Fannie Mae announces a policy to withhold loans from strategic defaulters for seven years and pursue deficiency judgements. Do you think they will really do it?

Irvine Home Address … 28 BELMONTE Irvine, CA 92620

Resale Home Price …… $650,000

I'm the one to taste your death

Basking in your dying breath

Messenger of all demise

Point is where all die

Piercing, impaling no judgement, just punishment

Desecrate, annihilate assault with no regret

Born to kill sweep and clear

Staring down the face of fear

Slayer — Point

A few months ago, I chastised Fannie Mae for their stupid policy of reducing the punishment time for getting a new loan from 5 years to 2 years after a default. Perhaps someone there read the post Fannie Mae Encourages Strategic Default by Reducing Punishment Time for New Loan where I pointed out their new policy would encourage strategic default because now they are modifying their own policy to target those who walk away.

Fannie Mae Increases Penalties for Borrowers Who Walk Away

Seven-Year Lockout Policy for Strategic Defaulters

WASHINGTON, DC — Fannie Mae (FNM/NYSE) announced today policy changes designed to encourage borrowers to work with their servicers and pursue alternatives to foreclosure. Defaulting borrowers who walk-away and had the capacity to pay or did not complete a workout alternative in good faith will be ineligible for a new Fannie Mae-backed mortgage loan for a period of seven years from the date of foreclosure. Borrowers who have extenuating circumstances may be eligible for new loan in a shorter timeframe.

So they have added two conditions: (1) must not have capacity to pay, or (2) must complete a loan modification in good faith.

How is that supposed to work?

First, who determines whether or not the borrower had capacity to pay? Let's say a borrower defaults, and three years from now, they want a new Fannie Mae loan. Is the burden of proof now on the borrower to document that they couldn't afford the payments years earlier when they defaulted? What is the criteria for establishing capacity? Who sets these criteria? Who keeps track of the documentation? Do you really think if the government — who still runs Fannie Mae — will turn away potential buyers in the future when they will be desperately needed?

Second, it is obvious that anyone planning to strategically default will simply get a loan modification and then stop paying. This must be obvious even to Fannie Mae who slipped in a "good faith" clause. Who will determine if the borrower made a good faith effort? And like the previous issue, if there is a need for borrowers to fill foreclosed homes, do you think the government will turn people away? I don't.

I commend Fannie Mae for trying to prevent strategic default, but all they are doing is bluffing existing borrowers with a threat they will never follow through on.

"We're taking these steps to highlight the importance of working with your servicer," said Terence Edwards, executive vice president for credit portfolio management. "Walking away from a mortgage is bad for borrowers and bad for communities and our approach is meant to deter the disturbing trend toward strategic defaulting. On the flip side, borrowers facing hardship who make a good faith effort to resolve their situation with their servicer will preserve the option to be considered for a future Fannie Mae loan in a shorter period of time."

Fannie Mae will also take legal action to recoup the outstanding mortgage debt from borrowers who strategically default on their loans in jurisdictions that allow for deficiency judgments. In an announcement next month, the company will be instructing its servicers to monitor delinquent loans facing foreclosure and put forth recommendations for cases that warrant the pursuit of deficiency judgments.

This is another empty threat. Fannie Mae like any servicer already has criteria for going after defaulting owners who have assets. Nothing has changed. Including this in the press release is an obvious bluff intended only to scare potential borrowers. Most people who strategically default — actually accelerated default — don't have any assets for Fannie Mae to recover.

Troubled borrowers who work with their servicers, and provide information to help the servicer assess their situation, can be considered for foreclosure alternatives, such as a loan modification, a short sale, or a deed-in-lieu of foreclosure. A borrower with extenuating circumstances who works out one of these options with their servicer could be eligible for a new mortgage loan in three years and in as little as two years depending on the circumstances. These policy changes were announced in April, in Fannie Mae's Selling Guide Announcement SEL-2010-05.

Fannie Mae recognizes that strategic default is going to become a bigger problem as people realize that prices are not coming back and that they are merely renting their houses from Fannie Mae at an inflated rental rate. Previous policies of the GSEs have encouraged strategic default, and now that people are doing so in large numbers, they are resorting to empty threats to keep borrowers from walking away. Good idea, but it is too little too late.

Another Ponzi implosion

The owners of today's featured property didn't put much into it, but they certainly pulled a great deal out of it. They are typical of the detritus washing through the Irvine market.

• The property was purchased on 12/8/2003 for $600,000. The owners used a $400,000 first mortgage, a $170,000 second mortgage, and a $30,000 down payment.
• On 7/26/2004 they obtained a $196,000 HELOC.
• On 1/26/2005 they refinanced with a $585,000 first mortgage and a $99,900 stand-alone second.
• On 3/31/2005 they refinanced again with a $585,000 Option ARM with a 1% teaser rate.
• On 12/14/2006 they refinanced with a $710,000 first mortgage.
• On 5/7/2007 they obtained a $131,000 HELOC.
• Total property debt is $841,000.
• Total mortgage equity withdrawal is $271,000.
• Total squatting time is at least 7 months.

Foreclosure Record

Recording Date: 04/28/2010

Document Type: Notice of Default

Irvine Home Address … 28 BELMONTE Irvine, CA 92620

Resale Home Price … $650,000

Home Purchase Price … $600,000

Home Purchase Date …. 12/8/2003

Net Gain (Loss) ………. $11,000

Percent Change ………. 1.8%

Annual Appreciation … 1.2%

Cost of Ownership

————————————————-

$650,000 ………. Asking Price

$130,000 ………. 20% Down Conventional

4.80% …………… Mortgage Interest Rate

$520,000 ………. 30-Year Mortgage

$131,541 ………. Income Requirement

$2,728 ………. Monthly Mortgage Payment

$563 ………. Property Tax

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

$54 ………. Homeowners Insurance

$0 ………. Homeowners Association Fees

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

$3,346 ………. Monthly Cash Outlays

-$463 ………. Tax Savings (% of Interest and Property Tax)

-$648 ………. Equity Hidden in Payment

$238 ………. Lost Income to Down Payment (net of taxes)

$81 ………. Maintenance and Replacement Reserves

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

$2,555 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$6,500 ………. Furnishing and Move In @1%

$6,500 ………. Closing Costs @1%

$5,200 ………… Interest Points @1% of Loan

$130,000 ………. Down Payment

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

$148,200 ………. Total Cash Costs

$39,100 ………… Emergency Cash Reserves

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

$187,300 ………. Total Savings Needed

Property Details for 28 BELMONTE Irvine, CA 92620

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Beds: 4

Baths: 2 full 1 part baths

Home size: 2,144 sq ft

($303 / sq ft)

Lot Size: 5,000 sq ft

Year Built: 1979

Days on Market: 43

Listing Updated: 40348

MLS Number: S616799

Property Type: Single Family, Residential

Community: Northwood

Tract: Ol

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

Spacious home on a quiet cul-de-sac location. Living room with fireplace. Dining room with wet bar. Kitchen overlooks family room. Oversized master bedroom. Large private backyard. Three car attached garage.

I'm Back

I made it back from my vacation yesterday. I really did go off the grid for 10 days. I managed to not think about work or real estate for the entire trip (I'll talk more about my trip on the weekend Writer's Corner). It may take me a few days to get back into the swing of things. I need a vacation from my vacation.

I plowed through about 200 emails — and I apologize to anyone I may have missed responding to. I will try to go back through the comments, but I may miss a few.

I hope you all enjoyed your holiday weekend.

Housing will remain stagnate from 2010 to 2020 due to demographic shifts, higher mortgage rates, and shifting consumer taste in real estate

Irvine Home Address … 8 BLACKBIRD Irvine, CA 92618

Resale Home Price …… $829,000

I'm gonna get me a motor car

Maybe a Jaguar

Maybe a plane or a day of fame

I'm gonna be a millionaire

So can you take me there

Wanna be wilde 'cos my life's so tame

Here am I, going nowhere on a train

Here am I, growing older in the rain

Oasis — Going Nowhere

Gear up for another lost decade in real estate. Housing will remain stagnate from 2010 to 2020. Demographic shifts, higher mortgage rates, and shifting consumer taste in real estate.

The dynamics for housing moving forward point to a very bleak future and a potential lost decade yet again from 2010 to 2020. Housing has a treacherous path moving forward and deep down demographic shifts will keep a lid on any significant housing appreciation moving forward. The economy is in the process of deleveraging from a market highly dependent on real estate. Wall Street and the government are doing everything they can to bring back the economy of yesterday but have had little success. This recession has shrunk the middle class so those looking to buy homes have declined simply because many can no longer afford to purchase a home even at today’s lower prices. Focusing on housing first was a big expensive policy mistake where we should have focused on creating sustainable jobs. The market is slowly shifting to a new housing paradigm. Family growth rates, employment trends, baby boomers, and wages will all keep a lid on housing prices moving forward.

First we should break down the entire housing market:

Source: Census

The U.S. has a large number of homeowners. A total of 75 million Americans can lay the claim to owning their home. 23 million of this group (31 percent) actually owns their homes outright with no mortgage. Of course not having a mortgage does not mean that these homeowners have no housing associated cost. They still need to pay yearly property taxes, insurance, and all the cost in maintaining a home. Another 37 million American households rent. These are the basic dynamics of the housing market.

Of those homeowners with a mortgage, 7.2 million (14%) are in foreclosure or 30+ days late on their mortgage. This practically guarantees a few years of cheaper housing hitting the market in a steady trickle. This puts a herculean hold on any significant home building going forward.

From the recent Federal Reserve Flow of Funds Report, we find that current outstanding mortgage debt is $10.334 trillion. We have to break out the renters and the homeowners with no mortgage and find that the average mortgage debt for homeowners is:

$10.334 trillion / 51.575 million mortgaged households = $200,374

The current median home price comes in at approximately $170,000. Now some would argue that housing will regain traction and go on to rising to new levels. Yet this assumption assumes that middle class wages will be growing moving forward. If we look closely at the data the only real winner so far in this economic crisis is Wall Street but average Americans have seen very little benefit from the current bailout measures. Now those with big investment bank salaries can afford their piece of prime real estate in Manhattan or the Hamptons but this does not make up the bulk of the housing market. The bulk of the housing market is highly dependent on how middle class Americans are doing.

If we look at the current unemployment levels by age group, we see that those in the household forming age ranges or those entering into these categories, are taking on the brunt of this recession:

You can see that up to age 34, the unemployment rate is trending much higher than the total national average. These are prime age groups for forming households and if a family is not feeling safe financially, they will delay on purchasing a home. The middle class young family is also delaying on having children so the necessity for a bigger home is also being pushed out. This demographic shift is happening at the same time that baby boomers start entering retirement age and many will want to downsize.

And many of these people have a buffer for equity to sell since they bought prior to the housing bubble. Take for example data on current owner households:

Moved in before 1989: 20.5% of all homeowners

Moved in before 1999: 40.9% of all homeowners

It is highly likely that in this group, you have many baby boomers that will sell to downsize in the years coming forward and the current decline in prices will only cut into their equity but not put them underwater given the decade long bubble. They purchased before that. Those that moved in before 1989 will have a much larger cushion. So there is a large group of people that will sell regardless of market trends because they will have to simply because of life changing events.

And then on the other hand we have the fact that one-third of homeowners in certain states are underwater on their mortgages. Take for example California:

California has a large renting population and most that own a home carry a mortgage (77 percent). Of those that carry a mortgage a stunning one-third are underwater. In other words 1.76 million mortgages in California are attached to homes that are worth less than the actual balance of the mortgage creating a large incentive to walk-away. Many of these loans come from Alt-A paper and option ARMs. These loans will impact the market at least until 2012 and hurt the state. California isn’t immune and other states like Nevada, Florida, and Arizona have similar dynamics. In fact, here is the amount of mortgage debt in a negative equity position according to a recent Deutsche Bank analysis:

California: $969 billion

Florida: $432 billion

Arizona: $140 billion

The only way that things would improve for banks is if prices moved higher. But how can prices move higher if middle class Americans are dealing with high unemployment and stagnant wages? The Federal Reserve and U.S. Treasury have really reached the end of options in terms of what they can do. Even the 30 year fixed mortgage is at all time lows in the midst of all this turmoil:

The 40 year average for 30 year rates is closer to 9 percent. Today it is under 5 percent. That is unsustainable and as we move forward with insurmountable levels of national debt, the rate will have to rise. I know this seems impossible for many but as we have seen with other debt ridden countries, the market can turn on like a tornado and quickly change the dynamics of the situation. For the housing market, this will mean even more pressure to keep prices muted.

The only way home prices can rise in a healthy manner is if we start seeing wage inflation. We saw some of this in the 1970s where wages went up in tandem with home prices. In the last decade, wages moved sideways while home prices went into a bubble. As far as the economy going forward, the big job sectors seem to be in low paying service sector jobs. Certainly someone can purchase a house with these jobs but not at current prices even though they appear to be solid.

The Federal Reserve and the U.S. Treasury have done everything to slam the dollar and create some level of inflation. Yet other central banks are doing the same. So what happens is easy money flows to Wall Street for gambling while the real economy stagnates. It is hard for many to believe that we will have another lost decade in housing but there is little reason to believe that prices will soon start to outpace inflation. In fact, in the last year or two we have been dealing more with aspects of deflation. We need to keep an eye on the real value of home prices adjusting for inflation/deflation.

Four years of squatting

Today's featured property is the worst example of squatting I have seen to date.

• The property was purchased on 6/7/1999 for $348,500. The owners used a $260,000 first mortgage and an $88,500 down payment.
• On 3/31/2003 they refinanced with a $369,000 first mortgage.
• On 8/5/2003 they opened a $100,000 HELOC.
• On 10/14/2005 the obtained a stand-alone second from a private party.
• On 5/25/2006 they obtained a $57,000 HELOC. Here is where the story gets wierd.
• The began squatting shortly after getting the last HELOC.

Foreclosure Record

Recording Date: 11/30/2006

Document Type: Notice of Sale (aka Notice of Trustee's Sale)

Click here to get Foreclosure Report.

Foreclosure Record

Recording Date: 11/22/2006

Document Type: Notice of Sale (aka Notice of Trustee's Sale)

• Then they managed to consolidate their private-party second and their HELOC with a $310,000 stand-alone second on 12/7/2006. It doesn't look like they bothered to make a payment.

Recording Date: 04/12/2010

Document Type: Notice of Default

Foreclosure Record

Recording Date: 06/10/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 12/31/2007

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 09/26/2007

Document Type: Notice of Default

Foreclosure Record

Recording Date: 08/02/2007

Document Type: Notice of Rescission

Foreclosure Record

Recording Date: 07/18/2007

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 04/12/2007

Document Type: Notice of Default

The second mortgage holder finally foreclosed on 4/30/2010 for $445,274. At first glance it looks like they got a great deal, but unfortunately, the $369,000 first mortgage — which probably has not been paid since 2006 — is still there. The balance on that mortgage probably exceeds $500,000. The second mortgage holder is trying to sell to recover what they can of the $445,274 they have in the property. Based on the listing description, it appears they had to evict the squatting homeowners.

I guess 4 years of squatting wasn't enough….

Irvine Home Address … 8 BLACKBIRD Irvine, CA 92618

Resale Home Price … $829,000

Home Purchase Price … $348,500

Home Purchase Date …. 6/7/1999

Net Gain (Loss) ………. $430,760

Percent Change ………. 123.6%

Annual Appreciation … 7.5%

Cost of Ownership

————————————————-

$829,000 ………. Asking Price

$165,800 ………. 20% Down Conventional

4.80% …………… Mortgage Interest Rate

$663,200 ………. 30-Year Mortgage

$167,765 ………. Income Requirement

$3,480 ………. Monthly Mortgage Payment

$718 ………. Property Tax

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

$69 ………. Homeowners Insurance

$139 ………. Homeowners Association Fees

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

$4,656 ………. Monthly Cash Outlays

-$843 ………. Tax Savings (% of Interest and Property Tax)

-$827 ………. Equity Hidden in Payment

$304 ………. Lost Income to Down Payment (net of taxes)

$104 ………. Maintenance and Replacement Reserves

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

$3,394 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$8,290 ………. Furnishing and Move In @1%

$8,290 ………. Closing Costs @1%

$6,632 ………… Interest Points @1% of Loan

$165,800 ………. Down Payment

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

$189,012 ………. Total Cash Costs

$52,000 ………… Emergency Cash Reserves

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

$241,012 ………. Total Savings Needed

Property Details for 8 BLACKBIRD Irvine, CA 92618

——————————————————————————

Beds: 4

Baths: 2 full 1 part baths

Home size: 2,389 sq ft

($347 / sq ft)

Lot Size: 7,840 sq ft

Year Built: 1999

Days on Market: 52

Listing Updated: 40302

MLS Number: P733648

Property Type: Single Family, Residential

Community: Oak Creek

Tract: Othr

——————————————————————————

According to the listing agent, this listing is a bank owned (foreclosed) property.

Beautiful area of Irvine , home is only eleven years old , gated commuinty drive by only at this time