A recent study by the Pennsylvania Association of realtors reveals that overextended borrowers are only one financial hardship away from foreclosure.

Irvine Home Address … 62 RACING WIND Irvine, CA 92614

Resale Home Price …… $500,000

We sit on the brink of extinction

The world lies in wait

Just a scratch on the surface

Of time that will wash away

We delude ourselves with the notion

That we are here to stay

Napalm Death — Brink of Destruction

Far too many borrowers exist on the brink of destruction. They delude themselves with notions that they have their houses for life, and they are there to stay. A small scratch on the surface of the false veneer of prosperity damages them beyond repair, and they face foreclosure.

The Pennsylvania Association of realtors recently conducted a study of those who experienced foreclosure over the last 12 months. It reveals a group of borrowers who were hopelessly overextended an unable to withstand the smallest amount of financial hardship. Of course, that isn't how the realtors spin it….

JOB LOSS, MEDICAL BILLS AMONG TOP FACTORS CONTRIBUTING TO HOME FORECLOSURES IN PA, SAYS rEALTOR® STUDY

Few experiencing foreclosures had subprime mortgages, previously regarded as the main culprit in the meltdown of the U.S. housing market

CONTACT: Samantha Elliott Krepps

External Communications Specialist

PA Association of rEALTORS®

(O) 717.561.1303 X 3006

(M) 717.303.9078

skrepps@parealtor.org

LEMOYNE, PA (Aug. 4, 2010) – Job loss and unexpected medical bills are among the top factors contributing to home foreclosures in Pennsylvania, according to a survey commissioned by the Pennsylvania Association of rEALTORS® (PAr).

Five hundred Pennsylvanians who encountered home foreclosure during the last 12 months were surveyed by Florida-based polling firm Strategic Guidance Systems (SGS) between June 22 and 27, 2010. Fifty-seven percent of the sample said their household had experienced a wage-earner’s job loss in the 12 months prior to their foreclosure,

This is the statistic they base most of their conclusion on. If 57% reported a job loss — not necessarily chronic unemployment — but some short-term drop in income, that means that 43% did not. Nearly half of those who went through foreclosure did not experience any job related financial distress.

while 47 percent said they had been hit by unexpected medical bills.

Don't people carry health insurance any more? Is it reasonable to think that unexpected medical bills that are not covered by insurance are that onerous? To me that is a sign that these borrowers were right on the edge of insolvency to begin with.

Thirty-six percent indicated they had other “unexpected bills.”

Doesn't everyone experience unexpected bills? If your car breaks down, that is unexpected. If the unexpected bills in life cause people to go over the brink and lose their houses, they have borrowed too much money.

The statistics they quote do not support their overriding conclusions. The truth is that most people borrowed way too much money under terms that were not stable, and even the slightest drop in their income put them in such a deep hole that they could not recover.

They forgot the most revealing statistic: 96% of foreclosed owners anticipated appreciation they could convert to cash to make payments and finance a lifestyle their wage income could not support…. Actually, I made that up, but it isn't far from the truth.

If you don't accept my argument that borrowers are hopelessly overextended, take a look at the graphic above modified from the JUNE HAMP report. The median back-end debt-to-income ratio of HAMP loan modifications is 79.9%. I find that number truly remarkable. Remember, the debt-to-income ratio is based on gross income. With 20% set aside for taxes, the median borrower has no disposable income whatsoever. And this is the median; that means half of the borrowers were even more indebted.

Subprime mortgages, which many regarded as the main culprit in the meltdown of the U.S. housing market, appear to have played a minor role in Pennsylvania foreclosures. Forty-one percent of survey respondents held prime fixed-rate mortgages and 12 percent had prime adjustable-rate loans. Only 14 percent carried a subprime mortgage.

Subprime is not the problem. Toxic loans cut across all borrower classifications.

“It’s clear that housing market conditions are closely tied to economic conditions, especially employment. Subprime mortgages have never really driven foreclosures in Pennsylvania,” said Austin Jaffe, Ph.D., PAR’s consulting economist and head of the Department of Insurance and Real Estate at the Smeal College of Business at Penn State University.

This academic pinhead is missing the broader problem. Sure, the housing market is closely tied to economic conditions, especially employment. Duh! The fact is the foreclosure problem is overly sensitive to economic problems because borrowers have too much debt. To fail to make that connection is to miss the real reason for the foreclosure problem.

“The study represents a significant number of Pennsylvanians who have personally experienced foreclosure in some way. They’re people from all walks of life, various socio-economic backgrounds and all parts of the Commonwealth,” SGS pollster Joel Searby said.

Government Programs, Lenders Not Helpful

Many of those surveyed also did not know about the state and federal programs available to those undergoing the foreclosure process:

• 67 percent of respondents “never heard of” the federal Home Affordable Foreclosure Alternative Program (“HAFA”)
• 57 percent never heard of the federal Making Home Affordable program
• 61 percent were unfamiliar with the Homeowner Equity Recovery Operation program of the PA Housing Finance Agency.

I find those numbers surprising. The various Bailouts and False Hopes have been well publicized. If more than half of those who are in trouble have not heard of these programs, they must not watch the news or use Google to search for help.

Ninety-one percent of those surveyed said they attempted to contact their lender about a solution to their pending foreclosure but 48 percent said their lenders were “not at all” willing to work with them.

Most of those 48% were probably unwilling to give up their entitlements in order to qualify for a loan modification. If borrowers are not willing to cut back on their lifestyles, lenders are not willing to cut them any slack.

The 30 percent who worked with their lenders said it made no difference. Nineteen percent said it “made things worse.”

The 30% who said it made no difference probably didn't qualify because they were already under the 31% DTI limit and didn't need a loan modification. These people applied to see if they could get some free money, and they were told no. The 19% who said it made things worse are the ones who lost hope and gave up when the loan modification didn't come through.

Most of the survey respondents were between the ages of 40 and 59. At the time of foreclosure, 71 percent had lived in their home for more than five years. Forty-one percent of the sample personally experienced foreclosure; 57 percent narrowly avoided or are currently in foreclosure.

The fact that 71% had lived in their homes more than 5 years shows this is not a problem limited only to peak buyers. I imagine they would also find that nearly 100% either bought at the peak or refinanced with cash out at the peak to put themselves into a situation where they faced foreclosure.

The survey has a margin of error of +4/-4 percent.

The association commissioned the study to understand the impact foreclosures have on individual Pennsylvanians, said Don Roth, PAR president.

The study was funded by a grant from the National Association of rEALTORS®.

In other words, the study is loaded with bias and dubious conclusions and will likely be used to lobby legislators for something that will benefit the NAr.

Foreclosure Process Shows Mortgage Lending Isn’t The Only Problem

By Ilyce Glink — Aug 4, 2010

Are mortgage lenders to blame for record high foreclosures?

Yes. They are. Greedy and foolish borrowers are their accomplices.

Some might say yes, but a new survey conducted by SGS on behalf of the Pennsylvania Association of Realtors found that the economy, not faulting lending practices, is the main cause of foreclosure in the state.

Yes, that is what they concluded. It is also complete nonsense.

Fifty-seven percent of the Pennsylvania homeowners surveyed said a wage-earner in the home lost their job within in 12 months prior to their slip into foreclosure. Additionally, 47 percent said they were hit with unexpected medical bills.

SGS Executive Vice President Joel Searby said that “most domestic factors [that led to foreclosure] we found were job loss, unexpected bills and change in personal relationships. It was never just job loss. It was always job loss plus something else.”

He refers to the phenomenon as the“plus one factor.”

But maybe the idea of the “plus one factor” will put homeowners’ minds at ease. Foreclosure doesn’t sneak up on you because of the loan you choose or because you lost your job. The “plus one factor” posits that job loss and at least one other factor, one most likely related to the economy, are what send you into the foreclosure process.

So this is supposed to put people's minds at ease? This study tells people they are hanging by a thread, and the slightest financial hardship will break this thread and they will lose their homes. That shouldn't give people comfort, it should scare the hell out of them.

According to the survey, bad mortgage lending isn’t to blame for foreclosures in Pennsylvania. Of those surveyed, 41 percent had prime fixed loans, and only 8 percent had adjustable rate mortgages (ARM).

So what kind of loan did the other 51% have?

Searby says the main takeaway from the survey is that people must understand “it’s not just about the individual type of loan you enter into but the overall strength of the economy.” …

This is stupid. If the loan type a borrower takes out puts them on the brink of disaster, they they have a toxic time bomb waiting to blow up. Is Mr. Searby suggesting people can take out any loan they like as long as economic conditions are booming? We all saw how that turned out.

Similar surveys were also conducted in Nevada and Florida and yielded – surprise, surprise! – similar results. Apparently the “plus one factor” is at work nationwide.

OMG, these people are so stupid. I would expect the same results in Nevada, Florida, California and Arizona, not because the "plus on factor" but because toxic loans and overextended borrowers are the norm in those states.

The NAr and all its affiliate organizations are morally bankrupt liars who only care about duping hapless buyers into overpriced homes. It's shameful.

Racing toward foreclosure

Based on the behavior of some of the borrowers I profile, some people really believed house prices would go up forever, banks would just keep adding to their loan balance year after year, and when they finally wanted to sell, someone else would pay off their debts. I can't fully grasp the thinking, but it is the only explanation for why someone would more than double their mortgage in just a few years.

• Today's featured property was purchased on 2/15/2000 for $282,000 by a single woman who borrowed $253,518 and put $28,482 down.
• A husband was added to title in 2001, and the newlyweds refinanced the first mortgage for $264,000. Perhaps the extra $10,000 helped pay off they honeymoon. It appears to have wet their appetite for more HELOC money.
• On 10/31/2002 they refinanced with a $352,000 first mortgage.
• On 8/17/2004 they refinanced the first mortgage for $365,000.
• On 9/19/2005 they obtained a HELOC for $125,000.
• On 3/3/2006 they obtained a larger HELOC for $269,100.
• On 11/05/2007 they got a $222,000 loan that appears to be a stand-alone second.
• Total property debt is $587,000, hence the short sale.
• Total mortgage equity withdrawal is $333,482. They more than doubled their mortgage.
• The defaulted late last year, so they have only missed about 9 or 10 months worth of payments so far. Their auction is scheduled for 9/13/2010.

Foreclosure Record

Recording Date: 06/21/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 03/19/2010

Document Type: Notice of Default

Do you think they will sell it before the foreclosure? I am guessing no. The second mortgage lien is quite large, and negotiations with the seconds kill most short sales. I suspect they will need to be blown out in a foreclosure.

Irvine Home Address … 62 RACING WIND Irvine, CA 92614

Resale Home Price … $500,000

Home Purchase Price … $282,000

Home Purchase Date …. 2/15/2000

Net Gain (Loss) ………. $188,000

Percent Change ………. 66.7%

Annual Appreciation … 5.3%

Cost of Ownership

————————————————-

$500,000 ………. Asking Price

$17,500 ………. 3.5% Down FHA Financing

4.57% …………… Mortgage Interest Rate

$482,500 ………. 30-Year Mortgage

$98,522 ………. Income Requirement

$2,465 ………. Monthly Mortgage Payment

$433 ………. Property Tax

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

$42 ………. Homeowners Insurance

$135 ………. Homeowners Association Fees

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

$3,075 ………. Monthly Cash Outlays

-$397 ………. Tax Savings (% of Interest and Property Tax)

-$627 ………. Equity Hidden in Payment

$30 ………. Lost Income to Down Payment (net of taxes)

$63 ………. Maintenance and Replacement Reserves

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

$2,142 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$5,000 ………. Furnishing and Move In @1%

$5,000 ………. Closing Costs @1%

$4,825 ………… Interest Points @1% of Loan

$17,500 ………. Down Payment

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

$32,325 ………. Total Cash Costs

$32,800 ………… Emergency Cash Reserves

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

$65,125 ………. Total Savings Needed

Property Details for 62 RACING WIND Irvine, CA 92614

——————————————————————————

Beds: 3

Baths: 2 full 1 part baths

Home size: 1,571 sq ft

($318 / sq ft)

Lot Size: 2,814 sq ft

Year Built: 1980

Days on Market: 48

Listing Updated: 40352

MLS Number: S622256

Property Type: Single Family, Residential

Community: Woodbridge

Tract: Ch

——————————————————————————

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

This property is in backup or contingent offer status.

Beautiful single family cottage home located in great South Lake location. The huge kitchen features an abundance of upgraded cabinets and upgraded lighting with a breakfast bar and casual eating area opening to the family room. Formal dining room is light and bright – perfect for entertaining. The separate living room featuring a fireplace could also be perfect for your den or library. The upstairs has 3 large bedrooms including an oversized master bedroom. In addition to the three bedrooms, there's an additional office space and loft area. Technically a 3 bedroom, but lives like a 4 bedroom. This home features tons of storage space, both inside the home and in the garage. The yard is low maintenance. Enjoy nearby pool, tennis court, school, shopping and dining. Welcome home to your cottage in Woodbridge!

These properties with low HOAs and no Mello Roos benefit the most from lower interest rates. When most of the cost of ownership is the payment, the lower interest rates really make some of these houses much more affordable. This property is probably at or below rental parity.

The FHA is raising the insurance premium on the loans it insures. This will make FHA bids lower and may impact low-end pricing.

Irvine Home Address … 263 TANGELO #354 Irvine, CA 92618

Resale Home Price …… $298,900

Divided by destiny

Torn between death and doom

Destruction by decision

Fate shows me my open tomb

Trivium — Torn Between Scylla and Charybdis

The FHA has to navigate the waters between qualifying enough borrowers to absorb the foreclosure inventory and qualifying too many borrowers who fail to make their payments and end up as foreclosures. If they error to the conservative, house prices fall because demand is curtailed. If they error to the permissive, the government is going to pay for a huge bailout.

The FHA stabilized the housing market by providing low-interest and low down payment loans to buyers when private institutions were unable and unwilling to do so. The FHA's market share typically runs from 8%-10% of the market, but it fell to 2% during the housing bubble as asset-backed security (ABS) loans took its market share. In the aftermath of the credit crunch and the withdrawal of private investment from unbacked mrtgages, the FHA's market share has climbed to over one-third of the mortgage loan market. The FHA and the GSEs insure over 95% of mortgage loans in the United States.

Since the down payments on FHA loans are only 3.5%, there is no real equity cushion for borrowers. After transaction costs, borrowers are 2.5% underwater when they leave the closing table. The lack of equity contributes to strategic default, particularly in markets that have continued to decline since FHA loans became prevalent.

To combat the problem of losses on FHA loans, Congress just passed an increase in the FHA insurance premium to help head off a government bailout. I have my doubts about how successful they will be — or if anyone in government really cares.

Bill to Let FHA Raise Annual Premiums Heads to Obama

Thursday, August 5th, 2010, 4:18 pm — Diana Golobay.

The Senate approved its versions of HR 5872 and HR 5981, which would respectively raise the Federal Housing Administration's (FHA) multifamily commitment authority and allow it to hike its annual premiums for its single-family program.

Both bills now travel to the desk of President Barack Obama to be signed into law.

HR 5981, which also passed the House of Representatives last week, would allow the FHA to raise its annual premiums for the single-family program, raising the statutory cap rate to 1.55% from 0.55% — a flexibility that could ultimately reduce the cost of credit insured by the FHA, according to the Mortgage Bankers Association (MBA).

"While premium increases are never ideal, this bill was necessary to help improve the strength and stability of FHA's single family programs," said MBA chairman Robert Story Jr. "We are encouraged that FHA Commissioner [David] Stevens has indicated he may not need to raise premiums to the maximum, and we believe that that a small increase in the annual premium, coupled with a decrease in FHA's upfront premium [calculated in the chart below, from the FHA], will help stabilize FHA while lowering closing costs for many borrowers."

The annual premium raise will provide approximately $300m of additional insurance per month to the FHA's Mutual Mortgage Insurance (MMI) Fund, according to Stevens.

"I thank Congress for giving FHA the flexibility to adjust its annual premium at a time when our reserves are perilously low," he said. "With this authority, FHA is in a better position to address the increased demands of the marketplace and return the MMI fund to its congressionally mandated level without disruption to the housing market."

Stevens added: "While we appreciate and applaud this recent action, there is still work to be done. [The US Department of Housing and Urban Development] remains steadfast in its commitment to comprehensive FHA reform legislation, similar to the FHA Reform Act passed earlier this year by the House, which would further enhance FHA's lender enforcement capabilities and risk management efforts."

The MBA noted that the broader FHA Reform Act passed the House in June but has yet to be considered by the Senate.

HR 5872, which passed the House of Representatives last week, increases FHA's commitment authority for its multifamily insurance programs by $5bn for the remainder of the fiscal year — which ends at the end of September.

Without the increase, the FHA would have exhausted its current authority sometime in mid-August, according to the MBA.

I have advised people to Use FHA Financing: Loan Assumption is the Appreciation of the Twenty-Teens. Of course, the ability to assume a loan and only put 3.5% down comes at a price. As that price continues to go up, the advice may become less valid.

The advantage and value of assumability becomes greater the more interest rates go up. If five or ten years from now we are back at 9% interest rates, an assumable 4.5% interest rate will have significant value. If we are still in the 5% to 6% range, assumablity won't make a significant difference.

FHA Set To Increase Annual Mortgage Insurance Premium

By Jessica Holzer — Thursday, 5 August 2010

… The FHA doesn't make loans; it backs mortgages for borrowers who pay a minimum 3.5% downpayment and meet the agency's other standards.

People often misunderstand the role the FHA plays. It does not actually make loans, it merely provides insurance to loans underwritten to a certain standard. IMO, this is the ultimate fate of the GSEs — if they survive at all.

"I remain cautious because the big uncertainty is what house prices are going to do," Stevens said.

The FHA's business has ballooned during the housing bust as home buyers have struggled to get conventional financing. The agency's market share rose to about one-third of the mortgage market last year, up from 2% in 2006. Together, the FHA and government-run mortgage insurers Fannie Mae (FNMA) and Freddie Mac (FMCC) are providing backing for more than 95% of new U.S. mortgages.

In an effort to shore up its finances, the FHA has expelled more than a thousand lenders from its program in recent months and tightened its credit standards. For example, it now requires borrowers with down payments of less than 10% to have credit scores of at least 580.

A 580 FICO score is not a particularly high standard.

Still, many critics argue the agency needs to go much further if it wants to avoid a taxpayer bailout. House Republicans pushed unsuccessfully earlier this year to raise the minimum FHA downpayment to 5%.

The reason the increase to 5% was defeated was due to the fact such and increase would have dramatically diminished an already depleted buyer pool. Most FHA loans have the bare minimum 3.5% down payment because so few people have saved any more than that.

Stevens said the higher premiums are "a significant step" for attracting private capital back to the mortgage market because private mortgage insurers were having difficulty competing with the government's pricing.

Do we really need a large private mortgage insurance market? Is there something wrong with the FHA standard? Call me a socialist if you like, but I don't have a problem with the government providing insurance that crowds out the private sector. If the government does a good job, the insurance is much less expensive, and if it doesn't do a good job, the private insurers can fill in the gaps.

But he acknowledged that, in the current environment, the private sector doesn't have much appetite for mortgage risk.

No kidding.

According to Mortgage Bankers Association Senior Vice President Steve O'Connor, "The FHA is still going to be the only game in town in the near term for lower-income and cash-strapped borrowers."

In other words, the FHA is the only game in town. After the huge debt orgy we witnessed during the bubble and the ugly recession that followed, everyone is cash-strapped.

The hardest working condo yet

The people who bought at the bottom of the last cycle in 1997 obtained the full advantage of the housing ATM. For those that utilized it, they managed to spend every penny of appreciation. It is more convenient to sell the property to the bank over and over again while prices go up because the bank will still let you live there after prices go down and you quit paying. Plus, you can still consider yourself a homeowner even though all you really have is a loan with no equity. Banks really did make the deal irresistible.

• The previous owner of this property paid $93,000 on 2/24/1997. They used a $50,000 first mortgage and a $43,000 down payment. At least it started out well.
• On 12/28/2000 the owners obtained a $55,000 HELOC and pulled out their down payment plus a few bucks spending money.
• On 7/12/2001 they refinanced with a $111,000 first mortgage.
• On 3/3/2003 they refinanced again with a $155,400 first mortgage.
• On 3/1/2004 they obtained a $70,000 HELOC.
• On 8/27/2004 they refinanced the first mortgage for $276,000.
• On 1/26/2005 they obtained a stand-alone second for $67,800.
• Total property debt was 343,800.
• Total mortgage equity withdrawal was $293,000 including their down payment. That is an astonishing amount on a small condo.
• Total squatting time is difficult to measure. They went delinquent in early 2007, got a loan modification, and re-defaulted in 2010.

Foreclosure Record

Recording Date: 05/19/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 02/16/2010

Document Type: Notice of Default

Foreclosure Record

Recording Date: 11/08/2007

Document Type: Notice of Rescission

Foreclosure Record

Recording Date: 08/13/2007

Document Type: Notice of Default

Irvine Home Address … 263 TANGELO #354 Irvine, CA 92618

Resale Home Price … $298,900

Home Purchase Price … $230,000

Home Purchase Date …. 6/8/2010

Net Gain (Loss) ………. $50,966

Percent Change ………. 22.2%

Annual Appreciation … 168.0%

Cost of Ownership

————————————————-

$298,900 ………. Asking Price

$10,462 ………. 3.5% Down FHA Financing

4.60% …………… Mortgage Interest Rate

$288,439 ………. 30-Year Mortgage

$59,103 ………. Income Requirement

$1,479 ………. Monthly Mortgage Payment

$259 ………. Property Tax

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

$25 ………. Homeowners Insurance

$250 ………. Homeowners Association Fees

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

$2,013 ………. Monthly Cash Outlays

-$136 ………. Tax Savings (% of Interest and Property Tax)

-$373 ………. Equity Hidden in Payment

$18 ………. Lost Income to Down Payment (net of taxes)

$37 ………. Maintenance and Replacement Reserves

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

$1,559 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$2,989 ………. Furnishing and Move In @1%

$2,989 ………. Closing Costs @1%

$2,884 ………… Interest Points @1% of Loan

$10,462 ………. Down Payment

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

$19,324 ………. Total Cash Costs

$23,800 ………… Emergency Cash Reserves

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

$43,124 ………. Total Savings Needed

Property Details for 263 TANGELO #354 Irvine, CA 92618

——————————————————————————

Beds: 2

Baths: 1 bath

Home size: 864 sq ft

($346 / sq ft)

Lot Size: n/a

Year Built: 1978

Days on Market: 23

Listing Updated: 40371

MLS Number: U10003021

Property Type: Condominium, Residential

Community: Orangetree

Tract: Cm

——————————————————————————

Welcome to the quiet and secluded Orangetree community of Irvine. This cozy 2 bedroom, 1 bath condo features an additional bonus loft with extra large storage room. Fully upgraded kitchen features new countertops and appliances, newer flooring and cabinets, and an open layout, perfect for entertaining. The living area features original hardwood flooring, a spiral staircase leading to the loft, and a large sliding door that allows for plenty of natural sunlight opening to a large outdoor patio space. The bedrooms have been upgraded with new paint and carpet and the bathroom features new porcelain tile flooring, fixtures, and stainless steel detailing. Enjoy the scenic views and peaceful sounds of the flowing creek just below your patio while you BBQ with friends!

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