance to Irvines award winning schools (Uni High is also very close), stores and parks. Also close to the 405 and 5 and toll roads.

Are large down payments supporting high-end home pricing?

This weekend's post is a detailed look at the median price, median loan, and median down payment in Irvine and nearby cities in Orange County, California.

Irvine Home Address … 63 WOODLEAF Irvine, CA 92614

Resale Home Price …… $325,000

I want to be a star, I'm going to have a car

And you'll have to admit, I'll be rich as shit

I'll just sit and grin, the money will roll right in

I would give you some, if you only would have treated me nice

You'll wish that you did, you'll feel pretty stupid

I'll just sit and grin, the money will roll right in

Nirvana — The Money Will Roll Right In

All-cash home sales hit record highs

By BRIAN MARTINEZ — THE ORANGE COUNTY REGISTER

All-cash home buying is surging across the United States, including in Orange County, as lenders tighten mortgage standards, middle-class buyers are sidelined and investors see opportunity.

Nationwide, cash buyers grabbed 33 percent of all used homes sold in February, the National Association of Realtors reported March 21. The figures, based on agent reporting, do not include foreclosure auctions on courthouse steps, which are usually cash-only.

In Orange County and California real estate, DataQuick Information Systems reports similar trends based on county recordings that do not show any purchase loan.

Cash-only sales have more than doubled in Orange County, from a monthly average of 10.4 percent in the past 23 years to a monthly average of 24 percent in the past 12 months, DataQuick statistics show. In January, all-cash sales hit 28.3 percent in the county – the highest for any month since DataQuick started tracking the figure in 1988.

That is a very large percentage of homes. It would be interesting to see the breakdown of that by cost. I know from what I witness in Las Vegas that most of the all-cash transactions are investors buying properties for less than $100,000. I suspect the bulk of the all-cash sales in Orange County are also at the very bottom of the price ladder.

PHOTOS OF O.C. HOMES BOUGHT WITH CASH

In Irvine, 31.6 percent of the 393 homes sold so far this year were paid for in cash, real estate broker Cathy Haney said. The average sales price of the all-cash deals this year was $657,854, while the median price for all the Irvine homes sold was $535,000, she said.

That sounds like a lot, but historically about a third of all homes are owned with no mortgage anyway. What would be really interesting would be to see the total number of all-cash purchases and percentages over time. Unfortunately, I don't have that data. I have heard anecdotally from someone inside TIC that they did sell nearly 1/3 of their product to all-cash buyers. That amounts to about 200 closed sales last year.

Across California, mortgage-less home purchases have doubled from an average 14.7 percent in the past 23 years to 28.3 percent in the past 12 months, according to DataQuick. Cash deals hit 32.9 percent in February, the highest for any month since at least 1988.

“You're seeing an increase in cash deals at both ends of the price distribution curve,” said Sam Khater, chief economist for CoreLogic Inc., a real estate information company. “You're seeing it in the hardest hit areas, where investors are coming in and picking up low-priced properties. And you're seeing higher cash activity at the upper end as well.”

The “lion's share” of all-cash purchases nationwide are from investors, according to Walter Molony, a spokesman for National Association of Realtors. Real estate investors seek rental income, long-term appreciation or a quick profit.

Vito Antoci, a full-time real estate investor from Newport Beach, recently bought an ocean view home at 1006 White Sail Way in Corona del Mar for $1.45 million in cash. He is spending another $500,000 in cash to expand and renovate the house, and said he will sell the home within six months for $2.5 million to $2.89 million to earn at least a half-million dollars in profit.

Kudos to him if he can pull that off. I'm glad it's not my deal. He may find selling that one is harder than he thinks.

“When you buy with cash, you get the best deals,” Antoci said. “Sellers don't want to deal with the bureaucracy of banks.”

Antoci, who owns Varm Development, saw a nonlocal realtor putting the for-sale sign into the ground as he drove the streets looking for homes to buy. The sellers were asking $1.8 million. He made an offer and it was accepted that same day. It never hit the market, and escrow closed in a week.

“It was a quick, intriguing cash offer, and they took it,” he said.

Cash is always king.

Carl Alford, a retiring owner of a dry-cleaning product business, recently paid cash for two homes in Irvine that he is renting out for income.

“Stocks and bonds are a gamble, and banks certainly aren't paying anything on money,” he said. “You can earn more in real state, and I like something you can touch, feel and correct.”

He has cash earning about 4% in Irvine real estate, and that is better than the stock market that nearly doubled in the last two years? I like cashflow properties, but there are places where you get more bang for the buck.

Alford recently sold a home in Fontana and carried the mortgage note himself, he said, meaning the buyers are paying him monthly payments.

Investors are also using cash – either their own or from alternative resources – to gain an advantage over buyers using a mortgage in nabbing bank-owned properties, which are plentiful these days and usually less expensive than other homes. Foreclosures in January accounted for 37 percent of all home sales nationwide, 25 percent in Orange County and 54 percent in California.

Traditional lenders often reject mortgage applications for foreclosed properties because the homes need a lot of work, appraisals come in below the accepted price or deals just take too long to close, said Thomas Popik, research director for Campbell Communications Inc., which conducts national surveys of real estate brokers.

Some flippers don't even have to improve a foreclosure.

I think I mentioned something about that recently….

“You buy the house at a discount with cash, then you flip it almost immediately to the first-time homebuyer who's using a mortgage, simply because they were not able to buy at the foreclosure sale,” said Oliver Chang, a housing-market analyst with investment bank Morgan Stanley.

About half of all home purchases were paid for in cash in Miami, Las Vegas and Phoenix, Chang said.

HIGH-END MARKET

In the local, million-dollar-plus home market, buyers are choosing to use their own money to purchase their principal residence, says Chris Valli of luxury real estate brokerage Surterre Properties.

Why? Banks are asking intrusive, exhaustive questions of anyone trying to get financing for a home above $729,000, Valli said. Fannie Mae and Freddie Mac won't insure mortgages over $729,750. Buyers feel it is just less of a hassle to pay for the home with their own money, Valli said. The buyers also want to negotiate a better deal on the property by showing they can close escrow without a third party lender, he added.

All those advantages are real if you have the cash. This guy makes it sound like every buyer has that freedom, and they don't. He does paint an accurate and sobering picture of the jumbo market.

“It puts the seller more at ease and gives them a little more assurance,” Valli said. He recently sold an estate in the $7 million range in Irvine's Shady Canyon community for all cash. Another home in Shady Canyon recently sold for $4.3 million in cash.

Chris Crocker, a Coldwell Banker broker in Corona del Mar, says the wealthy are looking at waterfront dream homes priced 40 percent below the peak as a safe venue to out their money in for the next few years while also having some fun. The cash buyers he or his colleagues have worked with are looking to buy second or third homes as a place to dock their yachts and their money on the West Coast.

There's a general perception that the market has bottomed out on prices, Crocker said.

There is a general perceptions that realtors will call the bottom at every opportunity.

CREDIT CRUNCH

Tighter underwriting in general for mortgage loans is also a factor in the percentage increase of cash-only deals among all sales.

Lenders are requiring higher down payments and higher credit scores.

The median down payment for all home purchases with a mortgage rose to 22 percent last year in at least nine major U.S. cities, according to a survey by Zillow.com. That's up from 4 percent in late 2006, when the housing bubble began to burst. During the housing boom, buyers could purchase a home with little or no money down.

The weighted average FICO score for a home purchased with a Fannie Mae mortgage was 762 last year, up from 716 in 2006, the mortgage finance company reported.

The tighter underwriting is sidelining many would-be middle-class buyers, especially first-time buyers, from purchasing a home – even though prices are relatively low because of all the foreclosures.

“The average Joe can't take advantage because he simply cannot get the credit to buy,” said Paul Dales, senior U.S. economist for consulting firm Capital Economics.

People became spoiled by an era of cheap credit and unfettered access. Those days are gone.

The banks who fueled the housing bubble with lax mortgage underwriting are now being too restrictive, said Molony, the realtor association spokesman.

“Lenders have only been willing to lend to the cream of the crop in terms of credit scores,” he said. “As a result, you're seeing a depressed level of traditional buyers.”

Bloomberg News and The Associated Press contributed to this report.

Contact the writer: bmartinez@ocregister.com or 714-796-7955

What does the data show?

When I first graphed the data on median loan amount, I was shocked by the obvious credit bubble that emerged from the data.

The current median loan amount has been steady at around $400,000 since late 2007. This line of support is about what a median income family could support with 5% interest rates. With the lack of jumbo financing, and with loan qualification being based on real incomes and amortizing loans, there isn't much upward pressure on loan balances. Lenders are providing enough air for support, but not enough to reinflate the bubble.

Their strategy to date has been to withhold inventory from the market and sell small numbers of high-end properties to the few buyers with cash. They are trying to drain a large reservoir with a tiny hose. At the current rate of liquidation, prices won't go down, but banks will own high-end properties for decades.

One of the ways this disparity shows up is in down payments. In areas where liquidations are proceeding at full speed, prices have been pushed down to the point that FHA buyers with 3.5% down become nearly half the housing market, hence the down payment percentages near 3.5% in Santa Ana and most of California.

Is this a sign of heavy cash buyers recognizing value and bidding up precious high-end properties? Perhaps, but there is an alternate explanation.

There are only so many frugal savers who have accumulated two or three years salary as liquid savings. Once those few people buy, buyers with smaller and smaller down payments get their opportunities. If there is limited supply, many buyers are left unsatisfied because they can't get property. These buyers are unable to increase their bids because they must qualify for a loan, and supplement with a down payment. Borrowers can't lie and make stuff up anymore to get around affordability.

Lenders know they have a problem, but they believe people will start making enough money to support the pricing on their books from 2006. It isn't going to happen. For now, they are content to withhold inventory from high-end markets and see what happens. As a result, there is very limited product that actually sells, and those go to the few buyers with lots of cash.

If we were seeing large down payments and normal to high transaction volumes, then the increased down payments would be indicative of increased buyer interest among those with cash. But since the transaction volumes are more than 30% below normal and near all-time lows, what we are seeing is the few available buyers paying what is asked with what resources they have. That isn't buying pressure that pushes up prices, that is restricted supply that forces the few buyers to reach for the sky.

The future of large down payment markets

The surest sign of liquidation of inventory is diminishing down payments. Low down payments characterize both market rallies and market bottoms. Moderate to high down payments are common to stable markets. Down payments where the highest after the credit crunch that signaled the collapse of the housing bubble.

To increase transaction volumes properties must be pushed down to buyers with smaller and smaller down payments. The buyer pool with 3.5% saved is much larger than the buyer pool with 20% down.

During the liquidation of high-end shadow inventory, if down payments are likely to compress, then either loan balances need to get larger, or prices are going to fall.

Orange County Asking Prices

I still think prices are going down, particularly at the high end. Here in Irvine, with loan balances holding at $400,000, the median will probably drop below $500,000, but unless loan balances decrease due to higher interest rates, the down payment compression won't get so severe as to push the median below $480,000.

More Ponzis flushed from loan ownership

Today's featured Ponzis put in $8,000 and took out $192,000. Not a bad ratio. They will want to own again.

  • The owners of this weekend's featured property paid $240,000 on 6/21/2001. They used a $232,703 first mortgage, and a $7,297 down payment.

  • On 10/22/2002 they refinanced with a $250,750 first mortgage. At least they waited a little over a year before getting their first nearly $20,000.

  • On 7/16/2003 they obtained a $27,000 HELOC.

  • On 3/24/2004 they refinanced with a $348,500 first mortgage.

  • On 12/28/2004 they obtained a $40,000 HELOC.

  • On 7/20/2005 they refinanced with a $384,000 Option ARM and got a $48,000 HELOC.

  • Total property debt is $432,000.

  • Total mortgage equity withdrawal is $192,000.

  • They just received their NOD.

Foreclosure Record

Recording Date: 02/08/2011

Document Type: Notice of Default

Irvine House Address … 63 WOODLEAF Irvine, CA 92614

Resale House Price …… $325,000

House Purchase Price … $240,000

House Purchase Date …. 6/21/2001

Net Gain (Loss) ………. $65,500

Percent Change ………. 27.3%

Annual Appreciation … 3.0%

Cost of House Ownership

————————————————-

$325,000 ………. Asking Price

$11,375 ………. 3.5% Down FHA Financing

4.84% …………… Mortgage Interest Rate

$313,625 ………. 30-Year Mortgage

$66,074 ………. Income Requirement

$1,653 ………. Monthly Mortgage Payment

$282 ………. Property Tax (@1.04%)

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

$68 ………. Homeowners Insurance (@ 0.25%)

$364 ………. Homeowners Association Fees

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

$2,366 ………. Monthly Cash Outlays

-$155 ………. Tax Savings (% of Interest and Property Tax)

-$388 ………. Equity Hidden in Payment (Amortization)

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

$41 ………. Maintenance and Replacement Reserves

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

$1,885 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$3,250 ………. Furnishing and Move In @1%

$3,250 ………. Closing Costs @1%

$3,136 ………… Interest Points @1% of Loan

$11,375 ………. Down Payment

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

$21,011 ………. Total Cash Costs

$28,900 ………… Emergency Cash Reserves

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

$49,911 ………. Total Savings Needed

Property Details for 63 WOODLEAF Irvine, CA 92614

——————————————————————————

Beds: 3

Baths: 2

Sq. Ft.: 1267

$257/SF

Property Type: Residential, Condominium

Style: One Level, Contemporary

View: Peek-A-Boo

Year Built: 1983

Community: Woodbridge

County: Orange

MLS#: P773002

Source: SoCalMLS

Status: Active

——————————————————————————

Gorgeous conner upper unit. 3bed/2bath, cozy fireplace. Recessed lighting, granite countertops in kitchen. Master bedroom is separaed from other 2 bedrooms and inside laundry room. Newly done in bathrooms, master bath has double sink. Travertine flooring in kitchen, dining room and master bathroom. Double pane windows and custom paint. Home is close to pool, lake shopping and schools.

conner? separaed?

Loan modifications and principal reductions fail to prevent future delinquency

Both principal reductions and loan modifications fail to prevent redefault. Borrowers are not sustaining ownership under those circumstances.

Irvine Home Address … 8 HUCKLEBERRY Irvine, CA 92618

Resale Home Price …… $497,000

Less conversation

No moral obligation

I see what's at the ending of the rat trap

…

The rabbit dug a hole straight through to China

So where do we go?

And where is the rabbit's hole?

I'm feeling like I'm pulling away, yea

I'm feeling like I'm pulling away, yea

Stone Temple Pilots — Huckleberry Crumble

In early 2010, i predicted the moral trepidation about strategic default would largely be gone from the American psyche. People are beginning to look at their homes as their other investments, and when the numbers favor waling away, they do so. People are opting to get out of the rat trap of working to service a bottomless pit of debt.

As underwater borrowers strategically default, lenders are trying different methods for holding back the rising tide. Loan modifications have postponed some foreclosures, and principal reductions might postpone a few more. The value in doing a few principal reductions goes beyond the money spent. It makes for a fantastic carrot lenders can dangle in front of distressed borrowers. Lenders benefit if the herd makes a few more payments based on false hope — whether that false hope be imminent appreciation or potential debt relief, lenders don't care. They just want a few more payments.

The article you are about to read touts the success of principal reductions and attempts to persuade the reader principal reductions are a viable alternative. In reality, principal reductions do little to sustain home ownership. The only real benefit is that banks may get a few additional, albeit reduced payments from some borrowers.

Mortgage Servicers Resist But Cut Debts

By RUTH SIMON And NICK TIMIRAOS — March 28, 2011

U.S. banks are resisting efforts by state attorneys general to force them to cut the amounts owed by some borrowers facing foreclosure. Yet mortgage companies already have reduced home-loan balances for more than 100,000 borrowers.

In for a penny, in for a pound? Who cares if they tried some principal reductions? They tried some, found out it didn't help, so now they don't want to do more of them.

How much larger the number will grow is likely to be at the center of negotiations this week aimed at reaching a settlement to the nationwide investigation of mortgage-servicing practices.

Officials from Bank of America Corp., J.P. Morgan Chase & Co., Wells Fargo & Co., Citigroup Inc. and Ally Financial Inc.'s GMAC unit have been summoned to Washington for a Wednesday meeting with state attorneys general and at least three U.S. agencies, according to people familiar with the situation.

It will be the first faceoff since the five companies, the largest home-loan servicers in the U.S., got a 27-page “term sheet” earlier this month from state attorneys general that would require the servicers to consider more borrowers for principal write-downs.

What does it mean to “consider” someone for a principal write down? Won't the banks “consider” each borrower for principal reduction, say no, then foreclose on them? Are the AGs suggesting a specific change to lender guidelines?

In addition, some of the financial penalties resulting from any settlement are “very likely” to be used for reductions in loan balances for certain borrowers, said Iowa Attorney General Tom Miller, who is spearheading the 50-state investigation.

Statements like his merely feed into the false hope of distressed borrowers everywhere. Principal reductions will only occur on the mortgages deepest under water in a belated attempt to keep the hopeless paying a little longer.

Even among state officials, there are disagreements as to whether shrinking loan balances is a good idea.

There's debate about the idea of principal reductions because it's a really bad idea. Foreclosure is a superior form of principal reduction.

The “term sheet's principal reduction proposals may actually foster an unintended 'moral hazard' that rewards those who simply choose not to pay their mortgage,” the Florida, South Carolina, Texas and Virginia attorney generals wrote in a March 22 letter to Mr. Miller.

At least of few of these guys get the implications of their pandering.

The chief executives of Bank of America and Wells Fargo have questioned the fairness of writing down loans, while claiming the costs could be enormous if widespread principal reductions are triggered by a settlement.

Speculation that “we want everybody 'underwater' to receive a principal reduction is not true,” Mr. Miller said in an interview, though lopping off thousands of dollars from what a borrower owes on a mortgage “has been underutilized as a tool.” An underwater borrower is one who owes more on a property than it is worth.

They may not want everyone to get a principal reduction, but they do want to create the false impression that everyone might get one. Principal reduction has not been underutilized as a tool to cure mortgage default. It doesn't work. Chainsaws are underutilized tools in operating rooms, and I hope it stays that way.

This month's proposal by state attorneys general would require banks to reduce loan balances for some borrowers if a modification that includes a principal reduction would provide a better long-term return than foreclosure or a loan modification that simply cuts the borrower's interest rate or extends the loan's life.

Based on the statistics, there is little or no difference in redefault rates between those who received principal reduction and those who only obtained a modification. How could anyone establish that principal reductions are better when the data clearly shows they aren't?

Loan balances would be trimmed over a three-year period, but only if borrowers made steady payments.

Bailouts and false hopes. String people along for three more years and pray the market has moved higher. It merely delays the inevitable.

Some loan servicers under investigation by state and federal officials already are slicing loan balances on a very narrow basis. In 2009 and 2010, Wells Fargo forgave a total of $3.8 billion in principal—or an average of $51,000 per loan—for roughly 73,000 borrowers whose mortgages are owned by the San Francisco bank.

There are 11,000,000 underwater loan owners. The 73,000 loan owners Wells Fargo gave money to represent 0.66% of the total.

Bank of America, based in Charlotte, N.C., had offered loan modifications to more than 127,000 borrowers as of December as part of its previous settlement with state attorneys general over alleged predatory lending by Countrywide Financial Corp., which it bought in 2008. An estimated 35,000 of those offers included a principal reduction.

Officials at Bank of America and Wells Fargo said the two banks are comfortable reducing loan balances for certain borrowers, but oppose broad-based cuts. One reason: Some borrowers could stop making payments to get their debt reduced.

A recent study by Columbia University economists concluded that Countrywide's relative delinquency rate “increased substantially…during the months immediately after the public announcement” of the 2008 settlement.

Banks have empirical proof of their own common sense. If you give people incentive to quit paying their mortgage to obtain a principal reduction, many borrowers will default.

“It's certainly something to be worried about, but you can't point to this and say, 'Well, we can't do any modifications,' ” said Christopher J. Mayer, one of the study's authors.

Why not? Why do we have to do loan modifications or principal reductions? People are scurrying about in Washington trying to solve a problem they made up in their own minds — a problem that will solve itself if they let the process go forward and foreclose on the delinquent mortgage squatters.

Most loan-modification programs have focused on temporarily reducing interest rates and extending loan terms.

Principal reductions have gotten more attention recently because so many borrowers owe more than their homes are worth.

At the end of 2010, nearly 11.1 million borrowers, or nearly 23.1% of those with mortgages, were underwater, according to CoreLogic Inc. The tepid nature of the housing recovery suggests many borrowers could remain underwater for years.

There isn't much hope for appreciation bailing this group out. With that many distressed owners, enough of them are going to succumb to their own debts that a steady supply of distressed properties will stop any real appreciation.

Supporters of principal reduction say borrowers who receive such cuts are less likely to redefault.

“Principal write-downs are much more likely to create a loan that is sustainable over the long-term,” said Massachusetts Attorney General Martha Coakley, who has made principal reductions a component of four predatory lending settlements.

A study last year by the Federal Reserve Bank of New York found that loan modifications with principal reductions are far more likely to succeed than those that simply reduce interest rates.

According to mortgage servicer Ocwen Financial Corp., 17% of its borrowers who got a principal reduction were behind on their payments again six months later, compared with 20% of those with a modification that reduced payments but not the loan balance.

The data clearly does NOT support the contention that principal reduction sustains home ownership. If 12 months later the difference in redefault rates is so small as to be negligible. No matter what you do with the over-indebted short of foreclosure and bankruptcy is going to save their homes. It isn't just the first mortgage debt that is weighing these borrowers down. They often have huge second mortgages or HELOCs, large credit card debts, and car payments.

Over the past year, Ocwen has cut balances on more than 16,000 loans, representing 22% of its modifications.

“We found that it's essential to include principal reduction in our modification arsenal to be able to address the negative equity problem,” said Paul Koches, Ocwen executive vice president. In February, Ocwen rolled out a program that will spread principal reductions over three years and let mortgage investors share in any subsequent increase in value when a home is sold.

Some mortgage companies say principal reductions are best used when borrowers are deeply underwater. PennyMac Loan Services LLC will consider reducing principal if the borrower is likely to remain underwater even after three or four years of loan payments, said Steve Bailey, chief servicing officer for PennyMac, which has used principal reduction in 58% of its modifications.

—Dan Fitzpatrick contributed to this article.

Write to Ruth Simon at ruth.simon@wsj.com and Nick Timiraos at nick.timiraos@wsj.com

How principal reduction could work

The Ocwen program described above is the only way principal reduction could work in the real world.

Let's say a borrower in Las Vegas owes $400,000 on a house currently worth $200,000 — a common occurrence there. Let's say the owner is given a principal reduction down to $200,000, but if they sell the house for a price between $200,000 and $400,000 the overage goes to the lender to recover the loss from the principal reduction. What that arrangement would effectively do is release the borrower from the property. They could sell without future financial liability, and if prices go up all the way to their entry point, they may even have equity again.

Of course, this approach would strongly encourage people who obtained principal reductions to immediately sell their homes. It would be far wiser to sell the house, buy one across the street, and keep the appreciation on that one. Hmmm…. I guess it doesn't work after all….

If you want to explore more on this issue, I recommend one from early in the IHB: 04-16-2007 — How Homedebtors Could Avoid Foreclosure — A look at a potential financing mechanism which might be used to assist homeowners who are underwater. It also examines the potential implications of the widespread use of such tools.

More stamina than most

I have always admired the stamina and determination of Japanese soldiers who never surrendered and finally come out of the jungle years after the war was over. Like the Japanese solders who carried on, many loan owners who bought at the peak will endure the crash and the very long climb back to their purchase price.

For those who put money down or who may not be too far underwater, it's easier to endure a little payment hardship rather than surrender the option value on the house. Prices will eventually go back up.

However, those property owners who bought at the peak and put no money down have a much lower pain threshold. Many of the posts I did in 2008 were peak buyers using 100% financing who walked away. I don't see those very often any more. And like the Japanese soldiers, when we find them, we should acknowldege their sacrifice… Although, I may question their wisdom.

Did they gain anything for their pain and suffering?

I hope they really enjoyed the high rent on this property while they were there. That money was expensive.

This property was purchased for $663,000 on 11/29/2006. The owner used a $530,400 first mortgage, a $132,600 second mortgage, and a $0 down payment. There is no telling how long they may have been delinqent in shadow inventory, but they were finally served notice last fall.

Foreclosure Record

Recording Date: 01/19/2011

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 10/15/2010

Document Type: Notice of Default

Irvine House Address … 8 HUCKLEBERRY Irvine, CA 92618

Resale House Price …… $497,000

House Purchase Price … $663,000

House Purchase Date …. 11/29/2006

Net Gain (Loss) ………. ($195,820)

Percent Change ………. -29.5%

Annual Appreciation … -6.5%

Cost of House Ownership

————————————————-

$497,000 ………. Asking Price

$17,395 ………. 3.5% Down FHA Financing

4.79% …………… Mortgage Interest Rate

$479,605 ………. 30-Year Mortgage

$100,463 ………. Income Requirement

$2,513 ………. Monthly Mortgage Payment

$431 ………. Property Tax (@1.04%)

$150 ………. Special Taxes and Levies (Mello Roos)

$104 ………. Homeowners Insurance (@ 0.25%)

$160 ………. Homeowners Association Fees

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

$3,358 ………. Monthly Cash Outlays

-$410 ………. Tax Savings (% of Interest and Property Tax)

-$599 ………. Equity Hidden in Payment (Amortization)

$32 ………. Lost Income to Down Payment (net of taxes)

$62 ………. Maintenance and Replacement Reserves

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

$2,442 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$4,970 ………. Furnishing and Move In @1%

$4,970 ………. Closing Costs @1%

$4,796 ………… Interest Points @1% of Loan

$17,395 ………. Down Payment

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

$32,131 ………. Total Cash Costs

$37,400 ………… Emergency Cash Reserves

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

$69,531 ………. Total Savings Needed

Property Details for 8 HUCKLEBERRY Irvine, CA 92618

——————————————————————————

Beds: 2

Baths: 2

Sq. Ft.: 1508

$330/SF

Property Type: Residential, Condominium

Style: 3+ Levels, Contemporary

Year Built: 2001

Community: 0

County: Orange

MLS#: P775055

Source: SoCalMLS

Status: Active

On Redfin: 1 day

——————————————————————————

Immaculate Detached 2 Bedroom + Loft Home in the Desirable Gated Community of Oak Creek. Main Floor Bedroom and Own Bathroom with Access to Private Patio. Gourmet Kitchen Features Granite Counter Top, Upgraded Stainless Steel Appliances including Dishwasher, Refrigerator, Gas Oven and Microwave. Kitchen, Dining Area and Livingroom ( Wired for Surround Sound System ) with Balcony on 2nd Floor. Master Bedroom with Large Loft Area on Third Level. 2 Car Attached Garage with Extra Storage Unit, Water Softner and More. ..

Enormous shadow inventory; option ARM foreclosure rate surpasses subprime

Reports were released from First American CoreLogic and Lender Processing Services on the current state of shadow inventory and the mortgage market.

Irvine Home Address … 33 ERICSON AISLE Irvine, CA 92620

Resale Home Price …… $419,000

How do you think I'm going to get along

Without you when you're gone

You took me for everything that I had

And kicked me out on my own

Are you happy are you satisfied?

How long can you stand the heat?

Queen — Another one bites the dust

How are people going to get along without their own ATM machines? Chasing free money induced many to pay peak prices, and now the lender has taken everything that they had and kicked them out to the street. I doubt they find the forbidden fruit of HELOC riches very satisfying under an ocean of debt.

Shadow inventory of foreclosures drops 11% from one year ago: CoreLogic

by JON PRIOR — Wednesday, March 30th, 2011, 10:02 am

Real estate data provider CoreLogic said 1.8 million properties make up the shadow inventory of foreclosures, down 11% from one year ago.

Analysts consider the shadow inventory as the major force against a recovery in the U.S. housing market. It is made up of mortgages in at least 90-days delinquency, in foreclosure or already repossessed by the lender as REO. These properties continue to drag down home prices, forcing more borrowers underwater and ultimately into default. Standard & Poor's recently put the principal balance remaining on the shadow inventory at $450 billion.

The 1.8 million homes represent a nine-month supply of inventory. Healthy real estate markets usually hold a six-month supply. Of the shadow inventory, nearly half are in some stage of serious delinquency. The rest is split almost evenly between properties in foreclosure or REO.

CoreLogic said while some portion of the shadow inventory can be carved away through modification or short sale, “only a small share can be effectively remediated from the shadow supply,” leaving the rest for liquidation through REO.

For the first time, CoreLogic studied net present value, or NPV, calculations, and expected severity and redefault rates for modifications and short sales. Analysts came to the conclusion that these loss-mitigation efforts could cut the shadow inventory in half. But communication difficulties between the borrower and the servicer could make that prediction too optimistic.

CoreLogic found in addition to the shadow inventory, there are nearly 2 million mortgages that are current but underwater.

The highest levels of the shadow inventory remain in New Jersey, Illinois and Maryland. While mostly lower-population states such as North Dakota, Alaska and Wyoming hold the least amount of the inventory, Texas had a notably small portion.

And Shevy's home state of North Dakota has no shadow inventory at all.

CoreLogic Chief Economist Mark Fleming said despite the decline over the last year, the shadow inventory will linger for some time.

“While the trend of the shadow inventory is improving somewhat, the current level and distressed months’ supply remain very high,” Fleming said. “The short-term weakness in prices and longer-term weakness in the drivers that affect the housing market imply that excess supply will remain high for an extended period of time.“

Write to Jon Prior. Follow him on Twitter @JonAPrior.

LPS' Mortgage Monitor Report Shows Enormous Backlog of Foreclosures; Option ARM Foreclosure Rate Higher Than Subprime Foreclosures Ever Reached

March 28, 2011

JACKSONVILLE, Fla. – March 28, 2011 -The February Mortgage Monitor report released by Lender Processing Services, Inc. (NYSE: LPS) shows that while delinquencies continue to decline, an enormous backlog of foreclosures still exists with overhang at every level. As of the end of February, foreclosure inventory levels stand at more than 30 times monthly foreclosure sales volume, indicating this backlog will continue for quite some time. Ultimately, these foreclosures will most likely reenter the market as REO properties, putting even more downward pressure on U.S. home values.

February’s data also showed a 23 percent increase in Option ARM foreclosures over the last six months, far more than any other product type. In terms of absolute numbers, Option ARM foreclosures stand at 18.8 percent, a higher level than Subprime foreclosures ever reached. In addition, deterioration continues in the Non-Agency Prime segment. Both Jumbo and Conforming Non-Agency Prime loans showed increases in foreclosures and were the only product areas with increases in delinquencies.

The data also showed that banks’ modification efforts have begun to pay off, as 22 percent of loans that were 90+ days delinquent 12 months ago are now current. Timelines continue to extend, with the average U.S. loan in foreclosure now having been delinquent for a record 537 days, and a full 30 percent of loans in foreclosure have not made a payment in over two years.

A 22% cure rate is abysmal. Only by comparing it to the even more abysmal 2008 numbers makes 22% sound good. Historically, cure rates are very high because borrowers used to have a rising market to sell into if they got into financial trouble. With the collapse of the Ponzi scheme, lenders were unwilling to extend credit, so borrowers couldn't Ponzi borrow to make payments. Since many borrowers were also underwater, they couldn't sell into a rising market, so they squat in comfort and wait for the bank to do something.

As reported in LPS' First Look release, other key results from LPS' latest Mortgage Monitor report include:

  • Total U.S. loan delinquency rate: 8.8 percent

  • Total U.S. foreclosure inventory rate: 4.15 percent

  • Total U.S. non-current inventory: 6,856,000

  • States with most non-current* loans: Florida, Nevada, Mississippi, New Jersey, Georgia

  • States with fewest non-current* loans: Montana, Wyoming, Alaska, South Dakota, North Dakota

Investor Contact: Parag Bhansali, 904.854.8640, parag.bhansali@lpsvcs.com. Media Contact: Michelle Kersch, 904.854.5043, michelle.kersch@lpsvcs.com

Let's walk through a few graphs to figure out what it all means.

The number of 90+ days delinquent loans continues to grow. We need to stop the increase and reduce the number to near zero. Historically, the percentage more than 90 days in arrears is very low.

To look at the chart above, one could mistakenly believe we are over the worst and delinquency rates are near historic norms. The truth is delinquencies are double historic norms, and distressed inventories are nearly eight times historic norms. How are prices supposed to go up in the face of that?

Another one bites the dust

Another one bites the dust

And another one gone and another one gone

Another one bites the dust hey

Hey I'm gonna get you too

Another one bites the dust

Queen — Another one bites the dust

Further we are making very little progress on foreclosures. For every borrower entering foreclosure, three are delinquent. We are continuing to build shadow inventory.

Notice on the chart below that foreclosures kept pace with delinquencies until early 2008. The foreclosure statistics show a peak during that time when lenders realized they were crushing the housing market and embarked on amend-extend-pretend and created shadow inventory.

What are the prospects for curing these loans? Most bulls assume cure rates of 85% or better will mop up this mess. With less than a quarter of loans curing, foreclosure is the most likely outcome for shadow inventory even if cure rates continue to improve. Distressed inventory will be with us for a long time.

And, in case you needed any reminder from me, mortgage squatting is an national epidemic with nearly 30% of delinquent borrowers enjoying over two years of free living.

There are plenty of ways that you can hurt a man

And bring him to the ground

You can beat him

You can cheat him

You can treat him bad and leave him

When he's down yeah

But I'm ready yes I'm ready for you

I'm standing on my own two feet

Queen — Another one bites the dust

To make matters worse, the Option ARMs are beginning to reset and recast putting many borrowers into delinquency.

Foreclosures related to Option ARMs increased more than any other loan program over the last six months. We are only now entering the two-year period with the most resets. Look for the delinquency rates on these loans to continue to perform poorly.

We are going to see many more distressed sales over the next several years. I question whether lenders can maintain current pricing and liquidate inventories in a reasonable timeframe. Lenders will not want to hold this property forever, and as a society, we don't want them to. The only real question is how orderly will the liquidation be? How The Lending Cartel Disposes Their REO Will Determine the Market’s Fate.

Taking their lumps and moving on

Everyone who buys during a decline should know they may have to move and sell when the resale value is down. It is an avoidable financial loss. Renting is always an option. The owners of today's featured property paid $470,000 on 6/17/2008. They put 50% down. I have no idea why why they are selling. I do know that any losses come out of what was their down payment. Ouch.

Irvine House Address … 33 ERICSON AISLE Irvine, CA 92620

Resale House Price …… $419,000

House Purchase Price … $470,000

House Purchase Date …. 6/17/2008

Net Gain (Loss) ………. ($76,140)

Percent Change ………. -16.2%

Annual Appreciation … -4.0%

Cost of House Ownership

————————————————-

$419,000 ………. Asking Price

$14,665 ………. 3.5% Down FHA Financing

4.79% …………… Mortgage Interest Rate

$404,335 ………. 30-Year Mortgage

$84,696 ………. Income Requirement

$2,119 ………. Monthly Mortgage Payment

$363 ………. Property Tax (@1.04%)

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

$87 ………. Homeowners Insurance (@ 0.25%)

$140 ………. Homeowners Association Fees

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

$2,709 ………. Monthly Cash Outlays

-$346 ………. Tax Savings (% of Interest and Property Tax)

-$505 ………. Equity Hidden in Payment (Amortization)

$27 ………. Lost Income to Down Payment (net of taxes)

$52 ………. Maintenance and Replacement Reserves

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

$1,938 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$4,190 ………. Furnishing and Move In @1%

$4,190 ………. Closing Costs @1%

$4,043 ………… Interest Points @1% of Loan

$14,665 ………. Down Payment

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

$27,088 ………. Total Cash Costs

$29,700 ………… Emergency Cash Reserves

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

$56,788 ………. Total Savings Needed

Property Details for 33 ERICSON AISLE Irvine, CA 92620

——————————————————————————

Beds: 3

Baths: 2

Sq. Ft.: 1424

$294/SF

Property Type: Residential, Condominium

Style: One Level, Contemporary

Year Built: 1989

County: Orange

MLS#: S651484

Source: SoCalMLS

——————————————————————————

Rare single-level three-bedroom, two-bath condominium located in the wonderful Northwood Villas tract. The large master bedroom features two closets, along with built-in custom storage, and the master bathroom offers dual-sinks and an oversize tub: perfect for unwinding after a hard day! Revel in the elegant hardwood flooring, plush carpeting, newer appliances and central cooling system. Relax in the very spacious living room by the cozy fireplace – and enjoy the great SoCal weather outside on the spacious and private wrap-around enclosed patio. One will also find a indoor laundry room. Northwood Villas is located centrally to many entertainment and shopping venues and restaurants, including the Irvine Spectrum – and the Irvine school district is rated one of the best in the U. S. Plus, it's a short drive to the huge Heritage Park, which features many tennis and basketball courts, tot lots, a large pond, county library and community center. Make this a home on your short list.

Banksters should be held accountable for ruining the housing market and economy

As the housing market crumbles, those most responsible for its demise are the ones suffering the least.

Irvine Home Address … 115 OVAL Rd Irvine, CA 92604

Resale Home Price …… $329,000

Caviar and cigarettes

Well versed in etiquette

Extraordinarily nice

Recommended at the price

Insatiable an appetite

Wanna try?

Queen — Killer Queen

The banksters taking over our country enjoy extraordinarily nice lives of caviar and cigarettes. They're insatiable greed is only surpassed by their lack of accountability. In last weeks post on shadow inventory, I came across a February story on how bankers let each other squat. It really made me angry:

Bankers allow each other to squat

One of the most infuriating facts about shadow inventory is its epicenter: the New York MSA. Boneheads in New York think their market is immune as it is one of the few where properties still routinely trade at peak prices. Little do they know that this price stability is an illusion created by shadow inventory.

Shadow inventory to push foreclosures to new heights

by JACOB GAFFNEY — Wednesday, February 2nd, 2011, 3:57 pm

“The shadow inventory in the New York MSA will take the longest to clear — 130 months as of fourth-quarter 2010. That is at least twice as long as it will take in any of the other top 20 MSAs and 2.7 times the average time to clear for the U.S. as a whole,” the S&P report states. “This is primarily due to very low liquidation rates in New York.”

What the hell is this? Very low liquidation rates? Why is that? Could it be that bankers don't want to hurt their own property values? What other reason could there be? Assholes.

The behavior of the banksters has been utterly reprehensible. They unleash a destructive Ponzi virus on our financial system for their own personal enrichment. When their Ponzi virus consumes the housing equity of a generation, they (1) give themselves huge bonuses, they (2) lobby government for handouts, and they (3) selectively refuse to foreclose on properties in their neighborhoods to preserve their own property values.

These creatures have taken greed and unaccountability to new hubristic heights.

A Lawyer's Perspective on… Promoting and Preserving Failure in America

Friday, March 18, 2011 — Capitalism Without Failure

It was with considerable sadness that I learned, during the financial crisis, that people I knew – economists, investment professionals, bankers – had given bad advice to their companies and their clients. They had not seen a housing bubble developing. They had not seen a highly over-leveraged banking system. They had not questioned the viability of an opaque derivatives industry that was growing exponentially. In fact, they had not seen any abnormal risk. And they had advised their clients and firms accordingly. As a result, their funds and their portfolios and their clients lost massive amounts of money.

I was concerned for these people. After all, their inability to call a major economic catastrophe, with plenty of warning signs, had led to horrible losses. And since plenty of people had been predicting a collapse… I assumed that my friends would all be losing their jobs, and their reputations.

That is a very reasonable assumption. Bankers should be held accountable for the problems they created. Those responsible should have lost jobs, and some of the worst should have gone to prison.

I could not have been more wrong. That's not how it works in the world of elite finance and economics. In the highest echelons of economics and banking and investing and advising, the people that succeed are not the ones that get it right. The people that succeed are the ones that do what they have to do in order to succeed.

Fifteen years ago, I completed a Masters Degree in International Economics at the Johns Hopkins School of International Studies. I had studied with a number of people that ended up working at top banks. In 2005, I had been considering a home purchase but was becoming convinced that real estate in the USA was in an unsustainable bubble. At that point, I had been working as an attorney for a number of years – so I thought I should speak to an expert. I called an economist friend of mine that had ended up at Goldman Sachs and asked him about the possibility that there was a bubble that could be bursting. He assured me that the economy was strong, and robust, and that I had nothing to worry about. He told me that economists who were worrying about potential weakness ahead, had it dead wrong and that they should be ignored. He called them “crazy”.

If I had listened to him, I would have bought a house at the height of the market – and would have lost every penny of down payment that I had managed to scrape together. Luckily, I did not listen. Instead, I considered what he said. Then I read more about what was going on and decided to take a huge risk – I decided to ignore the experts, to not to buy a home, and to risk missing out on the huge appreciation that those experts were predicting. In the end, he turned out to be wrong – not jut a little bit wrong, but absolutely and completely incorrect.

How many realtors and mortgage brokers told their clients tales that turned out to be a fantasy? And how many of those buyers made their decision based on the faulty advice? Do the realtors involved feel guilt or shame over their responsibility for the family financial catastrophes that resulted from their bad advice?

I didn't see him until after the meltdown was well behind us. I assumed he had lost his job. After all, his analysis was an absolute disaster. And he had been more than willing to share it.

Here's where my own powers of analysis failed in a major way: I assumed that he would have lost his job; instead, he had been promoted. In fact, not one person I knew in the financial industry had lost their job. I remember subsequently chatting with another Goldman Sachs economist shortly after the bailouts. He seemed completely unaware that there was even an issue with regard to how the industry had been protected. All that was really going on for him was that he had multiple nannies helping to care for his 2 young children. He was otherwise in terrific spirits.

My very fortunate friends turned out to be a perfect microcosm of what we all witnessed: the worst analysts with the worst judgment that got us into the worst financial quagmire in a century, were not only maintained – they were promoted. This happened in the private sector, academia, and in the public sector. In the public sphere, Tim Geithner and Ben Bernanke come to mind. And let's not forget Robert Rubin and Larry Summers. (And I would sincerely appreciate it if we could stop hearing from Alan Greenspan – arguably the arch-architect of our misery.)

We have done little to fix the underlying problems. We have now entrenched incompetence and largess into our system of finance at the expense of good governance.

We all know why my friends ended up on top; we bailed out their failed banks and our compromised financial system. That is wrong on many levels. But it's not as wrong as what has happened within our government. If our political economy had been functioning properly, Geithner and Bernanke would have lost their jobs – and their influence – long ago. Instead, Bernanke is arguably the most powerful individual in the world. And Tim Geithner (an alum of mine from SAIS!) is not far behind.

The United States has an incredibly resilient economy. It has withstood mismanagement and corruption on a scale that rivals almost any country in this world. It continues to putt along, notwithstanding the undermining of meritocracy, fairness, and justice – in every sphere. Unfortunately, the long-term prospects for a system that promotes the most corrupt and most compromised actors is poor.

Even the most resilient economy on earth requires the rejuvenation that comes with the removal of people with failed ideas, poor judgment, and who are corrupt. Our current leadership has taken a stand when it comes to our economy: instead of weeding out the corruption and allowing for organic economic strength to return, they are working to overwhelm the corruption-induced-failure with the economic equivalent of steroids. That can only work temporarily when the worst and most corrupt actors are allowed to thrive and maintain leadership roles. Ultimately, those compromised people and their compromised ideas will threaten our macro-economy again. We will never need principled and courageous leadership more than when that eventuality is upon us.

How do we purge the system?

Our financial services sector is too large. Contrary to popular belief on Wall Street, pushing paper does not create value. Wall Street is supposed to determine which sectors of our economy and which businesses obtain capital to expand. They are traffic cops directing the flow of money. Their activities create nothing of value directly, but they enable those who create valuable goods and services.

Unfortunately, we have let this sector of the economy take over. They believe their fiefdom will endure forever. Beyond the desire to save their own housing values in NYC, bankers believe someone will come along who makes enough to pay a huge mortgage. They plan on holding onto all their shadow inventory as long as they have to for overpaid bankster buyers to come back for NYC homes. They don't think it will take very long. If we don't stop them, they may be right.

Setting a low bar

The owners of today's featured property increased their mortgage by 50% in the 11 years they owned it. Personally, I don't think it is wise financial management to increase a mortgage balance by 50%, but it's what passes for conservative borrowing here in California.

  • The property was purchased on 7/26/2000 for $175,500. The owners used a $157,950 first mortgage, and a $17,550 down payment.

  • On 4/25/2001 they refinanced with a $165,000 first mortgage.

  • On 4/11/2003 they refinanced with a $166,322 first mortgage.

  • On 2/1/2008 they refinanced with a $222,000 first mortgage.

Their mortgage equity withdrawal was only $64,050, small by Irvine standards. As a result, they stand to get a check at closing. It will be about $75,000 smaller than it should be.

Irvine House Address … 115 OVAL Rd Irvine, CA 92604

Resale House Price …… $329,000

House Purchase Price … $175,500

House Purchase Date …. 6/26/2000

Net Gain (Loss) ………. $133,760

Percent Change ………. 76.2%

Annual Appreciation … 5.8%

Cost of House Ownership

————————————————-

$329,000 ………. Asking Price

$11,515 ………. 3.5% Down FHA Financing

4.79% …………… Mortgage Interest Rate

$317,485 ………. 30-Year Mortgage

$66,503 ………. Income Requirement

$1,664 ………. Monthly Mortgage Payment

$285 ………. Property Tax (@1.04%)

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

$69 ………. Homeowners Insurance (@ 0.25%)

$140 ………. Homeowners Association Fees

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

$2,157 ………. Monthly Cash Outlays

-$155 ………. Tax Savings (% of Interest and Property Tax)

-$397 ………. Equity Hidden in Payment (Amortization)

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

$41 ………. Maintenance and Replacement Reserves

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

$1,668 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$3,290 ………. Furnishing and Move In @1%

$3,290 ………. Closing Costs @1%

$3,175 ………… Interest Points @1% of Loan

$11,515 ………. Down Payment

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

$21,270 ………. Total Cash Costs

$25,500 ………… Emergency Cash Reserves

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

$46,770 ………. Total Savings Needed

Property Details for 115 OVAL Rd Irvine, CA 92604

——————————————————————————

Beds: 2

Baths: 2

Sq. Ft.: 1200

$274/SF

Property Type: Residential, Condominium

Style: Two Level, Contemporary

Year Built: 1972

Community: 0

County: Orange

MLS#: S652347

Source: SoCalMLS

Status: Active

On Redfin: 5 days

——————————————————————————

2 bedrooms 2 baths remodelled home has 19' tile floors on lower level, remodelled kitchen with newer appliances, recessed lighting, scraped ceilings, ceiling fans, attached garage, enter from dining room. Upgraded bathrooms with new tub and granite sink top. large back patio has avocado, lemon and grape trees. wide open street in front of the home makes it a desirable location in the tract. walk across to the shopping center and restaurants. close to library , parks and more. association offers pool, spa, basketball court, children's play area, bar b que and pays for insurance, water, hot water and trash. lots of greenery and plenty of parking in the neighborhood. this home can easily be converted to 3rd bedroom. NO MELLO ROOS, LOW TAX RATE. REGULAR SALE RESPONSE IN 24 HOURS.