Major US Banks are distressed and closer to collapse than most realize.

Irvine Home Address … 3 RAINBOW Fls #53 Irvine, CA 92603

Resale Home Price …… $613,750

Look into my eyes

Now you're getting sleepy

Are you hypnotized

By secrets that you're keeping?

I know what you're keeping

I know what you're keeping

Got a secret

Can you keep it?

Swear this one you'll save

Better lock it, in your pocket

Taking this one to the grave

If I show you then I know you

Won't tell what I said

Cause two can keep a secret

If one of the m is dead…

The Pierces — Secret

The banks, the federal reserve and our government have been trying to conceal the true level of distress with our banking system. The policies being put forth in Washington only serve to extend this crisis and inhibit economic growth. First, let's take a look at how much REO the banks already have.

JPMorgan, Wells Fargo and BofA each hold more than $20 billion in foreclosures

by KERRY CURRY — Friday, October 22nd, 2010, 4:05 pm

JPMorgan Chase, Wells Fargo Bank and Bank of America each reported more than $20 billion in single-family mortgages currently foreclosed or in the process of foreclosure as of midyear, according to Weiss Ratings.

In addition, for each dollar these banks held of mortgages in ?foreclosure, they had additional exposure to more than $2 in mortgages that are 30 days or more past due.

"Although only some portion of the past-due loans will ultimately go into foreclosure, these figures tell us that the biggest players are not only in deep, but could sink even deeper into the mortgage mayhem," said Martin D. Weiss, chairman of Weiss Ratings.

As readers here know, part of the reason for the banks having so much REO is because Banks are being Forced to Repurchase Bad Bubble Loans.

Among all U.S. banks, JPMorgan Chase has the largest volume of mortgages in foreclosure or foreclosed with $21.7 billion. It has $43.4 billion in mortgages past due.

Bank of America has a somewhat smaller volume of foreclosures ($20.3 billion), but it has a larger pipeline of past-due mortgages — $54.6 billion. Thus, overall, including all foreclosed and delinquent categories, Bank of America has the largest volume of bad mortgages among U.S. banks, with $74.9 billion, while Wells Fargo has the second largest with $68.6 billion.

Other banks, despite their large size, are less heavily exposed. Citibank has $6.3 billion in foreclosures and $19.2 billion in past-due mortgages, or a total of $25.6 billion. The volume held by other large banks, such as U.S. Bank, PNC Bank, and SunTrust is smaller.

"In addition to the volume of bad mortgages, the vulnerability of each bank to the foreclosure crisis depends on the capital and loan-loss reserves it has set aside to cover losses and other factors such as its earnings, liquidity, reliance on less-stable deposits, and the quality of its overall loan portfolio," Weiss said.

Among banks with $1 billion or more of mortgages already foreclosed or in process of foreclosure, Wells Fargo has the greatest exposure to bad mortgages in proportion to its capital. For each dollar of Tier 1 capital, the bank has 75.4 cents in bad mortgages, or a ratio of 75.4%. The equivalent ratios for JPMorgan Chase, Bank of America and SunTrust are 66.8%, 66% and 57.6%, respectively.

The issue of bank REO is critical to the housing market because How The Lending Cartel Disposes Their REO Will Determine the Market’s Fate. What's worse is that bank REOs are not the only problem as GSE Foreclosures Shatter Record Highs, Keep Climbing.

Also, for every home in REO, there are four that are delinquent on their mortgage and tied up in shadow inventory (Shadow Inventory Signals Three Years of Falling Prices).

Triple Down: Fannie, Freddie, and the Triumph of the Corporate State

October 27, 2010 — The Institutional Risk Analyst

"JOHN BULL can stand many things but he cannot stand two per cent." That aphorism, quoted by Walter Bagehot, a 19th-century editor of The Economist, expressed savers' traditional distaste for very low interest rates. For the first three centuries of the Bank of England's existence, 2% was indeed as low as the central bank was willing to let interest rates fall. Not even the Depression, nor the long Victorian period of stable prices, induced the bank to go any further. Some minimum return on capital was deemed to be required.

Buttonwood

The Economist

September 16, 2010

… Because President Barack Obama and the leaders of both political parties are unwilling to address the housing crisis and the wasting effects on the largest banks, there will be no growth and no net job creation in the U.S. for the next several years. And because the Obama White House is content to ignore the crisis facing millions of American homeowners, who are deep underwater and will eventually default on their loans, the efforts by the Fed to reflate the U.S. economy and particularly consumer spending will be futile. As Alan Meltzer noted to Tom Keene on Bloomberg Radio earlier this year: "This is not a monetary problem."

Government Props Weakened the Housing Market and Delayed the Recovery

Indeed, the public embrace by the Federal Open Market Committee of further quantitative easing or "QE", instead of calling for the immediate restructuring of the largest zombie banks, actually threatens to push the U.S. into a deeper and far more dangerous economic path. According to the Q2 2010 Bank Stress Index survey conducted by IRA and our review of the Q3 2010 earnings results, the financial condition of smaller lenders is actually improving. While the FDIC now has over 800 banks on its troubled list, the righteous banks for which we currently have "positive" outlooks in The IRA Advisory Service are showing better earnings and less credit stress.

Part of the reason for the improvement is that the FDIC and state regulators have taken a very hard line with smaller banks, pushing many into resolutions and distressed asset sales. But for the healthy lenders that survive and investors that buy failed banks, there will be a lot of money left on the table — profits that will come back into earnings via recoveries and other windfalls and help to boost the private economy. Resolution and liquidation is how a free market economy regenerates. The trouble is, the approach taken with the large banks and the GSEs is precisely the opposite of that applied to smaller lenders. The policy of the Fed and Treasury with respect to the large banks is state socialism write large, without even the pretense of a greater public good.

Forget Treasury Secretary Tim Geithner lying about the relatively small losses at American International Group (AIG), the fraud and obfuscation now underway in Washinton to protect the TBTF banks and GSEs totals into the trillions of dollars and rises to the level of treason. And the sad part is that all of the temporizing and excuses by the Fed and the White House will be for naught. The zombie banks and GSEs alike will muddle along until the operational cost of servicing bad loans engulfs them. Then they will be bailed out — again — or restructured. …

Living in a Post Bubble World: What's Next?

Pictures of Deflation

Comments by Christopher Whalen American Enterprise Institute October 6, 2010

Is the Subprime Crisis Over?

• No. The improvement in bank loan default rates is a mirage. The use of loan modification to make bad credits appear “current” is an economic fraud perpetrated by Washington that is already becoming apparent via foreclosure moratoria.
• Mounting cash flow stress on all lenders is reaching crisis levels. Non-payment by borrowers and mounting foreclosure backlogs are creating the conditions for the collapse of some of the largest U.S. banks in 2011.

Chart 1: Efficiency

• First stage of the banking crisis involved stress on liquidity due to market contagion. TARP, the Fed, FDIC responded with liquidity and debt guarantees.
• The second stage involved stress on capital via charge- offs and loan loss reserves, both of which drove banks into record levels of loss.
• The third stage of the banking crisis involves degradation of bank operating efficiency as restructuring accelerates, expenses rise and lenders involuntarily become non-operating REITs.

Lenders are becoming non-operating REITs. In the first story, we documented that the banks now own billions in non-performing real estate. At some point, banks no longer operate by making loans and collecting interest, they operate by buying property at foreclosure and collecting rent just like a REIT. When you buy bank stocks, are you really buying a disguised REIT? I think you are, except that REITs are generally well managed, and bank portfolios are not.

Chart 2: Net Interest Income

• Many on Wall Street believe that net interest margin or NIM among U.S. banks is at record levels. They are right, but not in the way that many investors and analysts expect.
• Unfortunately, measured in dollars, the NIM of the banking industry has been cut by a third over the past three years due to the Fed’s zero interest rate policy. Banks are literally dying from lack of yield on assets due to the Fed’s ZIRP.

The long-term problem with lowering interest rates to boost bank profits is that the yield curve flattens and the banks margins get squeezed. When banks could borrow at 0% and loan money for mortgages at 6%, the margins were helpful, and the banks had opportunity to recover; however, over time, competition drives down long term rates and flattens the yield curve. Banks are still borrowing at 0%, but now they can only loan at about 4.25%, a significant decline in margin.

Chart 3: Non-Interest Income

• In 2005-2007 period when the subprime frenzy peaked, non-interest revenue for U.S. banks reached a record $80 billion. Expenses, conversely, were muted as defaults disappeared, but are now growing rapidly.
• Since 2007, the non-interest revenue of all U.S. banks has fallen by over $10 billion. Non-interest expenses at U.S. banks will continue to increase due to residential and commercial foreclosures.

If bank portfolios weren't so poor operated, the non-interest income would be rising and non-performing loans would be converted to performing rentals.

For example, right now in Las Vegas, I can buy properties and obtain a 9% return based on rental cashflow, so I know the banks can too. If they began renting out their REO, they can obtain income superior to the loan interest they would obtain on a 4.25% note. In fact, I think they are rather foolish for not renting out more of their REO in beaten down markets like Las Vegas.

Chart 4: Exposure at Default (EAD)

• U.S. banks continue to shrink their unused credit lines to limit exposure to default. The shrinkage in EAD is also a function of slack demand for credit in a deflating economy.
• The combinations of still-record default rates and rising servicing costs related to foreclosures is making banks hyper-cautious about credit. The muddle along policy of Obama and Geithner = no net credit growth.
• Chart on the following page shows unused credit lines for BAC, C. JPM and the large-bank peer group created by The IRA Bank Monitor. Note all have greatly reduced EAD.

Conclusions

• The U.S. banking industry is entering a new period of crisis where operating costs are rising dramatically due to foreclosures and defaults. We are less than 1⁄4 of the way through the foreclosure process. Laurie Goodman of Amherst Securities predicts that 1 in 5 mortgages could go into foreclosure without radical action.
• Rising operating costs in banks will be more significant than in past recessions and could force the U.S. government to restructure some large lenders as expenses overwhelm revenue. BAC, JPM, GMAC foreclosure moratoriums only the start of the crisis that threatens the financial foundations of the entire U.S. political economy.
• The largest U.S. banks remain insolvent and must continue to shrink. Failure by the Obama Administration to restructure the largest banks during 2007-2009 period only means that this process is going to occur over next three to five years – whether we like it or not. The issue is recognizing existing losses — not if a loss occurred.
• Impending operational collapse of some of the largest U.S. banks will serve as the catalyst for re-creation of RFC-type liquidation vehicle(s) to handle the operational task of finally deflating the subprime bubble. End of the liquidation cycle of the deflating bubble will arrive in another four to five years.

I guess that means I will have plenty of properties to recycle over the next several years.

Live the Irvine HELOC abuse lifestyle

Let's be real honest about Californian's love affair with real estate: everyone here wants to spend the free money that comes out of the walls. People here believe house prices go up by magic, so all they have to do is buy and they get rich. Of course, if that believe is widely held, it is self-fulfilling — to a point. Trees cannot grow to the sky.

The owner of today's featured property regularly went to the housing ATM to spend the deposits left by the appreciation gods. in the process, he borrowed himself into oblivion, and now he is selling short after 14 years of loan ownership. He is probably pissed because no greater fool was willing to step forward and overpay for his run down property.

• This property was purchased on 5/3/1996 for $360,000. The owner used a $207,000 first mortgage and a $153,000 down payment.
• On 4/4/2002 he refinanced the first mortgage for $202,000. For the first six years of ownership, he had the mortgage going in the right direction.
• On 10/7/2003 he obtained a new first mortgage for $251,000. That $49,000 was his first taste of kool aid, and it changed his financial life.
• On 6/24/2005 he refinanced with a $338,000 first mortgage.
• On 4/25/2006 he got a $432,000 first mortgage.
• On 6/14/2007 he refinanced with an Option ARM for $595,000.
• Total mortgage equity withdrawal is $388,000 plus negative amortization.
• Total squatting time is about a year so far.

Foreclosure Record

Recording Date: 02/01/2010

Document Type: Notice of Default

Realistically, they will put off foreclosing on this guy as long as they can. The banks are praying prices will come back with sufficient volume to clear out guys like this. That isn't happening, and it isn't going to happen.

Irvine Home Address … 3 RAINBOW Fls #53 Irvine, CA 92603

Resale Home Price … $613,750

Home Purchase Price … $360,000

Home Purchase Date …. 5/3/1996

Net Gain (Loss) ………. $216,925

Percent Change ………. 60.3%

Annual Appreciation … 3.6%

Cost of Ownership

————————————————-

$613,750 ………. Asking Price

$122,750 ………. 20% Down Conventional

4.23% …………… Mortgage Interest Rate

$491,000 ………. 30-Year Mortgage

$116,181 ………. Income Requirement

$2,410 ………. Monthly Mortgage Payment

$532 ………. Property Tax

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

$51 ………. Homeowners Insurance

$490 ………. Homeowners Association Fees

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

$3,483 ………. Monthly Cash Outlays

-$396 ………. Tax Savings (% of Interest and Property Tax)

-$679 ………. Equity Hidden in Payment

$186 ………. Lost Income to Down Payment (net of taxes)

$77 ………. Maintenance and Replacement Reserves

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

$2,671 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$6,138 ………. Furnishing and Move In @1%

$6,138 ………. Closing Costs @1%

$4,910 ………… Interest Points @1% of Loan

$122,750 ………. Down Payment

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

$139,935 ………. Total Cash Costs

$40,900 ………… Emergency Cash Reserves

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

$180,835 ………. Total Savings Needed

Property Details for 3 RAINBOW Fls #53 Irvine, CA 92603

——————————————————————————

Beds: 3

Baths: 2 full 1 part baths

Home size: 2,246 sq ft

($273 / sq ft)

Lot Size: n/a

Year Built: 1976

Days on Market: 96

Listing Updated: 40459

MLS Number: S625787

Property Type: Condominium, Residential

Community: Turtle Rock

Tract: Gh

——————————————————————————

Based on our analysis of the description, this listing may be a short sale or in a stage of pre-foreclosure.

Rare Below Market Opportunity in Prestigious Turtle Rock / Irvine This is a pre-approved short sale that can close quickly. The approval includes a significant credit repairs, new paint, flooring and fixtures. A great opportunity for the buyer looking for a home in the prestigious Turtle Rock community of Irvine. The home has 2,246 Sq Ft of living space, plenty of closet space and storage, crown molding throughout and need only misc. repairs, new paint, flooring and court yard landscaping. Make an offer now and select the paint colors, new flooring and fixture styles. Enjoy the walking paths, great schools and excellent location while buying a home with immediate equity.

The approval includes a significant credit repairs? I would think a short sale would include significant credit destruction….

Some of the biggest participants in the housing bubble are now apologizing for the wanton destruction their actions inflicted on ordinary families.

Irvine Home Address … 4 TONADA Dr Irvine, CA 92620

Resale Home Price …… $519,900

Two vibrant hearts could change.

Nothing tears the being more than deception,

unmasked fear.

"I'll be here waiting" tested and secure.

Nothing hurts my world,

just affects the ones around me.

When sin's deep in my blood,

you'll be the one to fall.

Avenged Sevenfold — Unholy Confessions

Confession is good for a troubled conscience. Many people made huge fortunes duping ordinary families into transactions that ultimately cost them their good credit and their family homes. Last week I noted that Countrywide’s Mozilo Should Go to Jail. Now, a former Freddie Mac employee has come forward to confess that ruining lives was his job, and he was better at it than he would have liked to be.

Housing Guy Apologizes For Housing Bubble

by Chana Joffe-Walt and Adam Davidson — October 22, 2010

Fannie Mae and Freddie Mac have worked for decades to help more Americans become homeowners. Now one former Freddie Mac employee has asked us for the opportunity to apologize for doing such a good job of fulfilling that mission.

Jacob Kosoff used to work as an economist for Freddie Mac's "Mission Department." His job was to look at the loan data each month and promote homeownership. He says his team was full of true believers who called themselves "housers."

This guy was a missionary for the cult of kool aid.

"I thought subprime was the best thing in the world," he says.

It was not until the spring of 2008, just months before Freddie would be bailed out by the federal government, that Kosoff began to question his fundamental belief that owning a home was better than renting.

He mentioned his concerns in the office.

"It was a bit like announcing there was no God — like the idea that housing was like God," he says. "Buying is always better. Listen to your mom, listen to your minister, listen to the government, listen to politicians. Everyone says it's better."

This shows how deeply embedded kool aid has become in our society.

There's one thing in particular that Kosoff would like to apologize for.

While at Freddie Mac, Kosoff managed an online calculator designed to help people determine whether to rent or buy a house. In fact, it's still online — you can see it here.

You plug in the cost of rent, cost of renters insurance, and the price of an equivalent home. Then it asks you to punch in an estimated appreciation rate for the home — how much you think the home's price will change over time. But if you plug in a negative number — if you estimate that the home will lose value — the calculator gives you an error message:

Freddie Mac

"I'm sorry that I didn't send an e-mail or work a little harder to get that fixed so the calculator can allow for the possibility of reality," Kosoff says — the reality that housing prices sometimes decline.

Kosoff wonders if some people used the calculator to come to a very bad decision: to buy an overpriced house with a subprime mortgage when they should have rented instead.

Or course people bought based on the results of this calculator. That was the whole point. All the online rent versus buy calculators — with the exception of ours — are designed to ignore costs and exaggerate benefits in order to induce people to buy. These calculators are generally sponsored by some person or entity whose livelihood depends on coercing people to buy.

Freddie Mac says it plans to fix the calculator to allow for the possibility that housing prices do not always go up — a reality we are all living through right now.

Many people have asked me why I don't put in the ability to project forward for inflation of costs and appreciation. There are several related reasons, but the primary among them is that any projection of the future will invariably exaggerate the benefit of ownership. Nearly all prospective buyers and existing homeowners think house prices go up faster than they do. House prices usually track wage growth (about 3%), but most people believe house prices go up two or three times that fast. Many accept that California house prices go up 6% to 10% a year as a truism. It's not.

Steady side income

Orange County is a hotbed for entrepreneurs. Many people either make their living or supplement their living from entrepreneurial activities. Nearly every homeowner in California — or at least all the ones who have been selling their homes over the last 4 years — have been living like entrepreneurs with a steady side income. When people make $80,000 a year and their house provides $40,000 a year, they get to live the OC lifestyle. People from the outside don't get out house prices until they see how paying those prices enables Californian's to live.

• Today's featured property was purchased on 5/29/1998 for $199,500 according to my records. I think this number is in error because there is a $202,950 first mortgage on the property. In all likelihood, that was an FHA loan, and the real purchase price was $210,000.
• On 4/21/1999 they obtained a stand-alone second for $11,631.
• On 9/17/2001 they refinanced the first mortgage for $229,800.
• On 12/3/2001 they got a $45,000 HELOC.
• On 7/9/2003 they refinanced the first mortgage for $271,000
• On 12/9/2003 they refinanced with a $305,000 first mortgage.
• On 6/18/2004 they opened a HELOC for $122,000.
• On 7/20/2006 they opened a HELOC for $100,000.
• On 9/28/2006 they opened a HELOC for $52,882.
• On 9/28/2006 they opened a HELOC for $47,118. Notice the simultaneous HELOCs. That is mortgage fraud.
• On 2/20/2008 they refinanced the first mortgage for $400,000.
• On 7/3/2008 they refinanced again for $399,400.
• On 12/5/2008 they refinanced with a $398,500 first mortgage. I have to wonder if someone in the family is a mortgage broker.
• On 4/23/2009 they refinanced with a $410,000 first mortgage.
• That is 13 refinances or HELOCs in a 10 year period.
• Total mortgage equity withdrawal is $207,050.

What amazes me about this behavior is that banks continued to support it as late as April of 2009. Isn't it obvious that this borrower has gone Ponzi? I suppose lenders love customers like this as they generate huge fees, but this behavior is exactly what caused banks to loan out too much money to the wrong people during the housing bubble. Apparently, lenders haven't learned anything from that experience.

Irvine Home Address … 4 TONADA Dr Irvine, CA 92620

Resale Home Price … $519,900

Home Purchase Price … $192,000

Home Purchase Date …. 6/17/1988

Net Gain (Loss) ………. $296,706

Percent Change ………. 154.5%

Annual Appreciation … 4.4%

Cost of Ownership

————————————————-

$519,900 ………. Asking Price

$103,980 ………. 20% Down Conventional

4.23% …………… Mortgage Interest Rate

$415,920 ………. 30-Year Mortgage

$98,415 ………. Income Requirement

$2,041 ………. Monthly Mortgage Payment

$451 ………. Property Tax

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

$43 ………. Homeowners Insurance

$285 ………. Homeowners Association Fees

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

$2,820 ………. Monthly Cash Outlays

-$335 ………. Tax Savings (% of Interest and Property Tax)

-$575 ………. Equity Hidden in Payment

$158 ………. Lost Income to Down Payment (net of taxes)

$65 ………. Maintenance and Replacement Reserves

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

$2,132 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$5,199 ………. Furnishing and Move In @1%

$5,199 ………. Closing Costs @1%

$4,159 ………… Interest Points @1% of Loan

$103,980 ………. Down Payment

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

$118,537 ………. Total Cash Costs

$32,600 ………… Emergency Cash Reserves

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

$151,137 ………. Total Savings Needed

Property Details for 4 TONADA Dr Irvine, CA 92620

——————————————————————————

Beds: 3

Baths: 2 full 1 part baths

Home size: 1,800 sq ft

($289 / sq ft)

Lot Size: 1,891 sq ft

Year Built: 1977

Days on Market: 93

Listing Updated: 40459

MLS Number: S626236

Property Type: Single Family, Residential

Community: Northwood

Tract: Sd

——————————————————————————

** REDUCED $20,000 ** you are looking to live in Northwood, this is a must see! Large living room with fireplace, Huge dining area, Family room, Wood flooring, New carpeting, Open kitchen, Large secondary bedrooms, Fireplace in master bedroom, Newer double paned windows & Oversized two car garage.

A recap of recent events and how these issues impact the housing market.

Irvine Home Address … 5 PERIWINKLE Irvine, CA 92618

Resale Home Price …… $500,000

Freedom–calls my name

Serenity–keeps me sane

Happineses–it dulls the pain

Honest–to see my place

Open–to other ways

Willingness–to understand

Justice–but do not judge

Courtesy–for others' flaws

Kindness–it's not that hard

Self-restraint–of toungue and pen

Inventory–my daily friend

Analysis–let down your guard

Look in the mirror

What do you see?

The shattered fortress

That once bound me

Dream Theater — Shattered Fortress

The Walls Keep Tumbling Down: Foreclosure Flap and Other Housing Industry Woes

Published: October 13, 2010

After suspending foreclosures in order to review cases that may be flawed by procedural errors or fraud, major mortgage companies have injected new uncertainty into the already weak housing market. While few of the homeowners under scrutiny are likely to avoid foreclosure, the freeze adds additional confusion and delays recovery of the troubled housing sector, according to Wharton faculty and real estate analysts.

The foreclosure flap is the most recent of many setbacks for the troubled industry, even as a new generation of potential buyers is rethinking the traditional dream of homeownership. "Buying a home doesn't make sense for a large proportion of the population," says Wharton real estate professor Fernando Ferreira, noting that ownership reduces the flexibility to pursue work in other regions and ties up cash in a down payment that might be used for better investments. "We forgot these lessons in the housing boom. But I think the new generation is learning them — at least for the next five to 10 years."

Our government's obsession with home ownership has blinded lawmakers and bureaucrats to the advantages of renting. Real estate is not going to produce high returns over the next decade as we work off the excesses of the housing bubble, and everyone who has bought property because they think they will make a fortune on appreciation is going to be very disappointed.

After discovering that employees violated procedures while attempting to process a crush of foreclosure cases, three of the nation's leading mortgage servicers — J.P.Morgan Chase, GMAC and Bank of America — are holding off on further action in 23 states that require foreclosures to undergo judicial review. One GMAC "robo-signer" acknowledged signing off on as many as 10,000 cases a month, even though the law requires the signer to review all documents personally. Bank of America later extended its halt to foreclosures in all 50 states.

Wharton real estate professor Susan Wachter says the foreclosure freeze might temporarily buoy prices by keeping foreclosed properties off the market and could give some families another chance to come up with enough money to save their home. However, she expects that most of the now-stalled foreclosures will eventually move forward. "This will only delay the market clearing process."

The banks can't afford the write-downs associated with the market clearing process, so they actively encourage and participate in delaying foreclosures.

According to Wharton real estate professor Georgette Chapman Phillips, lenders may be guilty of shoddy paperwork, although she stops short of calling it fraud. Lengthy delays or overturning foreclosures based on improper documentation, she adds, would create new levels of moral hazard that might lead even more homeowners to stop paying their mortgages. "This is a horrible mess created by the banks and the secondary market. It's sloppiness, but the borrowers are not asserting fraud in the lending of money. We can't ignore that, at the bottom of all this, the people who were foreclosed upon didn't pay their mortgages."

All the nonsense about improper foreclosures seems to miss one basic point: the people being foreclosed on are not paying their mortgage. Banks are worried that walking away will be socially acceptable. Well, it has. People who are not paying their mortgages have now achieved victim status which will almost certainly make their ranks grow larger. The housing entitlement in this country has gotten so bad that people no longer believe they have to pay for their housing. Whatever they can move into they can keep.

The Key Driver: Jobs

The questionable cases are part of a backlog of more than 1.2 million loans that are in the process of foreclosure in the United States, according to RealtyTrac, a housing data firm based in Irvine, Calif. In addition, another 900,000 properties taken back by banks remain on lenders' books, while five million more loans are seriously delinquent. The National Association of Realtors reports that distress sales, including foreclosures, made up 34% of all existing home sales in August.

For every property in visible bank inventory, there are four that are in shadow inventory waiting for the banks to initiate foreclosure proceedings.

"The only way to clear prices is by getting rid of the foreclosure backlog, but that will take a long time to work out. It's still a multi-year process," says Wharton real estate professor Joseph Gyourko, adding that 20% to 25% of all U.S. homes are worth less than what their owners owe lenders. "Every one of them is a candidate for default and foreclosure. It will just take a while to work through."

It looks like flipping houses in Las Vegas will be a viable business plan for a while….

While housing is always highly cyclical, Gyourko says the current prospects for recovery are hampered by extremely low levels of activity throughout the market, including new housing starts and sales volume. And the current slump is different from others because it is driven not only by imbalances in the sector, but also by larger economic problems. "This recovery is different. It's slower than normal…. You won't get much pickup in housing market activity — buying and selling — until you get job growth." Wachter agrees: "The key driver in housing is still jobs."

It is ultimately about jobs, but we have a chicken and egg problem with housing. One reason growth in residential investment corresponds to the bottom of recessions is because once job growth creates housing demand, that puts people back to work in homebuilding which creates even more job growth and more housing demand. Since our current problems are centered in housing, any recovery will not get the same housing demand and homebuilding job growth that helps the recovery gain strength.

Rick Sharga, senior vice president at RealtyTrac, says the latest foreclosure problems represent a "breach of trust" but will have little effect on the final resolution of cases. "It really is more of a temporary delaying issue." The foreclosure reviews will probably add 60 to 90 days to the process, Sharga predicts. This could cause foreclosures to be delayed an additional 6 to 18 months and string out the adjustment in home prices by that amount of time, according to residential mortgage tracker Access Mortgage Research & Consulting. While Chase has disclosed that 56,000 cases are under review, the other companies have not said how many foreclosures will be delayed. Some of the states with the largest numbers of foreclosures — including California, Nevada, Arizona and Michigan — are not ones that require formal judicial review for a lender to take back possession of a property.

According to RealtyTrac, foreclosure filings — including default notices, scheduled auctions and bank repossessions — were reported on 338,836 properties in the U.S. in August, up 4% from July, but down 5% from August 2009. One in every 381 U.S. housing units received some form of a foreclosure filing during the month. Sharga suggests that 2011 will be the peak year in bank repossessions, and that "2012 will be a little better….In 2013, we could see foreclosure activity drop significantly [as] we deal with getting through the overhang of foreclosed properties."

I think he is dreaming to think foreclosure activity will see any significant decline in activity even when the economy picks up. People couldn't afford their houses in good times, so when the economy picks up, loan owners are still facing the fact that they can't afford their homes. Foreclosure activity will likely peak in 2012, but there will be a long tail as this drags on for many years.

Of the 900,000 foreclosed homes now owned by banks, only a third are on the market, he notes. Banks are carrying homes on their books because of delays in processing the volume of paperwork and also because of state laws that put a six-month hold on sales as a way of giving owners a last chance to pay back their loans. Another factor, Sharga says, is banks' unwillingness to take title to foreclosed properties because new accounting rules would require the homes to be valued at their current market price. In many cases, the amount would be less than the outstanding loan, diminishing the bank's financial statements.

While some forecasters have suggested there are as many as eight million homes in the so-called "shadow inventory" of properties waiting to come on the market, RealtyTrac estimates that the total number of distressed properties that will change hands as a result of the financial crisis will top out at 3 million to 3.5 million. According to Wachter, when homes are sold in foreclosure, they go for 40% to 50% less than in a standard transaction between homeowners.

I don't know why he thinks so many will ultimately keep their homes. I wager the number will be closer to eight million homes than three million homes.

… According to Wachter, a look at the city-by-city Case-Shiller data shows that homes in some markets are improving strongly while others are continuing to lose value. For example, the most recent data shows home prices are up in San Francisco (11.2%), San Diego (9.3%) and Los Angeles (7.5%) compared to the same month last year. At the same time, prices for the period are down in Las Vegas (4.9%), Charlotte (3.5%) and Tampa (3.2%). "Different markets are responding in different ways," Wachter notes. "The story now is that markets are bifurcating between the ones that are coming back and the markets that are very slow to recover."

The differences in the performance of various markets has largely been dictated by how much squatting the banks are allowing. In the markets doing the best, loan owners are not being foreclosed on. in the markets doing the worst, loan owners are being booted out.

Homeowners who are disappointed with their decision to buy a home are only discovering what housing economists have always known — a home should not be considered an investment, Gyourko states. Paying a mortgage can be a good way to save because it requires the discipline to make regular payments. But, he notes, a rise in the price of a home is less valuable than a rise in price for other investments, such as stocks or bonds. If a homeowner pays $100,000 for a house that appreciates in value to $200,000, the gain is not really $100,000; the homeowner would not realize the gain because he or she would still need to find a new place to live. A comparable home would also have appreciated as much, eating into the homeowner's gain. A stock that rose in value by the same amount would yield the full $100,000 gain upon sale, less taxes.

Did you catch that? Home price appreciation is not the great deal everyone thinks it is. You still have to live somewhere, and if you spend the house — like everyone else did — then you still need to replace it with a house that has also gone up dramatically in price. People who buy for appreciation do not get the same advantages as a competing investment. Of course, everyone ignores those issues when prices are rallying and lenders are giving out HELOCs like crack to an addict.

In the years leading into the crisis, Gyourko says, homeowners "fooled" themselves into thinking their homes were investment vehicles, and they leveraged the value of their homes to borrow new money for vacations, cars or college educations. "But that's risky. When prices dropped, these homeowners were underwater." The only time home price appreciation counts as savings is when the homeowner trades down in the quality of their housing, or dies and no longer needs a new place to live.

Homeownership also prevents workers from relocating to get a better job if they are locked into a home that cannot easily be sold. In a paper written with Ferriera, Gyourko found that between 1985 and 2007, people with negative equity in their homes were one-third less likely to move. "A lot of people are stuck," he says.

Loan owners don't move. If there is a better job in another town, forget it.

According to Ferreira, the market is close to being stabilized, but could continue to decline over the next two years; he does not expect a pick up in prices for five or possibly even 10 years. In addition, it is difficult to even forecast prices because so few transactions are occurring. Between 1980 and 1986, he says, the U.S. housing market recorded 600,000 to 800,000 home sales per year. That figure jumped to 1.4 million in 2005-2006. Now the market is down to 350,000-400,000 home sales per year, even though the nation's population has grown more than 30% since 1980.

Yet another problem that will weigh on the market in the future are those homes owned by people who are able to make their mortgage payments, or have paid off their loans, but would still like to move to a bigger or a smaller home, to a new neighborhood or to another state. These people, Ferreira says, have been holding off on listing their homes because the market is so weak. Eventually, he adds, they will grow tired of waiting and will put their homes up for sale, adding even more supply to the market and further depressing prices. "They can stick with the investment for now, but the reality is that eventually — and that can be one, two or three years from now — a lot of people will be tired of investing in housing and will sell for any price."

He is describing market capitulation. Until everyone abandons hope and sells, the overhang of supply will keep prices from rising.

Over the long run, Ferreira predicts that housing will return no more than 3% a year, barely keeping pace with inflation. Going forward, he says, homes should be considered a place to live, not an investment. "I strongly recommend not using housing as a potential investment. Leave that for the speculators. If you buy a house, you should buy it for your own consumption. That's all you should care about."

Owner occupants should never consider home price appreciation in their purchase decision. For one, most people dramatically overestimate how much house prices will go up. When people start factoring in appreciation, they are usually just playing games with numbers to find some rationalization for an emotional decision they already made.

This neighborhood is crumbling

I have written many times about how the banks have withheld supply to artificially support prices. The neighborhood where today's featured property is located is a perfect example of what happens when the inventory gets too abundant for the available sellers to mop up.

This particular neighborhood within Oak Creek is north of Alton and adjacent to the shopping center. There are numerous three-story units and a mix of other product types. The prices for these units has been holding steady at $610,000 to $650,000 for the last 18 months. Since the expiration of the tax credits, very little has sold, and a few of the properties not mired in short-sale debt have been competing for the few remaining buyers.

The bank bought this property at auction in February, and they put in on the MLS in June. The have been steadily lowering their price, and they are still unable to find a buyer:

Date	Event		Price
Sep 29, 2010	Price Changed		$500,000
Sep 02, 2010	Price Changed		$555,000
Jul 29, 2010	Price Changed		$595,000
Jun 22, 2010	Listed		$625,000
Feb 16, 2010	Sold (Public Records) This home was foreclosedForeclosure is a process that transfers the right of home ownership from the homeowner to the bank or lender. A home goes into foreclosure when the owner stops paying his mortgage loan payments. and bank-ownedShort for "real estate owned," REOs are foreclosed homes owned by banks and lenders..		$617,971

Their first list price was reasonable for comps at the time. When they lowered the price below $600K, I imagine they where quite surprised the offers didn't come flooding in. Now they stand at $500,000. Where are the multiple offers over the ask? Why have they had to lower the prices 20% and they still haven't found a buyer?

The answer is simple: the tax credit pulled all the demand forward, and there are no buyers ready, willing, and able to pay the previous price equilibrium. I must admit, I am surprised by how far the banks and the flippers have had to lower prices to get out of these properties. When some of these properties close, the comps are going to be crushed, and a big drop will become reality.

Hat tip to Shevy for pointing out this neighborhood's activity.

A refi they will regret

The previous owner of today's featured property paid $695,000 on 6/28/2004. They used a $556,000 first mortgage and a $139,000 down payment. The wend into default in mid 2009, and the bank bought it at foreclosure for $617,971 which is the total of the note, missed payments, various fees, and so on — BTW, that means many of the bank losses I show are actually much larger.

The owners refinanced their first mortgage for $562,500 on 6/15/2007. They only took out $6,500 which probably covered their origination fees plus gave them a few dollars. The refinance cost them their non-recourse protections. When the bank finally disposes of the REO, they may go after this couple for the shortfall. The previous owners already lost $139,000 and their good credit, and later the bank may come back for another pound of flesh.

Irvine Home Address … 5 PERIWINKLE Irvine, CA 92618

Resale Home Price … $500,000

Home Purchase Price … $617,971

Home Purchase Date …. 2/16/10

Net Gain (Loss) ………. $(147,971)

Percent Change ………. -23.9%

Annual Appreciation … -31.4%

Cost of Ownership

————————————————-

$500,000 ………. Asking Price

$17,500 ………. 3.5% Down FHA Financing

4.25% …………… Mortgage Interest Rate

$482,500 ………. 30-Year Mortgage

$94,874 ………. Income Requirement

$2,374 ………. Monthly Mortgage Payment

$433 ………. Property Tax

$160 ………. Special Taxes and Levies (Mello Roos)

$42 ………. Homeowners Insurance

$43 ………. Homeowners Association Fees

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

$3,052 ………. Monthly Cash Outlays

-$375 ………. Tax Savings (% of Interest and Property Tax)

-$665 ………. Equity Hidden in Payment

$27 ………. Lost Income to Down Payment (net of taxes)

$63 ………. Maintenance and Replacement Reserves

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

$2,101 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$5,000 ………. Furnishing and Move In @1%

$5,000 ………. Closing Costs @1%

$4,825 ………… Interest Points @1% of Loan

$17,500 ………. Down Payment

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

$32,325 ………. Total Cash Costs

$32,200 ………… Emergency Cash Reserves

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

$64,525 ………. Total Savings Needed

Property Details for 5 PERIWINKLE Irvine, CA 92618

——————————————————————————

Beds: 2

Baths: 3 baths

Home size: 1,750 sq ft

($286 / sq ft)

Lot Size: 2,000 sq ft

Year Built: 2001

Days on Market: 117

Listing Updated: 40457

MLS Number: U10002802

Property Type: Condominium, Residential

Community: Oak Creek

Tract: Othr

——————————————————————————

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

PRICE REDUCED! WELCOME HOME TO THE CITY OF IRVINE AND WHAT MAY WELL BE THE VERY BEST CITY IN ORANGE COUNTY.THIS IS A SINGLE FAMILY DETACHED CONDOMINIUM LOCATED IN THE SOUGHT AFTER OAK CREEK COMMUNITY. THE PROPERTY FEATURES TWO BEDROOMS PLUS A DEN, AND 3 BATHROOMS. YOU ARE PART OF A GATED ASSOCIATION THAT CREATES THE FEELING OF BEING ON PERMANENT VACATION IN AN EXCLUSIVE RESORT. YOU WILL ENJOY THE ASSOCIATION POOL AND SPA, AND MANICURED GREENBELTS. THE LOCATION IS FANTASTIC YOU ARE CLOSE TO ALL THE GREAT THINGS IN IRVINE; PARKS, SCHOOLS, GOLF,THE NATURE CONSERVANCY, RECREATION, THE SPECTRUM, AND SO MUCH MORE. SO COME HOME TO IRVINE, AND START TO LIVE THE ORANGE COUNTY LIFESTYLE TODAY. THE BUYER SHOULD INVESTIGATE THE PROPERTY WITH PROFESSIONAL INSPECTORS.

Anthony Mozilo, former CEO of Countrywide Financial, has settled his case with the SEC and paid a large fine. IMO, he is a crook, and he should go to jail.

Irvine Home Address … 159 TOPAZ Irvine, CA 92602

Resale Home Price …… $439,500

And the judge's gavel fell

Jury found him guilty

Gave him sixteen years in hell

He said "I ain't spending my life here

I ain't living alone

Ain't breaking no rocks from the chain gang

I'm breakin' out and headin' home

Gonna make a jailbreak

And I'm lookin' towards the sky

I'm gonna make a jailbreak

Oh, how I wish that I could fly

All in the name of liberty

All in the name of liberty

Got to be free

Jailbreak, let me out of here

Jailbreak, sixteen years

Jailbreak, had more than I can take

AC/DC — Jailbreak

If I had to narrow my list down to the people most responsible for the housing bubble, Anthony Mozilo would be near the top of the list.

The Option ARM loan was the primary loan product that inflated the housing bubble. Using negative amortization and teaser interest rates, people were able to borrow more than twice the amount than they could afford with a conventional 30-year fixed-rate amortizing mortgage. Once the Option ARM imploded and lending retreated to conventional mortgages, prices needed to fall significantly to rebalance affordability. The Option ARM was the Ponzi virus that caused the debilitating financial disease that inflated the housing bubble and created the current economic morass still plaguing the country.

The only person perhaps more responsible for the housing bubble is Alan Greenspan. If he hadn't let the Ponzi virus out of its vial, and if he didn't allow unregulated insurance "swaps" to encourage dumb money to flow into what they thought were riskless transactions, the air that inflated the housing bubble would not have found its way into Option ARM loans being peddled by Mozilo. Greenspan and Mozilo are my nominees for the fools most responsible for the housing bubble.

Alan Greenspan was clueless, incompetent, and philosophically blinded to the mess he created. What's arguably worse about Mozilo is that he recognized that he released a monster and did nothing about it. Personally, I hope he does go to jail, and he forfeits everything he made from about 2002 onward. It won't happen, but I can always wish for it….

How Countrywide Covered the Cracks

By GRETCHEN MORGENSON — Published: October 16, 2010

ON June 27, 2006, Countrywide Financial, the nation’s largest mortgage lender, was about to close its books on a record-breaking six-month run. The housing market was on fire and Countrywide’s earnings were soaring. Despite all the euphoria inside the company, some executives noticed that Angelo R. Mozilo, the company’s brash and imperious chief executive, seemed subdued.

At a town hall meeting that day with 110 of the company’s highest-ranking executives in Calabasas, Calif., Mr. Mozilo sat alone on a stage, fielding questions and offering rosy predictions about his company’s prospects. But then he struck a sober note in response to a question from one of his colleagues.

The questioner wanted to know what, if anything, worried Mr. Mozilo, according to a participant.

“I wake up every day frightened that something is going to happen to Countrywide,” Mr. Mozilo said.

A year and a half later, that day arrived. In January 2008, Countrywide, the company he had built from a two-man mortgage operation into a lending behemoth, had to sell itself to Bank of America at a bargain price because it was being smothered by losses tied to a mountain of sketchy loans.

Let's be very clear on this point: Anthony Mozilo made a fortune while running his company into bankruptcy. While his company profited hugely as the Ponzi Scheme took over, Mozilo divested himself of his options and shares so that very little of his personal fortune was lost when Countrywide went under.

Yet almost until the moment Countrywide was taken over, Mr. Mozilo was publicly buoyant about its ability to ride out the mortgage crisis. Privately, however, he occasionally offered a gloomier assessment of Countrywide’s prospects and practices, according to e-mail and interviews.

What Mr. Mozilo, now 71, knew about Countrywide’s problems, and precisely when he knew it, was what eventually led the Securities and Exchange Commission to file civil securities fraud charges against him last year. And on Friday, in the Los Angeles courtroom of John F. Walter, a federal District Court judge, representatives for Mr. Mozilo and for two of his top lieutenants — David Sambol, Countrywide’s former president, and Eric Sieracki, the company’s former chief financial officer — settled those charges.

As part of the settlement, Mr. Mozilo and his co-defendants didn’t admit to any wrongdoing. But Mr. Mozilo agreed to pay $67.5 million in a penalty and reparations to investors and is permanently banned from serving as an officer or a director of a public company. Mr. Sambol is paying $5.52 million in a penalty and reparations and agreed to a three-year ban from serving as an officer or director of a public company. Mr. Sieracki agreed to pay a $130,000 penalty.

The settlement is a signal event in the credit crisis and its aftermath, including the foreclosure debacle that is now rattling the mortgage market and upending the lives of average homeowners. Although Goldman Sachs settled securities fraud charges earlier this year, Mr. Mozilo is the first prominent chief executive to be held personally accountable for questionable business practices that contributed to the housing bubble, the dizzying financial machinations that surrounded it, and a ruinous lending spree that ultimately threatened to undermine the nation’s economy.

They got him! $67.5 million!

Mr. Mozilo and his two former colleagues were accused of misrepresenting the company’s declining lending standards during 2006 and 2007 and portraying themselves publicly as underwriters of high-quality mortgages even as they learned that the company’s loans were becoming increasingly risky.

The government also contended that Mr. Mozilo and Mr. Sambol improperly profited on inside information about the company’s problematic loans when they sold Countrywide shares. From May 2005 to the end of 2007, Mr. Mozilo generated $260 million from his stock sales, while Mr. Sambol’s sales produced $40 million, the government says.

$67.5M was not enough. He needs to forfeit all of his ill-gotten gains. With as large as his fine is, as long as he profited from the deal, there is no deterrent for others to do the same.

Lawyers for Mr. Mozilo declined to comment. Mr. Sambol’s lawyer said his client had “put the matter behind him for the benefit of his family and loved ones.” Mr. Sieracki’s lawyer noted that the S.E.C. had decided not to pursue fraud charges against his client and that his client had not been barred from serving at a public company. Bank of America is paying Mr. Mozilo’s legal bills. Countrywide is paying $5 million toward Mr. Sambol’s repayment to investors and $20 million of Mr. Mozilo’s reparations.

Bank of America is paying his legal bills and part of his fine? That's outrageous!

The S.E.C.’s legal team, led by John M. McCoy III, associate regional director of the enforcement division, said the settlement amounted to a hard-won victory.

In a statement on Friday, Mr. McCoy said: “This settlement will provide affected shareholders significant financial relief, and reinforces the message that corporate officers have a personal responsibility to provide investors with an accurate and complete picture of known risks and uncertainties facing a company.”

Actually, it reinforces that corporate CEOs can do whatever they want, and either the taxpayers or the shareholders will have to clean up the mess. CEOs are above the law.

Battered by widespread criticism that it failed to corral scam artists like Bernard L. Madoff and to effectively police Wall Street as a whole during the years leading up to the credit crisis, the S.E.C. may now regain some stature as a successful litigator and investor advocate from its settlement with Mr. Mozilo.

“As is the case with most settlements, this is a compromise where nobody comes out a complete winner,” said Lewis D. Lowenfels, an authority on securities law at Tolins & Lowenfels. “The S.E.C. gets a substantial monetary settlement and a bar with respect to Mozilo serving as an officer or director. On Mozilo’s side, he is probably satisfied to have this behind him. He suffers a considerable stain on his reputation, has to pay a substantial amount of money but retains significant wealth and at the age of 71 may find the possibility of being an officer or director of another public company less enticing.”

The fact that Mozilo finds any "win" in this situation is a loss for everyone.

COUNTRYWIDE FINANCIAL began operations in 1969, when Mr. Mozilo and his mentor, David Loeb, refugees from an established mortgage lender, decided to start their own loan originator. The company grew slowly at first, but by 2004, Countrywide was the nation’s largest home lender, generating annual revenue of $8.6 billion. Mr. Mozilo ran the company alone after Mr. Loeb retired in 2000. (Mr. Loeb died in 2003.)

After Mozilo's partner dies, Mozilo unleashes a Ponzi Scheme that ruins the company and the national economy.

An up-by-the-bootstraps entrepreneur — his father was a butcher in the Bronx — Mr. Mozilo was obsessed with wresting market share away from his buttoned-down rivals in the staid world of banking.

“I run into these guys on Wall Street all the time who think they’re something special because they went to Ivy League schools,” he told The New York Times in 2005. “We’re always underestimated. And we still are. I am. I must say, it bothered me when I was younger — their snobbery and their looking down on us.”

In an industry that favored low-key behavior and conservative dress, Mr. Mozilo stood apart. He offered blunt opinions about banking and was open about his corporate aspirations. To complement his ever-present tan, he wore flashy clothes and drove expensive cars like Rolls-Royces that were often painted in a shade of gold.

Still, he managed his business for most of its history with a tight focus on the bottom line and on vigilant lending practices.

If he was so vigilant, why did he approve the Option ARM? Sometimes I wonder if guys like him approach the end of their career and say "WTF, I will maximize short-term gains, make a fortune, and walk away when it all crashes." He is old enough, he probably couldn't spend his fortune if he tried. Like Greenspan, his reputation will never recover, but perhaps a couple of hundred million dollars makes you care less about that sort of thing.

For years, Countrywide specialized in plain-vanilla, fixed-rate loans. As recently as 2003, such mortgages accounted for 95 percent of the company’s loans, according to regulatory filings. Countrywide was the biggest supplier of mortgage loans to Fannie Mae, the federally backed mortgage finance giant that was also hobbled in the credit crisis.

Don't for a moment think that Mozilo is any less responsible for this disaster just because the GSEs got into the game late. The GSEs were trying to make up market share being lost to subprime lenders and lenders like Countrywide that were taking market share with Option ARMs.

In 2004, Countrywide’s sober-minded lending style changed significantly. It began aggressively offering loans to first-time home buyers and to borrowers with modest incomes. These mortgages were known in the industry as “affordability products,” but that ho-hum designation belied the potential financial dangers embedded in the loans if borrowers — particularly low-income borrowers — wound up unable to pay their debts.

Even so, Countrywide embraced such loans with gusto. For example, adjustable-rate mortgages — those with a low introductory rate that could ratchet up in later years — accounted for about 18 percent of Countrywide’s business in 2003. But a year later, they made up 49 percent of its loans.

Subprime loans also grew in 2004, to 11 percent of its originations, up from 4.6 percent in 2003. These loans often required no down payments and very little documentation of borrowers’ incomes, assets or employment; they generated immense profits to Countrywide but, again, presented a bevy of risks. And even when the going got rough for some homeowners, Countrywide didn’t hesitate to take a hard line with borrowers who fell behind.

Up until the time Countrywide collapsed, all lenders were taking a hard line with borrowers who fell behind. It wasn't until subprime foreclosures crashed the housing markets in places like Las Vegas, Riverside County, Arizona, and Florida that anyone cared about loan modifications, foreclosure moratoriums, and widespread squatting.

A born salesman, Mr. Mozilo promoted his company’s prospects wherever he went. In front of a crowd of investors or analysts, he would predict what Countrywide would generate in profits five years down the road and how many of its competitors the company would vanquish. No matter what, Countrywide would survive, he vowed.

“Over the entire history of this country, housing prices have never gone down nationally. They have gone down in some local areas, but never nationally,” he told an interviewer for CNBC in early 2005. “Secondly, any homeownership over the 10 years has proved to be the best investment that you could ever make. Over any 10-year period, housing prices go up.”

Mozilo was completely kool aid intoxicated.

Later that year, he was equally optimistic when he again visited CNBC’s studios.

“From our perspective — and we’ve been doing this for 38 years — we’re still in a terrific mortgage market,” he said. “So the road ahead to us appears to be extremely vibrant, very sound.”

Even as the wheels were coming off of the Countrywide cart in 2007, Mr. Mozilo’s upbeat public pronouncements continued.

“I think you have to keep things in perspective. You know, there’s an old saying that you don’t know who’s swimming naked until the tide goes out, and obviously the tide’s gone out,” he told CNBC in March 2007, when a number of once-successful subprime lenders were plunging toward bankruptcy. “I think it’s a mistake to apply what’s happening to them to the more diversified financial services companies such as Countrywide.”

When Bank of America invested $2 billion in Countrywide in August 2007 — a move that caused many analysts to question Countrywide’s financial wherewithal and its ability to remain independent — Mr. Mozilo again struck an optimistic note.

“Countrywide’s future’s going to be great. You know, it’s always been great,” he told CNBC at the time. “So I think, down the line, this is going to be a better company, a more profitable company and a company that’s going to be a great investment for shareholders as we continue down the line. Because the market ultimately will come to us. This is America. People want to own homes.”

PRIVATELY, however, Mr. Mozilo had long been worried about some of the loans his company favored, as indicated by e-mails he sent to his deputies. And this gulf between Mr. Mozilo’s private views and his public proclamations went to the heart of the S.E.C.’s case against him.

Mozilo knew the Option ARM was going to end badly, and yet he allowed that product to grow to nearly half of his origination volume. Why would someone do that? To me it seems obvious that he knew he could make huge short-term gains and bail before it all crashed.

Beginning in 2005, for example, he fretted about lending practices at Countrywide, e-mail messages show. One target of his ire was the “pay-option adjustable-rate mortgage,” a loan that let borrowers pay a fraction of the interest owed and none of the principal during an introductory period. These loans put homes within many borrowers’ financial grasp — at least initially.

When a borrower made only modest payments, the shortfall was added to the principal balance on the loan, meaning that the mortgage would grow in size. Given this arithmetic, borrowers could wind up owing more than their homes were worth.

In 2004, pay-option A.R.M.’s accounted for 6 percent of Countrywide’s originations. Two years later, they accounted for 21 percent of its loans. The loans were moneymakers for Countrywide; internal company documents show that the company made gross profit margins of more than 4 percent on such loans, double the 2 percent generated on standard loans backed by the Federal Housing Administration.

Countrywide pushed the lucrative loans hard. A sales document called “Pay Option A.R.M.’s Made Simple” asked rhetorically what kinds of customers would be interested in these loans. “Anyone who wants the lowest possible payment!” was one of the answers.

But these loans unnerved Mr. Mozilo, as his e-mails indicate. In April 2006, for example, he learned that almost three-quarters of the company’s pay-option customers had chosen to make the minimum payment the prior February, up from 60 percent the previous August, according to the S.E.C.’s complaint. In an e-mail to Mr. Sambol, Mr. Mozilo wrote: “Since over 70 percent have opted to make the lower payment it appears that it is just a matter of time that we will be faced with much higher resets and therefore much higher delinquencies.”

Mozilo knew exactly what was coming. The statement above from his emails could have been written on a bubble blog at the time.

Two months later, and just one day after he talked up his company’s pay-option A.R.M.’s to investors at a Wall Street conference, Mr. Mozilo wrote an e-mail to Mr. Sambol predicting trouble ahead for many borrowers in these mortgages. They “are going to experience a payment shock which is going to be difficult if not impossible for them to manage,” he said.

And in September 2006, Mr. Mozilo wrote an e-mail saying the company had no way to assess the risks of holding pay-option A.R.M.’s on its balance sheet. “The bottom line is that we are flying blind on how these loans will perform in a stressed environment of higher unemployment, reduced values and slowing home sales,” he wrote.

Another Countrywide product that concerned Mr. Mozilo was its so-called 80/20 loan, named for the fact that the combination allowed a borrower to receive money covering 100 percent of a home’s purchase price.

Mr. Mozilo had become worried about these loans in the first quarter of 2006, when HSBC Bank, a buyer of Countrywide’s 80-20 loans, began forcing the lender to repurchase some that HSBC contended were defective.

“In all my years in the business, I have never seen a more toxic product,” he wrote to Mr. Sambol in an April 17, 2006, e-mail cited by the S.E.C. “With real estate values coming down … the product will become increasingly worse.”

Such e-mails suggest that by mid-2006, Mr. Mozilo had recognized how reckless some of his company’s lending had become. And just three months later, according to the S.E.C. complaint, he met with his financial adviser to increase the amount of Countrywide shares he could cash in under a planned executive stock-sale program.

How else can you interpret his behavior? He obviously knew his company was going to implode, and he wanted to get as much money as he could out of the company before the end.

Mr. Mozilo had always been a big seller, and rarely a buyer, of the Countrywide shares he was granted as a part of his compensation. The timing of some of his sales, however, has drawn the scrutiny of the S.E.C.

For example, on Sept. 25, a day before writing the e-mail about how Countrywide was “flying blind” on pay-option A.R.M.’s, he set up a new planned stock-selling program for himself, known as a 10b-5 plan, the S.E.C. said.

Such plans allow executives to sell stock regularly, without running afoul of regulations governing the sale of stock around significant corporate announcements. Mr. Mozilo also set up plans enabling a family foundation and a trust he oversaw to sell shares.

Altogether, the S.E.C. said, from November 2006 to October 2007, he sold more than five million Countrywide shares under his personal plan. His gains were $140 million, the S.E.C. said.

Mr. Mozilo has long maintained that his stock sales were not unusual, and in the past Countrywide has said that it and Mr. Mozilo were battered by economic forces beyond their control.

Mozilo is a liar. His stock sales were unusual, and he did now that Countrywide was going to be battered by the economic forces his mistakes created.

“No one, including Mr. Mozilo, could have foreseen the unprecedented combination of events that led to the problems borrowers, lenders and investors face with many of these loans today,” a Countrywide spokesman told The Times in 2007. “Countrywide is proud of its role in making homeownership affordable to lower-income households.”

But lawyers and analysts say Friday’s settlement means that Mr. Mozilo’s legacy is likely to be something quite different from that of a banker who brought homeownership to the masses.

“Mozilo is agreeing to a permanent ban on serving as an officer or director of a public company,” said James A. Fanto, a professor at Brooklyn Law School and a specialist in corporate and securities law. “That is a significant punishment and does not look good for his legacy.”

Mozilo should be forced to face every borrower who took out his toxic loans. These people lost their family homes, and they should be angry.

Mozilo's legacy will be one of personal greed and foolishness. He drove his company into oblivion for his personal enrichment.

Bought at the bottom of the bear rally

The current bear rally began in the spring of 2009 when the Federal Reserve bought down the interest rates, regulators permitted amend-extend-pretend, and banks began the policy of widespread squatting in high-end homes. People who bought in that time period believe they purchased at the bottom and now they have some equity. We will see.

The previous owner of today's featured property bought the place for $416,000 on 6/24/2003. When this property sold for a loss in 2009, it was a 2003 rollback. That owner managed to own California real estate for 6 years and lose money.

The property was then purchased for $400,000 on 6/22/2009. Apparently the new owners have changed their minds and now would like to get out at breakeven. They have priced the property at $429,500. This gives them some room to negotiate and still get out at even.

So will they get it? Have prices of individual properties increased 10% since last year allowing these owners to get out at breakeven?

Irvine Home Address … 159 TOPAZ Irvine, CA 92602

Resale Home Price … $439,500

Home Purchase Price … $400,000

Home Purchase Date …. 6/20/2009

Net Gain (Loss) ………. $13,130

Percent Change ………. 3.3%

Annual Appreciation … 7.1%

Cost of Ownership

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$439,500 ………. Asking Price

$15,383 ………. 3.5% Down FHA Financing

4.25% …………… Mortgage Interest Rate

$424,118 ………. 30-Year Mortgage

$83,394 ………. Income Requirement

$2,086 ………. Monthly Mortgage Payment

$381 ………. Property Tax

$71 ………. Special Taxes and Levies (Mello Roos)

$37 ………. Homeowners Insurance

$215 ………. Homeowners Association Fees

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$2,790 ………. Monthly Cash Outlays

-$330 ………. Tax Savings (% of Interest and Property Tax)

-$584 ………. Equity Hidden in Payment

$24 ………. Lost Income to Down Payment (net of taxes)

$55 ………. Maintenance and Replacement Reserves

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$1,954 ………. Monthly Cost of Ownership

Cash Acquisition Demands

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$4,395 ………. Furnishing and Move In @1%

$4,395 ………. Closing Costs @1%

$4,241 ………… Interest Points @1% of Loan

$15,383 ………. Down Payment

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$28,414 ………. Total Cash Costs

$29,900 ………… Emergency Cash Reserves

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$58,314 ………. Total Savings Needed

Property Details for 159 TOPAZ Irvine, CA 92602

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Beds: 2

Baths: 1 full 2 part baths

Home size: 1,500 sq ft

($293 / sq ft)

Lot Size: n/a

Year Built: 2002

Days on Market: 89

Listing Updated: 40420

MLS Number: P744558

Property Type: Condominium, Residential

Community: West Irvine

Tract: Mand

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What a beauty! Perfectly designed for a roommate situation, this quality Lennar home with two big master suites has loads of upgrades: travertine flooring with an inlaid marble design pattern downstairs, elegant sand-colored corian kitchen counters and a BIG walk-in pantry. One of the master bedroom baths has a shower with dual heads, travertine floors, double sinks and a roomy walk-in closet. This popular plan has a big common room downstairs with a kitchen that opens directly to the living room with fireplace, and a big 2-car garage with easy direct access into the home. Relax on the front stone patio of this beautifully-designed community and have an afternoon cool drink or a casual barbecue with friends. Located walking distance to the huge community pool, spa, kiddy pool and public tennis courts, and popular Tustin Marketplace. Enjoy an evening stroll to the much-utilized year-round Tustin Sportspark with walking paths, tennis and baseball diamonds.