Borrowers choosing to keep the second mortgage current is an unexepected phenomenon in the outbreak of first mortgage defaults.

Irvine Home Address … 28 YORKTOWN Irvine, CA 92620

Resale Home Price …… $695,000

What has happened to it all?

“Crazy,” some would say.

Where is the life that I recognize?

Gone away…

But I won't cry for yesterday, there's an ordinary world,

Somehow I have to find.

And as I try to make my way to the ordinary world,

I will learn to survive.

Duran Duran — Ordinary World

At a basic level, each of us wants the safety and security of an ordinary world of predictable surroundings and routines. The real estate and mortgage world we live in today is a surreal landscape of failed loan programs, ever-tightening credit standards, and uncertainty about the future of real estate prices.

The success or failure of many loan programs will determine the likelihood of their reappearance in an altered form. Subprime first-mortgage lending will return. The 20% down piggy-back loans and 100% HELOCs are not coming back soon. The second mortgage liens — the key problem for bank's residential loan portfolios — are performing very badly, and they will continue to post losses exceeding expectations. However, these loans are performing better than I thought they would because people are choosing to pay these credit lines even if they bail on the first mortgage.

Few good options

A distressed and underwater homeowner has few good options concerning their mortgage obligations. Most just keep paying even if it means sacrificing everything else. Many choose to accelerate their inevitable defaults, and they quit paying on both the first mortgage and the second mortgage.

If a borrower fails to pay either loan, the lender can chose to foreclose or try to negotiate a settlement. A seocnd mortgage lien holder has very little leverage in these negotiations because in a foreclosure, that lender is no longer secured by the property, and if the borrower has no other assets, there is little chance of recovery on the bad loan.

I had expected to see many people default on their second mortgage while keeping the first mortgage current. The first mortgage may not be underwater even though the CLTV is more than 100%. Most borrowers would consider the threat of foreclosure from a second lien holder to be an empty threat because that second mortgage gets wiped out in the foreclosure. People could go on paying the first mortgage and stay in the house because the second mortgage would not foreclose. What we are actually seeing is the opposite of what I expected.

Strategic defaulters opt to continue paying on second liens

by KERRY CURRY — Tuesday, December 14th, 2010, 6:50 am

Borrowers who strategically default on their first mortgage often continue to pay on home equity lines of credit, according to a new white paper from two authors with the Philadelphia Federal Reserve.

The authors, Julapa Jagtiani and William W. Lang, said they wanted to take a closer look at the little-studied phenomenon of strategic default behavior as it relates to first- and second-lien mortgages.

“Predicting mortgage losses has become more difficult with the increase in strategic default behavior and the increase in loan modifications,” the paper said.

Our current accounting fantasies encapsulated in amend-extend-pretend is based on mythical loss recoveries based on past behavior. The study periods do not include times like now — when strategic default is a good idea. Strategic default is going to be much more severe than ever before, and banks are going to lose much more money than they currently project. When amend-extend-pretend becomes a crisis, when the banks lies are fully revealed, lenders will say their fraudulent accounting projections were based on past data. The actual performance didn't match past projections due to the housing bubble. No kidding.

“Focusing on mortgage defaults, our results indicate that the default rate for first mortgages far exceeded those of the second-lien mortgages during the financial crisis. This behavior was not observed in the pre-financial crisis period (i.e., the booming period of 2004-2006).”

About 20% of borrowers in the process of foreclosure due to defaults on the first mortgage kept their second-lien mortgage current. Among those who defaulted on their second-lien mortgages, about 80% also defaulted on their first-lien mortgage.

Data for the study came from a large random sample of individual credit records drawn at the end of each quarter from Equifax, a national credit bureau. The authors only studied consumers who had one first mortgage and at least one home equity line of credit or home equity loan over the period beginning in the fourth quarter of 2004 and ending in the second quarter of 2010. The study merged the Equifax data with another database of loan-level data from LPS Applied Analytics.

The data contradict the hypothesis that consumers would strategically default on a second lien and keep their first lien current to reduce their monthly payment and thus avoid a foreclosure, the white paper said.

That is what I thought would happen.

Instead, a far larger number of households do the opposite; that is, they default on their first lien — thus risking a foreclosure — while keeping their underwater second-lien mortgages current.

The reason?

The authors hypothesized that borrowers have incentives to keep their second lien current — after having stopped paying their first mortgage — in order to maintain their access to credit through the HELOC.

I think that conclusion is highly suspect. Most of these people likely don't have a HELOC they can access because they are underwater.

The study also found that the size of the unused line of credit is an important factor. Homeowners with larger credit lines are less likely to default, as they are motivated to maintain their access to the credit line.

That sounds more reasonable. For people with equity, access is merely having liquidity. Of course, homeowners with larger credit lines and plenty of equity probably don't need to borrow much money and aren't in as much financial distress as those who are maxed out.

Like other studies and white papers, this one also found that negative equity is a big driver in strategic default.

“A large portion of first mortgages with estimated LTV (loan-to-value) ratios greater than 100% is still current, but the continued willingness and ability of these homeowners to make their mortgage payments is subject to great uncertainty,” the authors wrote.

The paper also noted that banks are not punishing borrowers who default on their first mortgages by limiting access to their home equity lines of credit. That could be due to poor risk management practices or lack of timely updates on consumer's risk scores, the paper said.

“Most of the HELOC lines were not increased or decreased after the borrowers defaulted on their first mortgages,” the paper said. “About 90% of the lines remain unchanged even after three quarters following first mortgage default. Interestingly, a small percentage (3% to 6%) of these borrowers had their HELOC lines increased.”

I find it astonishing that people who default don't have their credit lines frozen immediately. Isn't continued borrowing after a default a good sign that a borrower has gone Ponzi? Banks can't be that stupid, can they?

Lenders have the right to foreclose in defaults of first- or second-lien mortgages.

Given the large number of current homeowners with negative equity, there are likely a large number of borrowers who could default on their home equity loans without being forced into foreclosure, the paper noted.

“The data indicate, however, that borrowers rarely engage in this strategy even though it appears to be viable.“

Although homeowners could default on their second-lien mortgages, lower their mortgage payment, and stay in the home, the loan contract stays valid and unpaid interest payments would keep accumulating. Should the house be sold, the second-lien creditor would be eligible for the recovery after the first-lien creditor is paid, the paper said.

Perhaps it is this last point that stops more people from defaulting on their second mortgages. Perhaps borrowers really do recognize that second mortgage debt is just like a credit card that follows them after they leave the house. If people accept that they can't escape the debt without bankruptcy, and they are unwilling to give up access to credit, then they will keep paying their second mortgages to keep the credit lines alive.

How did they spend their house?

I can 't give you a detailed story on how this family buried themselves with mortgage debt. I'm sure their entitlements demanded they spend copious amounts of cash. This house was purchased back in 1993 for $255,000, and it went into foreclosure being worth three times as much. We all know how that happens. Unfortunately, the sordid details are missing from my data source. Whatever they did, we can assume it was typical of the others I have profiled and leave it at that.

Irvine Home Address … 28 YORKTOWN Irvine, CA 92620

Resale Home Price … $695,000

Home Purchase Price … $255,000

Home Purchase Date …. 9/10/1993

Net Gain (Loss) ………. $398,300

Percent Change ………. 156.2%

Annual Appreciation … 5.7%

Cost of Ownership

————————————————-

$695,000 ………. Asking Price

$139,000 ………. 20% Down Conventional

4.87% …………… Mortgage Interest Rate

$556,000 ………. 30-Year Mortgage

$141,784 ………. Income Requirement

$2,941 ………. Monthly Mortgage Payment

$602 ………. Property Tax

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

$116 ………. Homeowners Insurance

$0 ………. Homeowners Association Fees

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

$3,659 ………. Monthly Cash Outlays

-$715 ………. Tax Savings (% of Interest and Property Tax)

-$684 ………. Equity Hidden in Payment

$260 ………. Lost Income to Down Payment (net of taxes)

$87 ………. Maintenance and Replacement Reserves

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

$2,607 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$6,950 ………. Furnishing and Move In @1%

$6,950 ………. Closing Costs @1%

$5,560 ………… Interest Points @1% of Loan

$139,000 ………. Down Payment

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

$158,460 ………. Total Cash Costs

$39,900 ………… Emergency Cash Reserves

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

$198,360 ………. Total Savings Needed

Property Details for 28 YORKTOWN Irvine, CA 92620

——————————————————————————

Beds: 4

Baths: 2 baths

Home size: 1,918 sq ft

($362 / sq ft)

Lot Size: 4,758 sq ft

Year Built: 1977

Days on Market: 44

Listing Updated: 40526

MLS Number: S638130

Property Type: Single Family, Residential

Community: Northwood

Tract: Ip

——————————————————————————

INVESTOR OWNED FORECLOSURE, INCREDIBLE OPPORTUNITY ON THIS QUIET CUL-DE-SAC HOME!! This home just had a $70K remodel and is totally turnkey. It has never been lived in since the remodel. Spacious private master suite, w/ walk-in closet. Three other larger than average bedrooms w/ mirrored closets. The complete kitchen remodel will be the pride of you at home gourmet with its New Appliances, Granite Counters, Stone Floor, & Custom Cabinets. The living room features soaring cathedral ceilings & a cozy Travertine fireplace. The bathrooms are completely remodeled including under mount sinks, Granite Counters, New Fixtures, and Custom Cabinets. The ceilings have been scraped, Canned lights, 4' Base boards, Crown Moulding, Plantation shutters, New carpet, & New designer paint throughout. Extra large 3 car garage has direct entry to the home. A great location just steps from Northwood Park.

Irvine isn't the only community that thinks it's special and their house prices are immune to decline. Today we look at the small Orlando suburb, Celebration, Florida.

Irvine Home Address … 17 ALTEZZA Irvine, CA 92606

Resale Home Price …… $650,000

Under the sea we off the hook

We got no troubles

Life is the bubbles

Under the sea

Under the sea

Since life is sweet here

We got the beat here

Naturally

The Little Mermaid — Under the Sea

The last place I lived in Florida before moving to California was the Disney creation, Celebration, Florida. I had just sold my house in Leesburg, Florida, and my soon-to-be wife and I rented the apartment (now condo) above Max's Cafe downtown. It sold me on living in planned communities.

Celebration, Florida, is a small suburb of Orlando. The property was designed and developed by the Disney Company on their own land under principals set down by Walt Disney himself. Celebration was Walt Disney's utopian vision of the perfect American life.

After living there for a year, I felt they did a wonderful job of creating a small town in large and growing metropolis. Particularly if you lived at or near the downtown like we did, you had recreation, dining, and entertainment in an enjoyably walkable place.

(mine was in the building on left, middle of three with large white awnings over the corner restaurant)

Celebration has much in common with Irvine. Both communities were developed by a single landowner ensuring a consistent level of quality throughout. Both communities were marketed at a more affluent move-up buyer but smaller products at lower price points provided a nice mix of owners. Both communities also saw house prices inflated dramatically during the housing bubble.

So where is Celebration different from Irvine. Irvine must be special because Celebration's house prices have crashed while Irvine's have held up. It must be different here, right?

Pixie Dust Loses Magic as Foreclosures Slam Utopian Disney Town

By Kathleen M. Howley – Dec 13, 2010 9:00 PM PT

Walt Disney Co. built Celebration, Florida, as an idealized version of a circa-World War II small town, where litter-free streets are lined with white picket fences and front porches entice neighbors to sit after dinner.

Now, there’s trouble in the 16-year-old paradise set within earshot of the nightly fireworks at Walt Disney World Resort.

Celebration’s foreclosure rate is about double the state’s pace as homeowners who paid a premium for a vision of utopia fall behind on their mortgages. Earlier this month, a resident on the verge of losing his house shot himself after a 14-hour standoff with police. Three days before that, the town had its first murder when a man was bludgeoned with an ax.

Celebration had everything going for it making even the most insane prices seem like a logical recognition of value by the market. There was no reason to believe house prices would decline in Celebration except for the fact that prices were way too high.

“A lot of people bought homes in Celebration thinking Tinker Bell had sprinkled the town with pixie dust,” said Michael Olenick, chief executive officer of mortgage-data firm Legalprise Inc., referring to the character in Disney’s “Peter Pan” movie whose magical dust allows people to fly as long as they think happy thoughts. “Reality is hitting hard.”

The foreclosure rate in Celebration since the beginning of 2009, based on notices of so-called lis pendens that initiate a case, is one for every 20 residents, compared with one per 48 people in Florida as a whole, according to Legalprise, in West Palm Beach. Celebration home values have dropped as much as 60 percent from the 2006 peak, while statewide values are down 51 percent, data from Seattle-based research firm Zillow Inc. show.

That is astonishing to me that a premium community could fall so hard. Celebration is great. Desirability is not causing prices to crater there.

‘Fantasyland’ Premium

Celebration foreclosures are happening at a faster pace in part because property owners in financial trouble are walking away from vacation homes in the town, where real estate sells for about 30 percent more than surrounding communities, said Olenick. Before the recession, people were willing to pay more for living in a Disney “fantasyland,” he said.

“The harsh reality is, bad things happen in Celebration too, both in real estate and in life,” Olenick said.

It's a good thing those bad things don't happen here.

… Disney started building Celebration in 1994, and the first residents arrived in 1996. Located on the southern border of Disney World, 25 miles south of Orlando, it was designed by Robert A.M. Stern, dean of the Yale University School of Architecture, and Jaquelin Robertson, a founding partner at Cooper, Robertson & Partners in New York. The style of the development is called New Urbanism, also known as neotraditionalism, emulating 1950s mixed-use neighborhoods where it was easier to walk than to drive.

Kilwin’s, Woof Gang

In the center of town, bordering a lake constructed by Disney, stores include Kilwin’s, a seller of ice cream and fudge, and the Woof Gang Bakery, where dog owners buy gourmet treats. At the Market Street Cafe, there’s an old-fashioned soda counter where diners can order the restaurant’s specials: meat loaf and chicken pot pie, followed by apple or pecan pie.

Lexin Capital, a New York-based private real estate investment firm, bought the 18-acre Celebration downtown from Disney in 2004. Mike Nunez, a spokesman for the company, didn’t return calls seeking comment. Disney still owns some commercial property in the town, according to Marilyn Waters, a spokeswoman for the Burbank, California-based company.

I find it interesting that Disney sold the downtown. It was not a great commercial center when I was there prior to the bubble, but the lack of foot traffic was likely due to the shortage of households in the early stages. Disney took a risk developing the commercial before the residential was there to support it.

Twice the Value

Living 12 minutes from Disney World’s Magic Kingdom, with a backdoor access road, comes at a price. Buying in the 10,000- person town requires paying what locals call the “Celebration Premium.” The median home value, including single-family properties and condominiums, was $250,800 in October, almost twice the $127,300 for the entire state, according to Zillow.

Sounds like Irvine and the "Irvine Premium," doesn't it?

Properties in Celebration are priced as high as $3.9 million for a six-bedroom, 8,000-square-foot (743 square-meter) mansion on a three-quarter-acre lot, according to Realtor.com. At $529,000, buyers could get a four-bedroom, 2,800-square-foot home with a wrap-around porch on about a sixth of an acre.

For condominiums, $90,000 will buy a two-bedroom, 1,000- square-foot unit, according to Realtor.com. At the top of the market, a five-bedroom, 3,400-square-foot, townhouse-style condo is priced at $675,000.

Four years ago, at the height of the real estate boom, the least expensive single-family house in the June to December period sold for $350,000, according to Kathleen Carlson, owner of Imagination Realty in the town’s center. In the same period this year, it was $210,000, she said.

The lowest condominium sale in the boom was $193,000, compared with a sale at $70,000 for the 2010 period, she said.

On a percentage basis, condos rose more and fell more than larger single-family detached properties. Of course, many of the mid to high end properties have not hit bottom yet either.

Town Maintenance

All owners pay about $860 a year for private trash pickup and recreational facilities, including parks, community pools and baseball fields. Condo owners pay an additional maintenance fee that varies depending on location.

The town’s Architectural Review Committee maintains strict control over the appearance of properties, dictating paint colors, regulating holiday decorations and overseeing the size of political signs that can only be posted in the 45 days leading up to an election.

Most residents see the rules as “protection,” said Carlson, who lives in a Celebration home with a wide front porch where she drinks coffee with neighbors on Sunday mornings.

“Most of us came here not because of Disney — we came because we wanted that type of control over our neighborhood,” Carlson said, “You don’t have to worry that your neighbor will suddenly start parking an old pickup on his front lawn.”

Isn't that Irvine? People don't come to Irvine to seek freedom to do whatever they want with their properties. People buy here because they know they aren't going to devalue their property, and they want neighbors that won't hurt values either. The HOAs get larger, take on more maintenance responsibilities, and stop homeowners from painting garish colors or parking cars up on blocks in the front yard.

Six Acceptable Styles

Like Carlson’s house, most properties have front porches that encourage neighborliness. There are six accepted historical architectural styles for homes: Victorian, Classical, Colonial Revival, Mediterranean, French, and Coastal.

While white picket fences outline most front yards, not everyone is allowed to have them. That would look too fake, said Laura Poe, a spokeswoman for the town. The architectural committee decides who can have the old-fashioned fences and who must have short, trimmed hedges.

The town shows its Disney heritage in annual seasonal shows, each with special effects originally designed by the entertainment company. In October, leaf-shaped confetti shoots out of lamp posts in the village center to simulate colorful falling foliage. During the month of December, the posts emit what locals call snoap — soap suds that look like snow.

Unlike in real life, the snow falls four times a night, on schedule, and dissipates without shoveling.

“Two of my grandchildren think we live inside Disney World, with Mickey Mouse,” said Celebration resident Sessoms, referring to a four-year-old and a five-year-old. “Except for the recent violence, I can understand why they would think that.”

Irvine is Celebration, minus the price crash. Will Irvine continue to escape the carnage? Perhaps we have less debt and fewer debtors here?

She borrowed and spent every penny she could get

The owner of today's featured property really became adept at raiding the housing ATM. She stopped paying about two years ago, but the property is only now making it to market. This one only hid in shadow inventory for about six months after the bank bought it. They probably couldn't find the right renter and decided to sell.

• This property was purchased at the bottom of the last housing bubble. She paid $241,000 on 9/12/1997. She used a $202,000 first mortgage and a $39,000 down payment. She didn't want to wait long to get back that down payment money.
• On 1/15/1998 she obtained two a stand-alone second mortgages for $25,000 and $16,000 respectively.
• On 8/12/1999 she refinanced with a $294,000 first mortgage. Less than a year into the house, and she managed to withdraw her down payment plus $53,000.
• On 2/21/2001 she obtained a stand-alone second for $75,000.
• On 10/10/2002 she refinanced the first mortgage for $374,000.
• On 7/3/2003 she refinanced again with a $454,500 first mortgage.
• On 8/29/2003 she refinanced with a $456,000 first mortgage.
• On 12/18/2003 she obtained a $100,000 HELOC.
• On 1/4/2005 she refinanced with a $600,000 first mortgage and a $150,000 stand-alone second.
• On 12/9/2005 she refinanced with a $680,000 first mortgage and a $170,000 stand-alone second.
• Total property debt was $850,000.
• Total mortgage equity withdrawal was $648,000.
• She squatted for about 15 months.

Foreclosure Record

Recording Date: 10/02/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 05/04/2009

Document Type: Notice of Default

She quit paying in late 2008 or early 2009, probably when she saw the housing ATM was turned off for a while. The bank foreclosed on 5/10/2010 for $749,912. For the last 6 months, they have been "processing" this REO.

Irvine Home Address … 17 ALTEZZA Irvine, CA 92606

Resale Home Price … $650,000

Home Purchase Price … $241,000

Home Purchase Date …. 9/12/1997

Net Gain (Loss) ………. $370,000

Percent Change ………. 153.5%

Annual Appreciation … 7.4%

Cost of Ownership

————————————————-

$650,000 ………. Asking Price

$130,000 ………. 20% Down Conventional

4.87% …………… Mortgage Interest Rate

$520,000 ………. 30-Year Mortgage

$132,604 ………. Income Requirement

$2,750 ………. Monthly Mortgage Payment

$563 ………. Property Tax

$167 ………. Special Taxes and Levies (Mello Roos)

$108 ………. Homeowners Insurance

$167 ………. Homeowners Association Fees

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

$3,756 ………. Monthly Cash Outlays

-$468 ………. Tax Savings (% of Interest and Property Tax)

-$640 ………. Equity Hidden in Payment

$243 ………. Lost Income to Down Payment (net of taxes)

$81 ………. Maintenance and Replacement Reserves

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

$2,972 ………. 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

$45,500 ………… Emergency Cash Reserves

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

$193,700 ………. Total Savings Needed

Property Details for 17 ALTEZZA Irvine, CA 92606

——————————————————————————

Beds: 3

Baths: 2 full 1 part baths

Home size: 2,056 sq ft

($316 / sq ft)

Lot Size: 2,550 sq ft

Year Built: 1996

Days on Market: 32

Listing Updated: 40525

MLS Number: S639477

Property Type: Single Family, Residential

Community: Westpark

Tract: Trov

——————————————————————————

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

BACK ON THE MARKET!!! Don't miss out on this beautiful home located in the Westpark area features 3 bedrooms plus a bonus room, large master bedroom with walk in closet, upstairs laundry room, fireplace in living room, 2 car attached garage, and much more! .

The published figures for negative equity doesn't account for necessary sales discounts, sales costs, and realtor commissions. The true negative equity rate is much worse.

Irvine Home Address … 38 WILLOWGROVE Irvine, CA 92604

Resale Home Price …… $559,900

Well I know, I miss more than hit

With a face that was launched to sink

An' I seldom feel, the bright relief

It's been the Worst Day Since Yesterday

If there's one thing I have said

Is that the dreams I once had, now lay in bed

As the four winds blow, my wits through the door

It's been the Worst Day Since Yesterday

Fallin' down to you sweet ground

Where the flowers they bloom

It's there I'll be found

Hurry back to me, my wild calling

It's been the Worst Day Since Yesterday

Flogging Molly — The Worst Day Since Yesterday

Almost a quarter of all homeowners with a mortgage are underwater. It's a staggering number. But the effective home equity is worse than the officially reported figures would suggest. Since selling a house has a cost paid by the seller, 6% to 10% of home equity is pulverized to grease the wheels of commerce. That being the case, a prolonged period of stagnant home prices immobilizes the population. With no equity to pay the transaction costs of leaving, homeowners with less than 10% equity are effectively underwater.

IMO, the actions taken by lenders, the Federal Reserve and our government to create an artificial bottom in house prices is going to drag this problem out for years. Ultimately, not letting home prices fall will be viewed as a mistake.

When a market bottoms and prices start moving up slowly but consistently, the buyers during the bottoming phase begin to have equity in their properties. Once prices rise off the bottom, sellers with newfound equity raise their bids on prime properties, and the move-up market adds to the sales volumes. It is the additional demand of move-up buyers with equity that lifts the market out of the doldrums.

By creating the false bottom at a price higher than what the market would have, the powers-that-be prevented the formation of a true and durable bottom, and none of the buyers during the period of the false bottom will have the equity to get out. We trapped several more years worth of buyers in their homes and delayed their move-up purchase.

Buyers who are selling their current house to obtain another — move-up buyers — usually form 25% of the market activity. Today it is effectively zero. Thanks to the manipulations of the market, it will be effectively zero for several more years. In a market suffering from sales rates 30+% below historic norms, the move-up buyer segment is urgently needed. Unfortunately, these buyers cannot be manufactured.

Negative Home Equity Is Worse Than You Think

By: Diana Olick — Wednesday, 15 Dec 2010

There was a lot of talk last week about how negative equity, now at 22.5 percent of all homes with mortgages, according to CoreLogic [CLGX 18.20 -0.06 (-0.33%) ], will affect the housing recovery. Then mortgage rates popped up to 5 percent overnight, thanks to the 10-year Treasury, and more folks voiced concern over today's potential home buyer and his or her ability to take advantage of this low-priced housing market.

Owing more on your mortgage than your home is currently worth doesn't necessarily mean you can't afford your monthly mortgage payment or that you're going to go about your day any differently, other than feeling a little financially depressed. While it may make some more likely to walk away or "strategically default," most won't.

It does mean that you can't use your home to pay for anything, like a new car or your kids' college tuition, and it does mean that you can't move up to a nicer home without having to take a hit by paying off your mortgage with whatever stash of cash you have. Now here's the issue: The move-up buyer (which is the market we're counting on now to get us out of this mess, given that the home buyer tax credit pulled a lot of first-time buyer demand forward to the beginning of 2010). A significant number of move-up buyers, even if not underwater on their mortgages now, may be in a negative equity position when it comes to buying a new home.

Let me just preface that if you happen to be wealthy independent of your home, or a relative just died and left you a sizeable chunk of cash, this doesn't apply to you. Now here goes. Mortgage expert Mark Hanson makes an excellent point and did some math, which I want to share:

"In order to sell and re-buy, a homeowner must receive enough proceeds from the sale to 1) pay off the mortgage(s), 2) pay a Realtor 5-6 percent and 3) put a 3.5-20 percent down payment on a new vintage loan," begins Hanson, and those alone may be too financially off-putting in today's economy for many potential buyers.

"Effective negative-equity is the big weight on housing that has no easy or quick cure," continues Hanson.

His math:

* Real effective negative-equity as it pertains to house selling and buying starts at:

* <9.5% positive equity for FHA repeat buyers (6% Realtor fee + 3.5% down payment)

* <16% positive equity for Fannie/Freddie repeat buyers (6% Realtor fee + 10% down payment)

* <26% for Jumbo repeat buyers (6% Realtor fee + 20% down payment)

When lowering Corelogic's negative equity threshold to 75% on CA mortgages, 53% are effectively underwater.

And I would add to Hanson's logic, that CoreLogic also noted that an additional 2.4 million borrowers are in a "near-negative equity" position, with less than 5 percent equity in their homes. That puts them out of the move-up market as well.

With rising mortgage rates, even if they don't go much higher, the "effective" negative equity rate of the move-up buyer will impact recovery, slowing sales as more buyers/demand are priced out of the market.

The negative equity situation is a lead weight on the mid to high end of the local housing market. Most of the people who can afford to buy these houses already have, and they are locked up in that 53% of California mortgages effectively underwater (for 20% down buyers). The effect of so much mortgage equity withdrawal is to leave so many potential buyers are hopelessly underwater on their existing mortgages that they are removed from the buyer pool. It is only a matter of time before many of these people become supply when they sell, but they will create no demand as they move to the rental pool.

18 months of squatting and 18 months in shadow inventory

• Today's featured property was bought on 3/2/2006 near the peak for $745,000. The owner used a $633,250 first mortgage and a $117,750 down payment.
• They refinanced on 6/25/2007 with a $632,000 Option ARM and opened a $78,000 line of credit.
• They quit paying in late 2007 or early 2008. They did not pay for more than 9 months.

Foreclosure Record

Recording Date: 01/08/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 06/06/2008

Document Type: Notice of Default

The property was taken back by the bank on 6/11/2009 where it has rotted in shadow inventory for 18 months until it was listed for sale.

Irvine Home Address … 38 WILLOWGROVE Irvine, CA 92604

Resale Home Price … $559,900

Home Purchase Price … $745,000

Home Purchase Date …. 3/2/2006

Net Gain (Loss) ………. $(218,694)

Percent Change ………. -29.4%

Annual Appreciation … -5.9%

Cost of Ownership

————————————————-

$559,900 ………. Asking Price

$111,980 ………. 20% Down Conventional

4.87% …………… Mortgage Interest Rate

$447,920 ………. 30-Year Mortgage

$114,223 ………. Income Requirement

$2,369 ………. Monthly Mortgage Payment

$485 ………. Property Tax

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

$93 ………. Homeowners Insurance

$337 ………. Homeowners Association Fees

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

$3,285 ………. Monthly Cash Outlays

-$403 ………. Tax Savings (% of Interest and Property Tax)

-$551 ………. Equity Hidden in Payment

$210 ………. Lost Income to Down Payment (net of taxes)

$70 ………. Maintenance and Replacement Reserves

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

$2,610 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$5,599 ………. Furnishing and Move In @1%

$5,599 ………. Closing Costs @1%

$4,479 ………… Interest Points @1% of Loan

$111,980 ………. Down Payment

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

$127,657 ………. Total Cash Costs

$40,000 ………… Emergency Cash Reserves

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

$167,657 ………. Total Savings Needed

Property Details for 38 WILLOWGROVE Irvine, CA 92604

——————————————————————————

Beds: 3

Baths: 1 full 2 part baths

Home size: 2,040 sq ft

($274 / sq ft)

Lot Size: n/a

Year Built: 1978

Days on Market: 26

Listing Updated: 40505

MLS Number: S639895

Property Type: Condominium, Residential

Community: Woodbridge

Tract: Gr

——————————————————————————

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

Large attached single family home with granite counters in kitchen, cozy fireplace in living room, large walk-in closet in master bedroom, lovely arched doorways, high vaulted ceilings and a private rear courtyard with in-ground spa. Needs a little TLC, but has great potential! Close to schools, parks and North Lake!

.

Banks are again encouraging strategic default with their policies. This time they are reducing the FICO score impact because they want to keep the credit card business going with strategic defaulters.

Irvine Home Address … 8 CARMICHAEL Irvine, CA 92602

Resale Home Price …… $790,000

This is a thing I've

never known before

It's called easy livin'

This is a place I've

Never seen before

Now I've been forgiven

Easy livin’ and I've been forgiven

Uriah Heep — Easy Livin'

One of the major fears people have concerning acclerating their mortgage default is that they will be cut off from future borrowing by a lowered FICO score. This fear is important to the functioning of the system because if people do not fear the ramifications of default, many more will default, and bank losses will mount.

Back in April Io wrote Fannie Mae Encourages Strategic Default by Reducing Punishment Time for New Loan. Now, lenders are succumbing to pressures from the credit card side of their business to lessen the impact of mortgage delinquency. Will make enough on the credit cards to make up for what they will lose by encouraging strategic default?

Are Mortgage Defaulters Getting a Pass?

Posted by Stephen Gandel — Tuesday, December 14, 2010 at 1:13 pm

It appears not paying your mortgage won't hurt your credit as much as you think.

The New York Times reports that banks, in an effort to boost their credit card business, are courting customers who decided to default on their home loans. So-called "strategic defaulters," who walk away from their mortgage loan because they owe more than their house is worth, are now apparently considered to be good potential customers. Voluntarily choosing foreclosures was once seen as financial suicide. It was assumed that banks would shun those that didn't end up paying back their home loans. But it turns out that was more of a threat by the banks. That's good news from the millions of Americans who are underwater on their homes. But if banks are truly giving strategic defaulters a pass that could lead to a new wave defaults, and more pain for their mortgage lending divisions and the housing market in general. This seems like another dumb move for the banks and for our economy. Here's why:

The banks' credit card businesses have taken a hit from the recession and new financial regulations. So they need new customers. The question is where will they get those customers. In the past two years, many people have had problems paying off their debt. Others are already over leveraged. So in that context it would seem that people who walked away from their homes would make good candidates to be new credit card customers. First of all, they could have kept paying their loans. Second, most strategic defaulters are now all of a sudden much more debt free, especially if they chose to become renters. That may mean they are even a less risky borrower.

The truth is, strategic defaulters probably are better creidt risks after the default. It will be much easier for them to make payments once they don't have to pay the huge mortgage.

The problem is that while there have been a significant number of strategic defaulters, there are millions more who are underwater and still paying their mortgages. On Monday, research firm Corelogic reported that there are nearly 11 million homes around the country that are worth less what borrowers owe on those houses. That was down from a peak of 11.3 million homes in the beginning of the year. But it is still a lot. According to Corelogic, 22.5% of all homeowners with a mortgage are now underwater. Worse, home prices have started to fall again. If values were to drop another 5%, Corelogic estimates the number of borrowers who owe more than they own would jump 2.4 million.

Not all of these people will end up defaulting. Many borrowers, out of love for their house or obligation, will choose to continue to pay even if it makes more financial sense to walk away. Still, we have come a long when from the moral outrage that was once associated with walking away from your mortgage. And that makes sense to me. When a bank makes a home loan they should realize they are taking on real estate risk as well as credit risk. They share the risk of falling home prices along with the consumer. So individuals should have a right to stop paying on their mortgage if it will improve their finances. If banks want to keep them paying, they should have to offer incentives, like the very good Responsible Homeowner Reward Program.

I don't think banks should run special programs that encourage people to keep paying their debts. People should do that anyway. If they don't repay their debts, they are not extended credit in the future. Obtaining future credit is what motivated borrower behavior. People will do whatever they have to in order to obtain that next loan. Usually that means continuing to pay the last one.

Yet, I think shunning those customers that do end up walking away from their mortgages is a good thing as well, for the banks and for the economy. For the banks, even offering tacit approval for strategic defaulting seems like another dumb move. Even if many of the loans were sold off to investors, banks lose money when people stop paying their mortgages. And while I haven't done the numbers, my guess is that they would lose more money from the added defaults than they gain from the new card business.

Second, one of the problems that led to the financial crisis was too much risk. Strategic default should be one of the mechanisms that helps to deleverage the economy. But if the people who walk away from their mortgage just become the pool from which banks pitch high-cost credit cards, then financial healing process we need won't happen.

Lenders don't want to see deleveraging even if it sit he best thirng for our economy. The banks don't care about the economy. They only care about making the most money they can by keeping people in a state of indentured servitude. Bankers would be elated if people could borrow their way to prosperity and keep all their bad debt alive and active.

In many cases, second mortgage debt including old HELOCs simply become revolving credit debt that is no longer secured by real estate. Strategic defaulters opt to continue paying on second liens to keep access to the line of credit.

I agree with this author that the banks shouldn't be giving strategic defaulters access to easy credit so soon after the default. Word will get out, and people will have one less reason not to walk away from their mortgages.

Irvine Home Address … 8 CARMICHAEL Irvine, CA 92602

Resale Home Price … $790,000

Home Purchase Price … $876,000

Home Purchase Date …. 4/26/2004

Net Gain (Loss) ………. $(133,400)

Percent Change ………. -15.2%

Annual Appreciation … -1.5%

Cost of Ownership

————————————————-

$790,000 ………. Asking Price

$158,000 ………. 20% Down Conventional

4.87% …………… Mortgage Interest Rate

$632,000 ………. 30-Year Mortgage

$161,165 ………. Income Requirement

$3,343 ………. Monthly Mortgage Payment

$685 ………. Property Tax

$267 ………. Special Taxes and Levies (Mello Roos)

$132 ………. Homeowners Insurance

$146 ………. Homeowners Association Fees

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

$4,572 ………. Monthly Cash Outlays

-$812 ………. Tax Savings (% of Interest and Property Tax)

-$778 ………. Equity Hidden in Payment

$296 ………. Lost Income to Down Payment (net of taxes)

$99 ………. Maintenance and Replacement Reserves

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

$3,376 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$7,900 ………. Furnishing and Move In @1%

$7,900 ………. Closing Costs @1%

$6,320 ………… Interest Points @1% of Loan

$158,000 ………. Down Payment

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

$180,120 ………. Total Cash Costs

$51,700 ………… Emergency Cash Reserves

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

$231,820 ………. Total Savings Needed

Property Details for 8 CARMICHAEL Irvine, CA 92602

——————————————————————————

Beds: 3

Baths: 2 full 1 part baths

Home size: 2,249 sq ft

($351 / sq ft)

Lot Size: 3,701 sq ft

Year Built: 2001

Days on Market: 16

Listing Updated: 40522

MLS Number: C10124820

Property Type: Single Family, Residential

Community: Northpark

Tract: Cust

——————————————————————————

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

BANK OWNED HOME!!! Beautiful Home in Highly Sought after Gated 'NORTHPARK' Community. Desirable Corner Lot Location! Home has 3 Bedrooms Plus Downstairs Office/Den that Could be Converted to 4th Bedroom. Tiled Entry/Living Room, Guest Bath Downstairs with Pedestal Sink, Open Modern Kitchen with Granite Countertops & Center Island with Space for Wine Refrigerator. Kitchen is Open to Family Room with Granite Fireplace, French Doors Open Up to Back Patio/Dining and Family Room Area, Spacious Master Suite with Walk In Closet and Dressing Area, Two Sinks Separated by Corner Bathtub with Tiled Floors in Master Bath. Upstairs Separate Laundry Room. Crown Molding and Ceiling Fans Included in this Exquisite Home! SUBMIT OFFERS BEFORE IT GONE!!!

I hope you have enjoyed this week, and thank you for reading the Irvine Housing Blog: astutely observing the Irvine home market and combating California Kool-Aid since 2006.

Have a great weekend,

Irvine Renter

The cartel of banks holding prices up are openly stating their contempt for the families of today's buyers and forcing them to pay inflated prices to obtain their American Dream.

Irvine Home Address … 26 LEWIS Irvine, CA 92620

Resale Home Price …… $584,900

Time for the final bow,

Rows of deserted houses,

All our stable mates highway bound.

Give us our measly sum,

Getting the air inside my lungs is heavenly,

Starting out, with nothing but crippling debt.

We'll rest easy justified.

Death Cab for Cutie — Stable Song

When you read trade publications you get a point of view on issues that is often unbiased by the political correctness of the mainstream media. I found the article today in www.bigbuilderonline.com written to interested parties in the homebuilding industry. The article in bold in its statements that the banking cartel is colluding to hold up prices. There is a matter-of-factness about the articles tone that says this activity is just and desirable. I think the bank's behavior sucks.

Banks holding onto foreclosed homes to keep market stable

Source: San Bernardino County Sun

Publication date: December 2, 2010

By Toni Momberger, San Bernardino County Sun, Calif.

Dec. 02–Inventory is low all over the area, and there are frustrated buyers among us.

They have saved a 3.5-percent down payment. They have an income and good credit. They want to take advantage of today's low prices and low interest rates. They tried to get the $8,000 tax credit.

They've made dozens of offers in the past year.

How can there be so little available when so many have lost their homes to foreclosure?

The properties are not all being released.

Banks are intent on screwing buyers. They are knowingly and intentionally withholding inventory in a futile attempt to sustain bubble prices — prices that were never supported by incomes.

Ultimately, the banks will fail to keep prices high. Competition among cartel members to liquidate their shadow inventory will put pressure on prices, and if the process drags on long enough affordable housing advocates may finally apply some political pressure to force government action.

"My understanding is there's between 1.2 (million) and 1.6 million in California alone," said Robert Laguna, an agent with ReMax Masters in Covina.

"Inventory has been diminished considerably, so they have to release some of these properties."

Shadow inventory, also called ghost inventory, is the population of houses that banks already own through foreclosure, but have not released to the market.

No, shadow inventory is both bank-owned properties not on the market and future foreclosures from currently delinquent borrowers. It is the latter group that is by far the largest segment of shadow inventory.

A small portion of the shadow inventory is a result of banks' being overwhelmed. The homes may just not have gotten processed yet.

But everyone seems to concur that most properties are being held to prevent another market crash.

And only a few vocal opponents are pointing out the problems with this approach. Lenders and loan owners fall on one side of this issue, and renters and buyers stand on the other.

"Fannie Mae and Freddie Mac own most," said Laguna. "The government said it doesn't want to flood the market with properties, because if it did, the properties will depreciate. Values will go down."

Adam Quinones of Mortgage News Daily added on MND site's NewsWire, "To reduce the cost of maintaining the condition of foreclosed properties, banks have delayed the liquidation process

and allowed delinquent borrowers to remain in their homes."

People who are not paying their mortgage or rent are living in property they don't own without paying for it. That is squatting by another name.

"In addition to that, by delaying the liquidation of foreclosed properties, banks have avoided large asset value write-downs."

Failing to recognize losses by avoiding the write down is amend-extend-pretend. This farce will ultimately shake confidence in our accounting and financial reporting systems here in the US. If not for the implied protection of our major banks as too-big-to-fail, investors would be avoiding our banks for lack of transparency and likelihood of bankruptcy.

Laguna said the key is to release some, then let the market stabilize, and repeat the cycle until all of the shadow inventory is bought.

"They have to release them in waves, not in tsunamis. They have to be very careful how they release them. They can't release them too slowly, because they'll drag it on for years and years."

How The Lending Cartel Disposes Their REO Will Determine the Market’s Fate.

Part of the frustration is that 3.5 percent means the buyers are planning on a Federal Housing Administration loan.

Because of the high default rate, the FHA has become pickier about the condition of homes it'll take as collateral.

"What banks are releasing in the marketplace are REOs that need work. FHA offers will be rejected in favor of conventional loans, so banks don't have to fix the house."

Banks are required to get three job bids per improvement.

They don't have the resources to deal with it. As a result, "very rarely does an FHA offer get chosen," Laguna said.

FHA loans always end up on the bottom of the list of seller's preference. There are so many costs and fees, and the hurdles to overcome that can kill escrows. FHA buyers are riskier candidates to fall out of escrow after wasting months of time in the process.

It can be argued that the cumbersome FHA process should be cumbersome so competitors can provide money under better terms and make a profit. The FHA is the lender of last resort, and right now it is three times the market share (25%) than normal (8%-10%).

If they're not immediately liveable — for instance, if the wiring has been yanked, or the toilet's gone — no bank will fund the purchase. Those houses must be bought with cash, and are often going to investors.

With foreclosures composing most of the transactions today, obviously, not all of the shadow inventory is being held.

Laguna said most of the houses not owned by Fannie Mae and Freddie Mac are getting released, and some government- owned properties are going on the market.

"How (Fannie and Freddie) decide what to release, I don't know," he said.

If you watched a family moving out of your dream home, and have been waiting for the sign to go up, you may just have to wait. Shadow inventory is not easy to buy.

Shadow inventory is impossible to buy. That is part of the problem.

.

Shadow inventory is composed of many delinquent borrowers many of whom are attempting short sales. When the short sale gets held up for months as owners and lien holders negotiate, the property is not effectively for sale. It is that rare gem under glass you can look at but can't touch. You know it's there, and it's ostensibly for sale, but it can't transact without approvals from lien holders that are not forthcoming.

None of the delinquent borrowers in this part of shadow inventory have gone through foreclosure. The bank does own them. The delinquent and most often underwater borrower has nothing and is paying nothing while this drama plays out.

Shadow inventory also consists of properties banks have foreclosed on and they now own. These properties may be renovated to sell, some are rented out, but many simply sit empty gaining no rental income and serving no family as a home. This inventory is considered shadow because it is not for sale on the MLS, but it will be someday soon because it isn't generating banking revenues sitting empty.

When I think of shadow inventory, I am not concerned about the stuff the banks already own. The inventory banks own but are not actively selling is not that large. It is the upcoming inventory from the delinquent borrowers that is the big, scary number. Millions of borrowers are not making their payments, and loan modification programs are not succeeding in resolving the the problem. Short sales are not working either. Foreclosure is the option everyone is trying to avoid, but it is exactly what is needed to get past this problem.

Laguna suggests starting by contacting a Realtor. Realtors have access to profiles and who owns the notes to houses.

"Sometimes the bank doesn't even know who would make the decision. You have to research that," he said.

"It's difficult to make an offer. The bank may say its Realtor has to be in charge. Then the Realtor says he hasn't got the listing yet."

After a foreclosure, there's a trustee sale, so all of the shadow inventory was for sale for at least a moment during the process. One of the consequences of shadow inventory is a high number of vacancies, which are targets for squatters and vandals.

"I don't know if vacancies are depreciating the market, because comparables use sold properties, but vandalized homes may make a neighboring conventional homes harder to sell," Laguna said. "Cities are being tougher and tougher on those properties, but there's just so many of them."

Whether property has been released for sale, the title holder of any property is responsible for basic maintenance. For example, pool water may not be green; lawns may not be brown.

Laguna said the city will impose a deadline for signs of neglect to be remedied.

After the deadline, there may be $1,000-a-day fine until the home is in compliance. If that fine is unpaid, the city may put a lien on the title. That property then cannot be sold until the lien is cleared.

"Every city is different.

Some (lien blemishes) follow the house; some follow the previous owners."

Laguna says buyers should not let the possibility of shadow inventory's release cause reluctance.

"Is it a good time to buy, with all this property about to come on the market? I think so. If I could afford it, I would buy. Who's to say how they're going to release it? The deals you can get on some of those properties now is incredible, and the interest rate!"

It's a good time to buy if you believe a cartel of lending interests that control the sale of millions of properties can hold price levels above what people can realistically afford and divest themselves of all their inventory. If you believe the banking cartel can do this, then we are near enough to the bottom that buying now doesn't hurt. On a nominal basis, it may not, but on an inflation-adjusted basis, it is not great planning to tie up money in an asset that treads water for 10 years while inflation ravages the buying power of the currency.

For the banking cartel to maintain the balance they are looking for between liquidation rates and asset prices, price volatility will be very low during the purging process. The inventory will prevent prices from going up. The real challenge for the asset managers is to dispose of their properties without pushing prices lower. This may be possible in some markets where inventory problems are smaller, but in over-debted California, the inventory and associated debt purge may take much longer.

If bank asset managers are successful, prices will probably drift slightly lower over a multi-year period while the debt winds down. Long periods of low volatility takes many appreciation traders out of the game. Why buy when prices are expensive and when prices are not going up? it takes a lot of faith.

A subprime casualty in Irvine

Many people who took out subprime loans did so because it was an easier process with less paperwork and less need for accuracy on the paperwork you had to fill out. We had less subprime in Irvine, mostly because the borrowers had higher FICO scores and became classified alt-a.

• This property was purchased on 12/22/2004 for $610,000. The owner used a $488,000 first mortgage, a $122,000 second mortgage, and a $0 down payment courtesy of New Century Mortgage Corporation.
• On 8/2/2005, only eight months after putting zero down on the property, the owners were given a $125,000 HELOC. There is a chance this simply replaced the second mortgage, and they didn't spend the extra $125,000 they were given for nothing. However…
• On 2/13/2007 they refinanced with a $588,000 first mortgage and obtained a $73,500 HELOC.
• Total property debt was $661,500.
• Total mortgage equity withdrawal was $51,500. Not a huge take, but considering they put nothing into the property, $51,500 in free money is not too bad.

She quit paying the mortgage in 2009.

Foreclosure Record

Recording Date: 02/03/2010

Document Type: Notice of Sale

The sale notice was in February, but the house did not sell until 11/12/2010 when the bank took the property back for $642,500.

Irvine Home Address … 26 LEWIS Irvine, CA 92620

Resale Home Price … $584,900

Home Purchase Price … $610,000

Home Purchase Date …. 12/22/2004

Net Gain (Loss) ………. $(60,194)

Percent Change ………. -9.9%

Annual Appreciation … -0.7%

Cost of Ownership

————————————————-

$584,900 ………. Asking Price

$116,980 ………. 20% Down Conventional

4.87% …………… Mortgage Interest Rate

$467,920 ………. 30-Year Mortgage

$119,323 ………. Income Requirement

$2,475 ………. Monthly Mortgage Payment

$507 ………. Property Tax

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

$97 ………. Homeowners Insurance

$0 ………. Homeowners Association Fees

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

$3,079 ………. Monthly Cash Outlays

-$421 ………. Tax Savings (% of Interest and Property Tax)

-$576 ………. Equity Hidden in Payment

$219 ………. Lost Income to Down Payment (net of taxes)

$73 ………. Maintenance and Replacement Reserves

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

$2,374 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$5,849 ………. Furnishing and Move In @1%

$5,849 ………. Closing Costs @1%

$4,679 ………… Interest Points @1% of Loan

$116,980 ………. Down Payment

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

$133,357 ………. Total Cash Costs

$36,300 ………… Emergency Cash Reserves

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

$169,657 ………. Total Savings Needed

Property Details for 26 LEWIS Irvine, CA 92620

——————————————————————————

Beds : 3

Baths : 3 baths

Home size : 1,856 sq ft

$0,000

Lot Size : 5,642 sq ft

Year Built : 1979

Days on Market : 15

Listing Updated : 40515

MLS Number : P761430

Property Type : Single Family, Residential

Community : Northwood

Tract : Cust

——————————————————————————

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

And that's all we know about this property because the realtor didn't bother with a description.

.