Category Archives: HELOC Abuse

Government lacks the will to further manipulate the housing market

One benefit of gridlock in Washington is that our government will be hampered in its ability to meddle in the housing market.

Irvine Home Address … 63 DARTMOUTH 62 Irvine, CA 92612

Resale Home Price …… $430,000

When you try your best, but you don't succeed

When you get what you want, but not what you need

When you feel so tired, but you can't sleep

Stuck in reverse

And the tears come streaming down your face

When you lose something you can't replace

When you love someone, but it goes to waste

Could it be worse?

Lights will guide you home

And ignite your bones

And I will try to fix you

Coldplay — Fix You

Many in Washington believe they can cure the ills in housing if they manipulate conditions enough. The government can pass some law or fail to enforce another to accomplish their ends. Unfortunately, the meddling cures nothing and the crisis drags on while the bureaucrats lament their lack of control over the housing market and push for more. If prices were allowed to crash everywhere like they have in Las Vegas, the groundwork for recovery would be in place. As it stands, we have too much overhanging debt that isn't going to get repaid draining our resources and weakening our economy. When those in Washington think they can fix a problem, their solutions are generally worse than doing nothing at all. Perhaps gridlock will be a good thing?

Morgan Stanley views political will to fix housing as scarce

by JASON PHILYAW — Tuesday, November 23rd, 2010, 4:05 pm

Housing and housing finance present the largest risk to the overall economy, according to Morgan Stanley analysts, who said they were too optimistic last year when they predicted "only a modest recovery in housing" for 2010.

Analysts said there are many options available to fix the nation's "dysfunctional housing and mortgage markets, but the political will to deploy them is scarce."

The analysts suggest additional loan modifications or refinancings, or principal writedowns may help ease the problems facing the industry.

If that is the best that "analysts" can come up with, then I am thrilled that the political will to screw our country up further does not exist.

First, loan modifications are a proven failure. No loan modification program can or will be successful. The problem is not that borrowers cannot make the payments, it is that borrowers have too much debt. Modifying the terms of that debt does not make the real problem go away.

Second, principal writedowns are part of the answer, but this must be done through a foreclosure to avoid moral hazard. Remember, Foreclosure Is a Superior Form of Principal Reduction. If we start writing down principal through debt forgiveness, then borrowers will be strongly incentivized to over-borrow next time because they know that if they get in too much trouble either the bank or the government will bail them out.

Banks have tightened lending standards and there's a shadow inventory of some 8 million units that create a vicious circle, according to Morgan Stanley. And without substantial policy reform, the imbalance won't correct itself for years and home prices may fall another 10% before reaching bottom in 2012, the analysts said.

Most of the people who wrote about the housing bubble before it became commonly accepted fact pointed out the vicious circle of tightening credit and lower prices would go unabated until prices fell below rental parity and buyers had a new reason to participate in the market. Only the amend-extend-pretend policy of the banks coupled with widespread squatting has prevented this inevitable cycle from cleansing the market of its excess debt. The Morgan Stanley analyst is raising this specter as a bogeyman, when in reality, it is exactly what the market needs to correct itself.

Morgan Stanley also said the risk of mortgage putbacks is restricting the supply of credit, as banks are only lending to borrowers with pristine credit and proper housing equity.

If banks want to make money, they should only rent to borrowers with good credit and proper reserves. To suggest otherwise shows how totally clueless our lending industry has become. They are so conditioned to passing the risk off to others that they see any barrier to origination as being an impediment to progress and profit. Our lenders are truly lost.

Still, the analysts expect loan originators to see losses of $85 billion to $165 billion from the putbacks with large-cap banks bearing the burnt of the losses.

Analysts said policymakers should first focus on repairing housing by reducing the supply and demand imbalances and restore market functioning. Then reforms can be implemented "to assure longer-term financial and economic stability."

These "analysts" are complete idiots. They are putting the cart before the horse. For the market to reduce any imbalances between supply and demand, it must be restored to its natural functioning. It doesn't work the other way around. The whole reason we have such imbalances today is because the government is manipulating the market in many ways with the primary goal being to preserve excessive debt and keep prices unnaffordable to a new generation of buyers.

Washington is making the housing crisis even worse

Bad policy and a bad economy make it a terrible time to buy. Instead of pushing cheap credit, Uncle Sam must let the market lower prices.

By Patrick Killelea — November 18, 2010

Our long national bender of house price inflation has finally ended. Now all that remains is for the government to get out of the way and let the housing market sober up completely. Unfortunately, Washington is still tempting Americans to have one more drink – "on the house."

Real value of a house

As I explain on my website,, the value of a house depends entirely on what it would rent for. It doesn't depend on what you paid for it, or on how much you spent to build it. If you can save money every month by renting the same quality house in a nearby location, then it is foolish to buy at that asking price. The price is just too high.

Rents, in turn, depend on salaries. Try walking into a bank and asking for a loan to pay your rent. You know what the answer will be. So why is it that the bank will lend us vast amounts of money to take out a mortgage and take on expenses that will be much higher than rent for the same place?

Because banks are stupid. If banks were smart, they would never loan money under terms where the payment exceeds the potential rental income. Why is that? Because if they did that, they would have no risk of a loss of cashflow in the event of a foreclosure.

Think about it: if lenders would not have made loans were the payments greatly exceeded potential rental income, then even if 10% or more of borrowers decided to default, the bank could take the property back and rent it out for enough to cover the payment.

In fact, the whole amend-extend-pretend policy would be effective if the banks had kept their loan payment below rental parity. They would have foreclosed on the deadbeats and replaced them with renters who could make the "payments" while the bank searched for a new owner-occupant to buy the house and liberate their tied-up capital.

Because it is profitable to get people into debt. Those profits result in political pressure to pass laws encouraging mortgage debt. For everyone above the buyer on the food chain – from seller to real estate agent to bank to Congress, the White House, and the Federal Reserve – there is a strong interest in getting young and inexperienced families deeply into debt. Once in debt, new buyers, too, become part of the game – they need to find new housing victims if they want to eventually sell at a profit.

Thus we have the mortgage interest deduction, Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA), and other harmful government programs, all of which serve primarily to increase the amount of mortgage debt. Since most people don't do math very well and will take on as much mortgage debt as they can, this government facilitation simply results in higher house prices.

Higher prices negate any benefit to the buyer – but they do benefit people higher up the food chain. Those profits at the expense of the buyer get funneled into campaign contributions that keep the system in place, or make it even more pernicious.

It sounds like a hokey conspiracy theory, but Patrick's description of the mass collusion among the participants in the housing market is essentially correct.

At some point, the cost of owning shot right past the cost of renting. Owners were losing money, month after month, on a real cash flow basis relative to renting. But they didn't care because they felt rich from the implied increase in their house's value. They could even refinance at the greater valuation implied by "comps" – appraisals or sale prices of similar properties nearby – and pull money out to cover their monthly shortfall.

That worked until it didn't, and America woke up with a dreadful hangover, still ongoing. What's worse is that many powerful financial interests are determined to make sure that we never sober up.

Special interests working against us

Older sellers depend on young families’ getting themselves into debt. Less debt for the young means lower selling prices for the old.

Real estate agents, after years of blathering about how house prices only go up, are finally faced with the incontrovertible reality that house prices also go down. Sales volumes also go down when prices are finally recognized as being too high. The lack of turnover and lower prices directly hurt their commissions.

Banks blew all their depositors’ money on bad mortgage lending, amounts way out of line with salaries. This was fine for them as long as they could get mortgage-backed bond buyers to take the risk off their hands, but the bond buyers got wise, and they don’t want any more of that bad debt. In fact, they want to make the banks buy it back.

The Federal Reserve exists to protect the banks from responsibility for their own bad decisions, at the expense of everyone else, in the name of “financial stability.” So we have the Fed printing cash to buy up those bad mortgage bonds – which weakens everyone’s wealth by inflating the currency – to get the banks off the hook.

Ways to make it better

What should we do?

First, the press should stop characterizing higher house prices as better. Higher house prices are not an "improvement" and lower prices are not a "worsening" of the housing market. Higher house prices are simply inflation, and inflation is bad for buyers.

The president should say that lower housing prices are a wonderful thing for buyers, especially young families. He should point out that lower housing prices are true affordability. Increased mortgage debt is not affordability, just a trap for the unwary.

Why does this issue have no champion? Someone in government will stand up for nearly anything — even stupid ideas have advocates. Why is a government policy that rips off an entire generation of home buyers getting no attention?

Lending regulations should eliminate comps as meaningless. All lending should be based by law on what it would cost to rent the equivalent house. Fannie, Freddie, and FHA lending programs should be stopped immediately, not gradually. It is the hope of lower prices that causes people to delay purchasing. We want to get prices back down below the cost of renting as quickly as possible for the maximum buyer benefit.

People in the Midwest and South should not be forced via their tax dollars to guarantee $729,750 jumbo Fannie and Freddie mortgages for Californians when they cannot get such a guarantee for themselves. The injustice is galling.

Why do we have an increased subsidy in areas with high prices? Isn't the subsidy actually inflating prices? Why do Nebraska taxpayers subsidize California HELOC abusers?

Banks should be heavily fined for leaving foreclosed property empty and deteriorating. Foreclosures don't ruin neighborhoods – empty houses do. If the banks won't take care of their houses quickly, the title should be auctioned off to people who will occupy and take care of them. Yes, even if the auction lowers comps or forces the bank to take a loss.

No mortgage interest deduction

There should be no mortgage interest deduction. Encouraging debt has resulted in disaster. Instead, we should promote savings, and outright ownership without any debt at all, in every generation.

Current owners usually misunderstand their own interests. If they ever want to upgrade, they will benefit more from the falling price on a bigger place than they lose from the falling price on their current place. Owners who want to upgrade should be firmly on the side of lower prices.

There is a feeling of terror that if house prices were allowed to be set by the unmanipulated free market, all consumer spending would stop and a permanent deflation would take hold. That just wouldn't happen. Consumers will always spend on things they need, and deflation will naturally stop at the point where a house is once again cheaper to own than to rent.

The nonsense and fear about lower prices is crazy. Fix the Housing Market: Let Home Prices Fall.

Another pseudo-cashflow property

If you count the appreciation as earned income, Orange County has some great cashflow properties during price rallies. Of course, you can't count appreciation as cashflow because it isn't sustainable, and it takes debt to access it, but many came to believe that appreciation converted to income through mortgage equity withdrawal was a wise way to manage their properties. That's why they are losing them now.

  • The owner of this property paid $243,000 on 12/18/1998. Their mortgage information is not available.
  • On 11/20/1999 this owner got a HELOC for $36,000 and extracted his first positive cashflow… kind of.
  • On 5/31/2001 he refinanced with a $231,000 first mortgage.
  • On 4/16/2002 he obtained a $68,000 HELOC.
  • On 1/23/2004 the got a HELOC for $100,000.
  • On 2/6/2004 he refinanced with a $235,638 first mortgage.
  • On 10/15/2004 he obtained a $150,00 HELOC.
  • On 11/1/2006 he opened a $250,000 HELOC.
  • On 3/12/2007 he refinanced with a $387,800 first mortgage.
  • On 10/10/2007 he obtained a $250,000 HELOC. If he withdrew this money, the property will be a short sale.

With the prospect of future ATM payments being slim, this owner defaulted on his first mortgage.

Foreclosure Record

Recording Date: 10/12/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 06/30/2010

Document Type: Notice of Default

Irvine Home Address … 63 DARTMOUTH 62 Irvine, CA 92612

Resale Home Price … $430,000

Home Purchase Price … $243,000

Home Purchase Date …. 12/18/1998

Net Gain (Loss) ………. $161,200

Percent Change ………. 66.3%

Annual Appreciation … 4.8%

Cost of Ownership


$430,000 ………. Asking Price

$15,050 ………. 3.5% Down FHA Financing

4.55% …………… Mortgage Interest Rate

$414,950 ………. 30-Year Mortgage

$84,531 ………. Income Requirement

$2,115 ………. Monthly Mortgage Payment

$373 ………. Property Tax

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

$72 ………. Homeowners Insurance

$295 ………. Homeowners Association Fees


$2,854 ………. Monthly Cash Outlays

-$341 ………. Tax Savings (% of Interest and Property Tax)

-$541 ………. Equity Hidden in Payment

$26 ………. Lost Income to Down Payment (net of taxes)

$54 ………. Maintenance and Replacement Reserves


$2,051 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$4,300 ………. Furnishing and Move In @1%

$4,300 ………. Closing Costs @1%

$4,150 ………… Interest Points @1% of Loan

$15,050 ………. Down Payment


$27,800 ………. Total Cash Costs

$31,400 ………… Emergency Cash Reserves


$59,200 ………. Total Savings Needed

Property Details for 63 DARTMOUTH 62 Irvine, CA 92612


Beds: 3

Baths: 1 full 2 part baths

Home size: 1,524 sq ft

($282 / sq ft)

Lot Size: n/a

Year Built: 1981

Days on Market: 83

Listing Updated: 40507

MLS Number: P751647

Property Type: Condominium, Residential

Community: University Town Center

Tract: Cc


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

This home is bright & cheerful and has many upgrades. The home offers 3 beds, 3 baths, vaulted ceilings, formal living room, fireplace, wooden floors, upgraded kitchen & baths and much more. Location offers the finest schools and shopping and easy access to freeways.

Bond Market Selloff Makes Mortgage Rates Rise

A global sell-off of American Debt would be a disaster for the United States in general and the housing market in particular. Could it happen?

Irvine Home Address … 5152 Yearling Ave Irvine, CA 92604

Resale Home Price …… $545,000

Delivered from the blast

The last of a line of lasts

The pale princess of a palace cracked

And now the kingdom comes

Crashing down undone

Smashing Pumpkins — The Beginning is the End is the Beginning

A sharp sell-off in the bond market has caused a sudden rise in mortgage interest rates. This kind of market action happens occasionally, and it may signify nothing; however, there are forces at work that may signal and end to super low mortgage interest rates.

Mortgage applications are down and rates are up

November 17, 2010 | 1:00 pm

Applications for mortgages fell last week as interest rates jumped — both bad signs for the housing market as it struggles to gain momentum in a lackluster sales environment.

The Mortgage Bankers Assn. said Wednesday that its market composite index, which measures the weekly volume of home loan applications, fell 14.4% on a seasonally adjusted basis last week compared with the week before.

Applications for mortgage refinances fell 16.5% and purchase applications fell 5%, the group said.

Reports of low sales volumes are mirrored in the mortgage volumes. You know rates have been low a long time when the refinance business is slow as well. Usually low interest rates spur refinances, but everyone who could refi has, and there are few qualified customers for loan products.

Mortgage rates were up, as a sell-off in the bond market pushed up longer-term interest rates across the board. The average rate for a 30-year fixed-rate mortgage jumped to 4.46% from 4.28%, with points increasing to 1.13 from 1.04 for loans that would cover 80% of the value of a home.

The average rate for a 15-year fixed-rate mortgage increased to 3.87% from 3.64%, with points falling to 0.91 from 1.08.

Michael Fratantoni, the bankers assocation's vice president of research and economics, said the increase in rates was due to stronger economic data and rising concern over the Federal Reserve’s "quantitative easing" program, under which the Fed plans to buy $600 billion worth of Treasury bonds by mid-2011.

— Alejandro Lazo

Those rates are both very low. I hope interest rates stay low over the next year so I can take advantage of it to buy inexpensive cashflow properties. If rates go up while the sales volume is weak, prices may drop beneath the current trading range and take a step down.

The story within the story is the happenings in the bond market that caused this sudden spike in mortgage interest rates.

BOB RUBIN: "US In Terribly Dangerous Territory," Bond Market May Be Headed For "Implosion"

Aaron Task Nov. 17, 2010, 11:24 AM

Warning of the risk of an "implosion" in the bond market, former Treasury Secretary Robert Rubin says the soaring federal budget deficit and the Fed's quantitative easing are putting the U.S. in "terribly dangerous territory."

Speaking at an event at The Pierre Hotel in New York City honoring Sen. Kent Conrad (D-N.D.), Rubin joined the growing number of current and former officials (foreign and domestic) to criticize QE2. The Fed's plan to buy $600 billion of Treasuries "has a lot of risk," he said, calling the international reaction "horrendous."

This statement sounds more like political posturing rather than sound financial analysis. It depends on what you believe about quantitative easing.

To recover from its concurrent financial bubbles in stocks and real estate, Japan has been printing money for decades, yet its government can continue to borrow at very low rates. If you believe that Bernanke is combatting deflation in the United States by reprinting the money vaporized by losses from real estate loans, then there is no real danger of a huge sell-off of American debt by foreign countries. Everything is okay.

However, if you believe expanding the government debt and printing money will be punished by the foreign debt markets by a massive sell-off, then (1) the bond market will implode, (2) interest rates will double or triple in a short period of time, (3) and we will have a major economic crisis — worse than 2008.

Rubin, who issued a similar warning about the bond market at The FT's "Future of Finance" conference in October, said Congress' vote on raising the deficit ceiling next spring could be the "trigger" for a rout in the Treasury market. Several Republican and Tea Party candidates vowed to not increase the government's debt ceiling unless Democrats agree to sharp cuts in spending that may not be politically tenable.

A Congressional standoff on the debt ceiling could spook international investors, Rubin said, alluding to a market event similar to the Dow's 778-point plunge on Sept. 29, 2008, when the House initially voted no on TARP.

While most pundits worry about the potential for China to dump its Treasury holdings, the former non-executive chairman of Citigroup said a financial version of the Cold War concept of Mutual Assured Destruction will likely prevent them from doing so. But he is worried about selling by the government's of Singapore, Hong Kong and Malaysia. "They could say ‘the Chinese are stuck but we're not,'" Rubin predicts.

Rubin's comments came during a panel discussion that also featured Sen. Conrad, chair of the Senate Budget Committee, former Nebraska Senator Bob Kerrey and former U.S. Comptroller General David Walker. The panel was moderated by former Commerce Secretary Pete Peterson, the senior chairman and co-founder of The Blackstone Group as well as founder of the Concord Coalition.

Aaron Task is the host of Tech Ticker. You can follow him on Twitter at @atask or email him at altask@yahoocom

Do you think there is any real danger of a massive global sell-off of American debt?

Another long-term owner goes Ponzi

The stability of our housing market depends on borrowers making their loan payments. When borrowers start going Ponzi — borrowing more money to pay debt — it is only a matter of time before delinquency leads to foreclosure and the collapse of pricing.

  • The owner of today's featured property paid $220,000 on 12/30/1994. The owner used a $198,000 first mortgage and a $22,000 down payment.
  • On 8/23/1999, he refinanced with a $232,000 first mortgage. From that point on, he had his original investment out of the deal, and any remaining borrowing was free money.
  • On 12/20/2001 he refinanced the first mortgage for $260,700.
  • On 6/7/2004 he opened a HELOC for $150,000.
  • On 2/6/2006 he obtained a $417,000 first mortgage.
  • On 2/13/2007 he opened a $200,000 HELOC.
  • Total property debt is $617,000.
  • Total mortgage equity withdrawal is $419,000.

After owning a property for 16 years, he is about to go through foreclosure due to excessive borrowing. What else is there to say?

Irvine Home Address … 5152 Yearling Ave Irvine, CA 92604

Resale Home Price … $545,000

Home Purchase Price … $220,000

Home Purchase Date …. 12/30/1994

Net Gain (Loss) ………. $292,300

Percent Change ………. 132.9%

Annual Appreciation … 5.8%

Cost of Ownership


$545,000 ………. Asking Price

$109,000 ………. 20% Down Conventional

4.55% …………… Mortgage Interest Rate

$436,000 ………. 30-Year Mortgage

$107,138 ………. Income Requirement

$2,222 ………. Monthly Mortgage Payment

$472 ………. Property Tax

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

$91 ………. Homeowners Insurance

$0 ………. Homeowners Association Fees


$2,785 ………. Monthly Cash Outlays

-$372 ………. Tax Savings (% of Interest and Property Tax)

-$569 ………. Equity Hidden in Payment

$185 ………. Lost Income to Down Payment (net of taxes)

$68 ………. Maintenance and Replacement Reserves


$2,097 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$5,450 ………. Furnishing and Move In @1%

$5,450 ………. Closing Costs @1%

$4,360 ………… Interest Points @1% of Loan

$109,000 ………. Down Payment


$124,260 ………. Total Cash Costs

$32,100 ………… Emergency Cash Reserves


$156,360 ………. Total Savings Needed

Property Details for 5152 Yearling Ave Irvine, CA 92604


Beds: : 4

Baths: : 4

Sq. Ft.: : 1808


Lot Size: : 5,227 Sq. Ft.

Property Type:: Residential, Detached

Stories:: 2

Year Built: : 1971

Community: : Irvine

County: : Orange

MLS#: : 100044467

On Redfin: : 118 days


This is a short sale. Subject to lender approval. Property will be sold as is 4 bed rooms 3 baths in good condition includes pool, well maintained. good size lot. Buyer to verify all condition, dimensions n infor before COE. Great family neighborhood. Close to shopping centers schools and freeway. Includes award winning schools Fax all offers. School district is irvine district.

Fear of Delinqency and Losses Prompts FHA to Tighten Standards

The FHA is continuing to tighten it standards despite the government's desire to get more buyers to absorb the foreclosure problems facing the market.

Irvine Home Address … 66 GOLDEN GLEN St 4 Irvine, CA 92604

Resale Home Price …… $262,000

I respect your time

Don't mean to hit you on a work night

But what I gotta do girl (do girl)

Baby can't you bend them rules

Did I miss that cut off time

Used to be down did I drop the dime

Omarion — Cut Off Time

Why is the FHA tightening their standards at a time when we need every buyer we can find? With a sky-high delinquency rate, and with the taxpayer on the hook for the losses, the FHA didn't have much choice. People who fall below the cutoff line are the ones most likely to default on their mortgage. Expect standards to tighten further before this crisis is over.

Home Buying Gets Tougher as Lenders Restrict FHA Loans

By Jody Shenn and John Gittelsohn – Nov 17, 2010 11:41 AM PT

Home ownership may be falling out of reach for more Americans as lenders toughen their standards for Federal Housing Administration-insured loans beyond what the agency itself requires.

Mortgage lenders including Wells Fargo & Co. and Bank of America Corp., the two largest, have raised the minimum credit score on FHA-insured loans that they will buy to 640 from 620. About 6.3 million people fall within that range, according to FICO, which created the formula for the ratings.

With about 10 million distressed properties coming to market, this one small change just eliminated 6.3 million potential buyers. That can't be good for the housing market.

The higher hurdles for FHA loans, used in about a fifth of U.S. home purchases, add to challenges for a housing market already struggling with record-low sales and surging foreclosures. While lax lending fueled the bust that led the U.S. into recession, the new requirements will stifle the real estate recovery needed to revive the economy, said Ron Phipps, president of the National Association of Realtors.

“We’ve gone from silly to stupid,” Phipps, principal partner of Phipps Realty Inc., said in a telephone interview from his home in Warwick, Rhode Island. “People who should be getting credit can’t get it. To have a healthy real estate market, you need activity. You need transactions.”

The National Association of realtors has gone from silly to stupid.

In order to have stable transactions where borrowers actually get to keep their homes, we need to know they can really make the payments. There is no more Ponzi borrowing. Borrowers cannot borrow money to make payments. The really need to make money and have income.

FHA Rules

The FHA, which previously didn’t have minimums for FICO scores, began in October to require grades of at least 500, and more than 580 for loans with down payments of as little as 3.5 percent. Borrowers with scores between those levels must put 10 percent down. Several lenders moved minimums to about 620 at the start of 2009, the companies said then.

FICO scores range from 300 to 850. The grades are based on data such as whether borrowers have missed debt payments, balances on their credit cards relative to borrowing limits, and the length of their credit history, meaning consumers who’ve never fallen delinquent can have lower scores, according to the company’s website.

The 6.3 million people with grades between 620 and 640 equate to about 3.7 percent of U.S. consumers with credit information available, according to FICO, the Minneapolis-based company formally known as Fair Isaac Corp.

Requiring a 640 credit score excludes as much as about 15 percent of FHA borrowers, David Stevens, the agency’s commissioner, said in an interview yesterday. Minorities and borrowers in communities hardest hit by the recession are most likely to lose based on FICO scores, he said.

Playing the race card? Give me a break. The people most likely to have problems with their FICO scores are the millions of people who stopped making their mortgage payments.

Finding Better Way

“We are restricting opportunity and access for those who can least afford it,” Stevens said. “We need to find a better way to provide access to these families who are being cut out simply because lenders are putting arbitrary overlays on top of our requirements.”

Arbitrary? Obviously lenders are putting these restrictions on their loans becaue these people default at higher rates than others. There is nothing arbitrary about it. Think about it. Why would lenders put arbitrary standards in place that restricts their ability to profitably do business?

FHA insurance covers lenders or debt investors when borrowers default. One of every five U.S. home purchases relied on the loans in the fiscal year through July, the agency said in a report yesterday. They accounted for a third of purchases by first-time homebuyers in the year ended Sept. 30.

The FHA, the Department of Veteran Affairs and Fannie Mae and Freddie Mac, the companies taken over by the government in 2008, have been providing about 95 percent of new mortgage financing after falling home prices sparked retreats by banks and by investors in mortgage bonds without U.S.-backed guarantees, according to Inside Mortgage Finance newsletter. The S&P Case-Shiller Index of property values in 20 cities fell as much as 33 percent from its 2006 peak.

Now that the government is the market and taxpayers have to absorb future losses, I am relieved that lending standards are getting tighter.

Larger Role

“It’s absolutely clear that, today, FHA is playing a larger role than it should,” Stevens said during a conference call with reporters yesterday. “But it’s a counter-cyclical force providing liquidity in a market where private capital still is completely absent.

I agree with him on this point. There is a viable place for the FHA. I would like to see the GSEs dismantled, but the FHA does serve a useful role in cleaning up after disasters like the Great Housing Bubble. Can you imagine what would have happened if the FHA were not around?

Mortgage companies are tightening FHA standards partly because of the higher costs they face in servicing delinquent loans, said Luke Hayden, president of the mortgage unit of Mount Laurel, New Jersey-based PHH Corp. By keeping defaults low, they can also boost the prices they fetch for bonds filled with the loans and thus offer lower rates, he said.

When FHA-backed loans go into default, the lender bears a greater share of the expenses than when the mortgage is backed by Fannie Mae and Freddie Mac, Hayden said. Lenders whose delinquency rates stray too far from averages can also face being cut off by the FHA or other sanctions from the agency, said David Lykken, president of Mortgage Banking Solutions, an Austin, Texas-based consulting firm.

Now we see why lenders are putting tighter standards in place.

Lender Buybacks

With Fannie Mae and Freddie Mac mortgages, lenders are forced to buy back bad mortgages that were improperly underwritten, which has also prompted them to adopt tougher guidelines for those loans.

More banks tightened standards on prime residential mortgages in three months ending Oct. 31 than loosened them, a switch from the prior period, a Federal Reserve survey found. …

‘Huge Effect’

“When the big companies change their standards and rules, it has a huge effect on the market,” said Bob Walters, chief economist at the Detroit-based company.

JPMorgan Chase & Co., the third-largest lender, had already been generally requiring credit scores of at least 640 on FHA loans before the tightening by competitors, said Tom Kelly, a spokesman for the New York-based company.

Matt Hackett, underwriting manager at New York-based Equity Now Inc., said higher requirements among buyers of its FHA loans cut off about 5 percent of his potential customers. A 640 score disqualifies about 15 percent of customers who were getting FHA loans through Chris Murphy, a loan originator at Main Street Home Loans LLC, an independent mortgage bank based in Alpharetta, Georgia.

“It’s bad from the originator’s standpoint because fewer people qualify,” Murphy said in a telephone interview from his office in Charlotte. “But it’s less likely they’re going to default and so, from the standpoint of the economy, it’s probably a good thing.

Since we are all paying the bills as taxpayers, I agree that tightening standards are a good thing. In fact, there are only three groups that want to see standards loosen: (1) those who make money off the transactions regardless of the outcome, (2) those who want to sell property at inflated values, and (3) government officials who feel pressure to expand home ownership. I could add buyers who no longer qualify for loans to that list, but the desires of those unlikely to repay their debts doesn't count for much.

Mortgage Delinquencies

About 9.8 percent of U.S. home mortgages were delinquent at the end of the second quarter, with an additional 4.6 percent in the foreclosure process, according to the Mortgage Bankers Association. The Washington-based group releases figures through Sept. 30 tomorrow.

Nearly 10% of mortgage holders are not paying. That number is truly astounding.

FHA lending to the riskiest borrowers has declined in the past two years. Only 3.8 percent of FHA loans had scores below 620 or no score in the quarter ended Sept. 30, down from a peak of 50.4 percent in the period through Dec. 31, 2008, according to a Nov. 4 agency report to Congress. A score below 620 was typically considered subprime before the credit crisis, meaning the borrower had a bad or limited credit history.

More Than Expected

“Mortgage credit availability has tightened even more than we expected,” Morgan Stanley analysts Oliver Chang, Vishwanath Tirupattur and James Egan said today in a report.

At the same time, the recession and unemployment has spurred a decline in borrower credit scores, they said. There has been about a 23-point drop in FICO scores among current borrowers who took loans without government backing in 2006 and 2007, they said.

The U.S. home-ownership rate remained at a 10-year low of 66.9 percent in the quarter ended Sept. 30, in part because of rising foreclosures, the U.S. Census Bureau reported Nov. 2. The rate reached a record high of 69.2 percent in the second and fourth quarters of 2004.

Sales of existing homes were at an annual pace of 4.53 million in September, compared with the average rate of 5.82 million for the past decade, according to the Chicago-based National Association of Realtors. The pace in July was 3.84 million, the lowest in data going back to 1999.

Restricting access to credit threatens to slow a rebound even as reduced home prices and interest rates near record lows boost affordability, said Stevens, the FHA commissioner.

“This has a broad potential impact to the economic recovery in total,” he said. “We’re not asking for lenders to be reckless. In fact, we believe we have prudent policies for the market. But we do believe that lenders need to put more work into making certain that they provide accessibility for families who can qualify for a mortgage.”

To contact the reporters on this story: Jody Shenn in New York at; John Gittelsohn in New York at

To contact the editors responsible for this story: Alan Goldstein at; Kara Wetzel at

How does a bank "put more work into making certain?" This nonsense is bureaucratic bullshit.

Put to the bank at the peak

In the post Mortgages as Options, I discussed how people used the "put" feature of loans to transfer the risk of falling prices to the lender.

Another method speculators and homeowners alike used was the “put” option refinance. Late in the bubble when prices were near their peak, many homeowners refinanced their properties and took out 100% of the equity in their homes. In the process, they were buying a “put” from the lender: if prices went down (which they did,) they already had the sales proceeds as if they had actually sold the property at the peak; if prices went up, they got to keep those profits as well. The only price for this “put” option was the small increase in monthly payments they had to make on the large sum they refinanced. If fact, on a relative cost basis, the premium charged to these speculators and homeowners was a small fraction of the premiums similar options cost on stocks. Of course, mortgages are not option contracts, and lenders did not view themselves as selling option premiums to profit from the premium payments; however, speculators certainly did view mortgages in this manner and treated them accordingly.

The owner of today's featured property owned the property for 18 years, then it went into foreclosure. WTF? Anyone who thinks adding to their mortgage is a good idea should consider the possibility that they may lose their house years later. It's very foolish.

  • This property was purchased for $133,500 sometime in 1992 — 18 years ago. The original loan information is not available.
  • On 5/1/2002, he opened a HELOC for $53,600. The kool aid must have tasted good.
  • On 1/28/2004 he obtains a loan for $117,838. This may have been a refinance of the first mortgage.
  • On 4/1/2005 he obtained a $139,427 HELOC.
  • On 2/28/2006 he got a GSE loan for $224,000.
  • He stopped paying in late 2009, but Fannie Mae didn't fool around with the foreclosure.

Foreclosure Record

Recording Date: 06/02/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 03/01/2010

Document Type: Notice of Default

They bought the property at auction for $215,800, and now they are trying to get a full recovery of their losses in a resale. Do you think they will get it?

Irvine Home Address … 66 GOLDEN GLEN St 4 Irvine, CA 92604

Resale Home Price … $262,000

Home Purchase Price … $215,800

Home Purchase Date …. 7/20/2010

Net Gain (Loss) ………. $30,480

Percent Change ………. 14.1%

Annual Appreciation … 47.5%

Cost of Ownership


$262,000 ………. Asking Price

$9,170 ………. 3.5% Down FHA Financing

4.55% …………… Mortgage Interest Rate

$252,830 ………. 30-Year Mortgage

$51,505 ………. Income Requirement

$1,289 ………. Monthly Mortgage Payment

$227 ………. Property Tax

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

$44 ………. Homeowners Insurance

$240 ………. Homeowners Association Fees


$1,799 ………. Monthly Cash Outlays

-$119 ………. Tax Savings (% of Interest and Property Tax)

-$330 ………. Equity Hidden in Payment

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

$33 ………. Maintenance and Replacement Reserves


$1,399 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$2,620 ………. Furnishing and Move In @1%

$2,620 ………. Closing Costs @1%

$2,528 ………… Interest Points @1% of Loan

$9,170 ………. Down Payment


$16,938 ………. Total Cash Costs

$21,400 ………… Emergency Cash Reserves


$38,338 ………. Total Savings Needed

Property Details for 66 GOLDEN GLEN St 4 Irvine, CA 92604


Beds: 2

Baths: 1 full 1 part baths

Home size: 864 sq ft

($303 / sq ft)

Lot Size: n/a

Year Built: 1971

Days on Market: 109

Listing Updated: 40463

MLS Number: S627597

Property Type: Condominium, Residential

Community: El Camino Real

Tract: Ws


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

Upper Level End Unit Condo in Irvine. 2 Bedrooms, 1.25 Baths, and 1 Car Detached Garage. New carpet, new paint, and ready to open escrow. Enjoy the association amenities. HOA dues include water and trash. Close to shopping, restaurants, and schools.

Orange County Sales Falling, Prices to Follow

Sales volumes are way down, and home prices are about to follow.

Irvine Home Address … 17501 TEACHERS Ave Irvine, CA 92614

Resale Home Price …… $583,731

This is my life

And people try to shut me down

Put my music on

And those people don't make a sound

Down down down down down

Everybody falling down down down down down

And they falling

Space Cowboy — Falling Down

Prices are falling, and they are about to go negative year-over-year. If interest rates go up, the price decline may gain momentum and lead to a significant leg down in local prices.

Housing prices flat, sales sinking

JEFF COLLINS — Nov. 16, 2010

The housing market continued to struggle against fierce headwinds last month, losing ground in the face of tightfisted lenders and edgy buyers.

The median price of an Orange County home – or price at the midpoint of all sales – fell to $438,000 last month, housing tracker MDA DataQuick reported Tuesday.

That's the lowest since April and up just 0.3 of a percentage point (or $1,500) from the October 2009 median.

Next month, we will likely see a year-over-year decrease in the median home price. The double dip will be official. The next milestone will be breaking below the false bottom put in during 2009.

Meanwhile, sagging sales stretched into their fourth month, with 2,298 Orange County homes trading hands in October.

That's 9 percent fewer than in September and 17.9 percent below the October 2009 tally.

While sales typically drop from September to October, last month was the second-slowest for an October since DataQuick began tracking home sales in 1988. It also was nearly 36 percent below the average of around 3,600 housing deals in a typical October.

I keep repeating it because the bulls do not get it: sales volumes are way, way down. The only people who believe sales are strong are those getting their information from the Irvine Company marketing team. For every 3 sales that ordinarily occurs in October, only 2 happened last month.

The market appeared to be on fire during the first half of the year. But industry insiders now fret that state and federal tax breaks failed to ignite a stronger, longer-lasting recovery after ending in the second half.

"A lot of us were disappointed that the wind that would be in our sails just faded," observed Jeff Culbertson, executive vice president for Coldwell Banker's Southwestern U.S. region, which includes Orange County.

"We're not in a bad market," Culbertson added. "But we're not in a good market."

Used house salesmen never give up. They won't admit the obvious: the market is very weak and prices are too high. The reason realtors are not trusted is obvious. They lie. They ignore the obvious. The candy coat a turd and expect buyers to eat it.

Although October was the 14th consecutive month of year-over-year price increases, the gain was the smallest of a streak dating to September 2009.

Last month's median price also fell $12,000 from the 2010 high of $450,000 reached in May and July. That means that all the price gains of the past year have virtually evaporated.

At $280,000, the median price of an O.C. condo fell 11.7 percent from last year's levels;

How do you get a move-up market while condos continue to implode? You don't.

the median price of a newly built home decreased 1.1 percent.

I thought the Irvine Company was increasing prices and building even more homes. That isn't what the statistics are saying.

"Things have slowed down and agents are starting to get worried," said Irvine top-producer Mac Mackenzie. "I think buyer confidence has been reduced, and people are having trouble getting (their loans) approved."

"We're not seeing any move-up buyers," added Harry Solomon, managing owner of Nova Real Estate Services in Laguna Hills. "If you can't sell the little condo because you're upside-down, you're certainly not going to buy something else. … If you don't have the equity to move up, people are going to renting."

Agents noted also that home sales at the high end of the housing market, which appeared on the verge of taking off, stalled recently.

In whose fantasy was the high end on the verge of taking off? The high end awaits its comeuppance. Prices will fall very hard at the high end when they get around to booting out the squatters.

For example, sales of $650,000 or more accounted for 30.4 percent of all home sales in July. Last month, they accounted for 27.6 percent of all deals.

"Once we get over (an asking price of) $1.5 million, it seems like it's quiet in the marketplace," said Newport Beach luxury home sales agent Steve High.

That's because nobody can afford those prices with their real incomes. Prices only got over $1.5M because we underwrote stupid loans at those price levels. Now nothing but air supports those prices. (see How to Lose $2,650,000 in Irvine Real Estate)

High noted that despite some of the lowest interest rates in history, buyers still are having a hard time qualifying – especially those seeking to get so-called "jumbo" loans of around $730,000 or more.

"You keep hearing about these low interest rates, but we still have a huge challenge in people qualifying for loans," High said.

Without liar loans, people have to qualify based on their income. And contrary to the popular fantasy of OC posers, there are not enough high wage earners in Orange County to support all the houses at those price points.

In Orange County's lower-cost central core, well-priced homes are getting offers within two weeks, said Santa Ana real estate agent Hector Ramirez of Citivest Realty Services.

Investors continue to buy three-bedroom houses selling for as low as $300,000, Ramirez said. With rent averaging $1,900 a month or more for such houses, the income will easily cover monthly loan payments. But such deals are hard to find.

Only a fool would pay $300,000 for a property grossing $1,900 a month rent. It may cover the loan payment, but it won't likely cover the other costs of ownership and have positive cashflow. I put an investor in a Las Vegas house for about $105,000 that grosses $1,300 a month in rent. That is a cashflow investment.

"There's not much to choose from," he said.

And even at the low end, the pace of sales also subsided since homebuyer tax credits dried up in June.

Lenders seized 604 homes from defaulting owners last month, 16.1 percent fewer than in October 2009, DataQuick reported.

Lenders also filed 1,501 default notices – the first stage in the foreclosure process – on borrowers who missed three or more payments. That's nearly a third fewer than the year-earlier level.

And since the rate of notices and foreclosures is a small fraction of the number of loan delinquencies, we continue to build an enormous shadow inventory. (see There are 36,000+ Distressed Properties in Orange County)

High, the Newport Beach agent, noted that prices will hold so long as the foreclosure rate holds steady.

But, he warned, "If we see an abundance of bank-owned properties coming on the market, we will see some volatility in prices."

Yes, downward volatility.

Culbertson, Coldwell Banker's regional chief, noted that the market needs to get over an "emotional drag," a sense among buyers that it's safe again to make a move. That won't occur until people start to hear more positive news about the economy and the job market, he said.

In other words, we need to give potential buyers a healthy dose of bullshit in order to dupe them into buying. This guy is shameless.

"The market that we're in right now," Culbertson said, "may be the market we're going to have to live with."

Register staff writer Jonathan Lansner contributed to this report.

Contact the writer: 714-796-7734 or

Foreclosure after 20 years loan ownership

Many loan owners started out in the late 90s and the 00s, so a housing bubble and irresponsible lending is all they know. However, many others survived the previous housing bubble and should have known better than to borrow themselves into oblivion. Today's featured owner borrowed all he could as soon as he could. He didn't leave much equity in the house before the market collapsed.

  • This house was purchased on 3/30/1990 for $260,000. The original mortgage information is not available, but it was likely a $208,000 first mortgage and a $52,000 down payment. That purchase date was the peak of the previous bubble. This owner spent most of the 90s underwater.
  • On 12/9/1997 he refinanced with a $243,000 first mortgage. As soon as the market bottomed, this borrower went Ponzi.
  • On 2/5/1998 he obtained a $50,000 stand-alone second.
  • On 12/14/2001 he refinanced with a $289,000 first mortgage.
  • On 5/23/2002 he obtained a $72,000 HELOC.
  • On 7/15/2003 he got a $322,000 first mortgage.
  • On 1/26/2005 he opened a $150,000 HELOC.
  • On 1/27/2006 he obtained a $592,000 Option ARM with a 2.2% teaser rate.
  • On 2/16/2006 he got a $65,000 HELOC.
  • On 6/26/2006 he enlarged his HELOC to $85,000.
  • Total property debt is $677,000.
  • Total mortgage equity withdrawal is $469,000.

If he hadn't borrowed the $469,000 as it appeared, he would only have netted about $300,000 on the transaction. Mortgage equity withdrawal is certainly the most efficient method for obtaining real estate equity. Of course, it is theft, and it requires sacrificing your credit score, but the potential gains are enormous. No wonder so many did it.

Irvine Home Address … 17501 TEACHERS Ave Irvine, CA 92614

Resale Home Price … $583,731

Home Purchase Price … $260,000

Home Purchase Date …. 3/30/1990

Net Gain (Loss) ………. $288,707

Percent Change ………. 111.0%

Annual Appreciation … 3.9%

Cost of Ownership


$583,731 ………. Asking Price

$116,746 ………. 20% Down Conventional

4.55% …………… Mortgage Interest Rate

$466,985 ………. 30-Year Mortgage

$114,752 ………. Income Requirement

$2,380 ………. Monthly Mortgage Payment

$506 ………. Property Tax

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

$97 ………. Homeowners Insurance

$224 ………. Homeowners Association Fees


$3,207 ………. Monthly Cash Outlays

-$398 ………. Tax Savings (% of Interest and Property Tax)

-$609 ………. Equity Hidden in Payment

$198 ………. Lost Income to Down Payment (net of taxes)

$73 ………. Maintenance and Replacement Reserves


$2,470 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$5,837 ………. Furnishing and Move In @1%

$5,837 ………. Closing Costs @1%

$4,670 ………… Interest Points @1% of Loan

$116,746 ………. Down Payment


$133,091 ………. Total Cash Costs

$37,800 ………… Emergency Cash Reserves


$170,891 ………. Total Savings Needed

Property Details for 17501 TEACHERS Ave Irvine, CA 92614


Beds: : 5

Baths: : 3

Sq. Ft.: : 2067


Lot Size: : 5,509 Sq. Ft.

Property Type:: Residential, Single Family

Style:: Two Level, A-Frame

Year Built: : 1971

Community: : Westpark

County: : Orange

MLS#: : S639286

On Redfin: : 2 days


BEST VALUE IN IRVINE AND MAY BE IN SOCAL. !!! PRICED FOR QUICK SALE!!!! THIS is it, don't miss this one. 5 Bed room 2.5 bath in great neighbour. Association pool, spa, basket ball court, Tennis court available. Great freeway access and very convinient location. Show and Sell.

neighbour? convinient?

After the flurry of ALL CAPS, the realtor ended the sentence fragment with a period, then she added three exclamation points. Half way through this description, there is no information, but plenty of extraneous realtorspeak. Awful.

This video is long, but it is worth a listen.

After Eight Years of Squatting, Who Absorbs the Losses?

The losses from the housing bubble will exceed $1.1 trillion. Who is going to pay for it?

Irvine Home Address … 29 SMOKESTONE 30 Irvine, CA 92614

Resale Home Price …… $285,000

Yeah runnin' down a dream

That never would come to me

Workin' on a mystery, goin' wherever it leads

Runnin' down a dream

I rolled on as the sky grew dark

I put the pedal down to make some time

There's something good waitin' down this road

I'm pickin' up whatever's mine

Tom Petty and the Heartbreakers — Running Down a Dream

Mortgage Mess: Shredding the Dream

The foreclosure crisis isn't just about lost documents. It's about trust—and a clash over who gets stuck with $1.1 trillion in losses

October 21, 2010 — Peter Coy, Paul M. Barrett and Chad Terhune

In 2002, a Boca Raton (Fla.) accountant named Joseph Lents was accused of securities law violations by the Securities and Exchange Commission. Lents, who was chief executive officer of a now-defunct voice-recognition software company, had sold shares in the publicly traded company without filing the proper forms. Facing a little over $100,000 in fines and fees, and with his assets frozen by the SEC, Lents stopped making payments on his $1.5 million mortgage.

The loan servicer, Washington Mutual, tried to foreclose on his home in 2003 but was never able to produce Lents' promissory note, so the state circuit court for Palm Beach County dismissed the case. Next, the buyer of the loan, DLJ Mortgage Capital, stepped in with another foreclosure proceeding. DLJ claimed to have lost the promissory note in interoffice mail. Lents was dubious: "When you say you lose a $1.5 million negotiable instrument—that doesn't happen." DLJ claimed that its word was as good as paper. But at least in Palm Beach County, paper still rules. If his mortgage holder couldn't prove it held his mortgage, it couldn't foreclose.

Eight years after defaulting, Lents still hasn't made a payment or been forced out of his house. DLJ, whose parent, Credit Suisse, declined to comment for this story, still hasn't proved its ownership to the satisfaction of the court. Lents' debt has grown to about $2.5 million, including unpaid taxes, interest, and penalties. As the stalemate grinds on, Lents has the comfort of knowing he's no longer alone. When he began demanding to see the I.O.U., he says, "I was looked upon like I had leprosy. Now, I have probably 20 to 30 people a month come to me" asking for advice. Lents is irked when people accuse him of exploiting a loophole. "It's not a loophole," he says. "It's the law."

The Lents Defense, as it might be called, doesn't work everywhere.

This guy is obviously a crook. Wether the bank can produce the paperwork or not doesn't change the basic facts:

  1. There was a note at one time that encapsulated the agreement between this borrower and the lender.
  2. He did borrow the money.
  3. He did agree to repay the money or surrender the house in a foreclosure action.

Since these basic facts are not in dispute, and since Mr. Lent's is not disputing that he failed to meet his contractual obligations, why can't this foreclosure go forward? He says this is not a loophole, but this clearly is a loophole or technical evasion. This squatter needs to get out the bank's house, then he can fight with them over "damages" caused by their failure to produce the note. Since he obviously is not being damaged in any way, his frivilous counter-suit would be dismissed.

So who ends up paying for the losses caused by this squatter. On the surface, this looks like a bank loss, but we all know that the taxpayer will ultimately be on the hook. Are you happy about this guy squatting in luxury while you pay for it?

Thousands of Floridians have lost their homes in lightning-fast "rocket dockets." In 27 other states, judges don't even review foreclosures, making it harder for homeowners to fight back….

Even if the documentation problems turn out to be manageable—as Bank of America (BAC) and others insist they will be—the economy will still suffer long-term consequences from the loose underwriting that caused the subprime housing bubble.

Bullshit alert! This was NOT a subprime housing bubble. The damage has largely been felt by subprime borrowers only because the alt-a and prime borrowers who defaulted have been allowed to squat. When the media begins falsely portraying this as a subprime housing bubble, it implies this was a problem caused by and limited to subprime. That is not accurate, and if widely believed may cause policy errors directed toward the "subprime" problem.

According to an Oct. 15 report by J.P. Morgan (JPM) Securities, some $2 trillion of the $6 trillion in U.S. mortgages and home-equity loans that were securitized during the height of the bubble, from 2005 through 2007, are likely to go into default. The report says the housing bust will ultimately cause losses of $1.1 trillion on those bonds.

Who is going to absorb the $1,100,000,000,000 in losses? The banks can't absorb that much as it would completely wipe out the capital in our banking system. In the end, it will be a combination of investor losses, bank losses, and US taxpayer bailouts that mop up this mess. As you might imagine, investors and bankers are working feverishly to pass that loss on to you.

While banks and investors take their hits, millions of homeowners continue to be punished by unaffordable mortgage payments and underwater home values.

Punished? Well, it they stupidly took on a mortgage payment they cannot afford, they deserve it. If they bought an overvalued house, that is their problem. The authors are setting up loan owners as victims when many of them were buying based on greed.

Laurie Goodman, a mortgage analyst at Amherst Securities Group, said in an Oct. 1 report that if government doesn't step up its intervention, over 11 million borrowers are in danger of losing their homes. That's one in five people with a mortgage. "Politically," she wrote, "this cannot happen. The government will attempt successive modification plans until something works."

We are revisiting this nonsense again. Why can't this happen? What if it does? People will move out of their homes, and new people will move in. So what?

I think she is right that the government will do everything it can to prevent the market from doing what it must to clear the bad debt, and in the process, the government's actions will delay the recovery and cause more people to suffer. When it's all over, the government will release some bullshit report claiming everything they did was right and helpful.

Meanwhile, a high-stakes fight is breaking out between the banks that made loans and the investors who bought them. A shot was fired on Oct. 18 when a group of major investors claimed that Bank of America's Countrywide Home Loan Servicing had failed to live up to its contracts on some of more than $47 billion worth of Countrywide-issued mortgage bonds. The group said Countrywide Servicing has 60 days to correct the alleged violations, such as failure to sell back ineligible loans to the lenders. According to people familiar with the matter, the group includes Pimco, BlackRock (BLK), and the Federal Reserve Bank of New York.

For banks that have just started making money again after near-death experiences in 2008, mortgage losses could delay the return to good health. Chris Gamaitoni, an analyst for Compass Point Research & Trading, a Washington financial advisory firm, estimates losses for the big banks of $134 billion from having to buy back bad loans from private investors and another $27 billion in losses from buying back loans from Fannie Mae and Freddie Mac. Other estimates are lower—from $20 billion to $84 billion—in part because those analysts are less certain than Gamaitoni that investors will succeed in court.

This battle between investors and bankers is more important than most realize. If the investors win, and if banks are liable to repay these losses, banks will suffer longer, and the economy will continue to sputter.

Bank of America, the nation's largest lender, has resorted to tough tactics in resisting repurchases of bad loans. Facing pressure from Freddie Mac, one of the two government-controlled mortgage financing companies, to buy back money-losing home loans with problems like inflated appraisals, overstated borrower income, or inadequate documentation, Bank of America issued a blunt threat, according to two people with direct knowledge of the incident. If Freddie Mac did not back off its demands for the buybacks, Bank of America officials said, the bank would take more of the new, more profitable mortgages it is originating these days to rival Fannie Mae, these people said. Freddie and Fannie, known as GSEs (government-sponsored entities), need a steady supply of healthy new loans to climb out of their financial hole.

Now that is playing hardball. Good for Bank of America.

The claimed threat from Bank of America, which was not put into writing, according to one of these people, was taken seriously enough that it has been discussed at several Freddie Mac board meetings, including one in mid-October. Some officials have urged the Federal Housing Finance Agency—the government conservator that has controlled Fannie and Freddie since they were bailed out in 2008—to confront Bank of America and prevent it from trying to play one against the other, which may be infuriating but is not illegal. "If the tactic worked, I'd be shocked and appalled," said Thomas Lawler, a former portfolio manager at Fannie Mae and now an economic consultant. "The GSEs are supposed to be run now to minimize losses to the taxpayers. Freddie ought to ignore the threat." FHFA Acting Director Edward J. DeMarco declined to comment, as did officials of Freddie Mac. Bank of America also declined to comment.

Why shouldn't Bank of America play one off against the other? The whole reason there are two GSEs instead of one was to foster competition and prevent either from having monopoly powers.

For policymakers, the dilemma is this: Enormous losses will cause problems wherever they end up. They could further harm Fannie and Freddie, which insure the vast majority of the nation's mortgages and have already received nearly $150 billion in taxpayer support. Or, if Fannie and Freddie succeed in pushing the burden back to the banks, the losses could cripple some of the major institutions that have just emerged from a government bailout. Bank of America faces $12.9 billion in buyback requests, and mortgage insurers have asked for the documents on an additional $9.8 billion on which they may consider seeking repurchases, according to regulatory filings. (Bank of America has put aside $4.4 billion for buybacks, and CEO Brian T. Moynihan says the costs will be manageable.) "The Treasury is very aware that they can't push too hard on this because if you do push too hard it might put the companies in negative capital again," says Paul J. Miller, an analyst at FRB Capital Markets. "There's a lot of regulatory forbearance going on."

Aside from ignoring banks' bad debts, Washington hasn't done much to fix the crisis. Both houses of Congress easily passed a bill this year that would have undermined centuries of law by requiring every state to recognize MERS-type electronic records from other states. Only a pocket veto by President Barack Obama kept it from becoming law.

One option, opposed by the Obama Administration and most Republicans in Congress but favored by Senate Majority Leader Harry Reid and others, is a national moratorium on foreclosures. It would last until regulators assure themselves that lenders have straightened out their foreclosure procedures.

So how is that supposed to work? The banks have all resumed their foreclosure proceedings, and they all claim they have worked out any procedural problems. Who can claim otherwise? Do we want to give a bunch of bureaucrats the ability to hold up foreclosures because in their opinion the banks procedures are inadequate? If the banks were not complying with existing laws, then they should be held accountable, but so far, there have been very few cases where any procedural flaws have been identified, and many reporters, loan owners, and attorneys have been looking.

Opponents say it would delay the recovery of the housing market by preventing qualified buyers from getting their hands on foreclosed homes.

Opponents of a moratorium say those things because it does delay the recovery, and it does prevent a qualified buyer from getting their new home.

Look at the language the authors used, "getting their hands on foreclosed homes." They portray the new buyer — a buyer qualifying under new stricter lending standards who will likely make their payments — as some kind of illegitimate claimant, a greedy buyer trying to get their filthy hands on someone else's property. The author's agenda is showing.

Supporters of the idea, such as Dean Baker, co-director of the Center for Economic and Policy Research, say there are plenty of already foreclosed homes available for sale and thus no urgent need to add to the supply.

Goodman, the Amherst Securities analyst, says banks need to reduce the principal that people owe on their homes so they have an incentive not to walk away. "Ignoring the fact that the borrower can and will default when it is his/her most economical solution is an expensive case of denial," Goodman writes. If the home whose mortgage was reduced happens to regain value, 50 percent of the appreciation would be taxed, she says. Meanwhile, to discourage people from sitting tight in homes while foreclosure proceedings drag on, she would have the government tax the benefit of living in the home rent-free.

Those ideas are bad on many levels. First, Foreclosure Is a Superior Form of Principal Reduction. Giving borrowers money only encourages the worst kind of moral hazard. Banks are far better off losing more money now and eliminating moral hazard than encouraging borrowers to steal from them over and over again in the future. Second, the 50% tax on appreciation sounds great, but as soon as some seller somewhere has to actually pay that tax, there will be a tax revolt, and congress will roll over and repeal the tax.

The one idea I do like is taxing the squatters. These people are receiving the beneficial use of the property as surely as if it were a gift of cash. It should be taxed to help pay for the bailouts.

CitiMortgage is testing an innovative alternative based on the legal procedure known as "deed in lieu of foreclosure." The owner turns the deed over to the bank without a fight if the bank promises not to foreclose, lets the family stay in the house after the agreement for six months, and gives relocation assistance.

In other words, CitiMortgage is giving cash for keys, a practice I am learning much about in Las Vegas.

Other ideas: In a New York Times blog post on Oct. 19, Harvard University economist Edward Glaeser suggested federal assistance to overwhelmed state and local courts, as well as $2,000 vouchers for legal assistance to low-income families that can't afford to fight foreclosures.

Just what we need, a handout for attorneys.

Bloomberg News columnist Kevin Hassett, who is director of economic policy studies at the American Enterprise Institute, says in his Oct. 18 column that the newly created Financial Stability Oversight Council should make the foreclosure mess its first big project, "take authority for solving it, and do so as swiftly as possible."

Speed is essential. The longer it drags on, the more the foreclosure crisis corrodes Americans' faith in their financial and legal systems. A pervasive sense of injustice is bad for the economy and democracy as well. Take Joe Lents. The Boca Raton homeowner hasn't made a mortgage payment since 2002, but he perceives himself as a victim. "I want to expose these guys for what they're doing," Lents says. "It's personal now."

Yes, let's take Joe Lents as an example. He is a perfect example of how a pervasive sense of injustice and victimhood can be cultivated among those perpetrating the injustice. Squatters need to get out of the houses they are not paying for. The pervasive injustice is that good families with the buying power to purchase a home are being denied that opportunity by delays in the foreclosure process and political grandstanding.

Evict the squatters now!

He nearly quadrupled his mortgage debt

Some borrowers were obviously gaming the system. No amount of careless spending can explain a borrower that methodically increases his mortgage to its maximum at every opportunity. This borrower had to know he was stripping the equity out of this place, and he was going to do so until he couldn't borrow any more. There was no thought given to actually paying down the mortgage.

  • Today's feature property is one of the hardest working condos I have seen to date. The property was purchased on 8/24/1998 for $130,000. The owner used a $104,000 first mortgage, a $13,000 second mortgage, and a $13,000 down payment.
  • On 3/9/2000 he got a stand alone second for $35,000. After about 18 months of ownership, he got back his down payment plus $18,000 (about $1,000 per month). It almost makes this property cashflow positive if you look at it that way.
  • On 6/7/2002 he refinanced the first mortgage for $176,000.
  • On 6/5/2003 he refinanced the first mortgage for $262,675.
  • On 4/14/2003 he refinanced with a $274,400 first mortgage.
  • On 7/8/2004 he refinanced with a $364,500 first mortgage and obtained a HELOC for $20,250.
  • On 11/1/2006 he refinanced with a $353,000 first mortgage and a $43,950 stand-alone second.
  • Total property debt is $396,950.
  • Total mortgage equity withdrawal is $279,950.
  • Total squatting time is over two years.

Foreclosure Record

Recording Date: 07/08/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 04/16/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 01/12/2009

Document Type: Notice of Default

So what do you think about this borrowers behavior? Perhaps we should reward him with principal reduction. He would be happy to borrow that money all over again, particularly if you are going to pay it off for him through your tax dollars.

Irvine Home Address … 29 SMOKESTONE 30 Irvine, CA 92614

Resale Home Price … $285,000

Home Purchase Price … $130,000

Home Purchase Date …. 8/24/1998

Net Gain (Loss) ………. $137,900

Percent Change ………. 106.1%

Annual Appreciation … 6.5%

Cost of Ownership


$285,000 ………. Asking Price

$9,975 ………. 3.5% Down FHA Financing

4.29% …………… Mortgage Interest Rate

$275,025 ………. 30-Year Mortgage

$54,336 ………. Income Requirement

$1,359 ………. Monthly Mortgage Payment

$247 ………. Property Tax

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

$48 ………. Homeowners Insurance

$290 ………. Homeowners Association Fees


$1,944 ………. Monthly Cash Outlays

-$123 ………. Tax Savings (% of Interest and Property Tax)

-$376 ………. Equity Hidden in Payment

$15 ………. Lost Income to Down Payment (net of taxes)

$36 ………. Maintenance and Replacement Reserves


$1,496 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$2,850 ………. Furnishing and Move In @1%

$2,850 ………. Closing Costs @1%

$2,750 ………… Interest Points @1% of Loan

$9,975 ………. Down Payment


$18,425 ………. Total Cash Costs

$22,900 ………… Emergency Cash Reserves


$41,325 ………. Total Savings Needed

Property Details for 29 SMOKESTONE 30 Irvine, CA 92614


Beds: 2

Baths: 2 baths

Home size: 917 sq ft

($311 / sq ft)

Lot Size: n/a

Year Built: 1980

Days on Market: 174

Listing Updated: 40480

MLS Number: R1003214

Property Type: Condominium, Residential

Community: West Irvine

Tract: Othr


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