Attorneys have mapped out the longest route from default to vacating the property. Many delinquent borrowers are following this path.

Irvine Home Address … 2 SUNPEAK Irvine, CA 92603

Resale Home Price …… $3,075,000

Tailored suits, chauffered cars

Fine hotels and big cigars

Up for grabs, up for a price

Where the red hot girls keep on dancing through the night

The claim is on you

The sights are on me

So what do you do

That's guaranteed

Hey little girl, you want it all

The furs, the diamonds, the painting on the wall

Come on, come on, love me for the money

Come on, come on, listen to the money talk

AC/DC — Money Talks

A popular method gaming the system for maximum benefit is (1) to quit paying the mortgage, (2) exhaust every procedural remedy made available, and (3) squat in a house for as long as possible. I can see the appeal of no house payment, and I don't know that I wouldn't be gaming the system if I were in those circumstances, but there is doomsday feeling of foreboding and certainty of unpleasant outcome that would make such living untenable for me. It's one thing to rent and feel less rooted as a function of your mobility, but it is horrifying to know your accommodations are temporary and you will be forced to leave at some random time with short notice.

People do decide to stay on enlist the help of specialists, often attorneys, to help them game the system to maximum advantage. From an actual letter written from an attorney to a trustee regarding a property in Las Vegas, Nevada:

Our law firm has been retained by Squatting Debtor to rescind the foreclosure of the property at I8 Your Neighborhood, Anywhere, US.

The names and addresses have been omitted, but the remainder is verbatim text.

As you know, one of the purposes of the required statement in the notice of default is to afford the debtor an opportunity to cure the default and obtain reinstatement of the obligation within three months after the notice of default was recorded as provided in §107.087 of the Nevada Revised Statutes. The subsections of this statute require the listing of a physical address of the property NRS § 107.087 (1)(b)(1). If there is no physical address and the Notices are not property posted and mailed to that address, then the foreclosure is void for lack of due process. Here the homeowner had no notice that his own home was being foreclosed and there is no physical address listed on the recorded Notice of Default, filed April 29, 2009.

April 29th, 2009? This letter is concerning a foreclosure sale in December 2010. If the owner was three months delinquent on his mortgage in April 2009, he hadn't made a payment that year. He hadn't made a mortgage paying since late 2008, perhaps earlier if the bank danced for a while before issuing the notice of default.

Are we to believe that a guy who has not made a mortgage payment in two years is surprised by a foreclosure? This squatter was somehow unaware of his predicament? Has this attorney managed to find an error in the process so egregious that this squatting-former-owner should continue to stay in the property with no payments indefinitely?

In the state of Nevada, the beneficiary or the trustee must comply with certain statutory requirements prior to exercising the power of sale under the deed of trust. According to NRS 107.080 (2)(c)., the power of sale must not be exercised until the beneficiary, the successor in interest of the beneficiary or the trustee first executes and causes to be recorded in the office of the recorder of the county wherein the trust property, or some part thereof, is situated a notice of the breach and of the election to sell or cause to be sold the property to satisfy the obligation.

Due to the error in the Notice of Default, we expect NDSC to rescind the foreclosure sale of this property.

A missing address on a sheet of paper at the recorders office? Really? This guy gets a free house for that? If someone does get a house that way, the cost of serving documents and processing paperwork for routine real estate transactions will go up as every step is double and triple checked for accuracy and completeness.

We understand a third party bought at the auction.

Yes, which means the sale has happened, and there isn't a prayer of getting the house back for the occupants. Foreclosure is the end of the line. It's the river card in a long game of payment poker. Any motions or maneuvers need to be completed before the sale. Bankruptcy attorneys are noted for attending foreclosure auctions with last-minute documents to stop that day's sale. Once the sale happens, it's over. The house is sold, and any old claims to title are wiped clean.

However, if NDSC is not successful in obtaining a rescission of the sale with the cooperation of the 3rd party, then a quiet title action will be in order and we will sue for wrongful foreclosure and wrongful eviction—if it comes to that.

We will be seeking compensatory damages and attorney fees in the action. It is in your best interests to settle this matter by paying the 3rd Party purchaser at the auction the amount of his bid (as provided in your agreement) and rescind the sale.

Time is of the Essence as my client is currently being threatened with forced eviction. If we must bring a claim, it will be brought within the short statutorily allowed period and your expenses will increase exponentially as our reasonable attorney fees are $350 hourly plus $100 hourly for rushed work If our clients are actually evicted,

Threatening with loss of money. If they tie up this property with some spurious quiet title action, it is the attorneys and debtors who should be prepared to pay the expenses of the victorious defendant. Fighting foreclosure is a good way to give the last few dollars you have to an attorney and gain nothing. This will do nothing to slow the wheels of justice through the eviction process.

this would be very bad news in the presses: Homeowner Evicted While Making Trial Payments under HAMP and Trustee Thumbs Nose at Nevada's Foreclosure Statute's Requirements.

Those would be great headlines on the IHB! Does someone, somewhere fear headlines like those so much that they would give this family a free house?

Again, it is in your best interests to rectify this immediately!

Remember, this letter went to the trustee for the sale, not the new owner. So put yourself in the Trustee's shoes and ask yourself what you would do next.

First, you ask yourself if Mr. Badass attorney would go through with his threat to bring quiet title action on the property. The client is a squatter, so they don't have the resources to pay the attorney's bills. Therefore, if Mr. Badass wants to get paid, he must win the case and get awarded his fees by the judge. This will cost Mr. Badass about $25,000 in attorney time to take on a hopeless case with limited prospects for fee recovery.

If I'm the trustee, I don't think a quiet title suit is forthcoming.

Perhaps there is an emotional release in letters like this one. The hopeless debtor facing eviction from what used to be their house needs to feel like someone is protecting them and looking out for them. This emotionally charged letter has the bravado of a knight riding to the rescue of this family in distress. Its all theater, of course, because the guy has no chance to prevail. The debtor bought a badass attorney to cover his back as the he slinks away in shame and squirms into a rental.

The debtor is paying his last dollars to an attorney for emotional support. Is that less expensive than a therapist?

Has it really gone up in value more than 50% over the last 3.5 years?

Today's featured property was purchased for $1,800,000 on 6/15/2007. The owner used a $1,000,000 first mortgage and a $800,000 down payment. No HELOC abuse today, just delusion on a grand scale.

Irvine Home Address … 2 SUNPEAK Irvine, CA 92603

Resale Home Price … $3,075,000

Home Purchase Price … $1,800,000

Home Purchase Date …. 6/15/2007

Net Gain (Loss) ………. $1,090,500

Percent Change ………. 60.6%

Annual Appreciation … 15.0%

Cost of Ownership

————————————————-

$3,075,000 ………. Asking Price

$615,000 ………. 20% Down Conventional

5.07% …………… Mortgage Interest Rate

$2,460,000 ………. 30-Year Mortgage

$641,793 ………. Income Requirement

$13,311 ………. Monthly Mortgage Payment

$2665 ………. Property Tax

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

$513 ………. Homeowners Insurance

$237 ………. Homeowners Association Fees

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

$16,726 ………. Monthly Cash Outlays

-$1929 ………. Tax Savings (% of Interest and Property Tax)

-$2918 ………. Equity Hidden in Payment

$1220 ………. Lost Income to Down Payment (net of taxes)

$384 ………. Maintenance and Replacement Reserves

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

$13,483 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$30,750 ………. Furnishing and Move In @1%

$30,750 ………. Closing Costs @1%

$24,600 ………… Interest Points @1% of Loan

$615,000 ………. Down Payment

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

$701,100 ………. Total Cash Costs

$206,600 ………… Emergency Cash Reserves

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

$907,700 ………. Total Savings Needed

Property Details for 2 SUNPEAK Irvine, CA 92603

——————————————————————————

Beds: 5

Baths: 3 full 1 part baths

Home size: 6,029 sq ft

($510 / sq ft)

Lot Size: 11,267 sq ft

Year Built: 2010

Days on Market: 82

Listing Updated: 40513

MLS Number: S634114

Property Type: Single Family, Residential

Community: Turtle Rock

Tract: Ch

——————————————————————————

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Designed by the renowned architect John Montierth specializing in design for the hospitality industry all over the world? Do I want my custom home designed by a restaurant designer?

the LOWEST COST PER FOOT custom home w/No Mello Roos! It's a bargain, right?

Most economists agree that households will continue to deleverage. Bank of America believes over $1,000,000,000 will come from strategic default.

Irvine Home Address … 65 GRANDVIEW Irvine, CA 92603

Resale Home Price …… $2,320,000

In the town where I was born,

Lived a man who sailed to sea,

And he told us of his life,

In the land of submarines,

So we sailed on to the sun,

Till we found the sea green,

And we lived beneath the waves,

In our yellow submarine,

Beatles — Yellow Submarine

Households likely to deleverage debt with underwater mortgage defaults: Report

by JON PRIOR — Monday, December 20th, 2010, 11:02 am

Bank of America Merrill Lynch analysts said the most likely way households will deleverage roughly $1 trillion in excess debt is through the default of more underwater mortgages.

Home prices in the Standard & Poor's/Case-Shiller 20-city index have dropped 28.6% from the peak in the summer of 2006. This has led to more than 10.8 million homes, or 22.5% of the entire U.S. market in negative equity as of the third quarter, according to the analytics firm CoreLogic. And while that percentage is down from the 50 basis points from the previous quarter, negative equity remains the primary factor holding back a recovery in the housing market and the overall recovery.

Analysts said the collapse in home prices means the asset value supporting Americans' debt is no longer there.

Home values were an illusion created by excessive debt. Americans were offered free money for nothing more than owning a house. This made houses very desirable which prompted more buying and drove prices higher. As prices moved higher, banks were willing to give out more and more free money in order to entice Americans to buy more houses to get more free money.

It was a Ponzi scheme.

The collapse in values is simply a reversion to what prices would have been if we hadn't inflated a massive housing bubble.

“It’s the holidays and talk of deleveraging needs would appear to be sacrilegious or even un-American,” BofAML analysts said. “Most of the deleveraging will come through default of underwater mortgages, although less consumption likely will be part of the equation as well.“

But consumers are not alone. Excess debt is also an issue in municipalities and sovereign nations. Recent increases to interest rates will put more need for the U.S. to begin implement fiscal constraint.

“At a minimum, the vast amounts of excess debt permeating the developed economies will act as a drag on growth for some time,” analysts said.

Of course there will be less consumption. We are no longer giving out hundreds of thousands of dollars of free money to Ponzis. Until we start doing that again, consumer spending will be down. Hopefully, we won't be giving Ponzis billions in tax subsidies and bailouts in the next cycle, but you never know.

An example of necessary deleveraging

Someone bought today's featured property with a great deal of debt. They have so much debt that they can't sell the house for more than the debt owed, and they can't rent it out for enough to cover the payments. This is a money pit. The original buyer is getting nothing out of the property. It doesn't appear as if this property was ever lived in. It looks like a purely speculative play on appreciation without regard to carrying costs.

This leverage has no support. The borrower isn't going to bleed cash every month to support an investment with no current value very long. A borrowers tolerance for negative cashflow is the strength of their kool aid intoxication about prices coming back. What loan owners have is an option position — no current value but potential future value if prices rise — hope and denial are what they cling to.

If prices stay down for a long period of time, distressed borrowers are bleeding cash every month for a reward that never comes. Their option position never gets back in-the-money.

A financial position taken by the herd — many loan owners are underwater clinging to the hope of rising prices — is self defeating. With so many anxious sellers waiting for some magic price point where they get out whole, the herd creates a buffer of overhead supply waiting to be absorbed at higher price points.

Some of the sellers can't wait because the distress is acute. Many of the borrowers who completed HAMP loan modifications still had 65% or greater back-end debt-to-income ratios after the modification. The debt distress will be worse for some than for others, but it will continue to shake out supply until the excess debt — the debt not supportable by incomes — is removed from the system.

I last profiled this property back when the asking price was $2,800,000.

Many nice tract-home neighborhoods became elevated to the $1,000,000 club by borrowed money. People used to sell their homes and port $500,000 in equity to buy a $1,100,000 home. During the housing bubble, they would borrow $2,000,000 with an Option ARM and push prices of homes up to the ridiculous prices we see today. The problem with this is simple: the debt buyers cannot be replaced with equity buyers. Some neighborhoods may survive, but the more debt a neighborhood has, the more it will fall — when lenders finally get around to pushing out the squatters.

• Today's featured property was purchased near the peak on 10/16/2006 for $3,518,000. The owners used a $2,814,167 first mortgage, a $351,771 HELOC, and a $352,062 down payment. Think about that — these people only put about $350K of their own money in a $3.5M purchase.
• On 12/8/2006 they obtained a HELOC for $356,078 to get access to their full down payment.
• On 6/14/2007 they obtained a HELOC for $742,400.
• Total property debt is $3,556,567
• Total squatting time is at least 11 months.

Foreclosure Record

Recording Date: 04/06/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 09/24/2009

Document Type: Notice of Default

Nice back yard….

Irvine Home Address … 65 GRANDVIEW Irvine, CA 92603

Resale Home Price … $2,320,000

Home Purchase Price … $3,518,000

Home Purchase Date …. 10/16/2005

Net Gain (Loss) ………. $(1,337,200)

Percent Change ………. -38.0%

Annual Appreciation … -7.9%

Cost of Ownership

————————————————-

$2,320,000 ………. Asking Price

$464,000 ………. 20% Down Conventional

4.87% …………… Mortgage Interest Rate

$1,856,000 ………. 30-Year Mortgage

$473,294 ………. Income Requirement

$9,816 ………. Monthly Mortgage Payment

$2011 ………. Property Tax

$583 ………. Special Taxes and Levies (Mello Roos)

$387 ………. Homeowners Insurance

$410 ………. Homeowners Association Fees

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

$13,207 ………. Monthly Cash Outlays

-$1699 ………. Tax Savings (% of Interest and Property Tax)

-$2284 ………. Equity Hidden in Payment

$869 ………. Lost Income to Down Payment (net of taxes)

$290 ………. Maintenance and Replacement Reserves

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

$10,382 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$23,200 ………. Furnishing and Move In @1%

$23,200 ………. Closing Costs @1%

$18,560 ………… Interest Points @1% of Loan

$464,000 ………. Down Payment

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

$528,960 ………. Total Cash Costs

$159,100 ………… Emergency Cash Reserves

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

$688,060 ………. Total Savings Needed

Property Details for 65 GRANDVIEW Irvine, CA 92603

——————————————————————————

Beds: 6

Baths: 4 full 3 part baths

Home size: 5,600 sq ft

($414 / sq ft)

Lot Size: 12,683 sq ft

Year Built: 2006

Days on Market: 6

Listing Updated: 40525

MLS Number: P762643

Property Type: Single Family, Residential

Community: Turtle Ridge

Tract: Lacm

——————————————————————————

According to the listing agent, this listing may be a pre-foreclosure or short sale.

Million $$ Views Luxury Estate – La Cima Model 1X on Single Loaded Street w Ocean/City Lights & Breathtaking Views * Welcome Entry Courtyard adjoints an Open Air Dining Loggia w Fireplace * 6 BR 6.5 BA + Hm Theater + Bonus Rm 4 Car Garage * Main Floor Master Suite * Complete Saparate Living Suite The Casita is a Private Oasis * 2nd Story Private Access to a spacious Living Rm w Open Kitchen * Super Launddry Rm * Lot of Custom upgrades

Launddry? Saparate?

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 2006.

Have a great weekend and a joyous holiday,

Irvine Renter

Borrowers choosing to keep the second mortgage current is an unexepected phenomenon in the outbreak of first mortgage defaults.

Irvine Home Address … 28 YORKTOWN Irvine, CA 92620

Resale Home Price …… $695,000

What has happened to it all?

“Crazy,” some would say.

Where is the life that I recognize?

Gone away…

But I won't cry for yesterday, there's an ordinary world,

Somehow I have to find.

And as I try to make my way to the ordinary world,

I will learn to survive.

Duran Duran — Ordinary World

At a basic level, each of us wants the safety and security of an ordinary world of predictable surroundings and routines. The real estate and mortgage world we live in today is a surreal landscape of failed loan programs, ever-tightening credit standards, and uncertainty about the future of real estate prices.

The success or failure of many loan programs will determine the likelihood of their reappearance in an altered form. Subprime first-mortgage lending will return. The 20% down piggy-back loans and 100% HELOCs are not coming back soon. The second mortgage liens — the key problem for bank's residential loan portfolios — are performing very badly, and they will continue to post losses exceeding expectations. However, these loans are performing better than I thought they would because people are choosing to pay these credit lines even if they bail on the first mortgage.

Few good options

A distressed and underwater homeowner has few good options concerning their mortgage obligations. Most just keep paying even if it means sacrificing everything else. Many choose to accelerate their inevitable defaults, and they quit paying on both the first mortgage and the second mortgage.

If a borrower fails to pay either loan, the lender can chose to foreclose or try to negotiate a settlement. A seocnd mortgage lien holder has very little leverage in these negotiations because in a foreclosure, that lender is no longer secured by the property, and if the borrower has no other assets, there is little chance of recovery on the bad loan.

I had expected to see many people default on their second mortgage while keeping the first mortgage current. The first mortgage may not be underwater even though the CLTV is more than 100%. Most borrowers would consider the threat of foreclosure from a second lien holder to be an empty threat because that second mortgage gets wiped out in the foreclosure. People could go on paying the first mortgage and stay in the house because the second mortgage would not foreclose. What we are actually seeing is the opposite of what I expected.

Strategic defaulters opt to continue paying on second liens

by KERRY CURRY — Tuesday, December 14th, 2010, 6:50 am

Borrowers who strategically default on their first mortgage often continue to pay on home equity lines of credit, according to a new white paper from two authors with the Philadelphia Federal Reserve.

The authors, Julapa Jagtiani and William W. Lang, said they wanted to take a closer look at the little-studied phenomenon of strategic default behavior as it relates to first- and second-lien mortgages.

“Predicting mortgage losses has become more difficult with the increase in strategic default behavior and the increase in loan modifications,” the paper said.

Our current accounting fantasies encapsulated in amend-extend-pretend is based on mythical loss recoveries based on past behavior. The study periods do not include times like now — when strategic default is a good idea. Strategic default is going to be much more severe than ever before, and banks are going to lose much more money than they currently project. When amend-extend-pretend becomes a crisis, when the banks lies are fully revealed, lenders will say their fraudulent accounting projections were based on past data. The actual performance didn't match past projections due to the housing bubble. No kidding.

“Focusing on mortgage defaults, our results indicate that the default rate for first mortgages far exceeded those of the second-lien mortgages during the financial crisis. This behavior was not observed in the pre-financial crisis period (i.e., the booming period of 2004-2006).”

About 20% of borrowers in the process of foreclosure due to defaults on the first mortgage kept their second-lien mortgage current. Among those who defaulted on their second-lien mortgages, about 80% also defaulted on their first-lien mortgage.

Data for the study came from a large random sample of individual credit records drawn at the end of each quarter from Equifax, a national credit bureau. The authors only studied consumers who had one first mortgage and at least one home equity line of credit or home equity loan over the period beginning in the fourth quarter of 2004 and ending in the second quarter of 2010. The study merged the Equifax data with another database of loan-level data from LPS Applied Analytics.

The data contradict the hypothesis that consumers would strategically default on a second lien and keep their first lien current to reduce their monthly payment and thus avoid a foreclosure, the white paper said.

That is what I thought would happen.

Instead, a far larger number of households do the opposite; that is, they default on their first lien — thus risking a foreclosure — while keeping their underwater second-lien mortgages current.

The reason?

The authors hypothesized that borrowers have incentives to keep their second lien current — after having stopped paying their first mortgage — in order to maintain their access to credit through the HELOC.

I think that conclusion is highly suspect. Most of these people likely don't have a HELOC they can access because they are underwater.

The study also found that the size of the unused line of credit is an important factor. Homeowners with larger credit lines are less likely to default, as they are motivated to maintain their access to the credit line.

That sounds more reasonable. For people with equity, access is merely having liquidity. Of course, homeowners with larger credit lines and plenty of equity probably don't need to borrow much money and aren't in as much financial distress as those who are maxed out.

Like other studies and white papers, this one also found that negative equity is a big driver in strategic default.

“A large portion of first mortgages with estimated LTV (loan-to-value) ratios greater than 100% is still current, but the continued willingness and ability of these homeowners to make their mortgage payments is subject to great uncertainty,” the authors wrote.

The paper also noted that banks are not punishing borrowers who default on their first mortgages by limiting access to their home equity lines of credit. That could be due to poor risk management practices or lack of timely updates on consumer's risk scores, the paper said.

“Most of the HELOC lines were not increased or decreased after the borrowers defaulted on their first mortgages,” the paper said. “About 90% of the lines remain unchanged even after three quarters following first mortgage default. Interestingly, a small percentage (3% to 6%) of these borrowers had their HELOC lines increased.”

I find it astonishing that people who default don't have their credit lines frozen immediately. Isn't continued borrowing after a default a good sign that a borrower has gone Ponzi? Banks can't be that stupid, can they?

Lenders have the right to foreclose in defaults of first- or second-lien mortgages.

Given the large number of current homeowners with negative equity, there are likely a large number of borrowers who could default on their home equity loans without being forced into foreclosure, the paper noted.

“The data indicate, however, that borrowers rarely engage in this strategy even though it appears to be viable.“

Although homeowners could default on their second-lien mortgages, lower their mortgage payment, and stay in the home, the loan contract stays valid and unpaid interest payments would keep accumulating. Should the house be sold, the second-lien creditor would be eligible for the recovery after the first-lien creditor is paid, the paper said.

Perhaps it is this last point that stops more people from defaulting on their second mortgages. Perhaps borrowers really do recognize that second mortgage debt is just like a credit card that follows them after they leave the house. If people accept that they can't escape the debt without bankruptcy, and they are unwilling to give up access to credit, then they will keep paying their second mortgages to keep the credit lines alive.

How did they spend their house?

I can 't give you a detailed story on how this family buried themselves with mortgage debt. I'm sure their entitlements demanded they spend copious amounts of cash. This house was purchased back in 1993 for $255,000, and it went into foreclosure being worth three times as much. We all know how that happens. Unfortunately, the sordid details are missing from my data source. Whatever they did, we can assume it was typical of the others I have profiled and leave it at that.

Irvine Home Address … 28 YORKTOWN Irvine, CA 92620

Resale Home Price … $695,000

Home Purchase Price … $255,000

Home Purchase Date …. 9/10/1993

Net Gain (Loss) ………. $398,300

Percent Change ………. 156.2%

Annual Appreciation … 5.7%

Cost of Ownership

————————————————-

$695,000 ………. Asking Price

$139,000 ………. 20% Down Conventional

4.87% …………… Mortgage Interest Rate

$556,000 ………. 30-Year Mortgage

$141,784 ………. Income Requirement

$2,941 ………. Monthly Mortgage Payment

$602 ………. Property Tax

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

$116 ………. Homeowners Insurance

$0 ………. Homeowners Association Fees

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

$3,659 ………. Monthly Cash Outlays

-$715 ………. Tax Savings (% of Interest and Property Tax)

-$684 ………. Equity Hidden in Payment

$260 ………. Lost Income to Down Payment (net of taxes)

$87 ………. Maintenance and Replacement Reserves

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

$2,607 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$6,950 ………. Furnishing and Move In @1%

$6,950 ………. Closing Costs @1%

$5,560 ………… Interest Points @1% of Loan

$139,000 ………. Down Payment

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

$158,460 ………. Total Cash Costs

$39,900 ………… Emergency Cash Reserves

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

$198,360 ………. Total Savings Needed

Property Details for 28 YORKTOWN Irvine, CA 92620

——————————————————————————

Beds: 4

Baths: 2 baths

Home size: 1,918 sq ft

($362 / sq ft)

Lot Size: 4,758 sq ft

Year Built: 1977

Days on Market: 44

Listing Updated: 40526

MLS Number: S638130

Property Type: Single Family, Residential

Community: Northwood

Tract: Ip

——————————————————————————

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