Don't get carried away with Tuesday's housing market surprise. A sustainable recovery is still years away.
Housing starts jumped more than 10% to a four-month high, the government said Tuesday. Permits for new construction also rose, the Commerce Department said. The news comes on the heels of the umpteenth bust-era runup in the homebuilding stocks.
But despite the upbeat signs, Tuesday's results were distinctly mixed. The headline housing starts number was boosted by a large rise in the volatile multifamily category. And the closely watched single-family housing permits number actually fell, for the fifth straight month.
"Although the headline looks good, the details of the report paint a more downbeat picture," writes Bank of America Merrill Lynch economist Michelle Meyer.
What's more, the outlook remains dismal, thanks to years of overbuilding that have left housing markets across the country in various states of oversupply. There is a year's worth of unsold houses on the market right now, which is roughly twice the typical level — and that doesn't even count the so-called shadow inventory that would come onto the market if conditions improved.
Given the reality of those conditions, there is no justification for the government policies we have instituted to date. We have propped up prices by create a massive overhead supply and encouraged squatting on a grand scale. The current pricing is an illusion, so any justification for these policies is just as illusory.
Though there is an impulse nowadays to blame everything on Ben Bernanke and Tim Geithner, another view is that the government's massive efforts to prop up the housing markets – costly though they have been — have actually worked as well as they might have been expected to.
Expectations must be very low considering how bad conditions really are.
Sure, prices are still soft and banks are still stuffed to the gills with bad loans and foreclosed properties. Noncurrent assets and other real estate owned hit 3.3% of bank assets in the second quarter – down a shade from last year but nearly seven times the 2005 level.
But by the same token, the relative stability of prices over the past year has given the banking sector time to find its footing and the rest of the economy a chance to creep forward.
According to this view, the government has succeeded in placing the housing market, once the source of so much economic instability, in position for a long slog back to health.
This will not have anyone turning cartwheels, obviously. Given the weakness of the economy and the slow rate of household formation in recent years, it will take years to absorb all the unwanted houses – a sobering thought when there is no end in sight to high unemployment.
But the good news, such as it is, is that unless there's another shock the housing market isn't about to bring the entire house of cards down again.
"Low rates and Fed mortgage buying have freed up sufficient liquidity to allow the 'shadow inventory' to remain in the shadows," says Andrew Barber of Waverly Advisors in Corning, N.Y.
"With such significant supply overhang, however, the market cannot rise appreciably," he adds. "As long as the Fed's put option is in place it might take something like a double-dip scenario or sudden rate environment shock to spur a sell-off. As such we could see this asset class tread water for a very significant time period."
Treading water isn't much fun, but think back to this time two years ago and tell me it doesn't beat the alternative.
If we had let prices crash to market clearing levels, the groundwork would be in place to have real appreciation. Once prices begin a sustainable rise, people regain their mobility, and the move-up market can return to health as people take the equity from a previous purchase to buy a more expensive home. As long as prices stagnate or decline, resale volume will be very low, and the economy will flounder.
North Korea Towers II
The only difference between these towers and the North Korea towers (Marquee at Park Place) is who was left holding the bag. The North Korea towers were sold out at the peak of the bubble, and both the investors and those who made loans in that building were left to face crashing prices, unpaid HOA dues, and little hope of recovery. The Astoria towers were not completed in time to catch any bubble sales, and Lennar's backer got to eat the losses.
Since the Marquee at Park Place was been seeing numerous forced sales by foreclosure, prices have been pounded down to the 200s. The Astoria towers are completely owned by Lennar, so there have been no foreclosures there. They are trying to obtain better pricing, but sales have been anemic, and with so much competition at lower prices, sales are not likely to improve there.
Lennar is facing a difficult choice: (1) lower price and take an even larger loss, (2) hold product off the market and hope prices go back up. Obviously, they are choosing to do the latter.
Perhaps we should rethink the terms "shadow inventory." I think we should call it "dark inventory." Many of the properties in shadow inventory are vacant like these towers. Vacant properties have no lights on, so they cast no shadows.
The Astoria is a microcosm of the shadow inventory problem. If you believe prices are going to fall, you would sell quickly to obtain whatever you could before prices fell further. Of course, that action becomes self-fulfilling. If you believe house prices are going to go back up, you want to release properties to the market slowly to allow some appreciation and still liquidate inventory. The problem with that approach is that your competitors may believe prices are going down, and they will provide lower priced product that steals your sales and pushes prices lower. That is the cartel problem. The sellers in Marquee at Park Place are undercutting the Astoria, lowering market prices, and stealing sales from the Astoria.
At the current rate of sales, the Astoria will be selling in 2030. They are betting that once the mess is cleaned up in the Marquee at Park Place that inventory will dry up and they will finally be able to sell for what they want. It isn't going to happen. These units simply aren't worth that much.
Look at the cashflow values. Even with 4.31% interest rates, these properties still cost more to own than they do to rent. What's the compelling reason to buy one of these? What happens when interest rates go up?
For now, Lennar will likely wait and see, but as time goes on and prices do not recover, the urgency to liquidate will increase. Prices will go down. The financial partners that backed this venture are going to lose a great deal of money.
Brand new Lennar high rise flat in Astoria. 2 bedroom, 2 bath flat with Wonderful Ammenities, Luxury living at its finest with valet parking, beautiful upgrades, gym, wine room, pool, spa and so much more.
Inmates learn new skills as part of their rehabilitation. It is a wise societal investment to give thieves training in something other than thievery so they can have an opportunity to begin a new productive life — if they choose to live differently after prison. Unfortunately, many skills taught in prison give criminals new skills to be even better criminals.
While I was in Edgefield Federal Prison Camp, many of us white-collar felons taught classes to the other inmates. Most of the classes involved helping inmates get their high school diploma (GED). Like other inmates who had the opportunity to teach, I felt good to find a way to give back.
Other classes helped inmates prepare for a career after prison. Hair cutting was a popular skill to learn, though many states prohibit felons from cutting hair….must have something to do with scissors. Tattoo art was also popular but the shortage of clean needles kept the enrollment for that particular class to a minimum.
So what was the most popular class during my time in Edgefield during 2001-2002, “How to be a Mortgage Broker”. The class was taught by an inmate, Eric, who was doing 3 years for mortgage fraud. So I guess that made him an expert. Each semester (a 2-hour class met 3 days a week for a month) the enrollment prompted a waiting list for the class. The waiting list resulted because the prison would only allow 25 copies to be made of the various forms that were a part of the curriculum (about 20+ pages of forms, work sheets and exemplar credit reports). Those with more time left on their sentence were pushed off to another semester to make room for those that would hit the streets in a few months. If you were doing 5+ years, you didn’t have a chance. Even prison classes are selective in their enrollment.
Mortgage Brokering was a great career because institutions did not care whether you were a felon or not, as long as you had a legitimate deal. And in 2002-2006 they were all legitimate. There was no licensing requirement and the inmate would return home with dreams of home-ownership to a host of friends and family. Testimonials to the success of the program flowed back to the instructor and he shared these with the next class.
Professor Eric probably meant well. The would-be brokers that he fed into the market were just trying to make a living in a business that seemed more lucrative and easier than selling the drugs that had put them in prison to begin with. Professor Eric did not do too bad either. He received $30 in commissary goods per inmate ($750 per session). Not bad for a place where the legitimate wage is about $0.15/hour for a prison job. Granted, there were only 4 sessions a year, but Eric also offered private lessons not sanctioned by the prison.
When I left prison, Professor Eric had turned his energy toward his own career once he secured his release, and it wasn’t Mortgage Brokering. He had created a business plan for a mutual fund that bet on NBA games with a guaranteed return of 12%. I told him that it sounded like a Ponzi Scheme, and I’ll never forget his reply, “What’s that?”
The entire housing market in California is a Ponzi Scheme. The newly released felons will be completely comfortable originating loans here in California. The question is, will you be comfortable having a convicted felon get a loan for you?
A private Ponzi prison
Perhaps we should make all the Ponzis who stripped the equity from small condos live in them until they pay the money back…. Actually, that is occurring to those who continue to make their payments. I wonder if they feel like they are in prison?
Today's featured property was purchased on 3/17/2003 for $279,000. The owner used a $223,200 first mortgage, a $41,850 second mortgage, a $13,950 third mortgage, and a $0 down payment.
On 11/10/2004 he refinanced with a $336,000 first mortgage.
On 12/27/2005 he refinanced again with a $360,000 first mortgage and a $40,000 second mortgage.
Total property debt is $400,000.
Total mortgage equity withdrawal is $121,000. Not bad for a small condo.
Investors are suing banks to get some of their money back from the bad loans banks originated and investors purchased. IMO, the only real beneficiaries will be the attorneys.
Investors in Pool of Securities Seek to Force Lenders to Buy Back or Modify Problem Mortgages
By CARRICK MOLLENKAMP — September 23, 2010
Big U.S. banks are facing legal pressure to make up for losses tied to pools of soured low-end mortgage loans.
In the latest effort, a group of investors in 2,300 mortgage securities worth roughly $500 billion is seeking to force several banks that originated or are now servicing faulty subprime-mortgage loans to repurchase or modify them.
I wonder who they are filing suit against. One of the brilliant aspects of subprime was that the major commercial banks and investment banks kept these operations at arms length as separate corporations. Once these corporations imploded, there was nowhere for investors to turn to get their money back. New Century Financial has guranteed billions on loans, but kept almost no capital in the company to cover them. This was common among subprime lenders. Their guarantee didn't mean much if they didn't have any capital to back it.
The move follows other similar efforts. Bond and mortgage insurers, hard hit in the housing crisis, have filed lawsuits accusing lenders and banks of sticking them with flawed loans marred by poor underwriting and faulty appraisals.
Federal Home Loan Banks in Pittsburgh, Seattle and San Francisco have sued Wall Street banks, seeking to force them to buy back mortgage-backed bonds. In July, the Federal Housing Finance Agency issued 64 subpoenas to obtain information about loans underpinning securities sold to mortgage giants Fannie Mae and Freddie Mac.
The banks and lenders are fighting these efforts, saying they aren't responsible for the housing crash.
And the outcome is far from certain and could depend on potentially contentious negotiations and litigation that could drag out for years.
Let the attorney feeding frenzy begin. The main parties who will be enriched by all this activity are the attorneys. Investors won't see much of their money, but the attorneys for both sides of these suits will make fortunes.
In any case, analysts say the efforts could force banks to disclose difficult-to-obtain information about the loans, such as how poorly they might have been originated or are being managed.
That data could be used to force banks to repurchase as much as $133 billion in souring home loans, according to Compass Point Research & Trading, a Washington, D.C., boutique investment bank.
The legal efforts focus on the contractual duties of lenders known as "representations and warranties," which can at times require them to repurchase loans or modify them so borrowers can keep paying monthly mortgage bills, which maintains value for mortgage securities tied to the loans.
One of the reasons loan modification programs have been difficult to implement is due to the huge number of loans placed into asset-backed securities and sold into collateralized debt obligations. The terms of these CDOs vary considerably, and many of them have no mechanism to modify loans because nobody anticipated the need.
The Trustees' Roles
At issue are the roles of trustees and loan servicers. Trustees are little-known administrators inside banks responsible for overseeing loan pools, or securitizations, on behalf of investors. Loan servicers handle day-to-day management of loans, including deciding how and whether to modify the terms of a loan. Both are charged with oversight of pools that hold thousands of loans.
If a trustee, for example, discovers that a borrower lied when getting a loan, the trustee or loan servicer is responsible for forcing the originating bank to repurchase the loan on behalf of mortgage investors. Trustees enforce warranties made by loan originators when they sell loans to a trust, and oversee loan-servicing firms.
But some loan-servicing units reside inside the same banks that originated or underwrote the loans or securities. This sets up a potential conflict of interest because a loan-servicing arm would have to force another department or affiliate inside a bank to take back a problem loan.
I recently reported on the GSEs efforts to force servicers to process loans. The large commercial banks in particular have billions of dollars in second mortgages on their books, so they are delaying foreclosure as long as possible to try to obtain some value from their worthless second mortgages. This glaring conflict of interest has not gone unnoticed.
In a letter to the trust departments of several large banks, Talcott Franklin, a Dallas lawyer representing the investors holding 2,300 mortgage bonds, claims the loan-servicing units too infrequently modify poor-performing home loans underpinning mortgage securities or replace them with better loans.
"This is of great concern to the pension funds, bank and credit-union depositors, mutual fund holders, 401(k) holders, endowments, state and local governments and taxpayers who depend on the performance of these investments," the letter says.
U.S. Bancorp, Bank of America Corp., Bank of New York Mellon Corp., and Wells Fargo & Co. received the letter from Mr. Franklin, while Deutsche Bank AG didn't, according to people familiar with the situation. The banks either declined to comment or didn't return requests for comment on the letter.
In a statement, a spokeswoman for Wells Fargo said the bank has "an established track record of responding to all legitimate verified bondholder inquiries in a timely manner."
All the major banks are delaying foreclosure for their own selfish needs. The holders of the first mortgages are still in denial, and the servicers who hold the second mortgage are in no hurry to bring reality to the situation.
A key first step in the legal fights is obtaining the loan files that will detail how the loans were originated and what is being done now to salvage investors' money.
If the investor maneuver is successful in getting the loan information, "this will lead to similar actions taken by a larger set of bondholders," said Chris Gamaitoni, a Compass Point senior analyst. "We believe that once loan files are acquired, that the breaches of reps and warranties will be relatively clear."
In an Aug. 17 report, Compass Point said the litigation makes common claims: "A significant portion of the underlying loans failed to comply with the underwriting guidelines or other reps and warranties, and thus misrepresentations and material omissions were made in connection with the sale of" residential mortgage-bond securities.
Actually, I don't think they will find many of the underlying loans failed to meet the guidelines. There were no guidelines. Often the guidelines that were in place were so ridiculous that the investors deserved to lose money. Many of these CDOs stated on the first page the kind of crap that was inside them.
In recent weeks, some of the banks have begun early-stage talks with Mr. Franklin to provide data about the loans underpinning the securities, such as loan documents and how the loan has been serviced. Separately, Mr. Franklin hopes to persuade the trustees to take increased steps to deal with souring loans, such as forcing loan sellers to repurchase the loans or requiring loan servicers to improve loan servicing.
In the past, complaints by mortgage-security investors went unheeded. But because Mr. Franklin now represents enough investors to meet certain legal thresholds—he, for example, represents 50% or more of the voting rights of 900 mortgage securities—his clients could fire a trustee, demand changes in the way a mortgage bond is managed or ultimately file a suit on behalf of a huge group of bondholders.
In the letter, Mr. Franklin said that in some trusts where the lender and servicer sit inside the same bank, the number of recent repurchases by the lender is zero, even though the default rate for the loan pool is 25%.
Do you think the conflict of interest is causing problems? I think it is obvious.
'That's Just Not Right'
Some investors "had no idea that their money was being invested in mortgage-backed securities," said Mr. Franklin. "And yet somehow these people are now the ones being punished, and that's just not right."
If the investors had no idea their money was being invested in MBS pools, then those investors were idiots. Accredited and institutional investors don't have many rights of recourse against a properly administered investment that goes bad. Big investors are supposed to know what they are buying, and ignorance to the nature of the investment that has been properly disclosed does not give them cause of action.
To keep track of the securities his clients own and protect his clients' confidential holdings, Mr. Franklin uses a software system he designed with a college friend, who consults on how to design large databases. Mr. Franklin calls it the "Tranche" program, a reference to the French word for slice or layer. Mortgage securities are chopped into tranches based on risk and return.
His clients' information is coded and Mr. Franklin keeps a secret code book as a reference. Mr. Franklin said the system is important because it lets him know when his clients in a specific deal have amassed enough voting power.
In the other cases, bond insurer MBIA Inc. sued Credit Suisse Group in New York state court in December over a $900 million loan pool, a large portion of which MBIA agreed to cover. MBIA said it had relied on Credit Suisse to vet the quality of the loans.
In January, Ambac Assurance Corp., the bond-insurance unit of Ambac Financial Group Inc., sued a Credit Suisse unit in New York state court, alleging that it made "false and misleading" representations about home-equity lines of credit backing bonds that the insurer guaranteed in 2007.
A Credit Suisse spokesman said the claims are without merit and the bank will defend itself against the claims.
Since Credit Suisse had people like Ivy Zelman consulting for them (she originated the ARM reset chart), it seems likely that Credit Suisse properly disclosed the risks.
Separately, American International Group Inc. is analyzing mortgage deals it insured before it imploded in 2008. Chief Executive Robert Benmosche told investors in May that the company will take "appropriate action" if it finds it was harmed by the transactions.
When a property is sitting empty in a nice neighborhood, the banks have been in no hurry to foreclose. Today's featured property might as well be an REO. I don't know how they plan on getting the owners to negotiate a short sale when they aren't there anymore, but title is still in the name of the former residents, and this property is listed as a short sale. Realistically, this listing exists to get bids so the banks can determine market value so they can make a determination on a bid at auction. This property will almost certainly go to auction.
The property was purchased for $487,000 on 3/4/1999. The owners used a $389,300 first mortgage and a $97,700 down payment.
On 5/18/1999, they obtained a $41,000 second mortgage.
On 2/13/2001 they opened a $100,000 HELOC.
On 3/1/2002 they refinanced the first mortgage for $525,000.
On 11/1/2002 they obtained a stand-alone second for $50,000.
On 4/25/2003 they refinanced with a $535,000 first mortgage.
On 5/28/2004 they refinanced again with a $652,000 first mortgage.
On 4/29/2005 they obtained a $100,000 HELOC.
On 1/2/2007 they refinanced the first mortgage for $900,000.
Total mortgage equity withdrawal is $510,700. They are part of the elite equity-stripping HELOC abusers: the half million dollar club.
Total squatting time is about 198 months.
Foreclosure Record
Recording Date: 03/16/2010
Foreclosure Record
Recording Date: 08/31/2009
Document Type: Notice of Sale
Foreclosure Record
Recording Date: 05/26/2009
Document Type: Notice of Default
Will this happen again?
What do you think? Will people get the chance to strip $500,000 out of their walls again in the future?
According to the listing agent, this listing may be a pre-foreclosure or short sale.
Beautiful 2 story home with 4 bedrooms and 3 baths.Corian counters in spacious Kitchen, Master Bath, and 1/2 bath. Custom closet in Master Bath. Wired for surround sound in Dining rm, Family room, outside and Master Bedroom. Wood Flooring downstairs and tile in upstairs bathrooms, laundry rm too. Epoxy garage floors. Schools, Oak Creek Elementary, Lakeside Middle School, Woodbridge High.This won't last, make an offer!
Of course, this doesn't meet the technical definition of squatting which is possession of real estate without the owner's permission. In this instance, the squatters are technically still the owners of property, so there is nothing illegal going on, but these owners are generally hopelessly underwater and failing to make their mortgage payments. They are in possession of real estate that can be called to auction at the discretion of their lender at any time. Ultimately, they will lose their homes.
Today, we are going to look at other forms of squatting from the traditional adverse possession to the return of former owners who couldn't leave their entitlements behind.
With thousands of mansions vacant, some see easy pickings
By Bill Briggs
msnbc.com contributor
updated 9/23/2010
On the big screen, actor Randy Quaid may be best known for his mooching, move-in-and-never-leave character “Cousin Eddie” from National Lampoon's "Vacation” films. Last weekend, he allegedly followed his own Hollywood script.
Quaid and his wife, Evi, were arrested Saturday after they were found living in a guest house on a million-dollar, Montecito, Calif., property Quaid once owned. While Quaid claims his name remains on the deed, the actor and his wife were jailed until they were able to post $10,000 bail.
For those of you who don't read the gossip on TMZ, here is a recap of this bizarre story:
Quaid is hardly alone in his distinctly post-bubble legal trouble. Such high-end "mansion squatting" has becoming an increasingly visible irritant in or near Seattle, St. Louis, Chicago and Los Angeles and probably elsewhere, industry experts say.
And the trend appears to be growing, as the housing bust means thousands of mansions around the country are languishing on the market, often under the control of banks that have foreclosed on them.
“It’s immoral but I do understand, logically, how people get this idea in their heads,” said Tara-Nicholle Nelson, a former Bay Area broker agent and now a consumer educator for the real estate website Trulia.com. “I also think this happens a lot more than we know.”
Yes, it is very easy to understand how this idea gets into everyone's mind: it's because they all see their neighbors doing it. Ask yourself, in your circle of friends and acquaintances, how many people do you know that are not paying a mortgage and living in a property that has no equity? How is that different from squatting? It is because their name is on title? What is title without equity? A lease… except that even a lease requires payment.
Luxury homes that are for sale or foreclosed are often unoccupied and under the care of asset managers who typically may be responsible for a lengthy list of idle properties. Many mansions are isolated, walled, cloaked by trees or otherwise hard for passersby to see.
“Squatters realize these places may not get showing for months at a time,” said Nelson. “That’s what makes these properties more of a target.”
Better the squatter you know than the one you don't? That seems to be the reasoning of banks these days.
Before the recession, squatters were known to slip into average- or bargain-priced homes for short, secret stays. In Oakland, Nelson recalls escorting clients to available, empty properties during which “you walk in and there’s like a shaving kit and mattress on the floor, and you go in the next room and find somebody there.
“Traditionally, this has been something you see more in low-end neighborhoods where there are more people around, where more people need a place, and perhaps where police have higher priorities than checking on a pushed-in door or broken window," said Nelson, who has written about the trend for WalletPop.com, a personal finance news site.
The sad truth is that squatters like that often live in squalor and are frequently the victims of crime.
But squatters have moved into nicer neighborhoods now. Realtor Adam Kruse discovered last February that his company-hired house cleaner was living it up – and sleeping over – at a $2 million, 10,000-square-foot home he had listed in St. Louis. The mansion, owned by an out-of-town seller, was nestled near a golf course and boasted large swaths of open space, a media room and “a gorgeous kitchen (with) really just bedrooms, bathrooms galore,” said Kruse, who works with the Hermann London Group.
I guess local realtors aren't the only ones stuck on the word "gorgeous."
You have to admire a squatter who has the nerve to squat in a multi-million dollar mansion.
After tidying up the place, the house cleaner “started having friends over, too, and drinking and partying and staying there … for days at a time,” Kruse said. The squatting went on for about three months until the cleaner – or one of her “guests” – accidently got locked out.
“We found a broken window by the front door and are to believe that at some point the squatters … needed to break in to get back in,” Kruse said. “We just saw party scenes – remnants that looked very similar to beer pong games.”
The cleaner was fired and no criminal charges were brought against her. The house is no longer on the market.
Upscale squatters have been nabbed in at least three other cities:
In Sugar Grove, Ill., a suburb west of Chicago, cops arrested 42-year-old Steven Hawthorne in April 2009 after he moved his furniture and big-screen TV into a vacant, $700,000 foreclosed home. He introduced himself to neighbors as the new owner and stayed for about eight months. Hawthorne, who also managed to have the power, gas and water turned on at the dwelling, was eventually charged by authorities with two felonies, including theft of government property (the utilities).
In Malibu, Calif., Wells Fargo executive Cheronda Guyton occasionally occupied a $14.9 million beach house to host swanky social gatherings, according to newspaper reports. One catch: the property’s former owners had lost the home to foreclosure after they were victimized by Bernie Madoff – and the estate was claimed by their bank – that’s right, Wells Fargo. When residents within the gated community glimpsed the parties, they got Guyton’s name from security guards and turned her in. Wells Fargo fired Guyton in September 2009.
In the Seattle suburbs, a small group – nicknamed the “Mansion Squatters” – has taken a more creative approach. In June, one of its members, Jill E. Lane, 30, moved into a foreclosed and vacant 8,000-square-foot-home in Kirkland, Wash. valued at $3.3 million. She posted a note on the front door that read: “Privately owned property. Not for sale."
The home takeover attempt also involved James McClung, a former real-estate agent and owner of a business called NW Note Elimination. He reportedly runs that business with Lane. Police soon arrested Lane on a criminal trespass charge.
Lane told the Seattle Times that her squatting was part of a protest movement: “Banks do whatever they want and nobody holds them accountable. It makes me ill to see what the banks are doing. They aren't using their bailout money to help anyone. So I'm standing up for the people who are being brutalized by banks every day."
Ordinarily, I would cheer her on for having such a great attitude. Unfortunately, everything she said is complete and utter bullshit.
In August, McLung apparently tried to stake claims to three more Seattle-area mansions, including a $2.2 million home in Bellevue. He posted similar notes on the doors of all three homes, according to the Seattle Times. Mark von der Burg, real estate agent for both the $3.3 million Kirkland property and for the Bellevue luxury home, did not return several phone messages seeking an interview.
I'll bet he didn't return the phone call. What would he say? He was either complicit in the scheme, or so totally disengaged from his job that he should hide his face in shame.
According to media reports, Lane’s short stay in Kirkland cost von der Burg’s client, a bank, $35,000 in legal fees and locksmith bills as well as increased security and cleaning.
Nelson said the targeted homes in the Seattle area were all owned by failed banks.
The squatters apparently believe "they’re going to come into this gap between ownerships and somehow trick someone into believing they now own this place for real — which is absurd," Nelson said. "Even if the (original) bank fails, somebody owns those assets.”
In St. Louis, Kruse can see why desperate people in some cities are making a bid for a taste of the good life – albeit a temporary one.
“People are seeing all the negative news (about the housing market) and just deciding to be more gutsy and stay in riskier places,” Kruse said. “With all the vacant homes, (they figure) their chances aren’t that bad.”
Isn't squatting just another manifestation of entitlement? The people living in houses they are not paying for are doing so because they believe life owes them something. It doesn't matter to these people that others who actually pay their bills live with less as long as they get what they deserve. The housing bubble has changed both the rich and famous and the ordinary and anonymous and made them into something less.
Squatting among the not so rich and famous
Thanks to the IHB, Irvine has become known as a HELOC abuser's and squatter's paradise. The residents here are generally not as well known, but their ongoing occupation of property they do not own and do not pay for is just as infamous. The owner of today's featured property got a great free ride.
This property was purchased on 8/21/1998 for $341,000. The owners used a $272,800 first mortgage, a $34,100 second mortgage, and a $34,100 down payment.
On 3/4/2003 they refinanced the first mortgage for $280,500.
On 11/10/2003 they opened a $200,000 HELOC.
On 9/15/2006 they went Ponzi and refinanced the first mortgage for $637,500.
Total mortgage equity withdrawal is $330,600
Total squatting time is about 16 months so far.
Foreclosure Record
Recording Date: 06/10/2010
Document Type: Notice of Sale
Foreclosure Record
Recording Date: 03/05/2010
Document Type: Notice of Default
Foreclosure Record
Recording Date: 07/29/2009
Document Type: Notice of Default
When you see the asking price history, you sense a bit of panic at the bank. Perhaps they were not getting the short sale offers they wanted.
Date
Event
Price
Sep 20, 2010
Price Changed
$499,000
Sep 13, 2010
Price Changed
$654,900
Aug 31, 2010
Price Changed
$670,000
Aug 27, 2010
Price Changed
$679,900
Aug 22, 2010
Relisted
—
Aug 03, 2010
Relisted
—
Jul 27, 2010
Delisted
—
Jul 02, 2010
Price Changed
$690,000
Jul 02, 2010
Relisted
—
Jun 08, 2010
Delisted
—
May 14, 2010
Listed
$680,000
Aug 21, 1998
Sold (Public Records)
$341,000
The extremes realtors go to attract attention is getting ridiculous. This house will not transact at $499,000. The realtor is playing a game to try to get some bidders into the process with hopes of duping them into bidding higher.
According to the listing agent, this listing may be a pre-foreclosure or short sale.
Beautiful Lite and Bright 3 Bedroom Home. Breakfast nook in kitchen, formal dining room, large master suite with walk in closet, inside laundry, new flooring. Close To Award Winning Irvine Schools. No Mello-roos, No Association Dues. Offers will be accepted at OPEN HOUSE ONLY Sat. Sept. 25 from 12-3 Home will be sold to the highest & best offer on Saturday.
Do any of you believe this home will be sold to the highest and best offer on Saturday? I hope none of you are that gullible.
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.
Zero down mortgages were a big factor in the inflation of the housing bubble. The debate now is whether or not this form of financing is inherently bad or if that bird can change. This is one Phoenix that probably shouldn't rise from the ashes.
I wrote about the evils of 100% financing in The Great Housing Bubble:
Once 100% financing became widely available, it was enthusiastically embraced by all parties: the lenders suddenly had a huge source of new customers to generate high fees, the realtors and builders now had plenty of new customers to buy more homes, and many potential buyers who did not have savings were able to enter the market. It seemed like a panacea; for two or three years, it was. There was a problem with 100% financing (which was masked by the rampant appreciation brought about by its introduction): high default rates. The more money people had to put in to the transaction, the less likely they were to default. It was that simple. The borrowers probably intended to repay the loan when they got it, however they did not feel much of a sense of responsibility to the loan when the going got tough. High loan-to-value loans had high default rates causing 100% financing to all but disappear, and it made other high LTV loans much more expensive, so much so as to render them practically useless. It was all part of the credit tightening cycle.
Besides stopping people from saving for downpayments, 100% financing harmed the market by depleting the buyer pool. In a normal real estate market, first-time buyers are saving their money waiting until they can make their first purchase. This usually results in a steady stream of first-time buyers that enter the market each year. When 100% financing eliminated the downpayment requirement, it also eliminated any need to wait. Those who ordinarily would have bought 2-5 years in the future were able to buy immediately. This emptied the queue. This type of financing appears periodically in the auto industry, especially in downturns when it is necessary to liquidate inventory. The term for this is “pulling demand forward,” because it reduces demand for new cars in the next few years. This might not have been a problem if 100% financing would have been made available to everyone forever; however, once downpayment requirements came back those who would have been saving were already homeowners, so there were few new buyers available, and any potential new buyers had to start over saving for the downpayment they thought would never be required. The situation was made worse because those late buyers who were “pulled forward” from the future buyer pool overpaid, and many lost their homes. This eliminated them from the buyer pool for several years due to poor credit and newly tightened credit underwriting standards. Thus, most who thought 100% financing was a dream come true found it to be a nightmare instead.
An option contract provides the contract holder the option to force the contract writer to either buy or sell a particular asset at a given price. A typical option contract has an expiration date, and if the contract holder does not exercise his contract rights by a given date, he loses his contractual right to do so. An option giving the holder the right to buy is a “call” option, and the option giving the holder the right to sell is a “put” option. Writers of option contracts typically obtain a price premium for taking on the risk that prices may move against their position and the contract holder may exercise his right. The holder of an options contract willingly pays this premium to limit his losses to the premium paid if the investment does not go as planned. Most options expire worthless.
Mortgages took on the characteristics of options contracts in the Great Housing Bubble. Speculators utilized 100% financing and Option ARMs with low teaser rates to minimize the acquisition and holding costs of a particular property. The small amount they were paying was the “call premium” they were providing the lender. If prices went up, the speculator got to keep all the gains from appreciation, and if prices went down, the speculator could simply walk away from the mortgage and only lose the cost of the payments made, particularly when this debt was a non-recourse, purchase-money mortgage. Another method speculators and homeowners alike used was the “put” option refinance. [viii] Late in the bubble when prices were near their peak, many homeowners refinanced their properties and took out 100% of the equity in their homes. In the process, they were buying a “put” from the lender: if prices went down (which they did,) they already had the sales proceeds as if they had actually sold the property at the peak; if prices went up, they got to keep those profits as well. The only price for this “put” option was the small increase in monthly payments they had to make on the large sum they refinanced. In fact, on a relative cost basis, the premium charged to these speculators and homeowners was a small fraction of the premiums similar options cost on stocks. Of course, mortgages are not option contracts, and lenders did not view themselves as selling option premiums to profit from the premium payments; however, speculators certainly did view mortgages in this manner and treated them accordingly.
The "put" and "call" option features of mortgages during the bubble are the direct result of 100% financing. Speculators and homeowners have too little to lose to behave responsibly when 100% financing is available. Without increasing the cost to speculators through downpayments or a loan-to-value limit on refinances, speculators are going to utilize these mortgage products in ways they were not intended. There are many expensive lessons learned by lenders concerning 100% financing during the Great Housing Bubble.
With the problems of 100% financing, it is a legitimate worry that we may not want to let that genie out of the bottle.
MILWAUKEE — When the housing bubble burst, one of the culprits, economists agreed, was exotic mortgages, including those that required little or no money down.
But on a recent evening, Matthew and Hannah Middlebrooke stood in their new $115,000 three-bedroom ranch house here, which Mr. Middlebrooke bought in June with just $1,000 down.
Because he also received a grant to cover closing costs and insurance, the check he wrote at the closing was for 67 cents.
“I thought I’d be stuck renting for years,” said Mr. Middlebrooke, 26, who earns $32,000 a year as a producer for a Christian television ministry.
The guy is only 26. Perhaps he could save money for a while like everyone else his age that wants to buy a house. Is a no money down house the new entitlement for twenty somethings?
As long as the borrowers are Christian ministers, I guess 100% financing is okay, right? Is this borrower more moral than the strategic defaulters who walked away from zero-down mortgages?
Although home foreclosures are again expected to top two million this year, Fannie Mae, the lending giant that required a government takeover, is creeping back into the market for mortgages with no down payment.
Mr. Middlebrooke’s mortgage came from a new program called Affordable Advantage, available to first-time home buyers in four states and created in conjunction with the states’ housing finance agencies. The program is expected to stay small, said Janis Smith, a spokeswoman for Fannie Mae.
Option ARMs were expected to stay small when they were rolled out too. A niche product with high appeal inevitably is made more widely available, and as these programs expand, buyers enter the market, prices go up, and the problems are masked by another housing bubble.
Some experts are concerned about the revival of such mortgages.
“Loans that have zero down payment perform worse than loans with down payments,” said Mathew Scire, a director of the Government Accountability Office’s financial markets and community investment team. “And loans with down payment assistance” — like Mr. Middlebrooke’s — “perform worse than those that do not.”
The evidence is clear: zero down loan programs have high default rates. Why should we pay the bad debts of the many who default to help the few that don't?
But the surprise is the support these loans have received, even from critics of exotic mortgages, who say low down payments themselves were not the problem, except when combined with other risk factors like adjustable rates or lax underwriting.
Moreover, they say, the housing market needs such nontraditional lending, as long as it is done prudently.
Again, the Option ARM is not a bad loan when given to the right people. The problem is that these loan programs are never contained to only the right people.
“This is subprime lending done right,” said John Taylor, president of the National Community Reinvestment Coalition, an umbrella group for 600 community organizations, and a staunch critic of the lending industry. “If they had done subprime this way in the first place, we wouldn’t have these problems.”
At Harvard’s Joint Center for Housing Studies, Eric Belsky, the director, said the loans might be the type of step necessary to restart the housing market, because down payment requirements are keeping first-time home buyers out.
I mentioned that problem above. This is a problem the housing market is going to have to get past. You can't give out 100% loans without having problems. The default rates will be high, and the programs will lose money. Do we really want to replace all the bad loan programs that inflated the bubble with government-run programs of the same ilk?
“If you look at where the market may get strength from, it may very well be from first-time buyers,” he said. “And a very significant constraint to first-time buyers is the wealth constraint.”
First-time buyers are really the only game in town. There is no move-up market while prices decline or stagnate.
The loans are the idea of state housing finance agencies, or H.F.A.’s, quasi-government entities created to help moderate-income people buy their first homes.
Throughout the foreclosure crisis, the state agencies continued to make loans with low down payments, often to borrowers with tarnished credit, with much lower default rates than comparable mortgages from commercial lenders or the Federal Housing Administration. The reason: the agencies did not offer adjustable rates, and they continued to document buyers’ income and assets, which many commercial lenders did not do. In 2009, the agencies’ sources of revenue dried up, and they had to curtail most lending.
Then they created Affordable Advantage. The loans are 30-year fixed mortgages, with mandatory homeownership counseling, available to people with credit scores of 680 and above (720 in Massachusetts). The buyers have to put in $1,000 and must live in the homes.
They keep out conventional investors with these requirements, but the specuvestor homeowner is strongly encouraged to buy a property with the government covering their downside risk. No risk loans are a bad idea.
All of these requirements ease the risk, said William Fitzpatrick, vice president and senior credit officer of Moody’s Investors Service. “These aren’t the loans that led us into the mortgage crisis,” he said.
So far Idaho, Massachusetts, Minnesota and Wisconsin are offering the loans. The Wisconsin Housing and Economic Development Authority has issued 500 loans since March, making it the first state to act. After six months, there are no delinquencies so far, said Kate Venne, a spokeswoman for the agency.
The agencies buy the loans from lenders, then sell them as securities to Fannie Mae. Because the government now owns 80 percent of Fannie Mae, taxpayers are on the hook if the loans go bad.
The US taxpayer is covering the losses of a new breed of speculator-homeowners.
The state agencies oversee the servicing of the loans and work with buyers if they fall behind — a mitigating factor, said Mr. Fitzpatrick of Moody’s.
“They have a mission to put people in homes and keep them in homes,” not to foreclose unless other options are exhausted, he said. The loans have interest rates about one-half of a percentage point above comparable loans that require down payments.
Ms. Smith, the spokeswoman for Fannie Mae, distinguished the program from loans of the boom years that “layered risk on top of risk.”
With the new loans, she said, “income is fully documented, monthly payments are fixed, credit score requirements are generally higher, and borrowers must be thoroughly counseled on the home-buying process and managing their mortgage debt.”
That probably does help.
For Porfiria Gonzalez and her son, Eric, the loan allowed them to move out of a rental house in a neighborhood with a high crime rate to a quiet street where her neighbors are retirees and police officers.
So this mortgage saved her and her son from the evils of drug dealers, gangs, and random violence. Pity the poor renters who have to continue to live in those crappy neighborhoods with pimps and prostitutes.
Ms. Gonzalez, 30, processes claims in the foreclosure unit at Wells Fargo Home Mortgage; she has seen the many ways a mortgage holder can fail.
On a recent afternoon in her three-bedroom ranch house here, Ms. Gonzalez said she did not see herself as repeating the risks of the homeowners whose claims she processed.
“I learned to stay away from ARM loans,” or adjustable rate mortgages, she said. “That’s the No. 1 thing. And always have some emergency money.”
When she first started shopping, she looked at houses priced around $140,000. But the homeownership counselor said she should keep the purchase price closer to $100,000.
A 40% reduction in price must have reduced the quality of the property she obtained a great deal. There is a tradeoff when deciding to purchase less.
“They explained to me that I don’t need a $1,200-a-month payment,” she said.
The counselor worked with her real estate agent and attended her closing. On May 28, Ms. Gonzalez bought her home for $90,500, with monthly payments of $834. After moving expenses, she has kept her savings close to $5,000 to shield her from emergencies.
“If I had to make a down payment, it would have wiped out my savings,” she said. “I would have started with nothing.”
Good thing she had some money to go shopping for furniture, right? How much of that emergency fund do you think she spent? If she didn't, I give her credit for great self-discipline. Most people would blow it on crap for the new house.
Now, she said, she is in a home she can afford in a neighborhood where her son can play in the yard. A neighbor brought her a metal pink flamingo with a welcome sign to place by her side door.
“My favorite part is the big backyard,” said Eric, 10. “And that’s pretty much it.”
“You don’t like it that it’s a quiet, safe neighborhood?” his mother asked.
“Yeah, I do.”
“He didn’t go out much with kids in the old neighborhood,” she said.
“Because they were bad kids,” he said.
Ms. Gonzalez said that owning a house was much more work than renting, and that when the basement flooded during a heavy rain, her heart sank.
“But I look at it as an investment,” she said, adding that a similar house in the neighborhood was on the market for $120,000.
That's a great attitude for zero-down buyers to have. Not. What would she be saying if comps were selling for $85,000?
Prentiss Cox, a professor at the University of Minnesota Law School who has been deeply critical of the mortgage industry, said the program met an important need and highlighted the track record of state housing agencies, which never engaged in exotic loans.
“It’s not a story people want to hear, because it won’t bring back the big profits,” Mr. Cox said. “The H.F.A.’s have shown how the problems of the last 10 years were about having sound and prudent regulation of lending, not just whether the loans were prime or subprime.”
He added, “One of the great and unsung tragedies of the whole crisis was the end of the subprime market.”
What? One of the great virtues of the crash has been the elimination of the subprime market. Why is it a good idea to loan money to people who have proven they cannot save money or make a consistent payment? Subprime borrowers are not stuck in poverty. Subprime borrowers suffer from the consequences of their own life's choices. Unless they prove they can make different choices, they cannot sustain home ownership, and loaning them money is only going to result in losses to the lender.
What do you think? Can no money down mortgages be underwritten prudently?
It's all an illusion
Sometimes I feel a bit sorry for the poor Ponzis in Irvine. There are thousands of Ponzis in communities all over California, but only the ones in Irvine have me looking through their dirty laundry. The illusion in Irvine is that a mob of high-income buyers live the good life. The reality is that many of them are pretending Ponzis that only made it by spending their home appreciation as soon as it appeared. Today's featured property is a Ponzi short sale.
The owners paid $750,000 on 8/22/2003. They used a $600,000 first mortgage, a $74,900 second mortgage, and a $75,100 down payment.
On 8/5/2004 they refinanced with a $700,000 first mortgage.
On 4/26/2005 they obtained a stand-alone second for $44,250.
On 11/9/2005 they refinanced with a $738,000 Option ARM and obtained a $220,000 HELOC.
On 9/6/2007 they got another Option ARM for $837,615 and a $170,385 HELOC.
Total property debt is $1,008,000.
Total mortgage equity withdrawal is $333,100.
Total squatting time is 10 months so far.
Foreclosure Record
Recording Date: 06/15/2010
Document Type: Notice of Sale
Foreclosure Record
Recording Date: 02/10/2010
Document Type: Notice of Default
Look at what these people spent, and look at the property they are going to lose because of that behavior. It's sad really.
According to the listing agent, this listing may be a pre-foreclosure or short sale.
This property is in backup or contingent offer status.
Guard Gated Northwood Pointe. Desirable Oakhurst plan with main floor bedroom and bathroom. Beautiful entry with custom double door and tasteful hardscape. Formal living and dining with vaulted ceilings. Light and bright kitchen with granite counters and breakfast nook opens to family room with fireplace and built in entertainment center. Nice size yard with built in bbq. Walk to Canyonview Elementary and Northwood High School.
![[Franklin]](https://sg.wsj.net/public/resources/images/MI-BG083_Frankl_NS_20100922180049.gif)
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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.
