Author Archives: IrvineRenter

Propping Up the Flagging Owner-Occupancy Rate

Fannie Mae is providing incentive for REO brokers to sell to owner occupants. Will it stop the decline in home ownership rates?

Irvine Home Address … 417 East YALE Loop Irvine, CA 92614

Resale Home Price …… $629,000

Move right outta here baby. Go on pack your bags.

Just who do you think you are?

Stop acting like some kinda star.

Just who do you think you are?

Take it like a man baby if that's what you are.

M People — Moving On Up

The declining home ownership rate is a serious concern for government policymakers. Increasing home ownership has been a policy of the US Government since the 1920s. The precipitous decline in home ownership caused by the tsunami of foreclosures has government officials groping for policies to stabilize the trend.

One year of First Look: Fannie Mae sells 29,000 REOs to owner occupants

by JON PRIOR — Monday, September 20th, 2010

A year into its First Look program, Fannie Mae vendors have sold 29,000 REO properties to owner-occupants and 5,000 to public entities under the Neighborhood Stabilization Program.

Fannie launched First Look in August 2009 to allow both owner occupants and those using NSP grants to submit offers 15 days ahead of investors. Fannie extended it to 30 days in Nevada.

"While investors play an important role in the REO market, homebuyers who intend to occupy a home make an immediate and lasting commitment to the community and therefore merit priority consideration in the REO sales process," said Jay Ryan, vice president for alternative REO dispositions at Fannie Mae.

Roughly 70% of the 123,000 Fannie Mae REO sales in 2009 went to owner-occupants. Not all of those were sold through the First Look program.

More than 800 public entities using the more than $7 billion in NSP grants have made purchases through First Look. Ryan said these entities are also working to rehabilitate and stabilize neighborhoods.

The government can't seem to accept the fact that its policies over the last several years were a failure. They took good renters and made them into bad homeowners. People can either make consistent monthly payments or they can't. If they can't they shouldn't become homeowners. Years of experience has shown that about 64% home ownership rate is stable. The increase from 1994 to 2006 was largely due to subprime lending, and as it turns out, many of those people shouldn't have been given title to real estate.

Fannie Mae adds broker bonuses, downpayment aid to move REO

by JON PRIOR — Thursday, September 23rd, 2010

Fannie Mae will give REO agents and brokers who sell a previously foreclosed property to an owner-occupant a $1,500 bonus per sale.

The government-sponsored enterprise will also give qualified homebuyers 3.5% of the final sales price that can be used toward the closing cost, including home warranty. Eligible offers must be submitted on or after Sept. 23 and must close by Dec. 31, 2010. Fannie said the sale must close within 60 days of the accepted offer.

Terry Edwards, executive vice president of credit portfolio management at Fannie, said more than 87,000 families have purchased a Homepath property in the first half of 2010. Homepath is the in-house manager of the Fannie Mae foreclosures. It hires vendors and agents to rehabilitate the home and ready it for the market again.

"We continue to look for ways to stabilize neighborhoods and offer incentives to qualified buyers who will occupy these properties over the long-term and help support their communities," Edwards said.

Fannie Mae, Freddie Mac and many lenders have instituted a First Look program to give owner-occupants a head start ahead of investors to buy these previously foreclosed homes. In one year of the First Look program, Fannie has sold more than 29,000 REO to owner-occupants.

I think giving owner-occupants a first look at properties is a good thing. Families should not have to compete with investors for properties. I never liked that aspect of resale flipping (and yes, I do see trustee sale flipping as being different). I am troubled about giving brokers a financial incentive to push properties to owner-occupants. Shouldn't they try to get the best price? After all, we are paying for the losses as taxpayers. Do you want to subsidize an owner occupant when an investor was willing to pay more money for a property.

Like the many other government manipulations of the housing market, I really think they should just stay out. What great societal need are we serving here? If the home ownership rate drops to 61% from 69%, are we going to have riots and vandalism? Doesn't having a mobile society that is able to move to take a job also have value?

The way you're supposed to manage your mortgage (almost)

Every once in a while, I come across a property where the owners didn't abuse HELOCs. It's rare, but it does happen. Today, I thought I would feature one just to remind everyone what good financial management is about.

  • This property was purchased on 4/29/1994 for $272,000. The owners used a $217,600 first mortgage and a 54,400 down payment.

  • On 1/29/1998 they refinanced for $212,650.

  • On 6/3/2002 they refinanced with a $187,700 first mortgage.

  • On 10/22/2002 they refinanced with a $181,500 first mortgage.

  • On 10/22/2003 they refinanced with a $165,000 first mortgage. That is ten years of declining mortgage balances.

  • On 10/27/2004 they refinanced with a $206,900 first mortgage. An increase, but still less than their original mortgage.

  • On 5/14/2010 they obtained a stand-alone second for $57,500 which was likely put into the property renovation prior to listing.

These owners owe a little over $260,000, so if they want to sell, they can lower their price to find a buyer. So far they have been lowering their price $10,000 a month, just as a patient seller would. Despite the ridiculous HOA fees, this house is priced close to rental parity with today's super low interest rates.

Irvine Home Address … 417 East YALE Loop Irvine, CA 92614

Resale Home Price … $629,000

Home Purchase Price … $272,000

Home Purchase Date …. 4/29/1994

Net Gain (Loss) ………. $319,260

Percent Change ………. 117.4%

Annual Appreciation … 5.1%

Cost of Ownership

————————————————-

$629,000 ………. Asking Price

$125,800 ………. 20% Down Conventional

4.31% …………… Mortgage Interest Rate

$503,200 ………. 30-Year Mortgage

$120,205 ………. Income Requirement

$2,493 ………. Monthly Mortgage Payment

$545 ………. Property Tax

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

$52 ………. Homeowners Insurance

$438 ………. Homeowners Association Fees

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

$3,529 ………. Monthly Cash Outlays

-$412 ………. Tax Savings (% of Interest and Property Tax)

-$686 ………. Equity Hidden in Payment

$196 ………. Lost Income to Down Payment (net of taxes)

$79 ………. Maintenance and Replacement Reserves

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

$2,706 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$6,290 ………. Furnishing and Move In @1%

$6,290 ………. Closing Costs @1%

$5,032 ………… Interest Points @1% of Loan

$125,800 ………. Down Payment

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

$143,412 ………. Total Cash Costs

$41,400 ………… Emergency Cash Reserves

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

$184,812 ………. Total Savings Needed

Property Details for 417 East YALE Loop Irvine, CA 92614

——————————————————————————

Beds: 4

Baths: 3 baths

Home size: 2,400 sq ft

($262 / sq ft)

Lot Size: n/a

Year Built: 1985

Days on Market: 39

Listing Updated: 40443

MLS Number: S629750

Property Type: Condominium, Residential

Community: Woodbridge

Tract: Ge

——————————————————————————

Absolutely the Best Value in Woodbridge. 4 Bedrooms with One Bedroom and Full Bath Downstairs Now Used as Den. Beautiful Formal Living Room with Vaulted Ceilings. Fully Upgraded Gourmet, Eat In Kitchen with Cooktop on Center Island, Granite Counters & Full Backsplash, Quality Appliances and Remodeled Cabinets. Separate Breakfast Nook Opens to Oversized Family Room with Fireplace and French Doors to Beautifully Landscaped, Relaxing Patio with Fountain. Romantic Master Suite with Window Shutters, His and Her Closets, Soaring Ceilings, Large Bath with Tub and Separate Shower. Hardwood Floors Downstairs. Newer Double Paned Windows and Custom Window Blinds Throughout. Custom Paint Throughout. Newly Refinished Wood Floors Downstairs. 2 Skylights – Stairwell and Master Bath. A/C 5 Years New. Furniture Negotiable. Lifetime Roof. 2(Two)Fireplaces! Within Walking Distance to Parks, Closed to Stonecreek. Woodbridge Amenites Include Lagoons, Beach Clubs and Dozens of Parks.

Absolutely the Best Value in Woodbridge? Yeah, right.

Why is this description in title case? Why would anyone write in title case except to write a title or a headline. Personally, I find reaching for the shift key is a pain, and it slows up my typing. It must have taken forever to write that description. Do you think they wrote it in Microsoft Word then changed it to title case? I doubt is considering they misspelled Amenites.

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,

Irvine Renter

Feeble Justifications for Government Manipulation of the Housing Market

The arguments used to justify the government's manipulation of the housing market are very weak.

Irvine Home Address … 401 ROCKEFELLER 412 Irvine, CA 92612

Resale Home Price …… $434,990

When the lights go down in the City

And the sun shines on the bay

I want to be there in my City

Journey — Lights

Housing is dead for the foreseeable future. Perhaps if we get another leg down, pricing may be low enough to sustain modest appreciation, but most likely prices will decline for a few more years then remain flat for quite some time.

The long housing stalemate

Posted by Colin Barr — September 21, 2010

Don't get carried away with Tuesday's housing market surprise. A sustainable recovery is still years away.

Housing starts jumped more than 10% to a four-month high, the government said Tuesday. Permits for new construction also rose, the Commerce Department said. The news comes on the heels of the umpteenth bust-era runup in the homebuilding stocks.

But despite the upbeat signs, Tuesday's results were distinctly mixed. The headline housing starts number was boosted by a large rise in the volatile multifamily category. And the closely watched single-family housing permits number actually fell, for the fifth straight month.

"Although the headline looks good, the details of the report paint a more downbeat picture," writes Bank of America Merrill Lynch economist Michelle Meyer.

What's more, the outlook remains dismal, thanks to years of overbuilding that have left housing markets across the country in various states of oversupply. There is a year's worth of unsold houses on the market right now, which is roughly twice the typical level — and that doesn't even count the so-called shadow inventory that would come onto the market if conditions improved.

Given the reality of those conditions, there is no justification for the government policies we have instituted to date. We have propped up prices by create a massive overhead supply and encouraged squatting on a grand scale. The current pricing is an illusion, so any justification for these policies is just as illusory.

Though there is an impulse nowadays to blame everything on Ben Bernanke and Tim Geithner, another view is that the government's massive efforts to prop up the housing markets – costly though they have been — have actually worked as well as they might have been expected to.

Expectations must be very low considering how bad conditions really are.

Sure, prices are still soft and banks are still stuffed to the gills with bad loans and foreclosed properties. Noncurrent assets and other real estate owned hit 3.3% of bank assets in the second quarter – down a shade from last year but nearly seven times the 2005 level.

But by the same token, the relative stability of prices over the past year has given the banking sector time to find its footing and the rest of the economy a chance to creep forward.

The stability over the last year is a temporary aberration, and the economy is only creeping forward because we have too much capital tied up in non-performing assets. The truth is Government Props Weakened the Housing Market and Delayed the Recovery.

According to this view, the government has succeeded in placing the housing market, once the source of so much economic instability, in position for a long slog back to health.

This will not have anyone turning cartwheels, obviously. Given the weakness of the economy and the slow rate of household formation in recent years, it will take years to absorb all the unwanted houses – a sobering thought when there is no end in sight to high unemployment.

But the good news, such as it is, is that unless there's another shock the housing market isn't about to bring the entire house of cards down again.

"Low rates and Fed mortgage buying have freed up sufficient liquidity to allow the 'shadow inventory' to remain in the shadows," says Andrew Barber of Waverly Advisors in Corning, N.Y.

"With such significant supply overhang, however, the market cannot rise appreciably," he adds. "As long as the Fed's put option is in place it might take something like a double-dip scenario or sudden rate environment shock to spur a sell-off. As such we could see this asset class tread water for a very significant time period."

Treading water isn't much fun, but think back to this time two years ago and tell me it doesn't beat the alternative.

If we had let prices crash to market clearing levels, the groundwork would be in place to have real appreciation. Once prices begin a sustainable rise, people regain their mobility, and the move-up market can return to health as people take the equity from a previous purchase to buy a more expensive home. As long as prices stagnate or decline, resale volume will be very low, and the economy will flounder.

North Korea Towers II

The only difference between these towers and the North Korea towers (Marquee at Park Place) is who was left holding the bag. The North Korea towers were sold out at the peak of the bubble, and both the investors and those who made loans in that building were left to face crashing prices, unpaid HOA dues, and little hope of recovery. The Astoria towers were not completed in time to catch any bubble sales, and Lennar's backer got to eat the losses.

Since the Marquee at Park Place was been seeing numerous forced sales by foreclosure, prices have been pounded down to the 200s. The Astoria towers are completely owned by Lennar, so there have been no foreclosures there. They are trying to obtain better pricing, but sales have been anemic, and with so much competition at lower prices, sales are not likely to improve there.

Lennar is facing a difficult choice: (1) lower price and take an even larger loss, (2) hold product off the market and hope prices go back up. Obviously, they are choosing to do the latter.

Perhaps we should rethink the terms "shadow inventory." I think we should call it "dark inventory." Many of the properties in shadow inventory are vacant like these towers. Vacant properties have no lights on, so they cast no shadows.

The Astoria is a microcosm of the shadow inventory problem. If you believe prices are going to fall, you would sell quickly to obtain whatever you could before prices fell further. Of course, that action becomes self-fulfilling. If you believe house prices are going to go back up, you want to release properties to the market slowly to allow some appreciation and still liquidate inventory. The problem with that approach is that your competitors may believe prices are going down, and they will provide lower priced product that steals your sales and pushes prices lower. That is the cartel problem. The sellers in Marquee at Park Place are undercutting the Astoria, lowering market prices, and stealing sales from the Astoria.

At the current rate of sales, the Astoria will be selling in 2030. They are betting that once the mess is cleaned up in the Marquee at Park Place that inventory will dry up and they will finally be able to sell for what they want. It isn't going to happen. These units simply aren't worth that much.

Look at the cashflow values. Even with 4.31% interest rates, these properties still cost more to own than they do to rent. What's the compelling reason to buy one of these? What happens when interest rates go up?

For now, Lennar will likely wait and see, but as time goes on and prices do not recover, the urgency to liquidate will increase. Prices will go down. The financial partners that backed this venture are going to lose a great deal of money.

Irvine Home Address … 401 ROCKEFELLER 412 Irvine, CA 92612

Resale Home Price … $434,990

Cost of Ownership

————————————————-

$434,990 ………. Asking Price

$15,225 ………. 3.5% Down FHA Financing

4.31% …………… Mortgage Interest Rate

$419,765 ………. 30-Year Mortgage

$83,129 ………. Income Requirement

$2,080 ………. Monthly Mortgage Payment

$377 ………. Property Tax

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

$36 ………. Homeowners Insurance

$876 ………. Homeowners Association Fees

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

$3,369 ………. Monthly Cash Outlays

-$330 ………. Tax Savings (% of Interest and Property Tax)

-$572 ………. Equity Hidden in Payment

$24 ………. Lost Income to Down Payment (net of taxes)

$54 ………. Maintenance and Replacement Reserves

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

$2,545 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$4,350 ………. Furnishing and Move In @1%

$4,350 ………. Closing Costs @1%

$4,198 ………… Interest Points @1% of Loan

$15,225 ………. Down Payment

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

$28,122 ………. Total Cash Costs

$39,000 ………… Emergency Cash Reserves

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

$67,122 ………. Total Savings Needed

Property Details for 401 ROCKEFELLER 412 Irvine, CA 92612

——————————————————————————

Beds: 2

Baths: 2 baths

Home size: 1,571 sq ft

($277 / sq ft)

Lot Size: n/a

Year Built: 2010

Days on Market: 44

Listing Updated: 40416

MLS Number: S628969

Property Type: Condominium, Residential

Community: Airport Area

Tract: Cpwas

——————————————————————————

Brand new Lennar high rise flat in Astoria. 2 bedroom, 2 bath flat with Wonderful Ammenities, Luxury living at its finest with valet parking, beautiful upgrades, gym, wine room, pool, spa and so much more.

Ammenities?

Prisoners Taught Mortgage Brokering as New Career

To train for a new career after prison, inmates are turning to mortgage brokering to start a new life.

Irvine Home Address … 90 BRIARWOOD #105 Irvine, CA 92604

Resale Home Price …… $300,000

Crawling to my glass prison

A place where no one knows

My secret lonely world begins

Life here in my glass prison

A place I once called home

Fall in nocturnal bliss again

Dream Theater — Glass Prison

Inmates learn new skills as part of their rehabilitation. It is a wise societal investment to give thieves training in something other than thievery so they can have an opportunity to begin a new productive life — if they choose to live differently after prison. Unfortunately, many skills taught in prison give criminals new skills to be even better criminals.

Mortgage Brokering Taught in Prison

Walter Pavlo — September 16, 2010

While I was in Edgefield Federal Prison Camp, many of us white-collar felons taught classes to the other inmates. Most of the classes involved helping inmates get their high school diploma (GED). Like other inmates who had the opportunity to teach, I felt good to find a way to give back.

Other classes helped inmates prepare for a career after prison. Hair cutting was a popular skill to learn, though many states prohibit felons from cutting hair….must have something to do with scissors. Tattoo art was also popular but the shortage of clean needles kept the enrollment for that particular class to a minimum.

So what was the most popular class during my time in Edgefield during 2001-2002, “How to be a Mortgage Broker”. The class was taught by an inmate, Eric, who was doing 3 years for mortgage fraud. So I guess that made him an expert. Each semester (a 2-hour class met 3 days a week for a month) the enrollment prompted a waiting list for the class. The waiting list resulted because the prison would only allow 25 copies to be made of the various forms that were a part of the curriculum (about 20+ pages of forms, work sheets and exemplar credit reports). Those with more time left on their sentence were pushed off to another semester to make room for those that would hit the streets in a few months. If you were doing 5+ years, you didn’t have a chance. Even prison classes are selective in their enrollment.

Mortgage Brokering was a great career because institutions did not care whether you were a felon or not, as long as you had a legitimate deal. And in 2002-2006 they were all legitimate. There was no licensing requirement and the inmate would return home with dreams of home-ownership to a host of friends and family. Testimonials to the success of the program flowed back to the instructor and he shared these with the next class.

Professor Eric probably meant well. The would-be brokers that he fed into the market were just trying to make a living in a business that seemed more lucrative and easier than selling the drugs that had put them in prison to begin with. Professor Eric did not do too bad either. He received $30 in commissary goods per inmate ($750 per session). Not bad for a place where the legitimate wage is about $0.15/hour for a prison job. Granted, there were only 4 sessions a year, but Eric also offered private lessons not sanctioned by the prison.

When I left prison, Professor Eric had turned his energy toward his own career once he secured his release, and it wasn’t Mortgage Brokering. He had created a business plan for a mutual fund that bet on NBA games with a guaranteed return of 12%. I told him that it sounded like a Ponzi Scheme, and I’ll never forget his reply, “What’s that?”

The entire housing market in California is a Ponzi Scheme. The newly released felons will be completely comfortable originating loans here in California. The question is, will you be comfortable having a convicted felon get a loan for you?

A private Ponzi prison

Perhaps we should make all the Ponzis who stripped the equity from small condos live in them until they pay the money back…. Actually, that is occurring to those who continue to make their payments. I wonder if they feel like they are in prison?

  • Today's featured property was purchased on 3/17/2003 for $279,000. The owner used a $223,200 first mortgage, a $41,850 second mortgage, a $13,950 third mortgage, and a $0 down payment.

  • On 11/10/2004 he refinanced with a $336,000 first mortgage.

  • On 12/27/2005 he refinanced again with a $360,000 first mortgage and a $40,000 second mortgage.

  • Total property debt is $400,000.

  • Total mortgage equity withdrawal is $121,000. Not bad for a small condo.

  • Total squatting time is 17 months so far.

Foreclosure Record

Recording Date: 11/09/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 07/31/2009

Document Type: Notice of Default

Irvine Home Address … 90 BRIARWOOD #105 Irvine, CA 92604

Resale Home Price … $300,000

Home Purchase Price … $279,000

Home Purchase Date …. 3/17/2003

Net Gain (Loss) ………. $3,000

Percent Change ………. 1.1%

Annual Appreciation … 0.9%

Cost of Ownership

————————————————-

$300,000 ………. Asking Price

$10,500 ………. 3.5% Down FHA Financing

4.31% …………… Mortgage Interest Rate

$289,500 ………. 30-Year Mortgage

$57,332 ………. Income Requirement

$1,434 ………. Monthly Mortgage Payment

$260 ………. Property Tax

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

$25 ………. Homeowners Insurance

$328 ………. Homeowners Association Fees

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

$2,047 ………. Monthly Cash Outlays

-$130 ………. Tax Savings (% of Interest and Property Tax)

-$395 ………. Equity Hidden in Payment

$16 ………. Lost Income to Down Payment (net of taxes)

$38 ………. Maintenance and Replacement Reserves

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

$1,577 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$3,000 ………. Furnishing and Move In @1%

$3,000 ………. Closing Costs @1%

$2,895 ………… Interest Points @1% of Loan

$10,500 ………. Down Payment

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

$19,395 ………. Total Cash Costs

$24,100 ………… Emergency Cash Reserves

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

$43,495 ………. Total Savings Needed

Property Details for 90 BRIARWOOD #105 Irvine, CA 92604

——————————————————————————

Beds: 2

Baths: 1 full 1 part baths

Home size: 1,125 sq ft

($267 / sq ft)

Lot Size: n/a

Year Built: 1978

Days on Market: 4

Listing Updated: 40443

MLS Number: P753437

Property Type: Condominium, Residential

Community: Woodbridge

Tract: Wbrs

——————————————————————————

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

Quite Inside Loop Location, 2 Huge Bedrooms, One with Walk-In Closet, Large Laundry Room.

Quite Inside Loop Location? I think he meant "quiet."

Banks Forced to Repurchase Bad Bubble Loans

Banks are being forced to buy back the bad loans they originated and packaged into securities.

Irvine Home Address … 7 FOXCHASE Irvine, CA 92618

Resale Home Price …… $800,000

You took my money, you got my honey

Don't want me to see what you doing to me

I can get back, I gotta deal with you

hey! Gotta gotta pay back

Revenge!

I'm mad!

Got to get back!

Need some get back

Pay Back!

There it tis

Payback!

Revenge!

James Brown — Payback

Investors are suing banks to get some of their money back from the bad loans banks originated and investors purchased. IMO, the only real beneficiaries will be the attorneys.

Banks Pressed on Sour Home Loans

Investors in Pool of Securities Seek to Force Lenders to Buy Back or Modify Problem Mortgages

By CARRICK MOLLENKAMP — September 23, 2010

Big U.S. banks are facing legal pressure to make up for losses tied to pools of soured low-end mortgage loans.

In the latest effort, a group of investors in 2,300 mortgage securities worth roughly $500 billion is seeking to force several banks that originated or are now servicing faulty subprime-mortgage loans to repurchase or modify them.

I wonder who they are filing suit against. One of the brilliant aspects of subprime was that the major commercial banks and investment banks kept these operations at arms length as separate corporations. Once these corporations imploded, there was nowhere for investors to turn to get their money back. New Century Financial has guranteed billions on loans, but kept almost no capital in the company to cover them. This was common among subprime lenders. Their guarantee didn't mean much if they didn't have any capital to back it.

The move follows other similar efforts. Bond and mortgage insurers, hard hit in the housing crisis, have filed lawsuits accusing lenders and banks of sticking them with flawed loans marred by poor underwriting and faulty appraisals.

Federal Home Loan Banks in Pittsburgh, Seattle and San Francisco have sued Wall Street banks, seeking to force them to buy back mortgage-backed bonds. In July, the Federal Housing Finance Agency issued 64 subpoenas to obtain information about loans underpinning securities sold to mortgage giants Fannie Mae and Freddie Mac.

The banks and lenders are fighting these efforts, saying they aren't responsible for the housing crash.

And the outcome is far from certain and could depend on potentially contentious negotiations and litigation that could drag out for years.

Let the attorney feeding frenzy begin. The main parties who will be enriched by all this activity are the attorneys. Investors won't see much of their money, but the attorneys for both sides of these suits will make fortunes.

In any case, analysts say the efforts could force banks to disclose difficult-to-obtain information about the loans, such as how poorly they might have been originated or are being managed.

That data could be used to force banks to repurchase as much as $133 billion in souring home loans, according to Compass Point Research & Trading, a Washington, D.C., boutique investment bank.

The legal efforts focus on the contractual duties of lenders known as "representations and warranties," which can at times require them to repurchase loans or modify them so borrowers can keep paying monthly mortgage bills, which maintains value for mortgage securities tied to the loans.

One of the reasons loan modification programs have been difficult to implement is due to the huge number of loans placed into asset-backed securities and sold into collateralized debt obligations. The terms of these CDOs vary considerably, and many of them have no mechanism to modify loans because nobody anticipated the need.

The Trustees' Roles

At issue are the roles of trustees and loan servicers. Trustees are little-known administrators inside banks responsible for overseeing loan pools, or securitizations, on behalf of investors. Loan servicers handle day-to-day management of loans, including deciding how and whether to modify the terms of a loan. Both are charged with oversight of pools that hold thousands of loans.

If a trustee, for example, discovers that a borrower lied when getting a loan, the trustee or loan servicer is responsible for forcing the originating bank to repurchase the loan on behalf of mortgage investors. Trustees enforce warranties made by loan originators when they sell loans to a trust, and oversee loan-servicing firms.

[Franklin]

But some loan-servicing units reside inside the same banks that originated or underwrote the loans or securities. This sets up a potential conflict of interest because a loan-servicing arm would have to force another department or affiliate inside a bank to take back a problem loan.

I recently reported on the GSEs efforts to force servicers to process loans. The large commercial banks in particular have billions of dollars in second mortgages on their books, so they are delaying foreclosure as long as possible to try to obtain some value from their worthless second mortgages. This glaring conflict of interest has not gone unnoticed.

In a letter to the trust departments of several large banks, Talcott Franklin, a Dallas lawyer representing the investors holding 2,300 mortgage bonds, claims the loan-servicing units too infrequently modify poor-performing home loans underpinning mortgage securities or replace them with better loans.

"This is of great concern to the pension funds, bank and credit-union depositors, mutual fund holders, 401(k) holders, endowments, state and local governments and taxpayers who depend on the performance of these investments," the letter says.

U.S. Bancorp, Bank of America Corp., Bank of New York Mellon Corp., and Wells Fargo & Co. received the letter from Mr. Franklin, while Deutsche Bank AG didn't, according to people familiar with the situation. The banks either declined to comment or didn't return requests for comment on the letter.

In a statement, a spokeswoman for Wells Fargo said the bank has "an established track record of responding to all legitimate verified bondholder inquiries in a timely manner."

All the major banks are delaying foreclosure for their own selfish needs. The holders of the first mortgages are still in denial, and the servicers who hold the second mortgage are in no hurry to bring reality to the situation.

A key first step in the legal fights is obtaining the loan files that will detail how the loans were originated and what is being done now to salvage investors' money.

If the investor maneuver is successful in getting the loan information, "this will lead to similar actions taken by a larger set of bondholders," said Chris Gamaitoni, a Compass Point senior analyst. "We believe that once loan files are acquired, that the breaches of reps and warranties will be relatively clear."

In an Aug. 17 report, Compass Point said the litigation makes common claims: "A significant portion of the underlying loans failed to comply with the underwriting guidelines or other reps and warranties, and thus misrepresentations and material omissions were made in connection with the sale of" residential mortgage-bond securities.

Actually, I don't think they will find many of the underlying loans failed to meet the guidelines. There were no guidelines. Often the guidelines that were in place were so ridiculous that the investors deserved to lose money. Many of these CDOs stated on the first page the kind of crap that was inside them.

In recent weeks, some of the banks have begun early-stage talks with Mr. Franklin to provide data about the loans underpinning the securities, such as loan documents and how the loan has been serviced. Separately, Mr. Franklin hopes to persuade the trustees to take increased steps to deal with souring loans, such as forcing loan sellers to repurchase the loans or requiring loan servicers to improve loan servicing.

In the past, complaints by mortgage-security investors went unheeded. But because Mr. Franklin now represents enough investors to meet certain legal thresholds—he, for example, represents 50% or more of the voting rights of 900 mortgage securities—his clients could fire a trustee, demand changes in the way a mortgage bond is managed or ultimately file a suit on behalf of a huge group of bondholders.

In the letter, Mr. Franklin said that in some trusts where the lender and servicer sit inside the same bank, the number of recent repurchases by the lender is zero, even though the default rate for the loan pool is 25%.

Do you think the conflict of interest is causing problems? I think it is obvious.

'That's Just Not Right'

Some investors "had no idea that their money was being invested in mortgage-backed securities," said Mr. Franklin. "And yet somehow these people are now the ones being punished, and that's just not right."

If the investors had no idea their money was being invested in MBS pools, then those investors were idiots. Accredited and institutional investors don't have many rights of recourse against a properly administered investment that goes bad. Big investors are supposed to know what they are buying, and ignorance to the nature of the investment that has been properly disclosed does not give them cause of action.

To keep track of the securities his clients own and protect his clients' confidential holdings, Mr. Franklin uses a software system he designed with a college friend, who consults on how to design large databases. Mr. Franklin calls it the "Tranche" program, a reference to the French word for slice or layer. Mortgage securities are chopped into tranches based on risk and return.

His clients' information is coded and Mr. Franklin keeps a secret code book as a reference. Mr. Franklin said the system is important because it lets him know when his clients in a specific deal have amassed enough voting power.

In the other cases, bond insurer MBIA Inc. sued Credit Suisse Group in New York state court in December over a $900 million loan pool, a large portion of which MBIA agreed to cover. MBIA said it had relied on Credit Suisse to vet the quality of the loans.

In January, Ambac Assurance Corp., the bond-insurance unit of Ambac Financial Group Inc., sued a Credit Suisse unit in New York state court, alleging that it made "false and misleading" representations about home-equity lines of credit backing bonds that the insurer guaranteed in 2007.

A Credit Suisse spokesman said the claims are without merit and the bank will defend itself against the claims.

Since Credit Suisse had people like Ivy Zelman consulting for them (she originated the ARM reset chart), it seems likely that Credit Suisse properly disclosed the risks.

Separately, American International Group Inc. is analyzing mortgage deals it insured before it imploded in 2008. Chief Executive Robert Benmosche told investors in May that the company will take "appropriate action" if it finds it was harmed by the transactions.

Write to Carrick Mollenkamp at carrick.mollenkamp@wsj.com

No hurry. It's empty

When a property is sitting empty in a nice neighborhood, the banks have been in no hurry to foreclose. Today's featured property might as well be an REO. I don't know how they plan on getting the owners to negotiate a short sale when they aren't there anymore, but title is still in the name of the former residents, and this property is listed as a short sale. Realistically, this listing exists to get bids so the banks can determine market value so they can make a determination on a bid at auction. This property will almost certainly go to auction.

  • The property was purchased for $487,000 on 3/4/1999. The owners used a $389,300 first mortgage and a $97,700 down payment.

  • On 5/18/1999, they obtained a $41,000 second mortgage.

  • On 2/13/2001 they opened a $100,000 HELOC.

  • On 3/1/2002 they refinanced the first mortgage for $525,000.

  • On 11/1/2002 they obtained a stand-alone second for $50,000.

  • On 4/25/2003 they refinanced with a $535,000 first mortgage.

  • On 5/28/2004 they refinanced again with a $652,000 first mortgage.

  • On 4/29/2005 they obtained a $100,000 HELOC.

  • On 1/2/2007 they refinanced the first mortgage for $900,000.

  • Total mortgage equity withdrawal is $510,700. They are part of the elite equity-stripping HELOC abusers: the half million dollar club.

  • Total squatting time is about 198 months.

Foreclosure Record

Recording Date: 03/16/2010

Foreclosure Record

Recording Date: 08/31/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 05/26/2009

Document Type: Notice of Default

Will this happen again?

What do you think? Will people get the chance to strip $500,000 out of their walls again in the future?

Irvine Home Address … 7 FOXCHASE Irvine, CA 92618

Resale Home Price … $800,000

Home Purchase Price … $487,000

Home Purchase Date …. 3/4/1999

Net Gain (Loss) ………. $265,000

Percent Change ………. 54.4%

Annual Appreciation … 4.2%

Cost of Ownership

————————————————-

$800,000 ………. Asking Price

$160,000 ………. 20% Down Conventional

4.31% …………… Mortgage Interest Rate

$640,000 ………. 30-Year Mortgage

$152,884 ………. Income Requirement

$3,171 ………. Monthly Mortgage Payment

$693 ………. Property Tax

$250 ………. Special Taxes and Levies (Mello Roos)

$67 ………. Homeowners Insurance

$113 ………. Homeowners Association Fees

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

$4,294 ………. Monthly Cash Outlays

-$748 ………. Tax Savings (% of Interest and Property Tax)

-$872 ………. Equity Hidden in Payment

$250 ………. Lost Income to Down Payment (net of taxes)

$100 ………. Maintenance and Replacement Reserves

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

$3,023 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$8,000 ………. Furnishing and Move In @1%

$8,000 ………. Closing Costs @1%

$6,400 ………… Interest Points @1% of Loan

$160,000 ………. Down Payment

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

$182,400 ………. Total Cash Costs

$46,300 ………… Emergency Cash Reserves

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

$228,700 ………. Total Savings Needed

Property Details for 7 FOXCHASE Irvine, CA 92618

——————————————————————————

Beds: 4

Baths: 2 full 1 part baths

Home size: 3,238 sq ft

($247 / sq ft)

Lot Size: 4,431 sq ft

Year Built: 1998

Days on Market: 17

Listing Updated: 40431

MLS Number: L34073

Property Type: Single Family, Residential

Community: Oak Creek

Tract: Ashp

——————————————————————————

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

Beautiful 2 story home with 4 bedrooms and 3 baths.Corian counters in spacious Kitchen, Master Bath, and 1/2 bath. Custom closet in Master Bath. Wired for surround sound in Dining rm, Family room, outside and Master Bedroom. Wood Flooring downstairs and tile in upstairs bathrooms, laundry rm too. Epoxy garage floors. Schools, Oak Creek Elementary, Lakeside Middle School, Woodbridge High.This won't last, make an offer!

The Right to Rent Would Flatten the California Housing Market

A new bill circulating in Congress would encourage accelerated default on a grand scale and crush California's housing market.

Irvine Home Address … 247 ORANGE BLOSSOM Irvine, CA 92618

Resale Home Price …… $217,900

I haven't ever really found a place that I call home

I never stick around quite long enough to make it

It's just a thought, only a thought

But if my life is for rent and I don't learn to buy

Well I deserve nothing more than I get

Cos nothing I have is truly mine

Dido — Life For Rent

Dean Baker of the Center for Economic and Policy Research was one of the early public voices who called the housing bubble. He accurately noted the disparity between rent and payments and concluded housing prices were not sustainable. Like me, he was a renter looking to buy as prices were ramping up, and like me, he noted that since it didn't make sense for him personally to buy, it didn't make sense for anyone else either. Being an economist at an influential think tank, he was in a position to research and write about the issue and be heard.

I really like Mr. Baker's proposal, but I have been afraid to write about it because I don't think lawmakers fully understand what passing his legislation would do to the housing market. I would very much like to see it become law, but if it does, every inflated housing market in the country would crash very hard as loan owners accelerate their defaults. If lawmakers are educated to this fact by me or the banking lobby, they will not pass this good legislation. But I am only a blogger, so perhaps they will ignore me. Let's hope so.

Right to Rent could change the nation's foreclosure crisis: CEPR

by CHRISTINE RICCIARDI — Wednesday, September 22nd, 2010

In the wake of reform enacted to promote homeownership, analysts at the Center for Economic and Policy Research are saying that ownership may not be the smartest option. In a report released today, The Gains from Right to Rent in 2010, the CEPR suggests that giving homeowners the right to rent their house at a fair market price could be a game changer in the nation's foreclosure crisis.

The report dissects the benefits of a drafted bill, H.R. 5028, also known as The Right to Rent. Under the legislation, homeowners entering the foreclosure process would be able to occupy their homes for up to five years, while paying rent to a lender. Rent would be based on fair market price as determined by an independent appraiser and adjusted annually.

Think about the effect of this law from the perspective of an underwater homeowner making a payment that exceeds a comparable rental. Why would anyone in that position keep paying their mortgage if they knew they could default and stay in their home for five years? Further, wouldn't these owners also believe that they would be given a chance to repurchase the house after 5 years when their credit is improved? If this law is passed, every market inflated above rental parity would crash to that price level because of a rush of accelerated default.

"This would give homeowners an important degree of security, since they could not simply be thrown out on the streets," wrote Dean Baker and Hye Jin Rho, co-director of and research assistant at CEPR. "This policy should also benefit neighborhoods in the most hard-hit areas, since they would not have large numbers of vacant homes following foreclosures."

This policy probably would benefit the hardest hit areas because there would be less turnover of the housing stock. Riverside County would benefit greatly while Orange County would be crushed.

The CEPR report, which compares the costs of owning a home and renting in 16 major metropolitan statistical areas around the U.S., found that homeowners would see substantial reductions in costs by becoming renters if they rented in a bubble-inflated market. Savings are much less, however, if the market was not affected by the housing bubble.

For example, in the Los Angeles MSA, homeowners would save $1,586 per month by becoming a tenant. The median home price in 2006 and 2007 was $608,600. Based on that number, CEPR found the monthly cost of ownership as $3,128 versus $1,420 to rent.

New York/New Jersey, Sacramento, San Diego and San Francisco savings are all over $1,000.

The tremendous savings being touted here are real, and they represent a loan owner's incentive to accelerate their default. Most loan owners believe house prices will go back up and they will get appreciation and HELOC riches: they are making a strategic repayment. Once the incentives change, fewer will make the oversized payments. Instead of continuing to make a strategic repayment, most will opt to strategically default. It's only the false belief that their investment will yield results that keeps most of these people paying now.

In Detroit, however, the marginal saving is only $89 between owning and renting home. MSAs including Baltimore, Chicago, Cleveland, Minneapolis, Philadelphia, Phoenix, and Tucson had a difference of less than $500.

“With roughly one-in four mortgages underwater, the loan modification plans put forth so far have done little to help homeowners facing foreclosure,” said Baker. “Right to Rent, on the other hand, would benefit millions, provide families with real housing security, and could go into effect immediately.”

And it would lower house prices to rental parity.

And it could fill adequate demand. According to a survey done recently by Apartments.com, 60% of respondents said they prefer renting to buying a home. Almost 30% said they had never rented before but are currently looking for an apartment.

The CEPR report includes an appendix with cost analysis for 100 MSAs around the country. Amounts for houses are based on costs for a house that sells at 75% of the median house price. The basis for rental costs is the Department of Housing and Urban Development's Fair Market Rent for a two-bedroom apartment. The calculations used assume the homeowner faces a marginal tax rate of 15%. View the full report here.

Permanent Rental Parity

Despite the problems created with implementation of a right-to-rent law, the impact would be long lasting and very positive because most first mortgages would be limited to rental parity. Right now, the excess mortgage payment going to the bank represents money not being spent in the local economy. When a loan owner in California is paying a 50% DTI, very little is left over to stimulate the economy — and have a life. Without appreciation and HELOC abuse, high DTIs are detrimental to California, and a HELOC based economy is an unsustainable Ponzi Scheme.

Since the incentive to default exists for mortgage payments above rental parity, lenders will stop underwriting those loans. If you were a lender, and if you knew the borrower could default at any time and stay in the property for 5 years and only have to pay you rent, wouldn't you keep the payment at or below rental parity? A right to rent law would stabilize the housing market in a way no other government program has succeeded in doing. Unfortunately for lenders, the implementation of this law will take the remaining air out of the housing bubble.

I strongly support the idea of keeping house prices at rental parity because it discourages Ponzi living and puts the economy on a sustainable footing. I proposed a similar idea in The Great Housing Bubble:

There is one potential market-based solution that would require no government regulation or intervention that would prevent future bubbles from being created with borrowed capital: change the method of appraisal for residential real estate from valuations based exclusively on the comparative-sales approach to a valuation derived from the lesser of the income approach and the comparative-sales approach. Both approaches are already part of a standard appraisal, so little additional work is necessary–other than appraisers will have to focus on doing the income approach properly. In the current lending system, the income approach is widely ignored. … When the fallout from the Great Housing Bubble is evaluated, it is clear that the comparative-sales approach simply enables irrational exuberance because the past foolish behavior of buyers becomes the basis for future valuations allowing other buyers to continue bidding up prices with lender and investor money. Prices collapsed in the Great Housing Bubble because prices became greatly detached from their fundamental valuation of income and rent. This occurred because the comparative-sales approach enables prices to rise based on the irrational exuberance of buyers. If lenders would have limited their lending based on the income approach, and if they would not have loaned money beyond what the rental cashflow from the property could have produced, any price bubble would have to have been built with buyer equity, and lender and investor funds would not have been put at risk. There is no way to prevent future bubbles, and the commensurate imperilment of our financial system, as long as the comparative-sales approach is the exclusive basis of appraisals for residential real estate.

My approach was to change the appraisal system to limit loans to rental parity, but Dean Baker's idea of right to rent would have the same effect. If loans are limited to rental parity, so will house prices — unless we suddenly become a nation of savers and manage to inflate a bubble with equity…. not going to happen.

Sold to Countrywide at the peak

This wasn't really sold to Countrywide, but borrowing the full value had the same effect. The owners extracted every penny of equity, and Countrywide (B of A) will end up with another REO. In effect, they bought the property in mid 2007 but didn't know it.

  • This property was purchased on 10/23/1998 for $88,000. The owners used a $66,000 first mortgage, and a $22,000 down payment.

  • On 3/5/2003 they refinanced with a $150,000 first mortgage.

  • On 7/30/2007 they refinanced with a $296,000 first mortgage. These owners were not regular HELOC abusers, but they did manage to double their mortgage on two occasions.

  • Total mortgage equity withdrawal is $230,000. That is great for a 1 bedroom condo.

Foreclosure Record

Recording Date: 07/19/2010

Document Type: Notice of Default

Some might disagree with my giving them a "D" for mortgage management. With only two refinances, I think these people really believed they were living within their means and only spending part of their appreciation. It doesn't appear thoughtless or reckless — stupid, but not reckless.

Irvine Home Address … 247 ORANGE BLOSSOM Irvine, CA 92618

Resale Home Price … $217,900

Home Purchase Price … $88,000

Home Purchase Date …. 10/23/1998

Net Gain (Loss) ………. $116,826

Percent Change ………. 132.8%

Annual Appreciation … 7.8%

Cost of Ownership

————————————————-

$217,900 ………. Asking Price

$7,627 ………. 3.5% Down FHA Financing

4.31% …………… Mortgage Interest Rate

$210,274 ………. 30-Year Mortgage

$41,642 ………. Income Requirement

$1,042 ………. Monthly Mortgage Payment

$189 ………. Property Tax

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

$18 ………. Homeowners Insurance

$230 ………. Homeowners Association Fees

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

$1,479 ………. Monthly Cash Outlays

-$94 ………. Tax Savings (% of Interest and Property Tax)

-$287 ………. Equity Hidden in Payment

$12 ………. Lost Income to Down Payment (net of taxes)

$27 ………. Maintenance and Replacement Reserves

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

$1,137 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$2,179 ………. Furnishing and Move In @1%

$2,179 ………. Closing Costs @1%

$2,103 ………… Interest Points @1% of Loan

$7,627 ………. Down Payment

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

$14,087 ………. Total Cash Costs

$17,400 ………… Emergency Cash Reserves

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

$31,487 ………. Total Savings Needed

Property Details for 247 ORANGE BLOSSOM Irvine, CA 92618

——————————————————————————

Beds: 1

Baths: 1 bath

Home size: 814 sq ft

($268 / sq ft)

Lot Size: n/a

Year Built: 1976

Days on Market: 62

Listing Updated: 40419

MLS Number: I10079989

Property Type: Condominium, Residential

Community: Orangetree

Tract: Cpwas

———————————————————

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

Located in a desirable community. Just down the road from Irvine Spectrum, to UC Irvine and walking distance to Irvine Valley College. It is a one bedroom/one bath downstairs and a big loft upstairs. Kitchen have new granite countertop and tile floors. Bathroom have new tile floors as well. And have wood floors in other rooms. Amenities such as tennis courts, basketball court, swimming pool, childrens playground.

The realtor needs to work on subject-verb agreement and basic grammar.

Where the local renters are