Due technical difficulties with our threaded comments, we closed the comments on the original post. The entire post is now here, and comments are open.

Do you want to pay the losses from jumbo loans — big loans to rich people — with your taxes?

Irvine Home Address … 7 PEPPERCORN Irvine, CA 92603

Resale Home Price …… $767,000

We be fallin up (up)

Never fallin down (down)

We keep it at a higher level elevating now,

(put it in your) in your area,

(city or your) town,

Black Eyed Peas — Fallin' Up

In our modern mortgage era, nearly all loans are backed by the US government. At one time we had something resembling a free market, but the quasi-governmental entities Freddie Mac and Fannie Mae crowded out much of the mortgage market, and when they were taken over by the Treasury department, they basically took over the mortgage market together with the FHA.

The GSEs and the FHA were originally intended to provide mortgages to lower and middle income Americans who where not being served by the free market. Rich people can get loans because they have assets and often high incomes.

There hasn't been much need to subsidize rich people, and there isn't much support among the electorate for such subsidies. That is why we have a conforming limit to GSE and FHA loans. Raising this conforming limit would offer a government subsidy to wealthy or high-income borrowers. It would also give opportunity for lenders to refinance many of their toxic jumbo loans into government-backed toxic loans and shift losses to the US taxpayer.

Total Mortgage founder: Increase jumbo loan limit nationwide to spur the market

John Walsh is founder and president of Total Mortgage Services, a direct mortgage lender and broker based in Milford, Conn. For this edition of In This Corner, Walsh gives his take on the jumbo loan market and the limit restrictions imposed across the country.

HousingWire recently spoke with an analyst who said jumbo loans are now performing similarly to the subprime market during the housing bubble. The delinquency rate for this type of mortgage is becoming abnormally high. How does this compare to your experience in the marketplace?

There's been a large loss in value in the jumbo market that has to do with a number of factors: the loss of liquidity on the jumbo side and the fact that there are fewer jumbo outlets has put further pressure on the jumbo housing market. I think that's the reason why there are troubles in that sector.

Let's put the horse back in front of the cart. The reason there is less liquidity and fewer jumbo outlets is because 10% of the borrowers are delinquent, and there is no government agency stepping up to take these losses. The lack of liquidity is the symptom of the market's real trouble: delinquent borrowers.

As far as a percentage decline in value, the jumbo market seems to have been hit extremely hard which has contributed to the performance on those loans — a lot of those jumbo loans are underwater.

That being said, prices have gotten to somewhere near a low.

What tea leaves did he read to come to that conclusion?

With the mortgages that we're giving out today, the loan-to-value requirements are a lot steeper, the credit score requirements are a lot steeper, the debt-to-income requirements are a lot more stringent. So I think the jumbo loans being written today as opposed to the ones written even as little as six months ago or a year ago, are going to perform significantly better. That's why you're beginning to see an ease on the jumbo side of loans.

The tightening of requirements he is talking about has also reduced the number of borrowers in the jumbo loan pool considerably. Think about how many homes are priced over $1,000,000 in Orange County, and pair that with the number of borrowers who can actually qualify for and make the payments on a jumbo loan — not factoring in mortgage equity withdrawal to make Ponzi payments. The supply of these homes greatly exceeds the potential demand.

There's also a lot of legacy jumbo problems which I think is just a function of the value of homes.

The legacy problems are a function fo the value of homes? I thought the problems were because lenders were insanely stupid and gave out huge loans to anyone with a pulse. And in fact, it was giving out those stupid loans with inflated the housing bubble and a created the problem with home values we have today.

There was a lot of no income (documentation) loans that were done on jumbo borrowers — that seemed to be the way a lot of the jumbo loans were done. A lot of places did no income option ARMs. So a lot of those problems, that's what you're seeing now from a legacy side of things.

Legacy loans: a feel-good euphemism for everything stupid in the housing bubble. The word legacy almost makes it sound regal, just, and important, like something meant for the aristocracy. I say we let the aristocracy eat the legacy loan cake they baked.

Going forward, the loans that are being written today are significantly better credit risks. That's why you're beginning to see some liquidity in the jumbo market.

As far as the demand for jumbo loans, where do you see most of the demand coming from? What kind of loans are these?

We don't really do commercial lending, so it's all residential lending on the jumbo side. The jumbo side is not really regional, there's just more people calling about them these days. I would say demand is up at least 25% over the past couple of months. We're beginning to refinance some of our customers from two, three, four years ago that got really good jumbo mortgage rates, but because the rates have come down so much, they're beginning to come into that area where a refinance makes sense. We have seen a fairly significant uptick in the jumbo refinances recently.

Phone calls asking about jumbo loans is not demand. I can imagine the calls he must be getting…

Qualified borrowers is real demand, and that kind of jumbo loan demand is not increasing with near 10% unemployment.

You mentioned in a statement that you believe conforming loan limits should be raised across the country, not just in "high-cost areas." What do you mean high-cost areas? How would this change affect the market?

There's a conforming jumbo now, so in certain areas of the country you can go and get virtually the same prices as a conforming loan and get the loan to go to either Fannie Mae or Freddie Mac. Normally the conforming loan limit is $417,000, but in certain areas you can go up to $729,750 as a mortgage amount. That's only in 20 metropolitan areas. So even though you're in one town, where you may only be able to go up to $650,000, in another town the limit is $729,000. So it varies from ZIP code to ZIP code. My thought is you should expand that increased conforming loan limit countrywide because a lot of people fall between $417,000 and $729,750.

Do the taxpayers want to subsidize loans between $417,000 and $729,750 everywhere? I think it is a ripoff for the taxpayer that those loans are insured here, but to do that everywhere would simply expose the taxpayer to more risk.

It would put a lot more people in the purchase market that wouldn't necessarily qualify under the jumbo program, but may qualify under this particular program. You also bring FHA into the possibility, which is 3.5% down up to $729,750. I think it would expand a ton of potential, not only buyers and a lot more purchases in the range $417,00 to $729,750, but also allow a lot of people to refinance and take advantage of these unbelievably, historically low rates.

We may be able to re-inflate the housing bubble nationally if we allowed 3.5% down loans up to $729,750. I don't think that would be a good thing, particularly since the taxpayer would be absorbing all the losses when the echo bubble burst.

A lot of people just don't qualify based on their loan-to-value; a lot of people have lost so much equity they can't capitalize on these low rates. And if all these people have the ability to refinance, you're looking at a lot of people saving money, a lot more money being pumped into the economy from a refinancing perspective. From a purchasing perspective, obviously when people buy a home they hire more contractors and go to Home Depot more. The good things that happen when people buy houses will happen and spur the purchase market even more all across the country; not in just these defined areas.

I am always amazed that people think you can borrow your way out of debt. Excessive debt is the problem. Adding to that debt is not a viable solution, and neither is refinancing excessive debt at a lower interest rate.

I think that could be a great thing on top of all the things the government is trying to do.

I think it is a terrible thing to do just as the other failed things the government is trying to do.

It's not like the short sale refinance program where they're actually going to subsidize the write down or the mortgages. This is just you're taking on a larger loan size.

Great idea: take on more debt because you can't afford the debt you already have. Brilliant!

I think it's a great time because the underwriting standards have gotten so much more stringent these days you're getting a lot more qualified borrowers.

Why hasn't the government already put in place some policy to deal with jumbo loans?

I'm sure there's a rationale as to why they only did it in pocket areas. I think they did it upon median income in particular areas. I sort of understand why they did it, but my philosophy in that area is this: just because you live in Fairfield, Conn., you have the ability to take advantage of this program. But if you live in Omaha, Neb., and you have a loan amount that meets the value of the home and you still have to meet the same underwriting guidelines, why can't you, in Nebraska, take advantage of that particular program? Again to spur more purchase activity and also to take advantage of lower rates for the ability to refinance and put more money back into the economy.

This idea is dumb for many reasons, but as the jumbo loans losses continue to mount, expect to see this dumb idea resurface. Personally, I don't want to become liable for the extravagant borrowing of fools with huge losses on their jumbo loans. As you read about today's featured borrower, ask yourself if you want to pay his bill.

Buy, refi, and bye-bye

Most of the foreclosure properties I see today have this familiar pattern: fools overpays during the bubble, and as prices go up, they add to their bloated mortgages until finally they implode and lose their property. Many of these people borrow enough to recoup their down payment and get some extra money out of the bank, and some do not. The owner of today's featured property had access to his entire down payment, but unless he used the HELOC, he may have left the down payment in the bank.

• This property was purchased for $720,000 on 7/16/2004. The owner used a $575,200 first mortgage, and a $144,800 down payment.
• On 8/8/2005 he refinanced for $584,600 and recovered some of his down payment.
• On 10/14/2005 he opened a $180,000 HELOC.
• He quit paying in late 2008, and he squatted for about 21 months before the auction.

Foreclosure Record

Recording Date: 07/08/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 05/11/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 02/05/2009

Document Type: Notice of Default

The flipper that purchased the property at auction is playing games with the listing price. This is the slow grinding loss of imaginary equity.

Irvine Home Address … 7 PEPPERCORN Irvine, CA 92603

Resale Home Price … $767,000

Home Purchase Price … $661,500

Home Purchase Date …. 8/23/2010

Net Gain (Loss) ………. $59,480

Percent Change ………. 9.0%

Annual Appreciation … 60.7%

Cost of Ownership

————————————————-

$767,000 ………. Asking Price

$153,400 ………. 20% Down Conventional

4.21% …………… Mortgage Interest Rate

$613,600 ………. 30-Year Mortgage

$144,845 ………. Income Requirement

$3,004 ………. Monthly Mortgage Payment

$665 ………. Property Tax

$225 ………. Special Taxes and Levies (Mello Roos)

$128 ………. Homeowners Insurance

$222 ………. Homeowners Association Fees

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

$4,244 ………. Monthly Cash Outlays

-$704 ………. Tax Savings (% of Interest and Property Tax)

-$851 ………. Equity Hidden in Payment

$231 ………. Lost Income to Down Payment (net of taxes)

$96 ………. Maintenance and Replacement Reserves

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

$3,015 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$7,670 ………. Furnishing and Move In @1%

$7,670 ………. Closing Costs @1%

$6,136 ………… Interest Points @1% of Loan

$153,400 ………. Down Payment

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

$174,876 ………. Total Cash Costs

$46,200 ………… Emergency Cash Reserves

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

$221,076 ………. Total Savings Needed

Property Details for 7 PEPPERCORN Irvine, CA 92603

——————————————————————————

Beds: 3

Baths: 2 full 1 part baths

Home size: 2,046 sq ft

($375 / sq ft)

Lot Size: n/a

Year Built: 2004

Days on Market: 66

Listing Updated: 40486

MLS Number: P750630

Property Type: Condominium, Residential

Community: Quail Hill

Tract: Laur

——————————————————————————

A True Turnkey Property with An Incredibly Open And Spacious Floor Plan Boasting High Ceilings, Plantation Shutters, Hardwood Flooring, New Paint, and Stainless Steel Appliances!!! Along with the Bedrooms there is any Extra DEN downstairs & LIVING AREA upstairs!!! Customized Tiles and Kitchen with Granite Countertops and Stainless Steel Appliances with a Brand New Wine Cooler! Boasts a TRUE Master Bedroom Features Walk-In Closet, Private Balcony, Dual Sinks, Roman Tub & Separate Shower. Inside Separate Laundry Rooom And Plenty Of Storage. This Fantastic End Unit Share Only 1 Wall. Situated In A Quiet Location Of A Very Desireable Complex Located In The Heart Of Irvine. Close to Restaurants, Theater And Shopping. Close To The Toll Road And It Is One Of Irvine's Newest complexes.

Why is this in Title Case?

Do you feel the excitement with the exclamation points!!!

Do you want to pay the losses from jumbo loans — big loans to rich people — with your taxes?

Irvine Home Address … 7 PEPPERCORN Irvine, CA 92603

Resale Home Price …… $767,000

We be fallin up (up)

Never fallin down (down)

We keep it at a higher level elevating now,

(put it in your) in your area,

(city or your) town,

Black Eyed Peas — Fallin' Up

In our modern mortgage era, nearly all loans are backed by the US government. At one time we had something resembling a free market, but the quasi-governmental entities Freddie Mac and Fannie Mae crowded out much of the mortgage market, and when they were taken over by the Treasury department, they basically took over the mortgage market together with the FHA.

The GSEs and the FHA were originally intended to provide mortgages to lower and middle income Americans who where not being served by the free market. Rich people can get loans because they have assets and often high incomes.

There hasn't been much need to subsidize rich people, and there isn't much support among the electorate for such subsidies. That is why we have a conforming limit to GSE and FHA loans. Raising this conforming limit would offer a government subsidy to wealthy or high-income borrowers. It would also give opportunity for lenders to refinance many of their toxic jumbo loans into government-backed toxic loans and shift losses to the US taxpayer.

Total Mortgage founder: Increase jumbo loan limit nationwide to spur the market

John Walsh is founder and president of Total Mortgage Services, a direct mortgage lender and broker based in Milford, Conn. For this edition of In This Corner, Walsh gives his take on the jumbo loan market and the limit restrictions imposed across the country.

HousingWire recently spoke with an analyst who said jumbo loans are now performing similarly to the subprime market during the housing bubble. The delinquency rate for this type of mortgage is becoming abnormally high. How does this compare to your experience in the marketplace?

There's been a large loss in value in the jumbo market that has to do with a number of factors: the loss of liquidity on the jumbo side and the fact that there are fewer jumbo outlets has put further pressure on the jumbo housing market. I think that's the reason why there are troubles in that sector.

Let's put the horse back in front of the cart. The reason there is less liquidity and fewer jumbo outlets is because 10% of the borrowers are delinquent, and there is no government agency stepping up to take these losses. The lack of liquidity is the symptom of the market's real trouble: delinquent borrowers.

As far as a percentage decline in value, the jumbo market seems to have been hit extremely hard which has contributed to the performance on those loans — a lot of those jumbo loans are underwater.

That being said, prices have gotten to somewhere near a low.

What tea leaves did he read to come to that conclusion?

With the mortgages that we're giving out today, the loan-to-value requirements are a lot steeper, the credit score requirements are a lot steeper, the debt-to-income requirements are a lot more stringent. So I think the jumbo loans being written today as opposed to the ones written even as little as six months ago or a year ago, are going to perform significantly better. That's why you're beginning to see an ease on the jumbo side of loans.

The tightening of requirements he is talking about has also reduced the number of borrowers in the jumbo loan pool considerably. Think about how many homes are priced over $1,000,000 in Orange County, and pair that with the number of borrowers who can actually qualify for and make the payments on a jumbo loan — not factoring in mortgage equity withdrawal to make Ponzi payments. The supply of these homes greatly exceeds the potential demand.

There's also a lot of legacy jumbo problems which I think is just a function of the value of homes.

The legacy problems are a function fo the value of homes? I thought the problems were because lenders were insanely stupid and gave out huge loans to anyone with a pulse. And in fact, it was giving out those stupid loans with inflated the housing bubble and a created the problem with home values we have today.

There was a lot of no income (documentation) loans that were done on jumbo borrowers — that seemed to be the way a lot of the jumbo loans were done. A lot of places did no income option ARMs. So a lot of those problems, that's what you're seeing now from a legacy side of things.

Legacy loans: a feel-good euphemism for everything stupid in the housing bubble. The word legacy almost makes it sound regal, just, and important, like something meant for the aristocracy. I say we let the aristocracy eat the legacy loan cake they baked.

Going forward, the loans that are being written today are significantly better credit risks. That's why you're beginning to see some liquidity in the jumbo market.

As far as the demand for jumbo loans, where do you see most of the demand coming from? What kind of loans are these?

We don't really do commercial lending, so it's all residential lending on the jumbo side. The jumbo side is not really regional, there's just more people calling about them these days. I would say demand is up at least 25% over the past couple of months. We're beginning to refinance some of our customers from two, three, four years ago that got really good jumbo mortgage rates, but because the rates have come down so much, they're beginning to come into that area where a refinance makes sense. We have seen a fairly significant uptick in the jumbo refinances recently.

Phone calls asking about jumbo loans is not demand. I can imagine the calls he must be getting…

Qualified borrowers is real demand, and that kind of jumbo loan demand is not increasing with near 10% unemployment.

You mentioned in a statement that you believe conforming loan limits should be raised across the country, not just in "high-cost areas." What do you mean high-cost areas? How would this change affect the market?

There's a conforming jumbo now, so in certain areas of the country you can go and get virtually the same prices as a conforming loan and get the loan to go to either Fannie Mae or Freddie Mac. Normally the conforming loan limit is $417,000, but in certain areas you can go up to $729,750 as a mortgage amount. That's only in 20 metropolitan areas. So even though you're in one town, where you may only be able to go up to $650,000, in another town the limit is $729,000. So it varies from ZIP code to ZIP code. My thought is you should expand that increased conforming loan limit countrywide because a lot of people fall between $417,000 and $729,750.

Do the taxpayers want to subsidize loans between $417,000 and $729,750 everywhere? I think it is a ripoff for the taxpayer that those loans are insured here, but to do that everywhere would simply expose the taxpayer to more risk.

It would put a lot more people in the purchase market that wouldn't necessarily qualify under the jumbo program, but may qualify under this particular program. You also bring FHA into the possibility, which is 3.5% down up to $729,750. I think it would expand a ton of potential, not only buyers and a lot more purchases in the range $417,00 to $729,750, but also allow a lot of people to refinance and take advantage of these unbelievably, historically low rates.

We may be able to re-inflate the housing bubble nationally if we allowed 3.5% down loans up to $729,750. I don't think that would be a good thing, particularly since the taxpayer would be absorbing all the losses when the echo bubble burst.

A lot of people just don't qualify based on their loan-to-value; a lot of people have lost so much equity they can't capitalize on these low rates. And if all these people have the ability to refinance, you're looking at a lot of people saving money, a lot more money being pumped into the economy from a refinancing perspective. From a purchasing perspective, obviously when people buy a home they hire more contractors and go to Home Depot more. The good things that happen when people buy houses will happen and spur the purchase market even more all across the country; not in just these defined areas.

I am always amazed that people think you can borrow your way out of debt. Excessive debt is the problem. Adding to that debt is not a viable solution, and neither is refinancing excessive debt at a lower interest rate.

I think that could be a great thing on top of all the things the government is trying to do.

I think it is a terrible thing to do just as the other failed things the government is trying to do.

It's not like the short sale refinance program where they're actually going to subsidize the write down or the mortgages. This is just you're taking on a larger loan size.

Great idea: take on more debt because you can't afford the debt you already have. Brilliant!

I think it's a great time because the underwriting standards have gotten so much more stringent these days you're getting a lot more qualified borrowers.

Why hasn't the government already put in place some policy to deal with jumbo loans?

I'm sure there's a rationale as to why they only did it in pocket areas. I think they did it upon median income in particular areas. I sort of understand why they did it, but my philosophy in that area is this: just because you live in Fairfield, Conn., you have the ability to take advantage of this program. But if you live in Omaha, Neb., and you have a loan amount that meets the value of the home and you still have to meet the same underwriting guidelines, why can't you, in Nebraska, take advantage of that particular program? Again to spur more purchase activity and also to take advantage of lower rates for the ability to refinance and put more money back into the economy.

This idea is dumb for many reasons, but as the jumbo loans losses continue to mount, expect to see this dumb idea resurface. Personally, I don't want to become liable for the extravagant borrowing of fools with huge losses on their jumbo loans. As you read about today's featured borrower, ask yourself if you want to pay his bill.

Buy, refi, and bye-bye

Most of the foreclosure properties I see today have this familiar pattern: fools overpays during the bubble, and as prices go up, they add to their bloated mortgages until finally they implode and lose their property. Many of these people borrow enough to recoup their down payment and get some extra money out of the bank, and some do not. The owner of today's featured property had access to his entire down payment, but unless he used the HELOC, he may have left the down payment in the bank.

• This property was purchased for $720,000 on 7/16/2004. The owner used a $575,200 first mortgage, and a $144,800 down payment.
• On 8/8/2005 he refinanced for $584,600 and recovered some of his down payment.
• On 10/14/2005 he opened a $180,000 HELOC.
• He quit paying in late 2008, and he squatted for about 21 months before the auction.

Foreclosure Record

Recording Date: 07/08/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 05/11/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 02/05/2009

Document Type: Notice of Default

The flipper that purchased the property at auction is playing games with the listing price. This is the slow grinding loss of imaginary equity.

Irvine Home Address … 7 PEPPERCORN Irvine, CA 92603

Resale Home Price … $767,000

Home Purchase Price … $661,500

Home Purchase Date …. 8/23/2010

Net Gain (Loss) ………. $59,480

Percent Change ………. 9.0%

Annual Appreciation … 60.7%

Cost of Ownership

————————————————-

$767,000 ………. Asking Price

$153,400 ………. 20% Down Conventional

4.21% …………… Mortgage Interest Rate

$613,600 ………. 30-Year Mortgage

$144,845 ………. Income Requirement

$3,004 ………. Monthly Mortgage Payment

$665 ………. Property Tax

$225 ………. Special Taxes and Levies (Mello Roos)

$128 ………. Homeowners Insurance

$222 ………. Homeowners Association Fees

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

$4,244 ………. Monthly Cash Outlays

-$704 ………. Tax Savings (% of Interest and Property Tax)

-$851 ………. Equity Hidden in Payment

$231 ………. Lost Income to Down Payment (net of taxes)

$96 ………. Maintenance and Replacement Reserves

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

$3,015 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$7,670 ………. Furnishing and Move In @1%

$7,670 ………. Closing Costs @1%

$6,136 ………… Interest Points @1% of Loan

$153,400 ………. Down Payment

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

$174,876 ………. Total Cash Costs

$46,200 ………… Emergency Cash Reserves

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

$221,076 ………. Total Savings Needed

Property Details for 7 PEPPERCORN Irvine, CA 92603

——————————————————————————

Beds: 3

Baths: 2 full 1 part baths

Home size: 2,046 sq ft

($375 / sq ft)

Lot Size: n/a

Year Built: 2004

Days on Market: 66

Listing Updated: 40486

MLS Number: P750630

Property Type: Condominium, Residential

Community: Quail Hill

Tract: Laur

——————————————————————————

A True Turnkey Property with An Incredibly Open And Spacious Floor Plan Boasting High Ceilings, Plantation Shutters, Hardwood Flooring, New Paint, and Stainless Steel Appliances!!! Along with the Bedrooms there is any Extra DEN downstairs & LIVING AREA upstairs!!! Customized Tiles and Kitchen with Granite Countertops and Stainless Steel Appliances with a Brand New Wine Cooler! Boasts a TRUE Master Bedroom Features Walk-In Closet, Private Balcony, Dual Sinks, Roman Tub & Separate Shower. Inside Separate Laundry Rooom And Plenty Of Storage. This Fantastic End Unit Share Only 1 Wall. Situated In A Quiet Location Of A Very Desireable Complex Located In The Heart Of Irvine. Close to Restaurants, Theater And Shopping. Close To The Toll Road And It Is One Of Irvine's Newest complexes.

Why is this in Title Case?

Do you feel the excitement with the exclamation points!!!

Do policy makers at the Federal Reserve really believe their policies will work, or are they just doing whatever they can to save the banks at the expense of everyone else?

Irvine Home Address … 5242 ROYALE Ave Irvine, CA 92604

Resale Home Price …… $640,000

You take it on the run baby

If that's the way you want it baby

Then I don't want you around

I don't believe it

Not for a minute

You're under the gun so you take it on the run

You're thinking up your white lies

You're putting on your bedroom eyes

You say you're coming home but you won't say when

But I can feel it coming

If you leave tonight keep running

And you need never look back again

REO Speedwaagon — Take It On the Run

Most of the policy decisions coming out of the Federal Reserve appear as if they are making it up as they go. During 2008 and 2009, some of the emergency lending windows opened at the Fed likely saved the economy from total collapse; however, many of the policy decisions have not been as successful, and the attempt to re-inflate the housing bubble to save bank balance sheets is failing as house prices roll over despite historically low interest rates.

Are the Fed's Honchos Simpletons, Or Are They Just Taking Orders?

(November 1, 2010) — Charles Hugh Smith

Without exception the Fed's policies are pernicious failures; either they are exceptionally thickheaded, or they are just taking orders.

At the risk of boring you with material you already know well, let's quickly cover the Fed's policies and stated goals since the Global Financial Meltdown of late 2008.

The Fed's supposed goal is "get the economy on its feet again" by stabilizing employment and prices. At the risk of sounding naive, we can paraphrase all the Fed's statements thusly: "We're trying to help everyone in the U.S. by fighting this recession."

Sounds noble enough, so let's look at what the Fed has actually done in the real world.

1. The Fed has injected "liquidity" into the banking sector, enabling banks to borrow essentially unlimited sums at essentially zero interest–the infamous ZIRP (zero-interest rate policy).

2. The Fed has pushed down mortgage rates by buying over 10% of all outstanding mortgages in the U.S.–all the toxic garbage loans which the banks were desperate to get off their crippled balance sheets.

3. The Fed has pushed down yields on U.S. Treasury bonds ("monetizing" this newly issued debt) by buying hundreds of billions of dollars of bonds itself.

Much has been made of the latest round of quantitative easing (a fancy term for printing money). That particular policy has caused concerns that inflation is right around the corner. i do believe inflation is going to occur at some point, but not until the Federal Reserve has printed enough money to compensate for the debt destruction that is occurring in residential and commercial loans. The debt creation during the bubble was extremely inflationary as all this new debt inflated massive real estate bubbles in both sectors; however, since the official government compilation of inflation does not include those asset prices, it went unnoticed by the Federal Reserve.

Now that the residential and commercial real estate bubbles are deflating, debt destruction is causing widespread deflation far in excess of the official government measures. This deflation is what is ravaging our economy. Quantitative easing is one method of combating deflation. Basically, you print money to make up for that which was destroyed. To the degree the two cancel each other out, neither deflation or inflation results. Unfortunately, in the real world, the Federal Reserve generally errors to the side of printing which will cause significant inflation once the deflation ceases and the economy improves.

Here is what each program was intended to do:

1. ZIRP and unlimited liquidity was intended to enable the banks to "earn their way back to solvency" by giving them free money which they could then loan out at much higher rates. The difference between zero (their cost) and the interest rate they charged borrowers (such as those wonderful 19% credit cards) was pure profit, courtesy of the Federal Reserve.

This is also theft from savers. The free market would place a value on stored financial reserves, but the Federal Reserve usurps the free market and diverts the return on savings away from savers to the member banks. The inflation that comes at the end of the cycle is a second form of theft from savers we will see when interest rates go back up.

2. The purchase of $1.2 trillion in mortgage-backed securities was intended to stabilize housing and real estate prices at far above their "natural" level set by "organic" supply and demand; in essence, the goal was to stop market prices from "reverting to the mean," i.e. returning to historical trendlines which are roughly equivialent to pre-bubble valuations circa 1997-98.

This was intended to stop the implosion of banks' balance sheets as their assets–all those mortgage-backed securities and derivatives they own–kept falling in value.

It was also intended to stabilize real estate prices so banks could slowly sell off the millions of foreclosed (REO) and defaulted homes they hold in the "shadow inventory" at prices far above where organic supply and demand would let them settle.

We have certainly seen the result of this policy here in Irvine. Our real estate prices have remained elevated far above their natural market levels. Banks are still hoping to unload their shadow inventory when demand increases as the economy improves. I believe we will see the collapse of the real estate cartel and lower prices in Orange County over the next several years.

On the other hand, markets like Las Vegas have over-corrected. Prices there are back at mid 90s levels, and they are likely to stay there for the foreseeable future. The Federal Reserves policy goals have been a failure in Las Vegas.

In the bigger picture, Las Vegas is actually a success of the free market whereas Orange County is a failure. When prices bottom in Las Vegas, the entire housing stock will be affordable, and as normal appreciation resumes, people will again build equity while enjoying the economic stimulus of low housing costs. Contrast that to Orange County where we will likely see slowly grinding downward pricing, no equity, and a moribund economy because so much of the local incomes are going toward debt service. Which market is a success and which is a failure?

As a side benefit, keeping home prices inflated far above their real value would also allow the Fed to dump its own portfolio of $1.2 trillion mortgage-backed securities without suffering catastrophic losses.

Lastly, the goal was to lower the cost of mortgages to such ridiculously low levels that otherwise prudent citizens might be seduced into buying a house "because rates are so low." (Never mind what happens if the house falls another 40% in value over the next few years.)

I freely admit that the low interest rates are certainly enticing me to buy cashflow properties. Of course, I don't believe those properties will fall 40% more in value, and frankly, even if they did, I wouldn't care because i bought them for their current cashflow not their resale value.

The idea was to encourage rampant home buying (for speculation or long-term ownership, it didn't matter) to prop up the market with "demand," even if that "demand" was driven by the low cost of borrowing rather than organic demand based on the need for shelter. (Please recall that there are 19 million vacant dwellings in the U.S. now.)

3. The outright purchase of U.S. Treasury bonds was intended to drop the yield on newly issued bonds to keep the cost of borrowing trillions of dollars for "fiscal stimulus" down so the potential future cost of all the trillions of dollars in new Federal debt would be masked from a credulous citizenry who care more about their entitlements than what happens to their kids and grandkids.

The lack of consideration for future generations is one of the features of the housing bubble I find most distasteful. The generation of owners who still have artificial equity do so at the expense of the next generation who must grossly overpay for housing. It is a transfer of wealth from the young to the old that rivals social security.

4. All the policies led to super-low yields on low-risk investments so that "cash is trash;" that created a powerful incentive to put capital into risk assets such as stocks, commodities and real estate. By explicitly pushing free money and zero-interest rates, the Fed made it impossible to earn any yield on low-risk assets; thus they have been explicitly pushing capital and borrowed money into the "risk trade": emerging markets, commodities, and stocks.

The goal here is to create a new "wealth effect": if another bubble is inflated in stocks and commodities, then owners of capital will feel wealthier and as a result, they will start spending more.

Right now, nobody is penalized for tucking away cash in their mattress.

Are the Fed's honchos really such knuckleheads that they don't know most Americans have no financial assets to boost in a new bubble?

Source: Wealth, Income, and Power.

The top-earning 20 percent of Americans — those making more than $100,000 each year — received 49.4 percent of all income generated in the U.S., compared with the 3.4 percent earned by those below the poverty line.

U.S. median household income fell 3 percent in 2009 to $50,221, the second straight annual drop, the Census Bureau said.

One Year Later, No Sign of Improvement in America's Income Inequality Problem:

Income inequality has grown massively since 2000. According to Harvard Magazine, 66% of 2001-2007's income growth went to the top 1% of Americans, while the other 99% of the population got a measly 6% increase.

The Top 5 percent in income earners — those households earning $210,000 or more — account for about one-third of consumer outlays, including spending on goods and services, interest payments on consumer debt and cash gifts, according to an analysis of Federal Reserve data by Moody’s Analytics.

The Fed's central idea was to create a "trickle down" of wealth as a new stock and commodity bubble increased the financial wealth of the top 10%. That idea has demonstrably failed; could the Fed's economic geniuses really be so stupid as to trust in the long-discredited "trickle down" theory that enriching the top tranch will actually benefit the bottom 90%?

What the author fails to recognize is that financial assets are not required to inflate a housing bubble. Copious amounts of debt are all that's required. The middle class proved they could inflate a massive housing bubble and consume any wealth it created by mortgage equity withdrawal.

5. All the policies were designed to flood the economy with new "free" money, thereby sparking inflation and a new round of consumption that would inject "growth" into the economy.

In other words, the "problem" is perceived as sagging asset prices (real estate and the worthless mortgages written on homes that have lost 50% of their value) which have impoverished homeowners and impaired banks' assets.

The Fed's "solution" is to reinflate the housing bubble (or stabilize its collapse) and push investors and speculators alike into risk assets, in the hopes that a new asset bubble somewhere will boost assets enough to create a "feel good" wealth effect which will trigger massive new consumer spending and repair banks' balance sheets with higher asset valuations.

The concept that asset prices are depressed is part of the problem with banks and the Federal Reserve. Most real estate markets — Las Vegas excluded — are not depressed and undervalued even with the dramatic price declines we have seen so far. Prices were previously elevated beyond their fundamental value, and the crash is a return to stable valuation metrics. This conceptual confusion is why the policies of the Federal Reserve have failed.

Put another way, here are the Fed's goals stripped of niceties:

1. Revoke the business cycle–no recessions allowed. In the normal business cycle of classical Capitalism (as opposed to the crony Capitalism we have today), then expansion of credit/debt and rising assets leads to mal-investment and rampant speculation: overbuilding, overcapacity, over-indebtedness and leveraged bets that misprice risk.

Which is precisely what occurred in the 1995-2000 stock market bubble and the 2002-2007 housing/real estate bubble: mal-investment, over-indebtedness, overbuilding and mispricing of risk on a grand, unprecedented scale.

In the normal scheme of things, all this bad debt would be written off and the assets would be sold/liquidated. Holders of those assets and the debt based on those assets would both suffer losses or even be wiped out. All the overbuilt properties and overcapacity would be sold for pennies on the dollar, and the liabilities (debt) wiped off the balance sheet along with all the inflated assets.

That is a great description of how free markets are supposed to work. Recessions are how free markets purge their excesses. Foolish business plans and excessively leveraged speculative bets are wiped out and capital is redistributed to where it can be used more efficiently. Keeping capital tied up in unproductive assets hinders economic growth and creates the malaise we experience today.

There is no other way to clear the market for future growth. Yet the Fed has pursued a "solution" that violates all the principles of Capitalism: to reinflate asset bubbles or keep them artificially high by injecting more credit/debt into the system.

In other words, if you can't service your current debt and you're insolvent because your assets have declined, then the Fed's "solution" is to give you free money to roll over into a bigger debt load and boost the risk-asset trade so the assets on your books will rise again, "solving" your insolvency.

Do you see the foolishness of this approach? You can't borrow your way out of debt.

Does anyone at the Fed really believe this will work , or are they just thick? Or even worse, are they just lackeys taking orders from Wall Street and the Financial Power Elites?

You cannot eliminate the consequences of speculative bad bets and over-indebtedness with more debt and more speculation, yet that is precisely the intent of all the Fed's policies.

The Fed's unprecedented purchase of mortgages and Treasury debt have indeed reinflated the stock and housing bubbles to a limited degree, but most of that free money has flowed into emerging markets and commodities, which are now in their own massive bubbles.

In yet another pernicious consequence, the Fed's bumbling attempts to create inflation in the U.S. have failed–the inflation is raging in China. And as inflation rages there, then the cost of Chinese goods in the U.S. will rise.

Is there any possible way to fail more spectacularly that the Fed? Instead of sparking "good inflation" in the U.S. which they presumed (thickheadedly) would boost wages along with prices, thus enabling debt-serfs to pay down their debts with "cheaper" money, they have sparked runaway asset bubbles in commodities and "bad" inflation in China, which means the cost of goods the debt-serfs need to survive is skyrocketing while their wages and income stagnate.

In other words, the policies of the Fed have completely backfired in terms of "helping" 90% of the citizenry. The "wealth effect" of rising stock prices failed to boost the spirits and balance sheets of the bottom 90% who have essentially no financial capital, average incomes have declined in the recession and yet prices for commodities are climbing.

The Fed's policies have created the worst-case scenario for the average American household: stagnant income and rising prices of essentials. The problem is demand is falling along with net incomes, not the supply of new debt. By raising the costs of commodities, the Fed is actually reducing the net disposable income of households: the reverse of the "wealth effect."

Rather than allow the economy to clear out bad debt and re-set asset prices that would enable organic growth, the Fed has tried to inflate new asset bubbles to save the Financial Power Elites from suffering the losses resulting from the last two bubbles popping.

I have stated on many occasions that I believe the end game is price inflation without wage inflation that will cause a decline in our standard of living. Everyone who is bullish on real estate believes inflation is coming and it will push real estate prices higher. The Federal Reserve's printing money will eventually ignite inflation. I agree with the bulls on that point; however, the inflation in prices will not be accompanied by inflation in wages, something required for house prices to go up. How does the Federal Reserve create wage inflation with chronic high unemployment? They can't. That is why house prices will not be going up any time soon.

It's as if the fever the patient needs to wipe out a deadly infection has been suppressed by the Fed, creating the illusion of "health" even as the infection destroys the patient from within.

2. "Save" Wall Street, the banks, the nation's Financial Power Elites and the nation's homeowners by blowing new asset bubbles with massive injections of free money and the bogus "demand" created by the Fed's own purchases. The dynamic has already been explained above: cover the losses of the last bubble imploding by blowing an even bigger bubble now that boosts the asset side of balance sheets.

Do the Fed's honchos really think there is another end-game here other than the collapse of their latest ZIRP-QE2-driven asset bubbles? Could they really be so blind, so stupid, so misinformed, so ignorant of reality and history, as to believe their policies will actually work?

Are they so detached from reality that they fail to see their policies are backfiring, further impoverishing most of the citizenry as they set up the inevitable collapse of the banks they have tried so hard to save?

Are they really simpletons, or are they just taking orders from the Financial Elites who have the most to lose when the whole sagging sandcastle finally collapses into the waves?

I think they really believe their policies will work. I also think they are mistaken.

Personally, I plan to load up on 4% debt to buy cashflow properties. If I am paying 4% in an inflationary environment where inflation exceeds 4%, I am paying back the debt with dollars declining in value at a rate higher than my interest rate. in other words, they will be paying me to keep the debt alive. This works great for cashflow properties, but not so well for speculative bets on price appreciation because higher inflation — absent wage inflation — and higher interest rates makes borrowing more expensive and reduces loan balances which hinders appreciation.

Cashflow will be the only way to make money in real estate for the next decade or more just like it was in the 90s.

Thinking up their white lies

I've often wondered what long term loan owners tell their families when they finally implode. How do people explain to their friends and relatives that they borrowed more than double what they paid for their house years ago, blew the money, and then lost their family home? It must be an interesting yarn.

• The owners of today's featured property paid $438,000 on 12/18/2000. They used a $365,000 first mortgage, a $36,500 second mortgage, and a $36,500 down payment.
• On 2/20/2003 they refinanced the first mortgage for $322,700. For the first two years, they were going the right direction, but then they tasted a bit of kool aid, and everything went poorly from this point forward.
• On 5/28/2003 they obtained a HELOC for $30,000.
• On 12/30/2003 they refinanced with a $359,400 first mortgage.
• On 3/17/2004 they got a HELOC for $115,000.
• On 7/28/2004 they refinanced with a $376,800 first mortgage and went Ponzi.
• On 1/25/2005 they refinanced the first mortgage for $524,000.
• On 5/31/2006 they refinanced with a $640,000 Option ARM with a 1% teaser rate.
• On 6/11/2007 they refinanced with a $656,000 first mortgage and a $40,000 stand-alone second.
• Total property debt is $696,000.
• Total mortgage equity withdrawal is $294,500 including their down payment.
• Total squatting time is 18 months.

Foreclosure Record

Recording Date: 07/01/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 07/15/2009

Document Type: Notice of Default

Seriously, how do people explain this behavior? Is it possible to dodge the question at family gatherings?

Irvine Home Address … 5242 ROYALE Ave Irvine, CA 92604

Resale Home Price … $640,000

Home Purchase Price … $438,000

Home Purchase Date …. 12/18/2000

Net Gain (Loss) ………. $163,600

Percent Change ………. 37.4%

Annual Appreciation … 3.8%

Cost of Ownership

————————————————-

$640,000 ………. Asking Price

$128,000 ………. 20% Down Conventional

4.29% …………… Mortgage Interest Rate

$512,000 ………. 30-Year Mortgage

$122,018 ………. Income Requirement

$2,531 ………. Monthly Mortgage Payment

$555 ………. Property Tax

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

$53 ………. Homeowners Insurance

$0 ………. Homeowners Association Fees

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

$3,139 ………. Monthly Cash Outlays

-$417 ………. Tax Savings (% of Interest and Property Tax)

-$700 ………. Equity Hidden in Payment

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

$80 ………. Maintenance and Replacement Reserves

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

$2,299 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$6,400 ………. Furnishing and Move In @1%

$6,400 ………. Closing Costs @1%

$5,120 ………… Interest Points @1% of Loan

$128,000 ………. Down Payment

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

$145,920 ………. Total Cash Costs

$35,200 ………… Emergency Cash Reserves

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

$181,120 ………. Total Savings Needed

Property Details for 5242 ROYALE Ave Irvine, CA 92604

——————————————————————————

Beds: : 4

Baths: : 3

Sq. Ft.: : 2011

$0,318

Lot Size: : 6,000 Sq. Ft.

Property Type:: Residential, Single Family

Style:: One Level, Ranch

View:: Faces Northeast

Year Built: : 1969

Community: : El Camino Real

MLS#: : P758091

Source: : CARETS

——————————————————————————

Charming 4 bedroom 3 bath home in the Ranch. Tastefully updated and well maintained. Granite counters in kitchen and bathrooms. Laminate flooring, crown molding, plantation shutters in kitchen, living room and family room. Dual pane windows. Mahogany front door. 2 car garage. Backyard has a pool, patio with awning, and gazebo. No HOA dues.

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

Lenders are in a no-win situation with regards to future house prices.

Irvine Home Address … 10 BLUE Riv Irvine, CA 92604

Resale Home Price …… $779,000

I've come to help you

With your problems

So we can be free

I'm not a Hero

I'm not a Savior

Forget what you know

I'm just a man who's

Circumstances went beyond his control

Beyond my control,

We all need control

The problem's plain to see

Too much technology

Machines to save our lives

Machines de-humanize

Styx — Mr. Roboto

In our quest for efficiency, we have eliminated much of the human element from our mortgage finance system. With automated models for loan qualification, payment processing, and now foreclosure, we have turned the system over to machines and computer algorithms. Most of what we have done in this area has been an improvement, but have we gone too far?

The Housing Bust Lobby

Obama is right to resist the foreclosure wails from the political left.

OCTOBER 19, 2010 — WSJ Opinion

More than three years into the housing bust, the foreclosure mitigation lobby apparently wants to keep the fun going. That will surely be the result if the political uproar over bank "robo-signers" becomes a moratorium on foreclosures.

So far the Obama Administration, to our surprise and perhaps its own, has behaved with admirable sobriety despite the wailing from the political left. Housing Secretary Shaun Donovan indulged in some familiar bank-bashing in an op-ed on the weekend, but he also says a moratorium would be a mistake. Perhaps this is because he knows something about mortgage contracts, including that bank process errors don't add up to an injustice to homeowners who haven't been paying their mortgages for months or years. He also notes that stopping a foreclosure creates unintended victims—such as the potential new buyer.

That is one of the first acknowledgments of the plight of new buyers I have seen in the media. Everyone is so focused on helping out the deadbeats being foreclosed on that we forget that a new buyer — a buyer willing to pay the mortgage — is waiting to move in to their new home. The idea that delinquent borrowers should have their debts forgiven because of a procedural error is ridiculous.

The alleged scandal here is that "robo-signers" for mortgage servicing companies have been signing foreclosure authorizations based on assurances from colleagues, rather than reviewing the files themselves. Some banks and mortgage servicing companies were also sloppy in maintaining records on the ownership of loans. This supposedly leads to horrible consequences for borrowers, though the evidence remains elusive.

The New York Times appeared to have produced a front-page victim on Friday—a woman fighting eviction from her $75,000 home at the hands of lender GMAC. The woman has not paid her mortgage in two years while remaining in the house. Some may view this as a case of rough treatment, but we doubt New York Times subscribers can receive the paper for two years after they stop paying for it.

All the squatters should move out first, then they can sue the lender for whatever they want. If they have a legitimate claim, they will be compensated, and if they don't have a legitimate claim — and we all know none of them do — then they can pound sand.

One left-wing financial blog has compiled news accounts that as many as seven people have unfairly suffered a foreclosure, despite making all payments. That's right, seven in a nation of more than 310 million. Our Journal colleagues also found a borrower who apparently paid her bills but was still charged additional fees by Senator Chris Dodd's favorite mortgage company, Countrywide Financial. As we said last week, whether the number of legitimate victims is seven or eight or more, anyone who paid on time and still suffered at the hands of a bank should be made whole. But on the record so far this is not a case of widespread fraud or injustice.

On the issue of maintaining the documents to establish ownership of a mortgage debt, it's not surprising that the process is messy, given that Fannie Mae and Freddie Mac helped design it. But securitization errors are also process flaws, and they do not entitle everyone to a free house.

Joseph Mason, a Wharton fellow and finance professor at Louisiana State University, states it plainly: "There is no question whether the contracts each party signed were valid. The Borrower owes the money they used to buy the property. The Lender has a claim to that money. Mere delays in providing the right documentation of a perfected collateral claim will not change the situation."

Part of me feels sad for the millions of distressed borrowers who are clinging to yet another false hope for debtor salvation. How many people are lapsing back into denial of their current circumstances because of stories like these? There is no hope that this pre-election emotional nonsense will result in delinquent borrowers getting debt relief. If this story gets people to make three or four more payments, does that benefit anyone other than the banks?

Sloppiness in some financial back offices does not come close to justifying a national foreclosure moratorium. By some estimates such a freeze could cost more than $2 billion per month, and given how involved the unwilling taxpayer has become in mortgage finance, this damage won't necessarily be limited to bank shareholders. This is a nightmare for anyone who wants a healing housing market and investors willing to lend to the next generation of homeowners. It also raises false hopes among delinquent borrowers.

More losses absorbed by taxpayers, more delays in reaching the bottom in prices, and more false hopes that will be dashed later: what a mess.

Backers of a moratorium claim they are upholding the rule of law, while we have allegedly abandoned it in opposing a freeze. This argument has it backwards. We say that disputes over private contracts should be decided on an individual basis under the law. The moratorium crowd wants to use the individual cases as a political lever to enact policies that effectively change the terms of existing contracts—e.g., more loan modifications, reductions in loan principal via bankruptcy court, or a moratorium.

As for the state Attorneys General who are promoting this foreclosure fracas, watch how few of them merely seek to force banks to document ownership, and how many try to muscle banks into settlements with unrelated benefits for the AGs' favored constituencies.

The moratorium lobby also argues that keeping people in homes they can't afford will somehow help the economy. This is of a piece with more than three years of failed policies intended to prevent housing markets from finding a bottom. These policies—begun under George W. Bush and continued under President Obama—have succeeded mainly in prolonging the agony and delaying a recovery.

In a slow-growth, high-unemployment economy still mending from a financial crisis, there are only so many trillion-dollar markets the politicians can destroy without sending America back into recession. Mr. Obama has often seemed indifferent to the economic consequences of political decisions, but on this issue he has correctly perceived the horrendous cost of blowing up the mortgage market again.

The ramifications of this policy go even deeper. The basic conundrum facing the banks is to foreclose or not to foreclose. If they foreclose, and if they process the sales, prices will crash. If they don't foreclose, more borrowers will quit paying, and prices will remain high, but few people will actually be paying them as squatting becomes the norm (Squatting Becoming a Way of Life for Many Delinquent Borrowers).

How The Foreclosure Mess Could Create a Downward Spiral for Housing

Monday, 25 Oct 2010 — John Carney

The mortgage mess that lead to foreclosure freezes by several large banks across much of the country may slow down the ability of banks to issue new mortgages, which could push the housing market into a sharp downward spiral.

Even as banks begin to lift their voluntary moratoriums on foreclosures, the paperwork problems—banks discovering that they often were not producing valid proof of ownership in foreclosure proceedings—that led to the freezes have the potential to stymie new lending.

The paperwork problem is curable. Banks can go back through the chain of ownership of loans and liens to correct lapses.

But this process is time consuming and costly, especially when some of the original mortgage lenders or intermediary owners of the mortgages have gone bankrupt or been merged into other banks.

In the meantime, borrowers who have defaulted on their loans will likely be able to keep their homes for longer than they otherwise could. (Thinking About Accelerated Default? The Average Squatting Time Is Up to 449 Days) What’s more, banks are likely to find that more foreclosure actions are contested by borrowers as the public and attorneys eager to collect legal fees by fighting foreclosures become more aware of the documentation problems.

I wonder how many people will give their last dollars to attorneys to fight for hopeless dream of regaining their lost property?

All this means that banks will find themselves with more bad loans on their books. The normal pace of run-off of bad loans—delinquency to default, default to foreclosure, foreclosure to sale—has meant banks have not been able to recover revenue on non-performing loans for upwards of a year and a half in much of the country. The new pace of run-off will likely mean that banks are stuck with the non-performing loans for far longer.

The longer it takes for banks to exit bad loans and recover cash, the higher the level of bad loans on the books of banks will get. As the non-performing loan portfolio grows, banks will need to set aside an increasing amount of capital to balance. This will, in turn, mean banks will make fewer home loans until the backlog of bad loans can be cleared up.

In short, the foreclosure crisis has the potential of creating a liquidity crisis for home loans. The actual number of defaults is not necessarily increasing—it’s just taking longer than usual to clear the old non-performing loans. But this means that banks aren’t generating revenue from the foreclosures. It also means that the loan portfolios will appear to be worsening as the percentages of non-performing loans grow.

This process of a liquidity crunch for the mortgage market could be short-circuited if both investors and regulators are willing to provide some relief to banks. Regulators at the FDIC and the Fed could grant dispensation to banks to keep making new loans despite spiking non-performance rates in the home loan portfolio.

We have already granted banks dispensation by allowing amend-extend-pretend. What more do we need to do? Perhaps we should just let them loan out money to anyone with a pulse to fill the buyer pool. Oh, wait, we tried that once, didn't we?

Investors too could look beyond the temporary drop in recovery rates and rising default levels—although this is far from guaranteed. Investors could also panic at the bad numbers and sharply sell-off bank stocks. Bank executives are likely to fear the latter—which would mean that even if regulators grant relief, banks could still hold back when it comes to extending new home loans.

The only reason banks hold back on writing new loans is because there aren't enough creditworthy borrowers available. Anyone who is not already over-indebted, has a job, and has good credit can borrow plenty.

A liquidity crunch in the mortgage market would hit home sales hard. Buyers would discover credit harder to come by and more expensive, which would push down the price of homes even further. Coming after a summer with particularly brutal home sales numbers, this could set the stage for a sharp decline in home prices across much of the country.

This is, in fact, what is happening today. As I noted Monday, the Home Price Drop was Sudden and Dramatic.

And that’s when things will get really scary. A sharp decline in home prices would put even more borrowers underwater. Many buyers who are already underwater but hoping for a home price recovery might lose that hope. Default rates would grow, putting even more pressure on the banks to slow down lending. The further slowdown on lending would put more downward pressure on home prices. Rinse. Repeat.

In short, we could be looking at a downward spiral on home loan lending and home prices, thanks to sloppy paperwork by the banks that, in the rush to make new loans during the housing bubble, failed to make sure they were meeting legal requirements for perfecting and transferring mortgage interests in homes. It’s a mess the banks made—but the price of which may be visited upon many homeowners.

The downward spiral is what took out the subprime areas. Will the alt-a and prime be next? It's starting to look that way.

Tale of Two Borrowers

IT WAS the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way.

The period of the housing bubble was a time of contrasts. The belief was that prices were normal and that they would rise forever; the reality was that prices were inflated and rising based on foolish emotion and greed.

Today's featured property is the tale of two successive HELOC abusing owners. The first spent $100,000 of his equity but still found the greater fool to give him even more. The second owners spent $120,000 of their equity only to go into default as their imagined equity evaporated.

• Owner number one purchased this property on 11/28/2000 for $425,000. He used a $297,500 first mortgage and a $127,500 down payment.
• On 7/15/2002 he refinanced with a $350,000 first mortgage.
• On 4/14/2003 he refinanced with a $397,500 first mortgage.
• Mortgage equity withdrawal was $100,000 which was most of his down payment.

The property records are unclear, but based on the HELOC information of the next owners, it looks like the property was sold on 7/19/2004 for $655,000. Despite the first owner withdrawing and spending his down payment, he still walked away with double what he put into the property. I think that kind of borrower behavior is foolish, but when people were rewarded for it during the bubble, I can see why everyone started doing it.

The next owners pick up with a $131,000 HELOC on 7/19/2004. Assuming this was a purchase money mortgage that represented a 20% of the purchase price, this property sold for $655,000. This couple increased their HELOC to $250,000 on 11/16/2005 and withdrew $129,000. They imploded in spring of 2009, and two loan modifications later, they are trying to sell.

Foreclosure Record

Recording Date: 07/09/2010

Document Type: Notice of Rescission

Foreclosure Record

Recording Date: 06/28/2010

Document Type: Notice of Default

Foreclosure Record

Recording Date: 09/18/2009

Document Type: Notice of Rescission

Foreclosure Record

Recording Date: 08/18/2009

Document Type: Notice of Default

Loan owners in California have become accustomed to spending their equity. In their minds this is now an entitlement. It's one of the perks for living in California and taking on those oversized mortgages. As long as this belief persists, and as long as lenders enable this foolishness, we will continue to have cycles of booms and busts that periodically enriches everyone and imperils the banks.

Irvine Home Address … 10 BLUE Riv Irvine, CA 92604

Resale Home Price … $779,000

Home Purchase Price … $425,000

Home Purchase Date …. 10/28/2000

Net Gain (Loss) ………. $307,260

Percent Change ………. 72.3%

Annual Appreciation … 6.2%

Cost of Ownership

————————————————-

$779,000 ………. Asking Price

$155,800 ………. 20% Down Conventional

4.23% …………… Mortgage Interest Rate

$623,200 ………. 30-Year Mortgage

$147,462 ………. Income Requirement

$3,058 ………. Monthly Mortgage Payment

$675 ………. Property Tax

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

$65 ………. Homeowners Insurance

$38 ………. Homeowners Association Fees

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

$3,837 ………. Monthly Cash Outlays

-$718 ………. Tax Savings (% of Interest and Property Tax)

-$862 ………. Equity Hidden in Payment

$236 ………. Lost Income to Down Payment (net of taxes)

$97 ………. Maintenance and Replacement Reserves

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

$2,591 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$7,790 ………. Furnishing and Move In @1%

$7,790 ………. Closing Costs @1%

$6,232 ………… Interest Points @1% of Loan

$155,800 ………. Down Payment

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

$177,612 ………. Total Cash Costs

$39,700 ………… Emergency Cash Reserves

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

$217,312 ………. Total Savings Needed

Property Details for 10 BLUE Riv Irvine, CA 92604

——————————————————————————

Beds: 4

Baths: 3 baths

Home size: 2,900 sq ft

($269 / sq ft)

Lot Size: 5,400 sq ft

Year Built: 1975

Days on Market: 70

Listing Updated: 40457

MLS Number: U10003725

Property Type: Single Family, Residential

Community: El Camino Real

Tract: Dc

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

Beautiful expanded and remodeled Plan 5. Downstairs Bedroom expanded with private entrance. Kitchen fully upgraded with granite counter tops, butcher block center island, stainless steel double dishwasher, new micro/convect oven, and stainless range. All new windows and upgraded base and crown. Recessed lighting, laminate wood floors and slate floors and granite counter in guest bath.