When people strategically default, are they ruthlessly ripping off their lender or merely deciding when they face the inevitable loss of their home?

Irvine Home Address … 27 MOMENTO Irvine, CA 92603

Resale Home Price …… $1,800,000

Photographs and memories

Christmas cards you sent to me

All that I have are these

To remember you

Memories that come at night

Take me to another time

Back to a happier day

When I called you mine

Jim Croce — Photographs and Memories

People form strong attachments to their homes. Walking away is never a decision they take lightly. We can discuss the pros and cons and come up with our own beliefs and attitudes about it, but the turnover of our housing stock caused by the housing crash will be very painful for those who go through it.

Ruthless default or accelerated default?

I write often about hidden premises buried within the arguments writers make. These distinctions are important, and unless we uncover our fallacious beliefs, we make erroneous judgments and carry false beliefs. I have written many times about strategic default, and in my last post on the subject, I uncovered something new.

There is no accepted definition of strategic default. Lenders have tried to define the issue as any borrower who is capable of making a payment and chooses not to. On the surface that sounds reasonable, but that misses a very important distinction. Some people chose to default because they know they can't afford the home and they are merely choosing the timing of the inevitable.

When I think about strategic default, I think about people who chose the timing of their default when there is little reasonable hope of having equity and they are facing escalating payments. The only thing strategic about the default is the timing, not whether or not they will lose the home.

True strategic default — a default by a non-distressed homeowner who can afford the payment on a fixed-rate amortizing mortgage — is rare. In cases where the owner is severely underwater and they can rent for far less than their current payment, the incentive certainly exists, but most borrowers in that circumstance with a fixed-rate mortgage will chose to ride out the collapse. The borrowers with most incentive to default are those with toxic financing or temporary loan modifications that know they are facing an increased debt and an increasing payment. When those borrowers default on their own schedule, is their default truly strategic or merely accelerated?

Although attitudes toward strategic default are changing quickly, for now most borrowers still think it's a bad idea.

Mortgage Is a Priority, Foreclosure Is a Reality

By Carmen Nobel 06/10/10

SILVER SPRING, Md. (TheStreet) — Among the lousy home-foreclosure reports comes encouraging news from the National Foundation for Credit Counseling: Most Americans at least think that foreclosing on their homes is a bad idea.

The NFCC's Financial Literacy Survey found that only 23% of respondents consider it justifiable to default on a mortgage even if the property value is now lower than the amount of money owed on the mortgage. When asked if they would be more likely to keep their mortgage or their credit cards current, 91% said they would pay their mortgage first.

They should ask that same question to people who are underwater and see if they get a different response. I suspect they would.

Americans continue to prioritize their obligation to service their mortgage loan, and this is indeed good news for homeowners, mortgage lenders and the housing market overall," NFCC spokeswoman Gail Cunningham said in a statement.

But the reality seems less rosy. The delinquency rate for mortgage loans on one- to four-unit residential properties increased to a seasonally adjusted rate of 10.1% of all outstanding home loans at the end of the first quarter, an increase of 59 basis points from the fourth quarter, according to the Mortgage Bankers Association. The percentage of loans on which foreclosure processes started in the first quarter was 1.23%, up three basis points from the previous quarter. The total percentage of loans in foreclosure at the end of the first quarter was a record 4.63%.

The serious delinquency rate, including both foreclosures and loans more than 90 days past due, was 9.54% at the end of March, a slight decrease from the previous quarter but an increase of 2.3% over the first quarter of 2009.

This is strong evidence that most of the defaults are not strategic but out of necessity. Most people are delinquent because they cannot make the payments not because they choose to default. However, as more in the media question this choice, many more will continue to chose accelerated default.

Know when to walk away

June 10, 2010

I never thought I would write something like this. I used to believe that it was wrong to just walk away from a home. I am not talking about taking the dog for a walk — I am talking about not paying the mortgage and leaving.

Yes we all signed legal documents that say we have to pay back our mortgages, but some people can't, and as we all know, many owe more on their homes then they can be sold for. In the past I have represented sellers who sold their homes because they could no longer afford the payments due to a change in their life circumstances, like divorce or the death of a spouse.

When that happens some home owners can't afford the mortgage on one income. Loan modifications are few and far between and so are short sales. Some home owners have tried everything and every program and there isn't any help and they can not pay. It seems that the bank would rather take the loss than modify the payment or entertain a short sale, and even if they do say yes to the short sale they may not say yes to an offer so that the sale can take place.

What about all those people who were given loans on terms under which they couldn't sustain ownership? Loan modifications are just Option ARMs in disguise. The people who can't afford their homes are going to sell eventually. Banks are hoping that not all of them decide to sell at one time, so they are doing whatever they can to drag out the liquidation process and hopefully get prices up a bit to increase their recovery. When the people chose to default when an unsustainable loan modification is available, I argue that default is accelerated and not strategic.

Walking away may be the only option, but keep in mind that the foreclosure process is slow. It can take a year from the last payment until the bank owns the home. A person could live rent free for six months to a year before they had to leave — giving them some time to pack and to save some money. It may mean the difference between years of struggling to come up with enough money and having little money for anything else like home repairs or food, and being able to make a fresh start and have a life again.

The more banks allow delinquent owners to squat the greater this incentive becomes.

Like I said when I started, I never thought I would write anything like this but now I get it. I have talked to people who have tried everything. They have called the bank many times, they have checked into various programs designed to help distressed home owners and there isn't any help. There is help for some but not for all. Programs that teach money management are nice, but there are some who simply don't have enough money to manage.

This may all sound wrong, but there have been so many foreclosures that I don't think it has the stigma it used to have. It may hammer a credit rating, but again — with so many foreclosures — I suspect the time will come when lenders will need to loan money to people who have gone through a foreclosure. I understand that a home loan is a legally binding contract but if there is no money, there is no money, and banks could modify loans or be more cooperative with short sales.

This is the other compelling truth about strategic default: banks will not make people wait five years before they loan them money again.

With the way things are today I don't think it is a good idea to try and save a home at any cost. It just doesn't make sense anymore. On the other hand I have no respect for people who walk away just because they owe more on the home than it is worth when they can afford to make the payments. I made payments on my home for at least three years when the value was less than what we owed and never would have considered walking away because it is my home. We bought it so that we would have a place to live and raise our children.

It is a difficult distinction to make between the truly ruthless default and the merely accelerated one. It is certainly much easier to feel empathy for the accelerated default because these people could never sustain home ownership. There is a dignity in choosing your own time rather than being subject to the whims of bankers and legislators. In contrast, the ruthless defaulters won't get much sympathy from anyone. What criteria separates the two groups? Who decides? It is possible to embrace one and reject the other?

Do you see a distinction between ruthless (strategic) default and accelerated default?

You should never loan money to friends.

Today's featured property is one of those that should have cured their loan or sold their property before it became a short sale.

• The property was purchased on 10/12/2006 for $2,146,000. The owner's used a $1,488,100 first mortgage, a $212,600 second mortgage, a $100,000 private-party third mortgage and a $345,300 down payment. I imagine it is quite unpleasant to endure a short sale after losing a hefty down payment.

Foreclosure Record

Recording Date: 05/06/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 08/14/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 07/29/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 04/27/2009

Document Type: Notice of Default

The third mortgage is likely what holds up any sale. There are no provisions for third mortgages in any of the government programs, and it is likely a personal friend of the owner… well, at least there were friends.

Irvine Home Address … 27 MOMENTO Irvine, CA 92603

Resale Home Price … $1,800,000

Home Purchase Price … $2,146,000

Home Purchase Date …. 10/12/2006

Net Gain (Loss) ………. $(454,000)

Percent Change ………. -16.1%

Annual Appreciation … -4.7%

Cost of Ownership

————————————————-

$1,800,000 ………. Asking Price

$360,000 ………. 20% Down Conventional

4.84% …………… Mortgage Interest Rate

$1,440,000 ………. 30-Year Mortgage

$365,948 ………. Income Requirement

$7,590 ………. Monthly Mortgage Payment

$1560 ………. Property Tax

$400 ………. Special Taxes and Levies (Mello Roos)

$150 ………. Homeowners Insurance

$251 ………. Homeowners Association Fees

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

$9,951 ………. Monthly Cash Outlays

-$1566 ………. Tax Savings (% of Interest and Property Tax)

-$1782 ………. Equity Hidden in Payment

$668 ………. Lost Income to Down Payment (net of taxes)

$225 ………. Maintenance and Replacement Reserves

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

$7,496 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$18,000 ………. Furnishing and Move In @1%

$18,000 ………. Closing Costs @1%

$14,400 ………… Interest Points @1% of Loan

$360,000 ………. Down Payment

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

$410,400 ………. Total Cash Costs

$114,900 ………… Emergency Cash Reserves

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

$525,300 ………. Total Savings Needed

Property Details for 27 MOMENTO Irvine, CA 92603

——————————————————————————

Beds: 5

Baths: 3 full 1 part baths

Home size: 4,672 sq ft

($385 / sq ft)

Lot Size: 7,203 sq ft

Year Built: 2006

Days on Market: 26

Listing Updated: 40324

MLS Number: P736846

Property Type: Single Family, Residential

Community: Tustin Field

Tract: Othr

——————————————————————————

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

Beautiful Upscale home. Sale is Subject to lender approval. A True must see.

As opposed to the False must-sees on other MLS listings, right?

Many of you received an email that appeared to come from me asking for money to help me in London.

I'm sorry for this odd request because it might get to you too urgent, but due to the situation of things right now, I'm stuck in London United Kingdom right now, i came down here on a short vacation and i was robbed, my bags, cash, cards and my cell phone were stolen off me at GUN POINT, so i only have access to my emails, it was such a crazy and brutal experience for me and i was hurt on my right hand, but i'm glad i still have my life. I need help flying back home, the authorities are not being 100% supportive, i have been to the embassy and the Police here in London, but they're not helping issues at all, but the good thing is that i still have my passport but dont have enough money to get my flight ticket back home and some bills settled, please i need you to loan me some money, i promise to refund it as soon as I'm back home. You can get it to me through western union, email me back so that i can give you details to send it to.

This is an email scam. My account was hacked, a duplicate account was set up at Yahoo, and the phisher sent out the emails from that account to my entire email directory. Over the last 3 years, I have answered a lot of emails, so I had an extensive contact list.

I received many concerned calls and emails from people on the list. Thank you all.

A couple of you even phished back to see if you could draw them out. If any of you were successful, let me know. We would all probably get a laugh out of the email exchange.

Home Owners Associations are being crushed by delinquencies, and there is little they can do about it. If the first lien holder doesn't foreclose, HOAs can't get paid, and any bills are wiped out when the foreclosure finally does occur. Existing homeowners are the ones who are damaged most.

Irvine Home Address … 77 CANYONCREST Irvine, CA 92603

Resale Home Price …… $650,000

{book1}

The fields of Eden

Are full of trash

And if we beg and we borrow and steal

We'll never get it back

People are hungry

They crowd around

And the city gets bigger as the country comes begging to town

We're stuck between a rock

And a hard place

Between a rock and a hard place

The Rolling Stones — Rock and a Hard Place

The amend-extend-pretend policies of lenders is fraught with unintended consequences. The obvious costs to lenders is lost revenue from squatters who get to stay in their homes without making any payments, but lenders are not the only parties involved who aren't getting paid.

Local taxing authorities and Home Owners Associations (HOAs) also are not being paid. The taxes will get paid eventually because property tax obligations survive the foreclosure. Whatever bills the old owners left behind are the responsibility of the new owner. Bills due to HOAs are only paid after mortgage holders are paid in full. Since most delinquent homeowners are underwater, there is no equity left over to pay the HOA bills, and any delinquent amounts are not paid by the new owner. The costs of extinguished HOA dues are passed on to existing homeowners who are still paying their bills.

Home owners associations have only one recourse to compel an owner to pay their dues: foreclosure. In a normal real estate market — one where home owners have equity — the threat of foreclosure is an effective threat; however, when owners do not have equity and they are not paying their mortgage, HOAs have no leverage. HOAs are generally unwilling to foreclose because their ownership position after the foreclosure is subordinate to the surviving mortgages — an HOA foreclosure does not wipe out the superior liens. In other words, HOAs can take possession of an underwater property — which provides them no benefit — and in the process wipe out any claims to back HOA dues. Taking ownership of a property they cannot sell to a dues-paying owner does not help them.

The HOA dilemma

HOAs cannot compel payment without foreclosure and their bills do not survive foreclosure if the home owner is underwater. Most HOAs are praying that loan modification programs succeed; unfortunately, cure rates fell off a cliff when prices started falling. The recent uptick is the short-lived boost from the government's loan modification program designed to shift liabilities from lenders to the US taxpayer. With millions of squatting homeowners underwater and unemployed, HOAs are not likely to see delinquent homeowners get current on their HOA dues any time soon.

HOAs want a dues paying homeowner. They would prefer banks to work out a loan with an existing borrower and get paid for the past due amounts. Since this is rare, their next best alternative is for the bank to foreclose, sell the property, and get a new homeowner to start making the HOA payments. However, when lenders refuse to foreclose — which is what creates shadow inventory — then HOA finances do not stabilize, and property owners face huge assessments or even bankruptcy of the HOA.

The current laws create two separate problems for HOAs. First, they must determine if there is any hope the existing homeowner will ever pay their delinquent HOA dues. Vacant properties owned by speculators are never going to pay their HOA dues, so these properties become targets for HOA foreclosures. This leads to the second problem: banks don't like to pay the HOA dues either once they have foreclosed.

New law lets HOA's go after banks

Friday, 11 Jun 2010

NEW PORT RICHEY – There are several houses in the Hunter's Creek neighborhood where the grass is long, the paint is fading, and the houses are vacant.

Neighbors call them eyesores, but they've become more than that. Foreclosed homes have become a financial drain on entire neighborhoods.

People often stop paying their HOA fees long before they stop paying the mortgage. Michael Paulson is a member of the Hunter's Creek homeowners association in New Port Richey.

He says once a house is empty, it's impossible to get even a nickel of the past due fees.

"We try to get with the banks who own the home and they don't do anything about it either, so we're constantly trying, it makes our property value go down," Paulson said.

It also forces those who do pay, to pay more.

"The cost of keeping up the common areas, the upkeep of the association and other bills that may come in is now spread out to those who continue to live there and are paying their maintenance fees," Paulson said.

State Senator Mike Fasano authored a bill that becomes law next month.

It allows homeowners associations to bill banks for delinquent HOA fees for home on which they've foreclosed.

"The mortgage company, the bank, the lender is now going to be responsible for paying up to 12 months of the maintenance fees, the monthly dues," Fasano said.

Condo associations have been especially hard hit by people who walk away from their homes, leaving thousands in unpaid association dues.

"We just had a special assessment. Everybody here has to pay extra. We had to raise $100,000 to cover these delinquencies," said Bill Sanders.

HOA board members say there is a limit to the number of extra fees they can force their members to pay to help make up for the bills their old neighbors left behind.

"They're saying 'hey look, every $50 dollars a month, you know it really hurts us,'" Sanders said.

The payment of HOA dues provides a strong incentive for banks not to foreclose. Even though they may end up paying the bills later, each month that passes with the property in shadow inventory is one more month the bank doesn't have to pay the HOA dues. This new Florida law makes it clear that lenders are responsible for HOA payments while they own the property. What this law will do is increase shadow inventory and decrease the time from foreclosure through disposition. In other words, lenders will not foreclose any faster than they can process and sell the REO in order to minimize their HOA dues.

HOAs need to force first-lien foreclosure

What HOAs really need is the ability to force the first lien to foreclose. Only then will a dues-paying homeowner get into a property. The law Florida gets banks to pay after the foreclosure, but it also provides a huge incentive not to foreclose. The only solution that will serve HOAs is for them to be given the ability to force the first lien holder to foreclose and make lenders pay the HOAs on their REO. Anything short of that will leave HOAs in the circumstances they are in now: bleeding cash with no recourse and no end in sight.

Something has to change or we will see an epidemic of HOA bankruptcies ahead.

She nearly forgot her down payment!

I wonder sometimes if lenders have learned anything about cash-out refinancing during the bust. The previous owner of today's featured bank-owned property would have lost her entire down payment if not for a HELOC.

• This property was purchased on 5/27/2005 for $759,000. The owner used a $607,200 first mortgage, a $75,900 second mortgage and a $75,900 down payment.
• On 7/3/2006 she got a HELOC for $135,000. Assuming she rolled the second mortgage into the first, she left $16,800 in the property which she has now lost.
• Total property debt was $742,200.
• Total mortgage equity withdrawal was $59,100.
• Total squatting time at least 13 months.

Foreclosure Record

Recording Date: 03/12/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 06/01/2009

Document Type: Notice of Default

This is a pattern observable on many bank-owned properties; the first mortgage was held by Wells Fargo, and the HELOC was from American Mortgage Express Corp. Since the same lender did not hold both the first and the second, it is wiser for the first mortgage holder to foreclose, extinguish the second mortgage, and resell the property to recover their capital on the first mortgage.

Going forward expect to see short sales when the same lender owns both the first and the second and foreclosure when these mortgages are owned by different parties.

Irvine Home Address … 77 CANYONCREST Irvine, CA 92603

Resale Home Price … $650,000

Home Purchase Price … $759,000

Home Purchase Date …. 5/27/2005

Net Gain (Loss) ………. $(148,000)

Percent Change ………. -14.4%

Annual Appreciation … -2.9%

Cost of Ownership

————————————————-

$650,000 ………. Asking Price

$130,000 ………. 20% Down Conventional

4.84% …………… Mortgage Interest Rate

$520,000 ………. 30-Year Mortgage

$132,148 ………. Income Requirement

$2,741 ………. Monthly Mortgage Payment

$563 ………. Property Tax

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

$54 ………. Homeowners Insurance

$181 ………. Homeowners Association Fees

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

$3,689 ………. Monthly Cash Outlays

-$466 ………. Tax Savings (% of Interest and Property Tax)

-$644 ………. Equity Hidden in Payment

$241 ………. Lost Income to Down Payment (net of taxes)

$81 ………. Maintenance and Replacement Reserves

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

$2,903 ………. 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

$44,400 ………… Emergency Cash Reserves

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

$192,600 ………. Total Savings Needed

Property Details for 77 CANYONCREST Irvine, CA 92603

——————————————————————————

Beds: 3

Baths: 1 full 2 part baths

Home size: 1,275 sq ft

($510 / sq ft)

Lot Size: n/a

Year Built: 2004

Days on Market: 14

Listing Updated: 40336

MLS Number: S619029

Property Type: Condominium, Residential

Community: Turtle Ridge

Tract: Chnt

——————————————————————————

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

Charming beach close town home in gated community of Turtle Ridge. Bamboo flooring, high base boards designer light fixtures. Elegant Lami doors throughout. World Class association amenities include a cabana lined pool, spa, bbq and clubhouse facilities. The good life!!!

We have a special visitor tonight. Pat Regnier from Money Magazine is doing a story on Orange County real estate, and he will be in attendance for anyone who wishes to express an opinion on the subject. Of particular interest is anyone who is underwater but isn't going to walk away from the property. Come out and tell your story, and you may make Money Magazine.

I hope to see all of you this evening.

Should lenders give away houses to delinquent borrowers to stabilize house prices? Would you be happy paying your mortgage knowing that your lender gave your neighbor their house for free?

Irvine Home Address … 23 BOWER TREE Irvine, CA 92603

Resale Home Price …… $705,000

{book1}

Down, down in an earlier round

And Sugar, we're going down swinging

I'll be your number one with a bullet

A loaded God complex, cock it and pull it

Fall Out Boy — Sugar, We're Going Down

In the housing bubble debate, the bears clearly won the first round. People defaulted, banks foreclosed, and prices crashed just as predicted. However, round two has gone to the bulls. Banks stopped foreclosing, people squatted, interest rates went down, and the few buyers that remained pushed prices up slightly. Now we are on to round three: the Great Housing Liquidation.

Distressed sales equal lower prices

The general concept is obvious to everyone including the lenders: distressed sales cause lower prices. Statistical experience over the last several years clearly demonstrates that markets can only absorb about 30% of its sales as distressed inventory. But what happens when more houses are in distress than can be absorbed by the market? Squatting.

As we all know, loan owners have continued to go delinquent at a much faster rate than lenders have been processing their foreclosures. The resulting discrepancy is shadow inventory.

The bulls have been celebrating the recent price stability as a sign that the worst is behind us. It is not.

The floodplain analogy

Imagine you lived on a river in a flooplain after torrential rains. At first, the dam at the reservoir upstream from you was letting this stormwater go and threatening to wash away your property. As an emergency measure, the dam operator closes the floodgates and the waters calm in front of your house. As a homeowner, you might feel safe and believe the problem is resolved. You would be mistaken.

Stopping the flow does nothing to relieve the pressure on the dam, and the reservoir operators don't know what to do. If they let the water go, it will wash away your home, but if they don't, the pressure of the water threatens to destroy the dam and release the water in an uncontrolled manner. One way or another, that water will have to be released and pass by your house. Far from being safe, you are at the mercy of powerful forces under the watchful eye of a group of dam operators who have no idea what they are doing.

Do you believe a cartel of lenders, each with different levels of economic health, can limit the release of shadow inventory to 30% of the overall market? At that rate of sales, will they ever empty the reservoir? When lenders realize they aren't disposing of their REO fast enough, will they continue to be patient and hold properties, or will they succumb to the pressures to sell?

Extend and pretend in US housing is reeeaaally extended

Posted by Tracy Alloway on Jun 10 13:05.

What’s this? A sudden wave of US housing optimism?

From HousingWire:

Serious delinquencies among US Alt-A residential mortgage-backed securities (RMBS) declined in April for the first time in four years, according to the latest data from Fitch Ratings.

Laurie Goodman, from Amherst Securities, is ready to quash it. In a 22-page note the analyst argues that US housing stats are massively distorted by mortgage modification programmes such as Hamp.

Here’s the basic problem:

The time from first delinquency to liquidation has been extending dramatically over the past 2 years. This is due primarily to a slow judiciary process and borrower-friendly government programs, which permit borrowers who have been delinquent for long periods to remain in their homes. We’ve also seen a huge rise in borrowers who are re-performing at the moment due to modifications (i.e., borrower was >60 days past due, and is now less than that), but the success rate on these modifications has been low. In fact, unless modification programs change substantially, it appears a near certainty that the vast majority of these modified loans will re-default.

By Amherst’s calculations once a loan becomes more than 60 days delinquent for the first time, borrowers have less than a seven per cent chance of catching up on it, on their own. About 20 per cent of them will get a mortgage modification and redefault at a rate of over 50 per cent per year.

As for the time to liquidation, it’s been stretched courtesy of mortgage modifications and a general overloading of foreclosures. For loans that liquidated in mid-2008, the time from the first missed payment to liquidation was about 15 months. Now it’s about 20.

Unsurprisingly then, the proliferation of mortgage modifications and the increased time lag between delinquency and liquidation can skew housing statistics (not to mention bank results).

Squatting is a direct result of high rates of mortgage delinquency coupled with low cure rates and relatively low foreclosure rates (despite the national foreclosure records we set each month, the rates are low compared to delinquencies). The problem is getting worse, and lenders are barely treading water.

Here’s what Amherst says:

The S&P/CS Index is great in that it is calculated from repeat sales; however, it does not distinguish distressed or REO sales from voluntary sales. As we all know, distressed home sales trade at a lower price than non-distressed home sales, which creates a fairly big impact on the indices as the contribution of distressed sales volume increases. Our data suggests that distressed home sales are generally suffering a 25% discount to non-distressed home sales. To the extent that the non-distressed sales component is a larger percentage of the total, home prices will appear to be firmer.

Exhibit 7 . . . shows two time series: the number of units in the private label securities market in REO and the number of units in serious delinquency or foreclosure. As you can see from that exhibit, the number of units in REO has been cut by approximately 50% over the past 18 months. Meanwhile the number of units in serious delinquency and foreclosure is up by nearly 3 times as much as the REO bucket has been cut. Homes are staying in the state of serious delinquency and foreclosure, and not making it to liquidation. As a result, distressed sales as a % of total sales is lower than it otherwise would have been. Exhibit 8 . . . is from the National Association of Realtors; it shows that total distressed sales, which were almost 50% of total home sales, are now ∼34%. If the loans moved through the delinquency foreclosure pipeline at the same speed they did 12-18 months ago the % of distressed sales would be much higher and the S&P/Case Shiller Price Index would likely be lower.

So basically the mix of distressed sales to non-distressed sales is impacting the index. The S&P/CS House Price index has improved but that’s likely due to an increase in non-distressed sales. If the mix changes again — say if distressed sales were to increase, the index could fall.

Amherst’s bottom-line:

We do not see housing as having bottomed. Extension of the liquidation timeline and the rise in modifications paint housing statistics a more rosy color than is really the case. Home price index stabilization is partially the result of a lower share of distressed sales, courtesy of the extension in the delinquency/foreclosure pipeline. Foreclosures have stabilized as a result of the slowing of the delinquency/foreclosure process. The drop in delinquencies is due to modification efforts. And, as we have shown, a large number of these will eventually default. And while transition rates are dropping, at least part of the drop is attributable to changes in loan composition.

It’s all very interesting but much of it we’ve heard before. In fact, some analysts have already argued that Hamp was very much about giving banks some time to build up their balance sheets while waiting for house prices to rise — extend and pretend and all that. Judging by the decline in real estate-owned, or shadow inventory, and bank NPLs peaking, it looks like it’s been a success in that sense.

But there are some loss considerations that perhaps haven’t been taken into account.

Yves Smith over at Naked Capitalism points out that mortgage servicers tend to advance interest payments and real estate taxes while a property is in default, and only recoup those costs when the property is sold. So a longer time to foreclosure could mean greater eventual losses for financials, if house prices and sales don’t meaningfully pick-up in the period.

Much more interestingly, Amherst also indicates that the stretched liquidation timeline can also mess up cash flows — and forecasts — for RMBS, the stuff still clogging plenty of bank balance sheets:

We also make the case that modifications and the extension of the liquidation timeline can distort cash flows in a RMBS securitization. That is, using current liquidation rates will give investors an expected loss number that is too low, as loans that have already transitioned and not yet liquidated are being ignored. Moreover, modifications not only alter cash flows on the loans, but also allow the servicer to recapture the principal and interest advances, which then lowers cash flows to the deal. These events do not affect all deals equally, as we have shown. Deals with shorter cash flows, and deals with few non-performing and re-performing loans are impacted less than other securities.

Full note, with much more technical detail, in the Long Room.

Related links:

Shadow bank losses – FT Alphaville

US homeownership minus negative equity = 61.6% – FT Alphaville

The slow death of Hamp, the summer of delinquencies – FT Alphaville

Hamp, what is it good for? – FT Alphaville

Squatting works… for now

Banks have given people a large number of homes. Think about it — banks paid for the house when the loan owners purchased, then when these people stopped paying the loan, lenders have done nothing about it. Lenders have given away houses. If you believed your lender would not foreclose if you quit making payments, why would you keep making payments? Morality? Despite the obvious moral hazard created by squatting, lenders are choosing that alternative over the less palatable option of foreclosure in hopes of stabilizing home prices.

Do you think squatting is a viable long-term solution?

Think about the floodplain analogy above. If squatting is not the answer, then these properties will end up being sold; some will be foreclosed, some will be short sales, and a few may hold out for an equity sale, but all struggling, delinquent homeowners will need to be washed through the resale market. With all that product due to hit the market, it doesn't seem likely that house prices have found a stable bottom.

Option ARMs to the rescue

The problem from Option ARMs has already arrived. I have seen some bloggers point to the lull in the Option ARM reset chart as a reason for our temporary lull in foreclosures. That isn't really the case. For one, many Option ARMs have already blown up, and many of these loan owners are squatting in shadow inventory.

I don't foresee a flood of future loan delinquencies caused by Option ARMs because these loan owners are delinquent already. There will certainly be some among the few Option ARM holders who haven't already defaulted, but many of these loans have already stopped making their payments. The flood of foreclosures we would have had in 2011-2013 are squatters today. Only the lenders know when they will get around to foreclosing on these people.

• Today's featured property was purchased for about $580,000 in 4/302004. The owners used a $433,200 first mortgage, with the remainder as a down payment.
• On 5/4/2004 they obtained a $78,800 HELOC from Countrywide.
• On 1/30/2006 Countrywide gave this guy a $200,000 HELOC.
• On 12/13/2006 he got a $650,000 Option ARM with a 1% teaser rate.
• On 3/16/2007 JPMorgan Chase thought it wise to add a $178,000 HELOC on the back of a 1% Option ARM. Brilliant!
• The owner quit making payments in late 2008 and squatted for a long time.
• Total property debt is $828,000 plus negative amortization and squatting.
• Total mortgage equity withdrawal is $394,800 plus the down payment.
• Total squatting time was at least 16 months.

Foreclosure Record

Recording Date: 07/29/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 03/31/2009

Document Type: Notice of Default

Irvine Home Address … 23 BOWER TREE Irvine, CA 92603

Resale Home Price … $705,000

Home Purchase Price … $648,000

Home Purchase Date …. 5/6/2010

Net Gain (Loss) ………. $14,700

Percent Change ………. 2.3%

Annual Appreciation … 51.7%

Cost of Ownership

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$705,000 ………. Asking Price

$141,000 ………. 20% Down Conventional

4.84% …………… Mortgage Interest Rate

$564,000 ………. 30-Year Mortgage

$143,330 ………. Income Requirement

$2,973 ………. Monthly Mortgage Payment

$611 ………. Property Tax

$183 ………. Special Taxes and Levies (Mello Roos)

$59 ………. Homeowners Insurance

$184 ………. Homeowners Association Fees

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$4,010 ………. Monthly Cash Outlays

-$721 ………. Tax Savings (% of Interest and Property Tax)

-$698 ………. Equity Hidden in Payment

$262 ………. Lost Income to Down Payment (net of taxes)

$88 ………. Maintenance and Replacement Reserves

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

$2,940 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$7,050 ………. Furnishing and Move In @1%

$7,050 ………. Closing Costs @1%

$5,640 ………… Interest Points @1% of Loan

$141,000 ………. Down Payment

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

$160,740 ………. Total Cash Costs

$45,000 ………… Emergency Cash Reserves

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

$205,740 ………. Total Savings Needed

Property Details for 23 BOWER TREE Irvine, CA 92603

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Beds: 3

Baths: 2 full 1 part baths

Home size: 1,410 sq ft

($500 / sq ft)

Lot Size: 3,900 sq ft

Year Built: 2004

Days on Market: 37

Listing Updated: 40303

MLS Number: S616075

Property Type: Condominium, Residential

Community: Turtle Ridge

Tract: Arbl

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

WOW !Bank Owned and in Turn Key condition, gated communinty, beautifully upgraded with granite counters, Hardwood floors, custom paint, custom shutters, ceiling fans in every room, all into this beautiful three bedroom home. All bedrooms are upstairs with formal living, formal dining and a large kitchen downstairs. Patio off the kitchen, easy access for entertainment and a barbeque. This home won't last, a rare find, if serious don't wait come and see this beauty.

communinty?

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