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Politicians Encourage Strategic Default with Foreclosure Moratoria

The announcement by BofA — who was blackmailed by numerous government officials — to suspend all foreclosures strongly encourages strategic default. Why would anyone pay their mortgage when they know they can stop paying and keep their house?

Irvine Home Address … 13 GREENWOOD Irvine, CA 92604

Resale Home Price …… $415,000

C'mon and hold me

Just like you told me

Then show me

What I want to know

Why don't we steal away

Why don't we steal away

Into the night

I know it ain't right

Robbie Dupree — Steal Away

Steal away. No, i don't mean to move quietly off into the night, I mean brazenly steal the house your living in. Why don't borrowers steal away? Why don't they keep the house and ignore the mortgage. With news like this, I really don't understand Why Struggling Homeowners Keep Paying Their Mortgages; after all Squatting is Becoming a Way of Life for Many Delinquent Borrowers, and now, the bank is stopping all foreclosures. Given these circumstances, isn't strategic default the most prudent course of action?

Not everyone will strategically default. Many borrowers really can afford their payments, and they rightfully figure the foreclosure moratorium will end; however, the struggling masses who are considering accelerating their defaults have just been given the green light to bail because they know the bank isn't going to foreclose on them. This is a dumb policy the banks will later regret.

BofA Halts Foreclosures

Bank Expands Freeze After Pressure From Government-Run Mortgage Firm

By DAN FITZPATRICK, DAMIAN PALETTA And ROBIN SIDEL — OCTOBER 9, 2010

Bank of America Corp. imposed a nationwide moratorium on foreclosures and the sale of foreclosed homes after it came under intense pressure from a government-run housing-finance giant worried about documentation problems, people familiar with the situation said.

The bank called the halt as concern mounted from legislators and state prosecutors about procedures used by lenders to foreclose on homes. Many banks use so-called robo signers, employees who sign hundreds of documents a day, without carefully reviewing their contents, when foreclosing on homes. Critics say that could result in improper foreclosures.

Improper foreclosures? Has anyone anywhere documented a case where a borrower who was current on their payments was foreclosed upon? Anyone who is not making their payments who ends up in foreclosure has experienced a "proper foreclosure." The notion of an improper foreclosure is simply a politician's fantasy. It gives those seeking election to public office something emotional to bluster about. The reality is there are no improper foreclosures.

Freddie Mac, the government-run mortgage-finance company that along with Fannie Mae owns many of the mortgages serviced by banks, pressed Bank of America to expand its search for problems with the foreclosure documentation process, said the people familiar with the situation.

On a call Thursday with several banks that included Bank of America, a Freddie official said the mortgage company wanted the institutions to look at foreclosure documentation across all 50 states, and asked them to consider putting a stop to the entire foreclosure process, say people familiar with the call.

Freddie Mac, an entity under government conservatorship and run by the Treasury department, asked major commercial banks to stop foreclosing on delinquent borrowers. This is one of two things: (1) It is a purely political act of desperate Democratic incumbents (Harry Reid and others) to make themselves look good going into next month's elections, or (2) the GSEs want to ramp up their own foreclosures while prices are still elevated and they don't want competition from the major banks (Government Expedites Foreclosures, Threatens Banking Cartel). I lean more toward political causes, but the economic issue cannot be dismissed.

Many in the banking industry fear that the widening paperwork problem could cause further delay on foreclosures and threaten an already weak housing market, which in turn is stalling the broader U.S. economic recovery. On the other hand, it could provide a brief financial respite to people who have defaulted on their mortgages and are still occupying their homes.

Could provide a respite? Do we need to give squatters any more breaks? For those of you waiting for these squatters to move out of your future home, how do you feel about this? You are paying a subsidy to the people living in your future home while you continue to work, pay bills, and rent.

As of August, there were more than 4.4 million home loans that were either in the foreclosure process or 90 days past due, according to mortgage research firm LPS Analytics. Since 2006, about 6.4 million homes have been lost through the foreclosure process.

Lost through the foreclosure process? Where did those houses go? Into the black hole of shadow inventory? The idea that these houses have been "lost" is very irritating. Any of those homes "found" on the MLS have been purchased by an owner-occupant or a cashflow investor who rented it out. While the squatter is living in the house, it is a completely non-productive asset; it costs money to maintain, but it produces no income. Foreclosure is the process by which we recycle these homes and obtain value from them. Nothing is lost in the foreclosure process.

Edward DeMarco, who heads the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, said in an interview that officials were working to find a "tailored" response to the foreclosure problem that won't cause broader problems for the fragile housing market. "We are trying to be quick but measured in the approach and the response taken," he said. "We're concerned about the whole housing market, and we're concerned about what this means for taxpayers and other market participants."

Can you find any substance to Mr. DeMarco's comment above? I read only bullshit.

Last week Bank of America, J.P. Morgan Chase & Co. and Ally Financial Inc. agreed to more closely examine documents used in 23 states where a court's approval is required to foreclose on a home. J.P. Morgan said its review suspended nearly 56,000 foreclosures.

In conversations with Bank of America, Freddie said financial penalties or litigation could result if the bank did not take additional steps, said a person familiar with the conversations. Bank of America told Freddie that an audit of procedures in the 23 states uncovered no errors, this person said.

But Freddie said the work didn't go far enough and asked for a review in all 50 states, as well a stop to any foreclosure sales, said people familiar with the situation. Freddie Mac declined to comment.

Of course Freddie Mac declined to comment, they just threatened B of A with a lawsuit if B of A didn't do what Freddie Mac asked. This is government extortion through an intermediary.

Bank of America Chief Executive Brian Moynihan said Friday that the bank hasn't found problems in its foreclosure process, but opted to temporarily halt all foreclosures to "clear the air." He said the bank wants to "go back and check our work one more time."

Its decision is expected to stop "a couple of thousand" foreclosure sales scheduled for the next week, according to one person familiar with the matter said. The bank declined to specify how many homes it has in the foreclosure pipeline.

All this is only expected to stop a few foreclosures for a single week? Talk about a tempest in a teapot. i hope the politicians get some mileage out of this.

So far, Bank of America is the only lender to expand its foreclosure freeze, but others may be forced to begin or broaden a review, banking executives say. Wells Fargo & Co., one of the nation's largest mortgage lenders, says it hasn't stopped foreclosing on any properties.

Apparently, the government is threatening other major banks, and they fully expect them to capitulate. Unbelievable.

At this point, J.P. Morgan isn't expanding its foreclosure moratorium, but is widening its document review beyond the 23 states where it has frozen foreclosures, according to a person close to the bank.

[BOFA]

Bank of America services 14 million mortgages, or one out of every five in the U.S., and its loan-servicing portfolio exceeds $2.1 trillion in size. Of its mortgages, 10 million came from its 2008 acquisition of troubled California lender Countrywide Financial Corp. More than 80% of its delinquent loans were acquired through Countrywide.

What a great bargain that deal turned out to be, right?

A push over the last week from politicians and law-enforcement officials troubled by reports of foreclosure problems only intensified the pressure on Bank of America, which has been working to improve its relations in Washington. It concluded that reviews in just 23 states wouldn't cut it with elected officials in the other states, a person close to the bank said.

"In this intense political season we are in, it didn't play well to say do it in some states but not your state," this person said.

That confirms this is nothing but a political ploy. Disgusting.

Senate Majority Leader Harry Reid (D., Nev.), whose state has been hit hard by foreclosures, and House Oversight and Government Reform Committee Chairman Edolphus Towns (D., N.Y.), both said Friday they welcomed Bank of America's move and called on other banks to follow.

Cassandra Toroian, chief investment officer at Bell Rock Capital LLC, a money-management firm, says the additional reviews are unlikely to significantly impact the outcome for homeowners who are facing foreclosure. "It's just delaying the inevitable," she says.

Actually, this policy is likely to have impact — it is going to cause more accelerated default.

Momentum builds for full moratorium on foreclosures

By Ariana Eunjung Cha, Steven Mufson and Jia Lynn Yang

Washington Post Staff Writers

Saturday, October 9, 2010

Senior Obama administration officials said Friday that a nationwide moratorium on foreclosure sales may be inevitable, despite their grave reservations about the impact a broad freeze would have on the nation's housing market and economic recovery.

Their remarks were made as pressure for a nationwide moratorium mounted Friday when Bank of America, the nation's largest bank, halted evictions in all 50 states. Senate Majority Leader Harry M. Reid (D-Nev.), who is locked in a tight reelection campaign, called on other major lenders to follow suit.

The White House has so far resisted joining the election-season calls for action but convened two interagency meetings this week to discuss reports that banks filed fraudulent documents to evict borrowers who missed payments as well as fundamental questions about whether banks are seizing properties without having clear ownership of the mortgages.

I know the Democrats are desperate right now, but this kind of pandering is a major turnoff. It's the kind of thing that makes me want to see them lose. It's also clear evidence that the pressure being exerted by Freddie Mac is coming directly from the Obama administration and Harry Reid.

One meeting was made up mostly of groups that regulate the housing industry, including the Department of Housing and Urban Development, the Treasury Department and the White House. The other, which involved the U.S. Securities and Exchange Commission, the Internal Revenue Service and U.S. attorneys from across the country, was focused on the question of whether financial fraud was committed.

With foreclosed properties comprising one in every four homes sold in the United States, the spreading moratorium could disrupt real estate deals in progress, slow down the process of clearing the backlog of troubled home loans and prolong the economic recovery, analysts said.

A freeze would also strike at the financial sector, just two years after it suffered one of the worst crises in its history. One government official who has been in discussions with several big financial firms said the banks are bracing themselves for a wave of lawsuits from homeowners who are fighting to keep their homes and from investors who had bought mortgage loans on Wall Street. On Friday, while the Dow Jones Industrial Average crossed 11,000, most major bank stocks fell.

It looks as if the government is going to delay the recovery by keeping a huge overhang of shadow inventory despite the inevitably lawsuits.

… Also Friday, the Federal Housing Administration said it had asked agency-approved mortgage servicers – which includes the nation's largest banks – to immediately audit their foreclosure operations. The FHA can impose financial penalties on companies that do not follow rules set by housing regulators.

Questions over the legal standing of banks in foreclosure proceedings as well as reports that these firms cut corners as they pushed foreclosures through the legal system fueled calls in Congress for a nationwide freeze and federal investigations.

Another tool of threat the government has is the FHA.

Reid, who had earlier sent a letter to major banks asking them to suspend foreclosures in Nevada, expanded that call Friday after Bank of America's announcement.

"I thank Bank of America for doing the right thing by suspending actions on foreclosures while this investigation runs its course," he said.

The Senate banking committee's chairman, Christopher J. Dodd (D-Conn.), said Friday that his panel will hold hearings Nov. 16 to investigate the morass.

Rep. Edolphus Towns (D-N.Y.), chairman of the House Committee on Oversight and Government Reform, said the top 10 mortgage lenders should immediately suspend foreclosure proceedings in all states.

"The implications of ignoring the foreclosure problems are far too great to be ignored," he said Friday.

Bullshit. I can't believe these guys have the nerve to say these things. I suppose they are politicians in close elections, so nothing should surprise me. These guys are unbelievable.

… "Calls for a blanket national moratorium on all foreclosures are a bad idea and would cause significant harm to communities at risk, the unstable housing market and the fragile economy," the industry letter said.

Suspending foreclosures could end up forcing banks, which act as service companies for the loans, to spend billions of dollars to compensate investors who own the pools of mortgages they manage. And it could add to the losses at Fannie Mae and Freddie Mac, the two government-owned mortgage financiers.

Pension funds and other investors in the pools of mortgage securities are worried that the big banks will get special treatment from Washington.

"What's happened is a gross mishandling of paperwork and often times a misrepresentation of the transaction," said Chris Katopis, a spokesman for the Association of Mortgage Investors. "The banks have to have some responsibility and accountability for this."

chaa@washpost.com mufsons@washpost.com yangjl@washpost.com

The only people who benefit from a moratorium are politicians and squatters. Everyone else gets screwed.

HELOC abusing squatters will benefit from a moratorium

As you contemplate whether or not this moratorium idea is good or bad, take a hard look at the people who will benefit the most. Today's featured property is a particularly bad case of HELOC abuse and squatting. They went to the housing ATM every year for another withdrawal. The income subsidy was enormous. After you see how these people lived over the last decade, ask yourself if this is the kind of behavior we want to subsidize and see more of.

  • This house was purchased on 7/22/1998 for $132,000. Their original mortgage and down payment does not show up in my records. Let's assume they used an 80% first mortgage ($105,600) and a $26,400 down payment. This may have been a 3% down FHA purchase, but I don't know.

  • On 10/4/2001 they refinanced with a $130,000 first mortgage.

  • On 12/24/2002 they refinanced with a $175,000 first mortgage.

  • On 10/30/2003 they refinanced with a $279,300 first mortgage.

  • On 11/15/2004 they refinanced with a $385,000 first mortgage.

  • On 11/14/2005 they refinanced with a $450,000 first mortgage.

  • On 12/28/2006 they refinanced with a $524,000 Option ARM.

  • Total mortgage equity withdrawal is $418,400.

  • Total squatting time is about 20 months.

Foreclosure Record

Recording Date: 09/11/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 06/08/2009

Document Type: Notice of Default

Foreclosure Record

Recording Date: 05/12/2009

Document Type: Notice of Rescission

Foreclosure Record

Recording Date: 05/06/2009

Document Type: Notice of Default

This family lived off their housing ATM machine. They were pulling out an average of $83,680 per year. That was roughly the median income in Irvine during that time.

Do you think we should encourage this kind of financial management? If we bail these people out or let them keep their house, we are ensuring we will have many more borrowers who emulate them in the future.

Irvine Home Address … 13 GREENWOOD Irvine, CA 92604

Resale Home Price … $415,000

Home Purchase Price … $132,000

Home Purchase Date …. 7/22/1998

Net Gain (Loss) ………. $258,100

Percent Change ………. 195.5%

Annual Appreciation … 9.2%

Cost of Ownership

————————————————-

$415,000 ………. Asking Price

$14,525 ………. 3.5% Down FHA Financing

4.21% …………… Mortgage Interest Rate

$400,475 ………. 30-Year Mortgage

$78,371 ………. Income Requirement

$1,961 ………. Monthly Mortgage Payment

$360 ………. Property Tax

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

$35 ………. Homeowners Insurance

$320 ………. Homeowners Association Fees

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

$2,675 ………. Monthly Cash Outlays

-$309 ………. Tax Savings (% of Interest and Property Tax)

-$556 ………. Equity Hidden in Payment

$22 ………. Lost Income to Down Payment (net of taxes)

$52 ………. Maintenance and Replacement Reserves

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

$1,884 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$4,150 ………. Furnishing and Move In @1%

$4,150 ………. Closing Costs @1%

$4,005 ………… Interest Points @1% of Loan

$14,525 ………. Down Payment

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

$26,830 ………. Total Cash Costs

$28,800 ………… Emergency Cash Reserves

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

$55,630 ………. Total Savings Needed

Property Details for 13 GREENWOOD Irvine, CA 92604

——————————————————————————

Beds: 3

Baths: 1 full 2 part baths

Home size: 1,642 sq ft

($253 / sq ft)

Lot Size: 2,110 sq ft

Year Built: 1976

Days on Market: 128

Listing Updated: 40459

MLS Number: S619881

Property Type: Condominium, Residential

Community: El Camino Real

Tract: St

——————————————————————————

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

Wonderful 3 bedroom 2.5 bath, two car garage with enclosed paito. Close to shoping, fwy, school and parks. Price to sell!

paito? shoping? That description is fewer than 20 words, and the realtor managed to misspell two of them.

What Really Prompts Borrowers to Accelerate Their Default?

A series of new studies on borrower behavior shed some light on the motivations behind those who quit paying their mortgages.

Irvine Home Address … 23 FOXHOLLOW Irvine, CA 92614

Resale Home Price …… $319,900

On and on we're charging to the place so many seek

In perfect synchronicity of which so many speak

We feel so close to heaven in this roaring heavy load

And then in sheer abandonment, we shatter and explode.

Judas Priest — Turbo Lover

Strategic default: the abandonment of mortgage and property. A financial explosion.

Most buyers of property were seeking riches from appreciation. They all enjoyed the synchronized movements of the market when everyone was clamoring for more property. Trees don't grow to the sky, and no matter how close prices get to heaven, nirvana is always out of reach.

Strategic Defaults Threaten All Major U.S. Housing Markets

Posted by Keith Jurow 09/30/10 8:00 AM EST

In my last article, we examined the shadow inventory to determine how many distressed properties (not on MLS) were almost certain to be forced onto the market in the not-to-distant future.

For a sensible follow up, let's take an in-depth look at so-called "strategic defaults" to see how many homeowners are likely to "walk away" from their mortgage debt although they might be financially able to continue paying it.

Strategic Default Defined

According to Wikipedia, a strategic default is "the decision by a borrower to stop making payments (i.e., default) on a debt despite having the financial ability to make the payments." This has become the commonly accepted view.

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

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

In a recent, thorough study of strategic defaults, an effort was made to narrow its definition even more specifically. The report examining 6.6 million first lien mortgages was published this past April by Morgan Stanley analysts. They considered a default to be strategic only if a borrower went from being current on the debt to 90 days delinquent in consecutive months "without any curing in between or thereafter."

The authors went further and included two other prerequisites. First, the borrower had to be "underwater" on the first lien mortgage. Second, the homeowner had to have an outstanding non-mortgage debt balance of more than $10,000. The purpose of this last requirement was explained to me in a phone conversation with the lead analyst. He clarified that unless the borrower had at least $10,000 in non-mortgage debts which continued to be kept current; it was very likely that the mortgage default was induced by the inability to continue making the payments.

While this definition by the Morgan Stanley analysts is plausible, I consider it to be too narrow. It excludes too many borrowers who choose to stop paying the mortgage even though they may miss payments on some of their other debt obligations. I define a strategic defaulter to be any borrower who goes from never having missed a mortgage payment directly into a 90 day default. We'll examine a graph a little later which clearly illustrates this definition.

This definition is not a bad way to identify people who default by choice, but it doesn't necessarily tell us why they made the choice. Many people who financially implode keep it all together until the reach a breaking point where they capitulate. The only thing we can be sure of about the people Mr. Jarow has singled out is that they were decisive. Once they stopped making payments, they didn't bother to play around with loan modifications or otherwise game the system.

I believe it is important to note that most people chose to default because they know continuing to pay is futile. Just because someone is capable of continuing a futile act doesn't mean that stopping is an irrational decision. In fact, those that acclerate their defaults are far more rational than those who continue to pay when it makes no financial sense for them to do so.

Why Do Homeowners Walk Away from Their Mortgage?

In the midst of the housing bubble, it was inconceivable that a homeowner would voluntarily stop making payments on the mortgage and lapse into default while having the financial means to remain current on the loan.

Then something happened which changed everything. Prices leveled off in 2006 before starting to decline. With certain exceptions, they have been falling ever since around the country. In recent memory, this was something totally new and it has radically altered how homeowners view their house.

In those metros where prices soared the most during the housing bubble and collapsed most severely, many homeowners who have strategically defaulted shared three essential assumptions:

1. The value of their home would not recover to their original purchase price for quite a few years.

2. They could rent a house similar to theirs for considerably less than what they were paying on the mortgage.

3. They could sock away tens of thousands of dollars by stopping mortgage payments before the lender finally got around to foreclosing.

Notice the considerable value lenders obtained by their failure to foreclose. Locally, where house prices are still elevated above reason, people believe house prices will return to peak valuations in a few years and the HELOC party will be back on. Denial keeps people making payments who would ordinarily accelerate their default. Many families in Orange County cannot afford their houses. Many have already defaulted. Few have been foreclosed on so prices remain elevated, and the hopeless maintain denial of a brighter tomorrow.

Put yourself into the mind and the shoes of an underwater homeowner who held these three assumptions. The temptation to default became very difficult to resist. What would you have done?

The author presumes everyone believes accelerated default is wrong. He portrays it as something evil that people are tempted with. It isn't the default that is a tempting evil, it was taking out the loan in the first place. If someone goes out on an all night bender, are they tempted by evil aspirin in the morning? People who accelerate their defaults are merely curing the problem that was created by their earlier mistakes.

Now you may ask: What has kept most underwater homeowners from defaulting?

Why Do Struggling Homeowners Keep Paying Their Mortgages?

This is not an easy question to answer. I suggest that you take a look at a very thorough discussion of this issue in a paper written by Brent White, a professor of law at the University of Arizona and published in February 2010. Its title is "Underwater and Not Walking Away: Shame, Fear and the Social Management of the Social Crisis." He asserts that there are strong societal norms and pressures that lead to feelings of shame, fear and guilt which prevent many underwater homeowners from choosing to default.

He also cites the strong moral condemnation heaped on strategic defaulters by the press as well as by significant political figures. Take the speech given in March 2008 by then Secretary of the Treasury Henry Paulson. Paulson declared on national television: "Let me emphasize, any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator – and one who is not honoring his obligations." Coming from the former Chairman of a Wall Street firm that earns billions every year by speculating, these words had a certain hollow ring to them.

Strategic Default Is Merely Collecting On Home Price Protection Insurance Sold By Lenders

Walking Away from a Mortgage to Secure Their Children’s Future

Two Key Studies Show that Strategic Defaults Continue to Grow

Within the past six months, two important studies were published which have tried to get a handle on strategic defaults. First came the April report by three Morgan Stanley analysts entitled "Understanding Strategic Defaults." Remember their narrow definition of a strategic defaulter which I described earlier:

1. an underwater homeowner who goes straight from being current on the mortgage to a 90+ day delinquency "without any curing in between or thereafter"

2. has an outstanding non-mortgage debt balance of at least $10,000 which does not become delinquent

The study analyzed 6.5 million anonymous credit reports from TransUnion's enormous database while focusing on first lien mortgages taken out between 2004 and 2007.

One conclusion which the authors reach is that the percentage of defaults which they label strategic has risen steadily since early 2007. By the end of 2009, 12% of all defaults were strategic. Even more significant is that loans originating in 2007 have a significantly higher proportion of defaults which are strategic than those originated in 2004.

Interesting. It appears that people who have not been in the home as long are more prone to walk away. Are they less attached? Since their values went nowhere but down, did they fail to get a taste of kool aid to keep them hooked?

The following chart clearly shows this difference.

kj-09292010-chart-1.jpg

It is also important to note that with higher Vantage credit scores, the strategic default rate rises very sharply. [Vantage scoring was developed jointly by the three credit reporting agencies and now competes with FICO scoring].

Is anyone else surprised that strategice default is more common among people with good credit scores? I guess we really are all subprime now.

Another Morgan Stanley chart shows us that for loans originated in 2007, the strategic default percentage also climbs with higher credit scores.

kj-09292010-chart-2.jpg

Notice that although the percentage of loans which default at each Vantage score level declines, the percentage of defaults which are strategic rises. A fairly safe conclusion to draw from these two charts is that homeowners with high credit scores have less to lose by walking away from their mortgage. The provider of these credit scores, VantageScore Solutions, has reported that the credit score of a homeowner who defaults and ends up in foreclosure falls by an average of 21%. This is probably acceptable for a borrower who can pocket perhaps $40,000 to $60,000 or more by stopping the mortgage payment.

Very interesting data. If you had an 800 FICO score, a strategic default will lower it 160 points to a value of 640. It probably doesn't take long to bring that up enough to qualify for most forms of credit, albeit at a higher rate.

There is one more key chart from the study that is worth looking at. This one looks at strategic default rates for different original loan balances.

kj-09292010-chart-3.jpg

Note that the size of the original loan balance has little impact on the strategic default rate.

Rich people and poor people accelerate their defaults at the same rate. I would have guessed that wealthier people would hold out longer by drawing on other sources of credit. Apparently not.

The Key Factor Behind Strategic Defaults

Then what is the decisive factor that causes a strategic default? To answer this, we need to turn to the other recent study.

This past May, a very significant study on strategic defaults was published by the Federal Reserve Board. Entitled "The Depth of Negative Equity and Mortgage Default Decisions," the study was extremely focused in scope. It examined 133,000 non-prime first lien purchase mortgages originated in 2006 in the four bubble states where prices collapsed the most — California, Florida, Nevada and Arizona. All of the loans had 100% financing with no down payment. These loans came to be known as 80/20s – an 80% first lien and a 20% piggy back second lien. It's hard to remember that those deals once flourished.

The first conclusion to note is that an astounding 80% of all these homeowners had defaulted by September 2009.

Anecdotally, I am not surprised by that number. Do you remember back in 2007 and 2008 many of the properties I profiled were 100% financing walkaways. By the end of 2008 and into 2009, we stopped seeing those and we began seeing people who had put 5% to 10% down. It is still rare to see a default where the owner put 20% or more down and there was no HELOC abuse.

Half the defaults occurred in less than 18 months from origination date. During that time, prices had dropped by roughly 20%. By September 2009 when the study's observation period ended, median prices had fallen another 20%.

The study really zeroes in on the impact which negative equity has on the decision to walk away from the mortgage. Take a look at this first chart which shows strategic default percentages at different degrees of being underwater.

kj-09292010-chart-4.jpg

Notice that the percentage of defaults which are strategic rises steadily as negative equity increases. For example, with FICO scores between 660 and 720, roughly 45% of defaults are strategic when the mortgage amount is 50% more than the value of the home. When the loan is 70% more than the house's value, 60% of the defaults were strategic.

Now take a look at this last chart. It focuses on the impact which negative equity has on strategic defaults based upon whether or not the homeowner missed any mortgage payments prior to defaulting.

kj-09292010-chart-5.jpg

This chart shows what I consider to be the best measure of strategic defaulters. It separates defaulting homeowners by whether or not they missed any mortgage payments prior to defaulting. As I see it, a homeowner who suddenly goes from never missing a mortgage payment to defaulting has made a conscious decision to default. The chart reveals that when the mortgage exceeds the home value by 60%, roughly 55% of the defaults are considered to be strategic. For those strategic defaulters who are this far underwater, the benefits of stopping the mortgage payment outweigh the drawbacks (or "costs" as the authors portray it) enough to overcome whatever reservations they might have about walking away.

Intuitively, this makes sense: the further you are underwater, the more hopeless your situation, so you are far more likely to accelerate your default. With deeply underwater homeowners — like anyone who has not defaulted already in Las Vegas — true strategic default becomes much more common. I am sure I would default on my mortgage if I were 50% underwater. Anyone that far underwater is stupid not to default.

Where Do We Go From Here?

The implications of this FRB report are scary. Keep in mind that 80% of the 133,000 no down payment loans examined had gone into default within three years. Clearly, homeowners with no skin in the game have little incentive to continue paying the loan when the property goes further and further underwater.

While many of these 80/20 zero down payment loans have already gone into default, there are still a large number of them originated in 2004-2005 which have not. We know from LoanPerformance that roughly 33% of all the Alt A loans that were securitized in 2004-2006 were 80/20 no down payment deals. Over 20% of all the subprime loans in these mortgage-backed security pools had no down payments. These figures are confirmed by the Liar Loan study which I referred to in a previous article. It found that 28% of the more than 700,000 loans examined in that report which had been originated between 2004 and 2007 were 80/20 no down payment deals.

The problem of strategic defaults goes far beyond those homeowners who put nothing down when they bought their home. Although the Morgan Stanley study found that only 12% of all the defaults observed were homeowners walking away from the mortgage, I think their definition of a strategic defaulter is much too narrow.

The chart from that study which we looked at earlier shows strategic default rates when the loan exceeded the home value by 20-60%. Total default rates were over 40% for mortgages of all sizes. This tells me that a substantial proportion of all these defaults by underwater homeowners were walk-aways.

It is not only the four worst bubble states examined in the FRB study to which these two reports are applicable. Remember, prices have declined by 30% or more in just about all of the 25 large metros that had the highest number of distressed properties which I examined in my previous article on the shadow inventory.

Another chart from the Morgan Stanley study showed that for all the 6.6 million loans analyzed, the percentage of them defaulting rose steadily from 45% for loans with a LTV of 100 to 63% for loans with a LTV of 155. It seems clear from these two reports that as home values continue to decline and LTV ratios rise, the number of homeowners choosing to strategically default and walk away from their mortgage obligation will relentlessly grow. That means real trouble for all major housing markets around the country.

Where we go from here is simple: we foreclose on the squatters and let whatever happens happen. There is no real dilemma here. We just don't want to do what is necessary and endure the pain that goes along with it.

The HELOC Lifestyle

California is the only place in the world where people come to believe they can live on home price appreciation as a reliable source of income. It isn't surprising that real estate takes on a special level of desirability when each house comes with a built-in ATM machine. It becomes obvious that people come to expect and rely on this source of income when you witness them steadily and methodically increasing their mortgage balance.

Of course, since banks allow people to borrow this money and become dependant upon this source of income, houses become desirable beyond all reason. The competition for free money becomes intense, house prices rise, and when the market rally fizzles, prices crash back to earth, and the banks lose billions of dollars.

  • The owners of today's featured property paid $175,000 on 3/18/1999. They used a $169,750 first mortgage and a $5,250 down payment.

  • On 11/15/2001 they refinanced with a $229,500 first mortgage.

  • On 12/4/2002 they refinanced with a $240,000 first mortgage.

  • On 2/11/2003 they refinanced with a $278,000 first mortgage.

  • On 11/1/2004 they refinanced with a $300,000 first mortgage.

  • On 2/11/2008 they refinanced with a $323,000 first mortgage.

  • Total mortgage equity withdrawal was $153,250.

  • Total squatting time is about 15 months so far.

Foreclosure Record

Recording Date: 09/14/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 03/24/2010

Document Type: Notice of Rescission

Foreclosure Record

Recording Date: 03/09/2010

Document Type: Notice of Default

Foreclosure Record

Recording Date: 10/30/2009

Document Type: Notice of Default

This is what passes for good mortgage management in California. They tried to live within their means so to speak; they only spent what they perceived to be within the bounds of normal appreciation for their property. Of course, they were wrong, but that is the mindset by which they approached their mortgage management.

Am I the only one who thinks this is crazy?

Irvine Home Address … 23 FOXHOLLOW Irvine, CA 92614

Resale Home Price … $319,900

Home Purchase Price … $175,000

Home Purchase Date …. 3/18/1999

Net Gain (Loss) ………. $125,706

Percent Change ………. 71.8%

Annual Appreciation … 5.2%

Cost of Ownership

————————————————-

$319,900 ………. Asking Price

$11,197 ………. 3.5% Down FHA Financing

4.74% …………… Mortgage Interest Rate

$308,704 ………. 30-Year Mortgage

$64,292 ………. Income Requirement

$1,608 ………. Monthly Mortgage Payment

$277 ………. Property Tax

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

$27 ………. Homeowners Insurance

$340 ………. Homeowners Association Fees

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

$2,252 ………. Monthly Cash Outlays

-$150 ………. Tax Savings (% of Interest and Property Tax)

-$389 ………. Equity Hidden in Payment

$20 ………. Lost Income to Down Payment (net of taxes)

$40 ………. Maintenance and Replacement Reserves

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

$1,774 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$3,199 ………. Furnishing and Move In @1%

$3,199 ………. Closing Costs @1%

$3,087 ………… Interest Points @1% of Loan

$11,197 ………. Down Payment

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

$20,682 ………. Total Cash Costs

$27,100 ………… Emergency Cash Reserves

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

$47,782 ………. Total Savings Needed

Property Details for 23 FOXHOLLOW Irvine, CA 92614

——————————————————————————

Beds: 3

Baths: 1 full 1 part baths

Home size: 1,300 sq ft

($246 / sq ft)

Lot Size: n/a

Year Built: 1985

Days on Market: 17

Listing Updated: 40443

MLS Number: S632715

Property Type: Condominium, Residential

Community: Woodbridge

Tract: St

——————————————————————————

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

Desirable 3 bedroom two story condominium in the Somerset Tract near an amazing and tranquil rest and park area, Green Belt and Pool. This perfect starter home includes super upgraded laminate and travertine floors. Kitchen has gas stove and stainless steel sink. Crown moulding and 3 inch baseboards grace each of the rooms, along with custom paint, smooth ceilings, and textured walls. For your comfort, home also features an oversized five year old air conditioner. Bathrooms feature new light fixtures. Living Room is showcased with a slate Fireplace and beautiful French Doors that open on to the Patio with an 8 year old fruit bearing guava tree. Enjoy all the Woodbridge area amenities, including the Lakes, Pools, Parks, Schools and Shopping. This home is lovingly maintained by this family and not a short sale fixer upper.

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

Private Property Rights: A Casualty of the Housing Bubble

Paul Jackson from HousingWire persuasively argues that private property rights are being trampled.

Irvine Home Address … 4152 HOMESTEAD Irvine, CA 92604

Resale Home Price …… $640,000

And all the clouds come in day by day

No one stop it in anyway

And all the peacemaker third war officer

Hear what I say

Police and thieves in the streets

Scaring the nation with their guns and ammunition

Police and thieves in the street

Fighting the nation with their guns and ammunition

The Clash — Police and Thieves

What do you do when the people who are supposed to protect you and serve your interests steal from you? Protest? To whom? What do you do when the government that is supposed to look out for us steals our money and gives it to greedy and corrupt corporations and bankers? It's happening to you right now.

The greatest heist in our country’s history

by PAUL JACKSON — Tuesday, October 5th, 2010, 5:29 pm

Our economy is being stolen from us, and our nation’s real estate crisis is providing cover for what will — if it goes unchallenged — go down as one of the greatest heists in our country’s history.

Yes, a mortgage crisis of historic proportions has now suddenly become a foreclosure crisis of historic proportions. And it’s front page news, too, bringing the market pundits out of the woodwork to exclaim as loudly as they possibly can that the entire U.S. mortgage system is a fraud.

Those three links are great supporting materials. If you are inclined to explore them, they are worthy of your time to read.

Banks are admitting to having taken shortcuts with their paperwork, or not having notarized documents properly, or delegated signing authority when they should not have. Yes, procedures haven’t been followed. And, yes, banks are going to pay for it, some far more than others.

Paul is referring to this tempest in a teapot: Paperwork storm hits nation's biggest bank. This news story isn't really news, but it serves to stoke the false hopes among debtors that mortgage relief is forthcoming. It isn't.

I’m even sure all of these procedural errors — and some that have yet to come to light — are on varying levels endemic and common throughout the mortgage servicing industry.

But in the end, am I the only one asking: who really cares? Does any of this make it more likely that a borrower will suddenly be able to afford their mortgage? Isn't that what really matters?

The Fallacy of Financial Innovation.

What really should matter is this: as a nation, we have lost at least $2 trillion in wealth thanks to the economic downturn, led by an absolute collapse of our housing and mortgage markets. It’s a collapse we have all yet to recover from, as a host of well-intentioned but ill-fated policies have done nothing except prolong pain — not only for banks, who are still playing hide-and-seek with bad assets on their balance sheets, but also for borrowers, who are being lied to by our government and by the very consumer advocates who claim to wish to help them.

The results emerging here threaten our nation’s very system of private property rights — a fundamental aspect of our democracy. But not because the banks have abused procedure, as so many pundits have conveniently alleged; instead, it’s because the very procedures designed to protect our nation’s property rights are now being used as a weapon against us.

And most of America doesn’t even know it’s happening.

An economy of lies

Just how much hide-and-seek is still out there, playing games within balance sheets of major financial institutions? Plenty. In March, I highlighted analysis from Laurie Goodman at Amherst Securities, who found that of more than $1 trillion in second mortgages outstanding, $963 billion remained on the balance sheets of commercial banks, thrifts and credit unions. As another way of slicing it, a look at Federal Reserve data shows that as of Sept. 22, U.S. commercial banks held $592.1 billion in revolving home equity loans — essentially unchanged from August of 2009, when banks held $605.2 billion.

Banks Refuse to Recognize HELOC and Second Mortgage Losses.

If you believe that the second liens and home equity loans banks are holding on their balance sheets are worth anything close to what they’re being booked at, you haven’t looked at what second liens tend to bid at on the secondary market: anywhere from 5 to 7 cents. And that’s for performing second liens.

Let that sink in a moment. Our banks are holding a trillion dollars of worthless second mortgages on their balance sheets. Do you see why short sales take forever? Banks don't want to recognize these losses, so they use the short-sale process as a means of facilitating negotiations with delinquent borrowers to get some recovery on their second mortgage loan debt.

Most properties that go to foreclosure quickly are those where the first mortgage is held by one bank and the second is held by another. Rarely do banks go to foreclosure if they hold both mortgages. Instead they endlessly amend-extend-pretend in hopes that these second mortgages will come back in-the-money from their currently worthless position. Banks live in a state of perpetual denial concerning these bad second mortgages. The horror of the reality of their situation is too terrible to be accepted.

Layer on top of that millions of borrowers who aren’t deleveraging yet, because Uncle Sam is telling them not to, and consumer advocates have swooped in to help. We’ve sold the American populace on the idea that their home truly is the American Dream, and that saving that dream is worth wallowing in bad debt and insolvency for years — rather than simply leaving it behind, deleveraging and moving on with their lives.

Foreclosure Is a Superior Form of Principal Reduction.

Toward this end, the HAMP program is an outright and unmitigated disaster: Consider that through August 2010, 468,000 of the 1.4 million homeowners offered trial mods had received "permanent" modifications. Even if only 40% of these “permanent” modifications redefault — an incredibly low redefault rate — that’s 280,800 borrowers that get to stay in their homes. Assume that number triples between now and 2012, when HAMP is slated to expire: that means 842,400 borrowers will be assisted by HAMP when all is said and done.

HAMP's program cost? $50 billion. The final price tag? $60,000 per success. We might as well have just given the whole lot of our nation’s delinquent borrowers a year’s worth of mortgage payments as a cash advance — it would have been just as effective.

But HAMP’s real crime isn’t its inefficiency and cost to the taxpayer. It’s the culture of ‘indentured servitude’ that it has spawned upon an unwitting American public. Our government has convinced millions that it is better for them to wait to resolve their bad debt, to wallow in insolvency — that they should attempt to see that debt restructured into some other bad debt, with much of this new, still-bad debt now guaranteed and backed directly by the U.S. government.

The Mechanism For Diverting Bank Losses to the US Taxpayer.

The result is that bad debt lurches along in our financial system, never really cleaning itself out; and borrowers are left with horrible credit for years as they work through attempting to restructure their debt again and again, damaging their future hopes of ever really contributing to GDP growth again.

It’s a crime upon our nation, financially and socially, yet it’s one that the American people have allowed themselves to be subject to. We are, after all, a government by the people and for the people.

But the real reason we aren’t seeing the sort of economic growth most have expected is precisely because we haven’t allowed the consumer to repair their balance sheets, a necessary and positive thing for the economy in general: we’ve encouraged them to do the exact opposite.

Eliminating Government Housing Subsidies Will Improve the Economy.

It’s somewhat convenient for the nation’s banks, too, that consumers decided to hold onto all of this debt, too — because doing so allows our financial institutions to continue to play hide-and-seek with their bad assets. Which avoids the need for messy additional government bailouts, politically untenable as they are these days.

So everyone plays along with the ruse.

Regardless, the inconvenient truth here is that until we allow this billions of dollars worth of bad mortgage debt to truly course through our economic veins, to work itself out, we won’t see an economic recovery. Deleveraging privately — and now, through transfer of debt, publicly — is a necessary prerequisite to future economic growth in our country.

Foreclosures Will Drive the National Economic Recovery.

Love me tender

Foreclosures, then, aren’t really the enemy at our gates; they’re instead a necessary and healthy indicator of market correction. They are proof that our nation’s well-developed system of private property rights is, indeed, actually working as it should.

Foreclosure is not the problem; foreclosure is the cure.

But our government has instead made foreclosures into a “last stop” measure instead, something to be avoided at all costs as well as something that probably rates just below Big Tobacco on most American’s scale of corporate loathing — this is a huge mistake, as NYU law professor Richard Epstein notes in a brilliant column published in Forbes magazine.

By giving in to sensationalism over robo-signers and who notarized what, we’ve allowed procedural gaffes to substitute for true substance. And we’ve forgotten why those procedures really exist in the first place — not to protect the hapless borrower, who has already defaulted, but to instead protect our nation’s sacred system of land rights. To protect the foundations of our very democracy.

Money Rentership: Housing and the New American Dream

“Foreclosure should be understood as a healthy form of market correction of prior transactions. It should not be regarded as a form of original sin, to be tolerated only under the most extreme circumstances,” writes Epstein. “The older rules were designed to allow strict foreclosures in order to clear title. The new rules will result in short-term victories for some besieged landowners — and fresh losses for everyone else.”

California, at least, seems to have had its priorities straight. Under California law, borrowers looking to challenge a foreclosure sale on grounds of any irregular procedure (like affidavit signing, notarization, and the like) must first make a “valid and viable” tender offer to the lender for the amount due on the loan. In other words: a procedural error doesn’t matter, if the borrower still can’t pay the debt.

After all, as I noted before and will say again: our nation’s detailed and paperwork-heavy procedural requirements don’t exist for the protection of the borrower in default. They exist to protect our nation’s very system of property rights.

I wasn't aware of this law prior to reading this article. It is a good law, IMO.

California’s "tender rule" has helped the courts in the Golden State avoid much of the same fate as those in Florida, which have quite literally been besieged by claims of procedural irregularities. It’s why California is more able to work through foreclosures, and the single largest reason why the state is closer to finding an equilibrium in housing than Florida is.

Actually, we are only at an equilibrium because we aren't foreclosing and putting supply on the market, but I don't want to take away from Paul's larger point.

But California attorneys I speak with now say that the “tender rule” in California is under heated attack from consumer attorneys that would see the rule turned around, allowing California’s courts to resemble the mess that is Florida’s.

Rather than fighting California’s “tender rule,” what we really ought to be doing is considering a national, federal law that makes something like the “tender rule” a national requirement. In other words, if you can’t make good on your debts anyway, procedural missteps in a foreclosure are immaterial and something for attorneys and their bar to worry about.

By subverting our nation’s real estate law to favor borrowers who have no intention of fulfilling their debts, we risk undermining everything that establishes private property rights in our country — and perhaps the coup de grâce of it all is that the American public will be cheering when it happens.

How very eerily Orwellian of it all.

The enemy at our gates threatening our very republic isn’t Wall Street, isn’t banks, isn’t foreclosure mills, isn’t botched paperwork, isn’t loan officers making empty promises, isn’t investment banks rolling loans into CDOs and other esoteric investments, isn’t rating agencies. Instead, we've met the enemy, and it’s us.

Paul Jackson is the publisher of HousingWire Magazine and HousingWire.com. Follow him on Twitter: @pjackson

Obviously, I think Paul Jackson really gets it.

$300,000 in HELOC abuse

Nearly every day I profile a house where someone extracted hundreds of thousands of dollars in HELOC money. Since these are almost always short sale and foreclosures, you know that these people have nothing to show for all that spending. They couldn't have buried it in the yard because they are losing the yard too.

  • Today's featured property was purchased for $475,000 on 10/15/2003. The owners used a $380,000 first mortgage and a $95,000 down payment.

  • On 11/5/2004 they refinanced with a $530,000 first mortgage.

  • On 5/3/2006 the obtained a HELOC for $150,000. We know they spent it because this property is listed as a short sale.

  • Total property debt is $680,000.

  • Total mortgage equity withdrawal is $300,000.

Do you want to pay off their debts? The bank is willing to loan you money at 4.3% to do it.

Irvine Home Address … 4152 HOMESTEAD Irvine, CA 92604

Resale Home Price … $640,000

Home Purchase Price … $475,000

Home Purchase Date …. 10/15/2003

Net Gain (Loss) ………. $126,600

Percent Change ………. 26.7%

Annual Appreciation … 4.3%

Cost of Ownership

————————————————-

$640,000 ………. Asking Price

$128,000 ………. 20% Down Conventional

4.74% …………… Mortgage Interest Rate

$512,000 ………. 30-Year Mortgage

$128,624 ………. Income Requirement

$2,668 ………. Monthly Mortgage Payment

$555 ………. Property Tax

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

$53 ………. Homeowners Insurance

$45 ………. Homeowners Association Fees

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

$3,321 ………. Monthly Cash Outlays

-$451 ………. Tax Savings (% of Interest and Property Tax)

-$645 ………. Equity Hidden in Payment

$230 ………. Lost Income to Down Payment (net of taxes)

$80 ………. Maintenance and Replacement Reserves

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

$2,535 ………. 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

$38,800 ………… Emergency Cash Reserves

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

$184,720 ………. Total Savings Needed

Property Details for 4152 HOMESTEAD Irvine, CA 92604

——————————————————————————

Beds: 5

Baths: 3 baths

Home size: 2,100 sq ft

($305 / sq ft)

Lot Size: 5,000 sq ft

Year Built: 1972

Days on Market: 77

Listing Updated: 40448

MLS Number: S625484

Property Type: Single Family, Residential

Community: El Camino Real

Tract: Gt

——————————————————————————

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

**** REMODELED TWO STORY FABULOS HOME IN A GREAT AREA. A BEDROOM AND BATH ON FIRST FLOOR.HARD WOOD FLOOR GRANITE KITCHEN AND MORE. NEAR SHOPPING, SCHOOLS AND PARKS . SHORT SALE, SEE REMARKS FOR SHOWINGS.

FABULOS?

The Market Is Accepting That House Prices Will Not Go Up

Hope springs eternal, and denial rules downtrodden financial markets. However, locally it appears that housing market watchers are beginning to accept that house prices will not be going up soon.

Irvine Home Address … 22 BUTTERFLY Irvine, CA 92604

Resale Home Price …… $460,000

There's gonna come a time when the scene'll seem less sunny

It'll probably get druggy and the kids'll seem too skinny

There's gonna come a time when she's gonna have to go

With whoever's gonna get her the highest

The Hold Steady — Stay Positive

No matter how bad things get, some people just choose to stay positive. It is a healthy way to manage one's emotions, but it is an incredibly poor way to manage one's finances.

Is 'flat' the new 'normal'

BY JONATHAN LANSNER — Sept. 30, 2010

Perhaps "flat" is the "new normal."

It's hard to find anybody who's really excited about housing's short-run outlook as the real estate market seems to be having some difficulty adjusting to homebuying without federal tax incentives.

LOL! Having some difficulties? If by difficulties he means that New Home Sales Plummet with Expiration of Tax Credits and Existing-Home Sales Sink to Lowest Level Ever Recorded, then yes, the market is having some difficulties.

Take housing tracker Veros from Santa Ana. They project Orange County home prices will rise 2.2 percent in the year ended September 2011.

Eric Fox, Veros' economic modeling VP, says "affordability is the driver" that will keep local housing prices up. Previously, Veros' forecast that home price will be up 1.8 percent in the year ending June 2011.

To Fox, local home affordability – a mix of depressed values and cheap mortgage rates — will largely offset the area's relatively weak job market. Fox also think rent-seeking investors will play a big role in supporting local home prices, as these cash-rich buyers won't have the tall hurdles — overall angst or loan qualification challenges — that currently chill some buyers seeking their own shelter.

Nearly every market myth in one brief statement. I can't say Mr. Fox has earned much of my respect.

First, market values are not depressed. We are recovering from a housing bubble, and prices are still artificially elevated not depressed.

Second, cheap mortgage rates are not offsetting the weak job market. Low Interest Rates Are Not Clearing the Market Inventory. The banking cartel's withholding of inventory is what is offsetting the weak job market. Demand is very low as sales volumes are well off historic norms. Only the lack of inventory is preventing a total price collapse.

Third, rent-seeking investors are not attracted to Orange County's housing market. Why would anyone accept a 4% return in Orange County when they can get an 7% return in Riverside County or a 9% return in Las Vegas? Only foolish speculators who believe rapid appreciation will return to Orange County are buying at current valuations.

Forth, foreign cash buyers can not, will not, and are not saving the Orange County housing market. This dumb idea is brought up periodically, and it is crazy. Perhaps FCBs have some small impact in some small neighborhoods and isolated enclaves where the activities of a few buyers can make a difference, but the OC housing market is much too large, and the number of FCBs is much too small to stem the tide.

That outlook for essentially flat pricing fits a pattern we've seen lately: Home-price gains – at least what's reported in various indexes — have been shrinking.

The latest reading of the price pulse in Los Angeles and Orange counties in July's Standard & Poor's/Case-Shiller housing indexes:

  • On a month-to-month basis, LA/OC prices rose 0.35 percent in July — fourth consecutive gain but the smallest since a drop in March.

  • On a year-over-year basis, LA/OC home prices rose 7.5 percent in July — seventh consecutive gain but also the smallest since March.

  • Sobering thought: Even with the recent gains, LA/OC prices by this measure are 35.6 percent below the 2006 peak.

Be prepared to watch the Case-Shiller index roll over in the coming months. We all know that the market hit some severe "turbulence" in May when the tax credits expired. Since the Case-Shiller is both a moving average and delayed by three months, we are only now seeing the impact of the sudden drop in demand and pricing. Nobody watching the market since May has reported increasing demand or rising prices. Going into the fall and winter with elevated inventory, these numbers can only get worse.

… HARD SELL …

And it's not just pricing, as buyers pull back in many parts of the market

In the 22 business days ending September 8, DataQuick found 52 of 83 O.C. ZIPs had year-over-year sales declines as overall countywide sales were off 14.9 percent vs. a year ago. The current sales pace is 69 percent of the average 3,597 homes sold per month in the 20 years ended in 2009.

Statewide, California Association of Realtors said August's homebuying was down 14.9 percent from a year ago. And what sells takes more effort: CAR's unsold inventory index for single-family resales in August was 6.1 months (to deplete the supply of homes on the market at the current sales rate) vs. 4.6 months a year earlier.

These sales numbers are a catastrophe. If the majority of the market were not tied up by banks who refuse to sell, prices would crater.

As expected, homeowners sense house shoppers' change of heart.

According to surveying by online real estate trackers HomeGain, 15 percent of Californian homeowners predicted this summer that their home's value will rise in the next six months — slightly less than half of the 34 percent who foresaw appreciation just three months earlier in the spring. Nationwide, the drop off wasn't as steep as 18 percent expected appreciation in the most recent survey vs. 27 percent in the second quarter.

But here's what really noteworthy: when just 15 percent of Californian homeowners see appreciation — and that makes our state a national leader in property optimism!

That is a very low number. Homeowners are the group most likely to have a rosy outlook for appreciation because they all want home prices to go up. Position bias is strongest among those who stand to make large amounts of money if a position goes in their favor.

HomeGain's third-quarter survey placed California in a tie for 9th place ranking among the states (along with Maryland) for the share of folks predicting upcoming appreciation. (Back in the second quarter, optimism was tied for 7th with New York and Colorado!)

California real estate agents, who were also polled, had equally and curiously "high" relative optimism — as 14 percent told HomeGain pollsters that they foresaw appreciation within six months. That tied us for the 6th most upbeat real estate pros among the states (withTexas.)

I am shocked! realtors think house prices are going up? Actually, I am surprised that so few (only 14%) do believe house prices are going up. Of course, all of them are telling their buyer-clients that house prices are going up in order to manipulate them into buying, but secretly only a small handful truly believe prices will rise. The duplicity is disgusting.

Perhaps, growing Californian pessimism comes from what buyers (or the lack thereof) are saying, as pollsters found agents saying 25 percent of California homebuyers currently believe homes are overpriced by 10 percent or more vs. 13 percent in the second quarter

… BUT NO 'DOUBLE DIP'?

Still, the market watchers at Beacon Economics don't think the current malaise will turn to anything ugly.

"Although home prices are not going to rocket back to pre-recession peaks anytime soon, fears of a significant double dip in home prices are likely exaggerated," Beacon economists wrote in a recent forecast. "The fundamental drivers of long-term home prices paint a picture of a housing market that has emerged from collapse healthier. Home prices have largely stabilized despite a small drop in the wake of falling sales; the price of an existing home is still more than 16% above the April 2009 trough. Additionally, measures of affordability show that California appears poised for slow but steady growth once the labor markets have healed. At roughly 6-times per capita income in the state, home prices are beginning to make sense again. As income continues to grow at a moderate pace, home prices will likely follow suit at a more tepid but sustainable pace."

Six-times income is now a good measure of affordability? It is amazing how super-low interest rates distort reality. Ordinarily, I embrace most of what I read from Chris Thornburg and Beacon Economics, but the above statement reads a bit like market cheerleading. I'm sure many loan owners read that will a small sense of relief. Denial requires constant reinforcement.

Flat is not where it's at

House prices are going to head lower in Orange County. When the bulls start to accept that prices may actually stay flat, it becomes pretty obvious that prices will head lower. We are not witnessing the despair after the crash which signals the bottom, we are witnessing the acceptance that comes before capitulation. Expect to see house prices grind lower for the next two or three years with greater declines at the high end than at the low end. Afterward, expect tepid appreciation until the overhang of distressed inventory is pushed through the system. The bear rally engineered by the Federal Reserve is over. The second leg down — a less steep and more controlled decline — is about to begin.

HELOC Metamorphosis

I don't think most HELOC abusers set out to be thieves. It is a slow transformation. Like Patty Hearst went from being a shy heiress to a gun-toting bank robber, most HELOC abusers get a taste of free money, like what they get from it, and then they just dig the hole deeper and deeper until there is no escape. Perhaps HELOC abusers will blame banks for keeping them financially hostage and claim mass insanity as another manifestation of the Stockholm syndrome.

  • The owners of today's featured property paid $317,000 on 10/31/2001. They used a $253,600 first mortgage, a $31,700 second mortgage and a $31,700 down payment.

  • On 2/26/2003 they refinanced with a $290,000 first mortgage.

  • On 10/23/2003 they took out $100,000 in a HELOC.

  • On 4/7/2004 they got a $150,000 HELOC.

  • On 5/7/2004 they obtained a $136,000 HELOC.

  • On 3/17/2006 they opened a $250,000 HELOC.

  • Finally, on 8/3/2006 they refinanced the first mortgage with a $560,000 Option ARM.

In short, these people committed every sin of bad mortgage management including periodic refinancing and obtaining an Option ARM. The worst part is that they probably don't realize they did anything wrong. I imagine they think they were behaving responsibly and if the housing market hadn't crashed, everything would be fine. I believe people have failed to learn the lessons of poor financial management, and I also believe we will likely repeat this cycle because of the poor lessons people have learned.

Irvine Home Address … 22 BUTTERFLY Irvine, CA 92604

Resale Home Price … $460,000

Home Purchase Price … $317,000

Home Purchase Date …. 10/31/2001

Net Gain (Loss) ………. $115,400

Percent Change ………. 36.4%

Annual Appreciation … 4.2%

Cost of Ownership

————————————————-

$460,000 ………. Asking Price

$16,100 ………. 3.5% Down FHA Financing

4.74% …………… Mortgage Interest Rate

$443,900 ………. 30-Year Mortgage

$92,448 ………. Income Requirement

$2,313 ………. Monthly Mortgage Payment

$399 ………. Property Tax

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

$38 ………. Homeowners Insurance

$215 ………. Homeowners Association Fees

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

$2,965 ………. Monthly Cash Outlays

-$377 ………. Tax Savings (% of Interest and Property Tax)

-$560 ………. Equity Hidden in Payment

$29 ………. Lost Income to Down Payment (net of taxes)

$58 ………. Maintenance and Replacement Reserves

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

$2,115 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$4,600 ………. Furnishing and Move In @1%

$4,600 ………. Closing Costs @1%

$4,439 ………… Interest Points @1% of Loan

$16,100 ………. Down Payment

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

$29,739 ………. Total Cash Costs

$33,300 ………… Emergency Cash Reserves

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

$63,039 ………. Total Savings Needed

Property Details for 22 BUTTERFLY Irvine, CA 92604

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Beds: 3

Baths: 2 full 1 part baths

Home size: 2,000 sq ft

($230 / sq ft)

Lot Size: 2,720 sq ft

Year Built: 1976

Days on Market: 122

MLS Number: S619416

Property Type: Single Family, Townhouse, Residential

Community: El Camino Real

Tract: Ig

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

Great Value for SQ/Footage, Spacious Home with Vaulted Ceilings, Open Floor Plan. HUGE Family Room with Lovely Bricked Fireplace and Wet Bar. Living Room with Fireplace, Formal Dining Room, Kitchen with Newer Appliances and Countertops. Extra Room with air conditioner off of the Large Master Bedroom that can be used as an office, den, playroom or storage. Central air through rest of the house Large Private backyard that backs to Greenbelt 2 Car Garage with newer roll up door. Walk to shopping, Restaurants, Award winning Schools

Should Government Mortgage Subsidies Be Offered to Cashflow Investors?

Among the dumb ideas being floated to resolved the housing crisis, one good one has appeared: Help investors buy up distressed homes and rent them out.

Irvine Home Address … 6 HERITAGE Irvine, CA 92604

Resale Home Price …… $319,000

Situation could be much better

much better than today

you know that you could do much better

much better than you do today

but how come you never try to change situation

how come you always escape

out of a serious conversation

dont't you know it can't never be too late

for us to succeed

out of every misery

you can be released

as long as you beleive

Ayo — Help Is Coming

In housing markets where a significant number of properties are being converted from owner-occupied to rental status, there is no government program or help for this transition to occur. Without government help, prices fall far below fundamental valuations as the imbalance of supply and demand becomes extreme. The only solution is to reduce supply and increase demand. To accomplish this, I propose that the GSEs promote investor programs that reduce the cost of ownership to small investors and encourage them to keep the supply off the resale market.

I am about to argue for something that would benefit me personally, so take everything which follows with a dose of skepticism. I would like to think I can set my personal biases aside and propose a solution better than those coming out of Washington. Feel free to disagree.

Should Treasury Help Investors Become Landlords?

Emily Peck — September 27, 2010

The government’s tried a lot of tactics in propping up the housing market: Tax credits for home buyers. Mortgage modifications for distressed homeowners. A program to buy up mortgage-backed securities.

Now, some analysts from Bank of America are proposing another plan: Help investors buy up distressed homes and rent them out.

In a recent research paper, the BofA analysts frame this as the second phase of the Public Private Investment Plan. Funded by TARP, which expires Oct. 3, PPIP offered investors funds and credit to buy up residential and commercial mortgage backed securities. The paper calls that program an unqualified success for driving up the value of mortgage backed securities.

Through their proposed PPIP 2, Treasury would use the same model to help investors to directly buy up foreclosed homes.

The analysts propose funding the purchase of up to $400 billion worth of homes by a select group of property management companies given the task of home oversight. Treasury could provide, they suggest, up to $100 billion in equity, matching the property management companies, as well as up to $200 billion in debt capital.

I like the basic idea of helping investors to purchase homes and convert them to rentals. I really hate the idea of it being done as another form of crony capitalism where the select few chosen by the Treasury department would get to make all the money. There is a much better way to make this happen.

The analysts propose that PPIP 2 investors be required to hold on to these homes for a certain amount of time, to avoid weighing the market down with low-priced foreclosed properties.

The U.S. homeownership rate, at about 67%, is “adjusting to a more natural level of 62-64%,” the analysts write. That means we’re in the process of converting owners to renters–sometimes painfully via foreclosure. The authors write that some of these folks probably never should have owned homes anyway and, since modification won’t (and doesn’t) always help them, the ability to rent distressed properties might do the trick, while also avoiding a flood of foreclosures onto the market.

This is exactly the problem. The home ownership rate must fall. Far too many people who were not prepared for home ownership were given title to property. These people must go back to being renters, but there is no mechanism in place to cost effectively make this transition. in fact, since investors loans carry a higher interest rate and are difficult to qualify for, there are roadblocks to this transition that must be removed.

The authors say that they haven’t seen any proposal along these lines. One possible reason? TARP fatigue. From the paper:

To put it mildly, in spite of its successes, TARP has not been particularly popular. We believe reauthorizing this type of spending on even a limited basis would be next to impossible, at least until after the upcoming election.

I agree; doling out another crony payoff is not going to be very popular either before or after the election. This is a transparent corporate giveaway that people are growing tired of.

The real reason you haven't seen proposals like this is because everyone in the administration is still focused on owner occupants. There have been no policies implemented or discussed that might hurt the home ownership rate — even is such a policy will help reduce taxpayer losses. A high home ownership rate has become a sacred cow in Washington, and until we admit maximizing the home ownership rate may not be a good thing, our policies will continue to be counter productive.

The GSEs should insure investor loans

Let's start by acknowledging that the GSEs no longer have any semblance of what they used to be. They were founded to support a secondary mortgage market and make capital available for low and middle income Americans to buy homes. Since they went into conservatorship in 2008, they have been largely used to prop up the housing market. Let's acknowledge that their primary function is currently to prop up the housing market by providing mortgage insurance at below-market costs to stabilize the housing market.

Once we accept the new role of GSEs, we can then discuss how this can best be accomplished. Our current policies are geared toward keeping owner-occupants in properties and Prop Up the Flagging Owner-Occupancy Rate. This policy will largely fail because many homes have to be converted to cashflow rental properties. If the government and the banks really want to limit their losses on mortgage loans (and GSE mortgage insurance), then they need to focus on how they can raise the property bids of cashflow investors.

If the GSEs offered the same loan insurance to cashflow investors as they do to owner-occupants so that interest rates were similar, and if the rental cashflow from the property could be counted toward the qualifying income, bids from cashflow investors would be much higher. Think about it: if you lower the cost of ownership for investors and make it easier for investors to qualify, you will get higher bids and more investor competition for properties. This in turn will raise prices and reduce the losses both banks and the GSEs will endure on those properties that must be converted from owner-occupied to rental status.

The truth of this fact is plainly obvious when you look at Las Vegas's housing market. The home ownership rate in Las Vegas is going to drop 25% or more from the 2006 peak. Nearly every household there is underwater, and they have little or no hope of price recovery. Accelerated default is the norm, and a huge number of homes are currently being converted from owner-occupied to rental status. Each time this happens, some lender is losing a fortune, and the only way to stop the bleeding is to raise the bids for cashflow rentals. The only way that is going to happen is to lower the cost of ownership for investors and increase the size of the borrower pool by qualifying more investors.

This is a problem I am very familiar with. I know the math as I face it myself with each property I consider buying personally. I know that investors pay a higher interest rate, face higher equity requirements, and have fewer loan programs that consider the rental income in qualification (it still must be cashflow positive). Each of those barriers lowers my bid for any particular property, and since everyone is facing the same issues, it lowers everyone else's bids as well. Lower market bids for these properties make for larger lender losses.

If the government and the GSEs were serious about combating this problem, the GSEs could offer relief in these areas (interest rates, equity requirements, and income qualification) to investors who agree to keep the properties off the market as rentals for three to five years. That would keep these properties out of the for sale market (or the loan would have a stiff financial penalty), and the reduced supply would also help stabilize prices.

This doesn't have to be some crony capitalist handout. It could be a grass roots program for small investors and prudent savers with good credit — you know, the people who have been being screwed at every turn in favor of banking interests and corporations with all the bailouts. I openly admit my personal bias, but I still believe this is a good idea that would be far more effective than any of the programs that have actually been implemented to date.

What do you think? Has the time come for the GSEs to help the small investor clean up this mess?

The California Housing Foreclosure Cycle

People often talk about the real estate cycle in California without having any idea of what causes it. In short, irrational exuberance among buyers enabled by foolish lenders causes prices to go up, and when buyers who over-borrowed stop repaying their loans, lenders tighten credit, and prices crash. This most recent housing bubble was actually the third such housing bubble here in California. It probably won't be the last.

  • Today's featured property was purchased by the Federal National Mortgage Association for $138,000 on 8/23/1996. It was an REO. They later sold the property Glendale Federal Bank who sold it to the current owner on 5/17/1997 for $100,000. The current owner used a $97,500 first mortgage and a $2,500 down payment.

  • On 8/24/1998, the owners obtained a stand-alone second for $37,300.

  • On 9/21/199 they refinanced the first mortgage for $163,946.

  • On 10/1/2004 they refinanced again for $220,000.

  • On 6/5/2006 they refinanced one last time for $237,000.

  • Mortgage equity withdrawal is $139,500.

If you believe the property description, this is a standard sale, but they don't have much cushion before this becomes a short sale.

How many other REOs from the last cycle will end up as REOs this time around? How many of today's REOs will end up as tomorrow's foreclosures?

Irvine Home Address … 6 HERITAGE Irvine, CA 92604

Resale Home Price … $319,000

Home Purchase Price … $100,000

Home Purchase Date …. 5/17/1997

Net Gain (Loss) ………. $199,860

Percent Change ………. 199.9%

Annual Appreciation … 8.6%

Cost of Ownership

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$319,000 ………. Asking Price

$11,165 ………. 3.5% Down FHA Financing

4.74% …………… Mortgage Interest Rate

$307,835 ………. 30-Year Mortgage

$64,111 ………. Income Requirement

$1,604 ………. Monthly Mortgage Payment

$276 ………. Property Tax

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

$27 ………. Homeowners Insurance

$273 ………. Homeowners Association Fees

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$2,180 ………. Monthly Cash Outlays

-$149 ………. Tax Savings (% of Interest and Property Tax)

-$388 ………. Equity Hidden in Payment

$20 ………. Lost Income to Down Payment (net of taxes)

$40 ………. Maintenance and Replacement Reserves

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$1,703 ………. Monthly Cost of Ownership

Cash Acquisition Demands

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$3,190 ………. Furnishing and Move In @1%

$3,190 ………. Closing Costs @1%

$3,078 ………… Interest Points @1% of Loan

$11,165 ………. Down Payment

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$20,623 ………. Total Cash Costs

$26,100 ………… Emergency Cash Reserves

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$46,723 ………. Total Savings Needed

Property Details for 6 HERITAGE Irvine, CA 92604

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Beds: 2

Baths: 1 full 1 part baths

Home size: 1,022 sq ft

($312 / sq ft)

Lot Size: n/a

Year Built: 1977

Days on Market: 23

Listing Updated: 40451

MLS Number: S631821

Property Type: Condominium, Townhouse, Residential

Community: El Camino Real

Tract: Hv

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Regular sale: stop wasting your time on short sales. No need to wait for the bank on this one. A wonderful, upgraded townhouse in the Heritage Park community of Irvine featuring dual master bedrooms with lots of closet space, and a spacious, upgraded kitchen featuring custom cabinets, tile floors, and beautiful Corian counters. Both bathrooms have been recently tastefully upgraded. Newly-installed laminate flooring. The enclosed patio is perfect for enjoying the great Southern California weather and there is an inside laundry area. Walk to the huge Heritage Park, association pool, large county library, basketball, tennis and other sports courts, and the area tot lot. The area is close to many restaurants, shops and entertainment venues. Walk to local, highly-rated schools. No Mello-Roos and low HOA! Easy access to major freeways, this is an excellent opportunity to live in one of the safest cities in America. Motivated seller – and this is a regular sale!