The spring rally is officially over as sales in Southern California have dropped dramatically. Sellers are getting frightened and greatly reducing their asking prices.
The Federal Reserve and the government spent the last 18 months engineering a market bottom through a variety of market props. The powers-that-be hoped the market would support itself as the artificial props were removed. Well, it isn't working out that way.
Southern California sees a 21.4% drop in home sales from 2009 but tax credits skew the figures.
[Before the article even starts, the writer has to put in some reassuring bullshit for nervous bulls. It goes downhill from here.]
August 18, 2010 — By Roger Vincent, Los Angeles Times
Southland home sales fell dramatically in July as federal tax credits for buyers expired, yet the median home price declined only slightly from June.
Volume always precedes price. In 2007 volume dropped off, inventory ballooned, and prices began to roll over. It was the beginning of a slide that went unabated until early 2009 when supply was constricted enough to prevent further declines. Since the bubble was not allowed to naturally deflate, we are awaiting another leg down to return us to reasonable valuations.
Observers say buyers' rush to take advantage of the tax benefits pushed forward sales that would otherwise have taken place later in the summer, creating a statistical drop that didn't signify sudden underlying market weakness.
Observers say? Well, I am an observer, and I say that the volume drop has far exceeded any "statistical drop" and falls into the category of complete disaster showing underlying market weakness. This guy is trying to make a huge drop in sales volume sound like no big deal. Typically, a sudden 20% drop in sales is a signal that the market has topped. The last time a similar event occurred was June of 2006.
When averaged, home sales have been fairly flat in recent months, said Gerd-Ulf Krueger, principal economist at HousingEcon.com.
"The lack of progress on the economic front is just having a very problematic impact on the psychological situation of a lot of American consumers," Krueger said. "They are very cranky."
So now we are all cranky? That explains a lot. Perhaps we will change our mood with a few more feel-good nonsense stories in the newspaper.
Notice how this is being portrayed as a completely psychological problem. This implies that the condition will change as quickly as people can change their mind. Such an idea is comforting to bulls, but it ignores the structural problems of foreclosure-induced bad credit, increasing unemployment, and tightening credit standards that are preventing people from buying. There is a legitimate reason for people's "crankiness" that will not disappear if people suddenly change their state-of-mind.
The median price for all new and resale single-family homes, condominiums and town homes in July in Southern California was $295,000, according to MDA DataQuick of San Diego. Although that was a 1.6% drop from June, it represented a 10% increase from a year earlier, the real estate research firm said Tuesday.
Prices have rolled over at the peak of the spring selling season. That is not a good sign. What is going to happen in the historically weak fall and winter? Notice the writer had to spin it with some good news about a higher median to lessen the impact. Of course he ignores that a higher median only reflects a change in product mix and not a real increase in prices.
Year-over-year price increases have occurred throughout 2010, with the exception of a 1% dip in April. But such advances will be harder to come by in future months, DataQuick analyst Andrew LePage said. Median prices — the point at which half the homes sold for more and half for less — were depressed early last year by a glut of distressed sales in cheaper inland markets, then moved up in later months as sales activity spread to wealthier neighborhoods.
"The high end came alive in the middle of last year," LePage said. "Sellers got real and buyers started buying."
"came alive" and "started buying" Let's put on our cheerleader uniforms and shout "Go team!" The real point lost in the rah rah is that sellers finally started lowering their prices in order to sell their properties.
A total of 18,946 homes were sold in the six-county region, a 20.6% drop from the previous month and a decline of 21.4% from July 2009, DataQuick said.
Those numbers are a catastrophe. New home sales plummeted 33% with the expiration of the tax credits. And now resales are confirmed at 20% off what was already 20% below historic norms. People can try to spin that all they want, but another 20% decline from already a weak sales volume does not bode well for the market.
"It was to be expected," LePage said, because many sales closed in May and June after buyers rushed to take advantage of a federal tax credit of up to $8,000.
Let's be a bit more specific here. Some kind of decline in sales was expected; that much is true. Nobody forecast a 33% drop in new home sales or a 20% drop in resale volume. If anyone had credibly forecast such a decline, the government probably would have extended the credit. I'm glad they didn't ask me.
About 34% of resales of existing homes involved foreclosed properties, compared with 33% in June and 43.4% in July 2009 in Los Angeles, Orange, Riverside, San Bernardino, San Diego and Ventura counties. Foreclosure sales have been flat for the last few months, LePage said.
Home prices will also be mostly flat in the months to come, perhaps with a slight upward trend, Krueger predicted.
That is pure NAr shilling nonsense. What is going to make prices trend upward? Ballooning inventory? Falling demand? A weakening economy? The only thing holding up prices at all is the falling interest rates, and Low Interest Rates Are Not Clearing the Market Inventory.
"That won't change until we hit the wall in terms of supply," he said.
Irvine's inventory hit 879 homes on Saturday, August 21, 2010. Where exactly is this wall Mr. Krueger speaks of? Is it when we eclipse the 2008 inventory peak of 948 houses? Or have we already hit it because of low demand?
Krueger found some encouragement in the number of homes being snapped up by investors. Almost 22% of July home sales were to absentee owners who intend to resell or rent them to tenants.
Krueger found some encouragement? Good for him. Why do I care? Is this supposed to be a news story giving me information, or is this an NAr press release to make homeowners and knife catchers feel good about their speculative bets.
"There is pent-up demand for speculative product," he said, and even a shortage of foreclosure-related bargain properties on the market as far as investors are concerned.
The old "pent-up demand" nonsense. Desire is not Demand. If we had actual demand — people with desire who can put dollars behind it — we would not have a huge decline in sales volumes. What we have done is pull all our available demand forward with a plethora of government incentive programs. The evidence clearly shows a total lack of demand, nothing is pent-up.
Recent first-time buyer Steven Kaplan said he and his wife were not impressed with the distressed properties they saw on the market around Melrose and La Brea avenues in Los Angeles. Many were "short sales" priced for less than the banks were owed.
"What we were seeing for $600,000 were totally trashed houses," the 33-year-old sound engineer said.
The couple ended up buying a smaller house for less than $600,000 last month that didn't need a lot of work. He and his wife, Lola Stewart, had been thinking about buying a house for about five years. They decided to plunge ahead when they saw both home prices and apartment rents tick up a bit earlier this year.
This couple bought out of fear of being priced out. Very sad. This false price signal from the bear rally has enticed many to buy prematurely.
"We were looking to get a better place," he said, "and low interest rates made us able to actually afford something."
The lure of loans at rock-bottom interest rates, though, still isn't strong enough to overcome weak consumer confidence, said broker Syd Leibovitch, president of Rodeo Realty Inc. in Los Angeles.
"Interest rates are at 1950s levels," he said. "I am surprised that hasn't spurred more activity."
Inventory on the market is almost double what it was in February, Leibovitch estimated. "Agents are no longer complaining they have nothing to show. There are lots of choices now."
Mr. Krueger said we won't have any problems until inventory hits a wall. Isn't a doubling of inventory a telltale sign that we have have hit the wall already?
Agent Lynette Williams, who specializes in northeast Los Angeles and Pasadena, said she was also seeing more houses on the market, and some of them in select neighborhoods sell rapidly. Still, she is apprehensive about how the market will perform without federal tax credits. State subsidies are also phasing out.
Interest rates may be low, but getting financing is no picnic, she added. "Banks are scrutinizing everything."
Banks are scritinizing everything? LOL! Let's go back to 100% financing on stated income and see how that turns out.
WAMU Option ARM
Today's featured property was purchased for $815,000 on 1/18/2007. The owner used a $652,000 Option ARM from WAMU and a $163,000 down payment. That has got to hurt….
She has squatted for about 18 months so far, so I suppose she is getting some of that value back.
Foreclosure Record
Recording Date: 05/10/2010
Document Type: Notice of Default
Foreclosure Record
Recording Date: 08/12/2009
Document Type: Notice of Rescission
Foreclosure Record
Recording Date: 05/06/2009
Document Type: Notice of Default
She has not received her notice of trustee sale yet, so she will likely get to drag this out for quite some time.
The real story with this property is the dramatic price reduction.
Date
Event
Price
Appreciation
Aug 20, 2010
Price Changed
$499,000
—
Jun 18, 2010
Price Changed
$625,000
—
May 27, 2010
Listed
$650,000
—
Jan 18, 2007
Sold (Public Records)
$815,000
0.0%/yr
This has been for sale since May, and apparently it has not attracted the kind of bid the holder of WAMUs trash wants to see. I imagine the seller hopes this will start a bidding war. At $499,000 with low interest rates, no HOAs and no Mello Roos, the price is attractive. The total cost of ownership is less than $2,000 per month. Surely this would rent for that much. To be honest, an updated 3/2 with a pool at less than $500K piques my interest (Did you see the cool home theater?)
Over the weekend, I profiled 5 FERN Cyn Irvine, CA 92604, also being offered for under $500K. It too had recently witnessed a dramatic price drop. That property might actually transact because it was an equity seller. These are both solid middle-class properties with costs of ownership at $2,000 a month. That kind of value — prices with a cost of ownership below rental parity — will entice buyers.
Perhaps two properties does not make a trend, but both today's featured property and 5 Fern Canyon show desperation by the sellers. Ballooning inventory and swooning demand will prompt more sellers to lower their prices if they want to transact. If enough of them lower their prices, that becomes the market, and prices fall.
Is this a trend, or are these two properties outliers that will be snapped up quickly for above their asking prices?
According to the listing agent, this listing may be a pre-foreclosure or short sale.
Expanded home in the Willows. Located on a culdesac. Remodeled kitchen with beautiful cherrywood cabinets. Bathrooms feature spa tubs. Bamboo style laminate flooring.
Cashflow investors sat on the sidelines for the better part of the 00s. Now they are finding opportunities in many markets to buy cashflow properties at attractive valuations.
The crash in housing prices has created a whole new world for cashflow investors. Investors have been waiting for years for the speculators to flame out. Now that the crash has occurred, many markets are inexpensive enough to present fantastic cashflow investment opportunities.
NEW YORK (CNNMoney.com) — These are the glory days of the residential real estate investor. Low prices, rock-bottom interest rates and stable rental markets have created huge buying opportunities.
"It's awesome right now. I don't think we'll ever see another time like this," said Tanya Marchiol of Team Investments, which has operations in about 10 states but focuses mostly on the Phoenix market.
These investors are known to many as vultures because they swoop in and buy "distressed properties" — foreclosures and short sales — cheap. Places like Las Vegas, Phoenix and Miami are popular because home prices there have dropped as much as 70%.
But how they're investing has changed. In the boom years, they would buy a property and flip it for a quick cash out. Today, they are holding and renting for hefty, steady incomes.
Once they analyzed their decisions based on home-price appreciation, which is very speculative. Now they consider potential rental profits, which is far more stable.
Back then, they flipped often and helped to bid up home prices into a froth. Now, the investors say, they can be a part of stabilizing neighborhoods.
This writer is conflating speculators and investors as if they are the same individuals, but they are not. Speculators were the idiots buying up properties because they were rising in price in hopes of capturing appreciation. Cashflow investors don't do that.
Speculators are currently groping for a safe haven for their money trying to find properties that are going to fall in value less than others. Speculators by nature have no concept of value other than recent changes in price. They are herd followers who may profit for a time, but eventually, they get stampeded when the herd bails on the speculative bubble of the moment. In contrast, investors are the ones buying for cashflow that don't care about resale value. They are the investors who create a bottom with their buying activity.
Condos for less than the cost of a Corolla
"People are not in it to flip like back in the old economy," said Matt Martinez, an investor and author whose new book, "How to Make Money in Real Estate in the New Economy" comes out next February. "The new economy dictates that you have to have a long time horizon."
Marchiol, for example, does not even factor in home price appreciation for at least a year. After that, she calculates only a 3% annual increase — a return that won't turn heads of investors who only want to buy low and sell high.
Marchiol just purchased four separate four-plexes in North Phoenix. Three years ago, each four-unit building sold for $310,000; she paid just $70,000 per building. She intends to spend about $64,000 rehabbing the properties, making her total investment $344,000.
In total, she currently owns about 17 rental units. Usually she buys the properties to keep herself, but she also works with a group of investors who are intent on holding them and renting them out. She can spot the deals and then sell to them.
For example, with her North Phoenix buildings, the investors will buy the buildings for $95,000 each. They'll put 20% down and finance the rest, about $76,000 per building.
At today's low interest rates, they'll get a near 5% loan. That yields a payment of about $400 a month. Figure another 10% of the price for property management, 10% for maintenance, an 8% vacancy rate, taxes, insurance and other home ownership expenses, and you're talking about a monthly nut of roughly $1,300.
Marchiol projects the apartments will rent for $600 a month each, for a total rent roll of $2,400. That gives the owners a profit of $1,100 per month and $13,200 per year — a nearly 70% annual return on investment.
I question those numbers, but the basics of what this woman does is brilliant cashflow investment. She is buying low and not selling. She is not buying high in hopes it goes higher.
After I wrote a recent post about Las Vegas, some investors there contacted me and said they were buying condos south of the strip for $50,000 cash and renting them for $750 a month. I can't verify those numbers, but they sound realistic, and the represent a GRM of 67. Locally, you would be lucky to find a GRM less than 200.
Although conditions are very favorable, investors have to be adaptable because the market is evolving rapidly. In Phoenix it's changed in just the past six months. Foreclosure auctions are no longer a fertile hunting ground for Marchiol.
"Amateurs have come in and run up the prices," she said. "In 2009 I bought 76 properties at foreclosure auctions, at an average of about 60 cents on the market dollar. This year, I've bought four."
That part of her story sounds like bullshit. All the great deals are already taken, right? Give me a break. She wants to brag about her home runs, but she doesn't want any competitors to come in and drive down her margins. I have had some similar discussions with trustee sale flippers. Just ask one, and they will tell you all the good deals were some time in the past and that margins are tight now.
Glenn Plantone faces a similar situation in Las Vegas. A veteran real estate broker and investor, he has switched from buying mostly foreclosures and repossessions to short sales almost exclusively. That's because the inventory of distressed properties available in Vegas is way down, to about a two-week supply.
There are no distressed properties in Las Vegas? I imagine the banks will be relieved to hear that. Forget about the 25% delinquency rate and the fact that 88% of mortgage holders are underwater. If there is any shortage of currently available properties, the shadow inventory is the entire city.
"The banks make better profits with short sales, so they're not foreclosing," Plantone said. "They've switched staff to processing short sales and they've gotten faster at processing them."
I don't know if that is true or not in Las Vegas, but lenders certainly have not gotten any faster at processing short sales in Orange County.
He tries to purchase properties for at least 10% less than what he considers to be true market value, then he does some light rehabilitation and sells them to some of the 3,000 buyers he works with.
Since prices have fallen about 70% in some Vegas communities and rents have only declined by about 20%, it's possible for his investors, who are cash buyers, to make money from the first month the homes are rented.
"We're getting cash flow (net return on investment) of 12% to 14%," he said.
He doesn't completely ignore potential profits from home price appreciation because he believes the town is bouncing around the bottom. (Homes already sell for below what it would cost to build new homes.) He does not, however, emphasize that aspect of the investment.
It's the income from rentals that's paramount right now.
The beauty of cash flow, of course, is that even if the prices decline another 10% or 20%, the investors should be able to live with that.
"I tell them to plan on holding for five years," he said. "With cash flow, there's no need to worry about price drops."
Doesn't that read like stuff I have written in the past?
Buying rental properties in Las Vegas
Over the last few weeks, I have had many discussions with people who want to invest in my fund to flip properties locally. Many of these investors also want to own rental properties as long-term investments. in reaction to my post Buy Las Vegas Real Estate, many have done independent research on prices there and reached the same conclusion I have: the next three to five years represent a great time to invest in Las Vegas real estate. There is no huge urgency to buy today. It will take quite some time to grind through the inventory, but the combination of very low interest rates and very low prices make that market particularly attractive.
I have stated, "I personally plan to acquire all the Las Vegas real estate I can buy. And no, neither Ideal Home Brokers nor the mystery fund I might know something about is going to invest in cashflow properties there. I am not selling you on Las Vegas because I will profit from convincing you. I am bullish on Las Vegas real estate because I perceive it as the best buy-and-hold value we will see in our lifetimes."
That was then. This is now. I have been asked, "If you are doing this for yourself, can you get some properties for us?" Yes, I can. After discussing this at length with several investors, I am going to buy properties and offer them for sale to investors who read this blog. I have several interested parties already. I will try to supply however much is demanded.
I will be the trailblazer. I will find the lender who will consider the rental income from the unit in qualifying for the loan. I will find a competent management company locally to handle landlord-tenant issues. And I will find the properties, usually at trustee sale, and acquire them on speculation. I won't recommend any deal I would not take myself. In fact, if the property does not sell on the blog, I probably will take it myself. And yes, I probably will cherry pick some too.
Realistically, it will take a few months to get everything together and go through the process a time or two myself. If you are interested in this kind of investment, keep reading the blog, and you will see them as they become available. If you are not interested, feel free to ignore them.
Peak Buyer loses 10% down
Many of the properties I profiled in 2007 and 2008 were 100% financing deals. They are the weakest hands, and it isn't surprising they were the first to walk away. Over the last 18 months, many of the properties I have profiled put 10% down. They are also underwater, but since they sunk money into the property, they generally hold on a little tighter and try a little harder to stay put.
Today's featured property was purchased for $796,000 on 9/21/2005. The owner used a $632,800 first mortgage, a $79,100 second mortgage, and a $84,100 down payment. He gave up in early 2009 and got to stay for about a year.
Foreclosure Record
Recording Date: 10/13/2009
Document Type: Notice of Sale (aka Notice of Trustee's Sale)
Click here to get Foreclosure Report.
Foreclosure Record
Recording Date: 07/06/2009
Document Type: Notice of Default
Have you ever stopped to think that there would have been no real estate bust if prices have never risen above rental parity? Properties get distressed because they cannot be rented for enough to cover the payments, particularly investment properties. Even a primary residence could be rented out to someone with a job if the owner becomes unemployed and needs to move to less expensive accommodations. Paying above rental parity is the path to destruction.
The flipper purchased it at auction on 6/10/2010 for $620,000. It appears they are having a little buyer's remorse as they have priced this property to get out near breakeven.
If you would like to learn how you can get involved with trustee sales, please contact me at sales@idealhomebrokers.com.
Gorgeous upgraded single family house in NORTHWOOD. It has been renewly remodeled & upgraded with kitchen cabinets, granite countertops and wood flooring on first floor. Master bedroom with Retreat can be easily converted to 4th bedroom. Fire place w/granite tile & mantel, wide hardwood floor, plantation shutters, vaulted ceiling, Spacious backyard w/patio cover, No mello roos, Walk to Top Rated schools. Convenient to shopping and transportation. Awarded schools!!!
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.
Vulture mortgage buyers are working with borrowers who are foolishly overextended on their mortgages, and they are unconcerned about the moral hazard it creates.
I like vultures. I think distressed assets are the best investment as you get properties at a low value based on temporary conditions. Of course, it isn't quite as fun being the carcass that vultures pick over, but the vulture is rarely the cause of death. Similarly, the distressed property buyer isn't usually the cause of an owner's distress, the property vulture is merely the agent of change removing whatever form of distress hinders the property.
A new form of distressed asset investor is emerging in the aftermath of the housing bubble. A group of investors is buying distressed mortgages and either working out the loan with the current owners or pushing them out with a short sale or foreclosure. These asset managers are acting as the banks did during the 90s downturn when foreclosure on distressed residential properties didn't make the bank insolvent. Today, with our banking industry masking their sorry state with the amend-extend-pretend dance, they are not quickly and efficiently disposing their distressed assets.
These vulture mortgage investors are forgiving principal as part of their loan workouts, and in the process, they are rewarding the foolish buyers who grossly overpaid for all the wrong reasons. This will create moral hazard because borrowers will have incentive to repeat that mistake in the future — which many certainly will do if given the chance. The nightmare of the housing bubble will never end.
Anna and Charlie Reynolds of St. George, Utah, were worried about losing their home to foreclosure last year. Then they got a lucky break—from an unlikely savior.
Selene Residential Mortgage Opportunity Fund, an investment fund managed by veteran mortgage-bond trader Lewis Ranieri, acquired the loan at a deep discount and renegotiated the terms with the Reynolds. The balance due was cut to $243,182 from $421,731, and the interest rate was lowered. That reduced the monthly payment to $1,573 from $3,464, allowing the family to stay in their home despite a drop in Mr. Reynolds' income as a real-estate agent. "It was a miracle," says Ms. Reynolds.
It was a miracle Selene chose to reduce that much principal rather than throw the borrowers out. I suspect they must have been deeply underwater, and there are some recapture terms in the new note.
But Mr. Ranieri isn't your typical miracle worker. As a fund manager who was once vice chairman of the bond-trading firm Salomon Brothers, he's a member of the Wall Street crowd that is often pilloried for helping inflate the housing bubble, though he sat out the excesses of recent years. The 1989 book "Liar's Poker" made him famous for billion-dollar trades in mortgage bonds and junk-food "feeding frenzies" with his trading-desk buddies.
As the nation struggles with the worst foreclosure crisis since the 1930s, Mr. Ranieri's investment fund and others like it are emerging as the best hope for the roughly seven million U.S. households behind on their mortgage payments. Nimble, flush and willing to strike deals with borrowers, these funds have an edge over banks and other lenders that can be mired in bureaucracy and hampered by government rules about which loans can be renegotiated and how.
The real advantage Selene has is a low basis. It is much easier to renegotiate a $500,000 loan when you only paid $200,000 for it. Plus, since Selene did not originate the loan, they don't worry so much about moral hazard or their other customers looking for the same.
Borrowers less lucky than the Reynolds family must work with middlemen—loan-servicing firms that don't actually own loans, but represent banks and investors, and collect mortgage payments on their behalf. These firms follow often-ambiguous rules set by the owners of the loans. In cases where a loan has been bundled into a security, it might have thousands of owners scattered around the world, making it impossible to know all their preferences.
These rules are not ambiguous; they simply don't allow for principal reduction. Further, it is very easy to discern the preferences of owners of ABS and CDOs: the want all their money back, so they aren't keen on principal reduction either. Mr. Hagerty is making it sound like the problems are from confusion or disagreement. The reality is that holders of toxic paper don't want to write down the losses.
By contrast, Mr. Ranieri's Selene is the sole owner of its loans and has a servicing affiliate that can negotiate directly with borrowers. "Every case is individual," Mr. Ranieri says. "There's no template."
I imagine he tries to negotiate with each desperate loan owner for whatever he can get on a case-by-case basis. I would.
But the main reason Mr. Ranieri can strike deals with borrowers is that his firm buys loans, mostly from banks, at steep discounts to the balance due. If his fund pays $50,000 for a loan with a $100,000 balance due, for example, it can make a profit even if the borrower ends up paying back only $70,000.
Since mid-2007, nearly 3.4 million households have received loan modifications, according to industry data from the Hope Now alliance of loan servicers. But the group doesn't disclose how many of those borrowers have fallen behind on payments again. Many of the loan modifications granted in the early months of the default crisis didn't reduce payments for the borrowers and merely helped them catch up on arrears; some of those modifications resulted in higher payments.
Cutting the loan balance is one of the most effective ways to motivate borrowers to resume payments because it gives them more hope of eventually owning the home, say nonprofit groups that work with distressed borrowers. But analysts say banks have been reluctant to reduce principal, partly because that would require them to recognize losses they still hope to avoid. Their modifications almost always involve reducing the interest rate or giving the borrower more time to pay.
It isn't only about recognizing losses, it is also about moral hazard an being re-traded by every borrower you have.
I remember sitting in a conference listing to a few bank asset managers talk. They all agreed on once principle: they would rather sell a loan for a 35% loss than negotiate a workout for a 25% loss. Banks don't take cramdowns very well.
Around 90% of Selene's loan modifications involve reducing the principal, compared to less than 2% of the modifications done by federally regulated banks in the first quarter.
Since Selene bought the mortgages for a greatly reduced price, they have room to reduce principal. The banks that sell Selene the loans have already written down the principal on their books, but rather than encourage moral hazard with their own borrowers, they would rather sell the loan to Selene who can do the principal reduction.
"There are obvious inconsistencies in treatment [of borrowers] depending on who owns and services the loan." says Edward Delgado, a former Wells Fargo & Co. executive who is now chief executive of Five Star Institute, a provider of training programs for mortgage professionals. To some extent, he says, "it's the luck of the draw."
Everything about the housing bubble has been the luck of the draw. Most people do not buy and sell real estate based on market conditions. If life's circumstances say "buy," then people buy; if life's circumstances say "sell," then people sell. The caprice of Fate makes some winners and some losers. For those who bought in 1997 and sold in 2006, they made a fortune. For those who bought in 2006, well… they did not.
But only the lucky few have so far benefited from Selene or other distressed-debt investors. Selene, which owns about $1 billion worth of home mortgages, will say only that it has modified "thousands" of loans, a drop in the bucket among the millions of overdue mortgages. Many loans are locked up in securities and thus unavailable for sale. In other cases, owners of loans aren't willing to take the losses that would be needed to mark down the mortgages enough to lure buyers like Selene.
Over the past two years, less than $25 billion of delinquent mortgages have been sold to investors who specialize in this area, estimates Dwight Bostic, a managing director of Mission Capital Advisors, which advises investors on mortgage transactions. That is only about 0.25% of U.S. home loans outstanding. But Mission Capital executives say the number of loans sold is likely to grow in this year's fourth quarter as banks try to clean up their books before year end. Some banks have more bad loans to sell because they have had to buy back from Fannie Mae and Freddie Mac mortgages that didn't meet quality standards.
Vulture loan buyers will never be big players in the housing market. Banks are going to amend-pretend-extend to the end.
Selene buys loans to make a profit on them, not as a public service, but company officials say it is often more profitable to keep the borrower in the home than to foreclose. If a delinquent loan can be turned into a "performing" loan, with the borrower making regular payments, the value of that loan rises, and Selene can turn around and either refinance it or sell it at a profit. Mr. Ranieri declines to discuss the fund's performance. But one of the shareholders, the Public Employees Retirement Association of New Mexico, reported that its holdings in the fund had a market value of $19.8 million as of June 30, up from $18 million in late 2008. That excludes distributions of profits to shareholders in the funds.
Once Selene acquires a loan, the firm immediately tries to contact the borrower, sometimes sending a FedEx package with a gift card that can be activated only if the borrower calls a Selene debt-workout specialist.
Paul Cheatham, a Houston oil-field engineer with two children, says he was worried about payments rising on his adjustable-rate mortgage and so was eager to talk when he got a registered letter from Selene saying it had acquired his loan and might be able to help. He says Selene was able to arrange lower payments and a fixed interest rate for him within about a month. "They helped me out," says Mr. Cheatham, who had fallen behind on payments because of a drop in income. Selene reduced his balance by $16,000, to $80,000, and his monthly payments to $541 from $831.
Selene says it's able to keep about half the borrowers it deals with in their homes through a refinancing or modified loan terms. Sometimes the company gets creative, paying off other debts, such as car loans, to lower a borrower's overall debt load enough to qualify for a refinancing. In roughly 20% of cases, the home is sold without a foreclosure in a so-called short sale for less than the balance due.
As for the remaining 30% or so of cases—their luck runs out when Selene proceeds with foreclosure. The company says some borrowers can't afford their homes, even at the reduced terms the fund would be willing to offer.
These guys know what they are doing. In fact, they are doing what banks did during the early 90s: (1) try a workout, (2) try a short sale, (3) boot them out. Selene has no reason to fool around with delinquent borrowers. The loans are on their books for less than the current value of the collateral, so they will move quickly to either get the loan to perform or to get their capital released from the property.
One reason Selene has the leeway to help borrowers is that it generally bypasses the federal government's $50 billion Home Affordable Modification Program, or HAMP. The program offers financial incentives to lenders and servicers to modify loans. When President Barack Obama announced HAMP 18 months ago, the program raised hopes among millions of borrowers. As of June 30, however, only about 389,000 households were benefiting from long-term reductions in payments under that program, and 364,000 were in "trial" periods, trying to qualify by showing they could make reduced payments.
These programs will only be considered successful to the degree they diverted money to the banks and extended the timeline of the crash.
… Among those whose future is uncertain are Alberta and Arthur Bailey, who live in a bungalow in LaPlace, La. Mr. Bailey, 69 years old, worked for decades in an auto-body shop but retired after a stroke in 2002 and now needs a cane to get around.
The Baileys bought their bungalow in 2003 and hoped to spend the rest of their lives in it. In 2004, Mr. Bailey got a call from a loan officer from Countrywide Home Loans, now part of Bank of America Corp. The loan officer told the Baileys they had $33,000 of equity in their home and could refinance the loan in a way that would release some of that money. They used the money to repair the roof and install new doors, Mr. Bailey says.
The Baileys ended up with more debt than they could handle on their income of $1,600 a month in Social Security payments, plus food stamps. Help, however, has yet to arrive.
These are the sympathetic borrowers for this story? They guy buys a house after he retires when he has no income to pay for it, then he begins Ponzi borrowing to pay for his retirement. WTF? I find it incomprehensible that people would really believe life works that way. Shouldn't this guy have spent his working life paying for a home he could enjoy free-and-clear in his retirement? How many seniors have come to believe they can Ponzi borrow throughout their retirement? How many financial cancers are we growing out there?
The mortgage ended up as one of hundreds of mortgages owned by investors in a series of securities. Alexa Milton, a manager at Affordable Housing Centers of America, a nonprofit group counseling the Baileys, determined that they qualified for HAMP. But, she says, the servicer of the loan, Litton Loan Servicing LP, told her that the rules governing the securities don't allow for a HAMP loan modification.
A spokeswoman for Bank of America, which now owns Countrywide, the original issuer of those securities, disagrees, saying that the rules would allow a HAMP modification. A Litton spokeswoman declines to comment. A person familiar with the situation says Litton believes that the rules are ambiguous and so a modification would subject the servicing firm to the risk of lawsuits by the owners of the securities.
Litton has held off on foreclosure while studying other means of reducing the Baileys' payments, currently about $750 a month. "If I can get it down to $500 a month," says Mr. Bailey, "I can make it."
Write to James R. Hagerty at bob.hagerty@wsj.com
If they guy can only afford $500 per month, then perhaps he should move into a house affordable with $500 per month. Why should he be allowed to live in a house that costs $750 a month? Isn't he displacing someone who can afford this property? How many people are squatting or otherwise gaming the system to live in properties they can't afford? The sense of entitlement is overbearing… and sickening.
Vulture mortgage buyers could use the Cartel Crusher or Superfund
The afternoon of the Cartel Crusher post, I had a meeting with a transaction attorney, and our discussion gravitated toward the Cartel Crusher idea. He was of the opinion that if you had the financial backing to release such a monster that the banks would respond by offering you buy their mortgages. Lenders would quickly realize that the Cartel Crusher would prompt so much accelerated default that their mortgages would lose significant value through delinquency. Rather than face Cartel Crusher induced delinquency, lenders would be better off selling the Cartel Crusher the loans and allow it to do a workout with the individual owners just as Selene is doing.
If Selene Residential Mortgage Opportunity Fund really wanted to force lenders into selling them large chunks of their portfolio at greatly reduced rates, they should form a Cartel Crusher Fund and force the lenders to go along. It would be a ruthless business move, and one that would likely be quite successful. Once this post comes out, I plan to write to Selene and see what they think: customerservice@selenefinance.com.
Cartel Crusher lacked the warm fuzzy feeling of an altruistic endeavor, so I came up with Superfund.
Wells Fargo blows out JP Morgan Chase
When the second mortgage holder is different than the first mortgage holder, lenders are far more inclined to foreclose. Why should they wait to recover what they can on the first mortgage when they aren't the ones taking a loss on the second? On this property, Wells Fargo held the first mortgage, and when JP Morgan Chase held up the short sale to negotiate a better deal from the borrower and the prospective buyer, Wells Fargo sent them a middle finger salute and blew them out in a foreclosure. Just to make sure, Wells bid to the full value of the first mortgage so that Chase wouldn't get a chance to recover anything. It's a jungle out there.
Today's featured property was purchased for $445,000 on 7/14/2003. The owner used a $322,700 first mortgage and a $122,300 down payment.
On 3/11/2005 she obtained a $180,000 HELOC and went Ponzi. Her spending over the 18 months that followed was truly extraordinary.
On 5/31/2005 she expanded the HELOC to $244,000.
On 12/8/2005 she enlarged it again to $324,682.
On 3/7/2006 she refinanced with a $525,000 first mortgage from Wells Fargo.
On 9/13/2006 she obtained a $141,000 stand-alone second from Chase.
Total property debt was $666,000.
Total mortgage equity withdrawal was $343,300 including her down payment.
Total squatting time was about 18 months.
Foreclosure Record
Recording Date: 09/17/2009
Document Type: Notice of Sale
Foreclosure Record
Recording Date: 06/15/2009
Document Type: Notice of Default
Wells Fargo bought the property on 7/19/2010 for $515,000. Considering they could have called on the auction in October of 2009, the last 10 months and the failed short sale attempt were a complete waste of time.
The latest regulatory body created by Congress and the Obama administration will fail to prevent future housing bubbles because they lack the understanding of what is required.
The scope and scale of the housing bubble is hard to comprehend. Lenders created four trillion dollars in excess debt, 12 million borrowers are delinquent on their mortgages, and 6 to 8 million loan owners are going to be forced to leave their family homes. And what was gained? There was no innovation or advancement, no long-lasting infrastructure that will enhance future economic growth, nothing we can point to as a silver lining — unless you consider a sea of McMansions in the hinterlands a great societal investment. And don't forget the rampant consumerism from HELOC spending.
Never in the course of human events has so much been given to so many for doing so little. In my opinion, the housing bubble was a colossal waste.
During the great housing bubble and bust, journalists spent a fair amount of time searching for the perfect mortgage victim. This victim would be someone who played by the rules, took a conservative approach to his finances and simply wanted a decent place to live. He made his monthly payments on time, right up to the day that the bank informed him that his payments would balloon because of a fine-print technicality that no borrower could have understood. Just like that, the homeowner was facing foreclosure.
The stories of the housing bust tended to be more complicated. Many borrowers stretched to buy homes, figuring that they would be making more money soon enough or that housing prices would keep going up. In Southern California, one homeowner told me he was well aware that his monthly payments would eventually balloon. He thought everything would work out, though, because he assumed that ever-rising home values would allow him to refinance. Much of the country shared this belief.
This is also why education is not the answer. You can't educate the kool aid intoxicated. I know; I have tried for several years now, and by and large, I am preaching to the choir.
Banks, mortgage brokers and real-estate agents were only too happy to encourage these fantasies, of course. In many cases, their encouragement crossed the line into malfeasance. But the bubble grew as large as it did because this malfeasance fed on human frailty, naïveté and even irresponsibility.
I dig this guy calling out the corrupt players.
This summer, with the bubble long gone, Congress and the Obama administration enacted a sweeping new law meant to change the business of lending and borrowing money.
The bubble is not long gone.
The part of the law that will directly affect the most people will be the new Consumer Financial Protection Bureau, which has already been the subject of heated debate. And the central question facing the bureau will be how to distinguish between corporate malfeasance and consumer frailty.
It is not an easy task. For as long as there has been money, people have been doing stupid things with it. We borrow more than we can afford. We pay higher interest rates than we need to. We play the lottery. The new consumer bureau can prohibit some of the banks’ worst practices. But figuring out precisely where to draw the line will be much more nuanced than the past year’s black-and-white, left-and-right debate over whether an agency should exist at all.
Elizabeth Warren — the Harvard law professor who first proposed such an agency, in a 2007 article in the journal Democracy — has pointed out that the history of consumer financial protection is a history of “thou shalt not.” The government bans lenders from doing something, and the banks stop. Quickly, however, they come up with new ways to separate people from their money. Last year’s credit-card legislation, for example, cracked down on overdraft fees (the frequently steep charges for people who tried to withdraw more money on a debit card than they had in their account). Banks have responded by raising other fees.
The writer's view that the credit-card legislation was flawed because lenders raised their fees is short sighted. Lenders raised their fees because they could. They have a large number of borrowers treading water that could not avoid the fees if they tried. The fees that were banned should have been banned long ago. Just because legislation is difficult and the results are delayed doesn't mean the legislation is not the right solution to problems of bad lender behavior.
This is why the thou-shalt-not approach, Warren says, “means you’ll always be behind.” Or, as Richard Thaler, the University of Chicago behavioral economist, puts it, “Regulating what financial companies can and cannot charge for is a losing game, because they’ll always think of something else.”
Their agreement on this point is notable, because Warren has come to represent the muscularly progressive vision of the new bureau, while behavioral economists like Thaler (who is close to several Obama advisers) are seen as more technocratic. And there is no doubt that the bureau will need to make judgment calls that some regulators would make differently than others. But the basic vision for the bureau is not in dispute, at least not among the people who are likely to run it under Obama.
When the Republicans get back in, they will gut the bureau like they did with the EPA.
The overriding goal of the bureau will be to help people understand their financial choices. More often than not, it will allow banks to continue a given practice — but force them to explain, in clear terms, what it means for consumers. Earlier this summer, I refinanced my mortgage and was reminded yet again of how much modern finance depends on obfuscation. Nowhere in the pile of documents was there a simple explanation of the only information that mattered to me: how much the bank was charging in fees, how much the lawyer was charging, how much the government was charging and how much my monthly payment would fall. Instead, I was confronted with a blizzard of terms that I did not fully understand: origination, title services, release tracking and the like.
Done right, the new bureau can begin to change this. It can require banks to speak in the language of customers, not internal bureaucracy. Another part of last year’s credit-card legislation offered a preview. As of February, banks have had to give people the often-bracing calculation of how much it will cost them to pay off their balance if they make only the minimum monthly payment, as well as how many years it will take. To see if such steps are working — and to keep pace with Wall Street ingenuity — the new bureau will have a research budget allowing it to test whether consumers truly know what they’re signing up for.
I challenge anyone to find a way to explain the Option ARM in language plain enough for the financially illiterate to understand. In fact, I challenge anyone to explain it to experts in the industry in a way that they understand. There are some loan products that are simply too complex for mere mortals to comprehend. To me regulation would be much simpler if we banned all loan products where payments can increase. That is the only method of ensuring people understand the risks they are taking on because they won't be taking on much risk. Do you really think the average Joe understands interest-rate risk? Do you?
The ultimate goal is pushing banks to compete in ways that benefit consumers, rather than having them compete over which methods can most cleverly fool consumers. If people know the true costs of their mortgages, credit cards, debit cards and mutual funds, they are more likely to gravitate to those offering low costs and good benefits. This will have the added feature of reducing the enormous, historically abnormal profits that Wall Street has enjoyed in recent years. It is also the way a market is supposed to work.
Still, no matter how well we grasp the implications of fees and interest on our credit cards, we may still decide to use a card to buy a new television or kitchen we can’t really afford. The new consumer bureau will not try to stop us. And it almost certainly will not be enough to prevent another bubble, in some other realm, sometime in the future.
But that is probably not a realistic goal anyway. Prohibition, after all, has a decidedly mixed record. A better goal may simply be making sure we understand what we are doing and hoping that is enough to make us a little less frail.
Nonsense. We could regulate lending in a positive way. Education is not enough.
Educating Borrowers is doomed to fail
The first step in a borrower education program would require a consensus on what borrowers should be taught. Lenders will game the system to peddling unstable loan products as safe if borrowers can be taught how to use them. I saw a scholarly study from the bubble that said the Option ARM was a great loan program if borrowers could be educated. Obviously, that is crazy.
Lenders will also use the political system to create doubt as to what loan programs are safe and which are not. I recently wrote about Another Ignorant and Misguided Attack on the 30-Year Fixed-Rate Mortgage. This appears to be an attempt by some right-wing political operatives to create a smoke screen to obscure the real danger of adjustable rate mortgages.
Adjustable rate mortgages are a dangerous loan product, and any reasonable education effort should encourage people to use fixed-rate financing instead, particularly at the bottom of the interest rate cycle. No amount of education will stop the use of adjustable-rate mortgages, and those loans will almost certainly lead to more foreclosures when interest rates rise.
With poorly reasoned attacks on the 30-year fixed-rate mortgage floating around, it creates the impression there is some legitimate difference of opinion on the matter. There isn't. However, if lenders can create enough confusion and dissent, it will make the job of a government-sponsored education bureau impossible — which is what lenders want. The Consumer Financial Protection Bureau will fail because it will get bogged down in the political process.
Further, the goal of education is unattainable: borrowers will not make good choices. Borrowers will borrow all they can no matter how much they are educated on the risks. Most ignore the risks or don't believe it will happen to them. Half of my masters curriculum was real estate finance, so recognized the risk and chose not to participate. However, there were plenty of Ivy League educated MBAs that didn't recognize the risk and got wiped out by the housing bubble. Education is not enough. We must have laws that limit lending.
The regulatory solution proposed herein is simple, yet far reaching. It comes in two parts, the first is to limit the amount lenders can loan to borrowers with a rather unique enforcement mechanism, and the second is to increase the penalties for borrowers who commit mortgage fraud. The following is not in legalese, but it contains the conceptual framework of potential legislation that could be enacted on the state and/or federal level. A detailed discussion of the text follows:
Loans for the purchase or refinance of residential real estate secured by a mortgage and recorded in the public record are limited by the following parameters based on the borrower’s documented income and general indebtedness and the appraised value of the property at the time of sale or refinance:
All payments must be calculated based on a 30-year fixed-rate conventionally-amortizing mortgage regardless of the loan program used. Negative amortization is not permitted.
The total debt-to-income ratio for the mortgage loan payment, taxes and insurance cannot exceed 28% of a borrower’s gross income.
The total debt-to-income of all debt obligations cannot exceed 36% of a borrower’s gross income.
The combined-loan-to-value of mortgage indebtedness cannot exceed 90% of the appraised value of the property or the purchase price, whichever value is smaller except in specially sanctioned government programs.
Any sums loaned in excess of these parameters do not need to be repaid by the borrower and no contractual provision is permitted that can be interpreted as limiting the borrower’s right to exercise this right, make the loan callable or otherwise abridge the mortgage agreement.
This last statement is the most critical. This is how the enforcement problem can be overcome. Regulators are pressured not to enforce laws when times are good, and decried for their lack of oversight when times are bad. If the oversight function becomes a potential civil matter policed by the borrowers themselves, the lenders know exactly what their risks and potential damages are. Any lender foolish enough to make a loan outside of the parameters would not need to fear the wrath of regulators, they would need to fear the civil lawsuits brought by borrowers eager to get out of their contractual obligations. If any borrower could obtain debt forgiveness by simply proving their lender exceeded these guidelines based on the loan documents, no lender would do this, and regulatory oversight would be practically unnecessary. One key to making this work is to prohibit lenders from introducing a “poison pill” to the loan documents that would make borrowers hesitant to bring suit, otherwise lenders would make their loan callable in the event of a legal challenge forcing the borrower to refinance or sell the property. Basically, if the borrower brought suit and won, they would see principal reduction equal to the deviation from the standards, if they brought suit and lost, they would have no penalty. Most of these cases would be decided by summary judgment based on a review of the loan documents thus minimizing court costs.
Another pillar to the system is the documentation of income as part of the loan document package–the “borrower’s documented income” from the proposed legislation. One of the most egregious practices of the Great Housing Bubble was the fabrication of income by borrowers that was facilitated and promoted by originating lenders. Stated-income loan programs were widespread, and they were the cause of much of the uncertainty in the secondary mortgage market during the initial stages of the credit crunch in the deflation of the bubble. Basically, investors had no idea if the borrowers to whom they had lent billions of dollars were capable of paying them back. Without proper documentation of income, investors lost all confidence in the secondary mortgage market. Stated-income loan programs were one of the first casualties of the credit crunch. These programs should be eliminated totally due to the inherent potential for fraud and the undermining of confidence in the secondary mortgage market stated-income loans create. If lenders can be sued based on the content of the loan documents, and if borrowers can be fined or go to jail for committing fraud or misrepresentation on loan documents, both parties have strong incentive to prepare these documents completely and correctly. Originating lenders will argue this adds to their costs and will result in higher application fees. The amount in question is very small, particularly relative to the dollar amount of the transaction. A small amount of additional expense here will provide huge benefits by assuring investors the borrowers to whom they are loaning money really have the income to pay them back. The benefit far outweighs the cost.
If such a law were passed, agency interpretation and court case precedents will end up defining adequacy in loan documentation. A single W2 does not establish a work history, but 2 years worth is probably excessive documentation. One of the most contentious areas will likely be documenting the income of the self-employed. In theory, the self employed must document their incomes to the US government either through Schedule C reports or corporate K-1s. The argument the self-employed have traditionally made is that these documents understate their income. Since many self employed take questionable tax deductions, there is probably some truth to the claim that tax records understate their income; however, why should the self-employed get to have both benefits? If the self-employed had to use their tax returns as loan documentation, they probably would not be quite so aggressive in taking deductions. A new business without a tax return or with only one year of taxable receipts probably is not stable enough to meet standards of income necessary to assume a long-term debt.
The poor quality of loan documentation during the bubble was a mistake of originating lenders; therefore, in this proposal much of the burden of paperwork and liability for mistakes falls on the lenders. During the deflation of the bubble, lenders paid an enormous price for some of their lax paperwork standards, but much of the problem was also due to borrowers misrepresenting themselves in the loan documents. There were instances where lenders encouraged this behavior, but in the majority of cases, the document fraud was perpetrated by the borrowers. The only recourse available to a lender is a civil suit as there are few criminal penalties associated with loan documentation and almost no enforcement. It can be very difficult and costly for lenders to pursue civil damages, and few lenders attempt it even when they have a strong case. To create a more balanced set of responsibilities, the borrowers must face criminal penalties for fraud and misrepresentation on loan documents. If borrowers know the lender can turn documents over to a prosecutor who will charge the borrower with a crime if they make false material statements, borrowers will be much less likely to commit these acts.
The parameters of the forming limitations on the debt-to-income ratio and combined-loan-to-value are essential to prevent bubbles in the housing market and to prevent the banking system from becoming imperiled in the future. People will commit large percentages of their income to house payments when prices are rising quickly; however, they do this out of fear of being “priced out” and greed to make a windfall from appreciation. These are the beliefs that inflate a bubble. Borrowers cannot sustain payments above the traditional parameters for debt service without either defaulting or causing a severe decline in discretionary spending. The former is bad for the banks, and the latter is bad for the entire economy. This must be prevented in the future. There are a number of reasons why high combined-loan-to-value lending is a bad idea: it promotes speculation by shifting the risk to the lender, it encourages predatory borrowing where borrowers “put” the property to a lender, it promotes a high default rate because borrowers are not personally invested in the property, it discourages saving as it becomes unnecessary, and it artificially inflates prices as it eliminates a barrier to market entry. This last reason is one of the arguments used to get rid of downpayment requirements. The consequences of this folly became readily apparent once prices started to fall.
The payment must be measured against “30-year fixed-rate conventionally-amortizing mortgage regardless of the loan program used.” One of the worst loan programs of the Great Housing Bubble was the 2/28 ARM sold to large numbers of subprime borrowers. These borrowers were often qualified only on their ability to make the initial payment, and these borrowers were generally not capable of making the fully amortized payment when the loan reset after 2 years. Regulations like this would prevent a recurrence of the foreclosure tsunami triggered by the use of this loan program. It is also important to ban negative amortization because it would allow the loan balance to grow beyond the parameters of qualification, and it invites property speculation. Perhaps borrowers would not be concerned because they would receive debt forgiveness of the expanding balance. Lenders should be wary of these loans after their dismal performance in the deflation of the bubble, but institutional memory is short, and these loan programs could make a comeback if they are not specifically outlawed. This provision is careful to allow interest-only loans. They are still a high-risk product, but an argument can be made that these loans have a place, and there is no need to completely ban them. They will not have a future as an affordability product capable of driving up prices if the borrower must still qualify for the fully amortized payment.
For the lending provisions to have real impact, they must apply to both purchases and to refinances, thus the clause, “Loans for the purchase or refinance of residential real estate.” If the rules only applied to purchases, there would be a tremendous volume in refinances to circumvent the regulations. The caps on debt-to-income ratios, mortgage terms and combined-loan-to-value only have meaning if they are universally applied. The combined-loan-to-value standard is based on the “appraised value of the property at the time of sale or refinance.” The new appraisal methods will have impact here. It is important that the records need only be accurate as of the time of the transaction. If a borrower experiences a decline in their income or if the property declines in value to where they no longer meet the loan standard, it does not mean they can go petition for debt relief.
The regulations would only need to apply to loans “secured by a mortgage and recorded in the public record.” People can still borrow money from any source they wished as long as the lender knows they will not have any claim on residential real estate. If a lender wanted to issue a loan secured by real estate outside of the outlined standards, the borrower would not have to pay back that money. If a borrower has non-recorded debts which create a total indebtedness requiring more than 36% of their gross income, they would not be eligible for a home equity loan even if they met the other qualifications. In such circumstances, it is better to limit borrowing than increase the probability of foreclosure.
Many states have non-recourse laws on their books. These laws serve to protect the borrower from predatory lending because the lender cannot go after other assets of the borrower in the event of default. In theory this should make lenders more conservative in their underwriting; however, the behavior of lenders in California, a non-recourse state, during the Great Housing Bubble was not conservative. These laws do serve to protect borrowers, and they should be enacted for purchase-money mortgages in all 50 states.
Since one of the goals of regulatory reform is to inhibit the behavior of irrational exuberance, the sales tactics of the National Association of Realtors should be examined and potentially come under the same restrictions as securities brokers through the Securities and Exchange Commission. After the stock market crash which helped precipitate the Great Depression, Congress created the Securities and Exchange Commission to regulate the sales activities of securities brokers. There are strict regulations in place governing the representations made concerning the future performance of investment opportunities. These protections were put in place to protect the general public from the false promises made by stockbrokers in the 1920s which many naïve investors believed. The same analogy holds true for Realtors. The National Association of Realtors has launched numerous advertising campaigns suggesting erroneously that residential real estate is a great investment and appreciation will make home buyers wealthy.
The result of these restrictions will be that all homeowners will have at least 10% equity in their properties unless they have borrowed from a government program like the FHA where the combined-loan-to-value can exceed the limits. This equity cushion would buffer lenders from predatory borrowing and a huge increase in foreclosures if prices were to decline. Home equity in the United States has been declining since the mid 1980s, and it actually declined while prices rose during the Great Housing Bubble due to the rampant equity extraction. The lack of an equity cushion exacerbated the foreclosure problem as many homeowners who owed more on their mortgage than the house was worth simply stopped making payments and allowed the house to fall into foreclosure.
If the new Consumer Financial Protection Bureau wanted to curb housing bubbles and restore stability to our banking system, they should implement the proposals I have outlined above. Will they do it? Not if the banking lobby has anything to say about it.
When you read about today's HELOC abuser, ask yourself if you think educating borrowers would have stopped this behavior. I don't think it any amount of government education programs would have made the slightest difference.
Long Term HELOC Abuse
It's obvious from looking through the property records that many borrowers supplemented their lifestyles with regular trips to the home ATM machine. The regularity and the size of these withdrawals is astonishing. It also explains much about why houses are so popular in California. If owning real estate gives you the opportunity to obtain hundreds of thousands of dollars for doing absolutely nothing, ownership will be highly desired; in fact, it becomes the primary reason people buy homes. Californian's live in their own personal ATM machines.
The owners of today's featured property paid $441,000 on 4/25/1991. I don't have their original mortgage information, but it is likely that they put 20% down ($88,200) and borrowed $352,800.
On 5/27/1997 they obtained a stand-alone second for $50,000.
On 12/7/1998 they refinanced their first mortgage for $387,500.
On 3/26/1999 they got a $47,500 stand-alone second.
On 12/28/2000 they refinanced with a $441,000 first mortgage and crossed the threshold of borrowing more than they paid.
On 3/31/2004 they refinanced with a $536,250 first mortgage.
On 10/5/2004 they obtained a $628,000 first mortgage.
On 11/30/2005 they refinanced with a $686,250 Option ARM with a 1.5% teaser rate.
On 5/3/2007 they obtained a second mortgage for $15,764.
On 7/3/2007, after witnessing the above patter of serial refinancing, World Savings Bank brilliantly loaned them $788,000 in an Option ARM.
Total property debt is $788,000 plus negative amortization and missed payments.
Total mortgage equity withdrawal is $435,200 including their down payment.
Total squatting time was minimal as the bank moved quickly to evict these squatters.
Foreclosure Record
Recording Date: 05/11/2010
Document Type: Notice of Sale
Foreclosure Record
Recording Date: 02/09/2010
Document Type: Notice of Default
The listing agent is Mike Dunn, and I have seen a prospectus for a fund he is forming to purchase and improve trustee sale flips. My guess is that he is also the flipper on this deal.
If you would like to learn how you can get involved with trustee sales like this one, please contact me at sales@idealhomebrokers.com.
According to the listing agent, this listing is a bank owned (foreclosed) property.
JUST REDUCED $5,000!!!***FANTASTIC OPPORTUNITY TO CHOOSE YOUR OWN UPGRADES FOR ONE WEEK ONLY BEFORE BUILDER STARTS REMODEL ON 7/30***This is a fixer but a beautiful blank canvas with an excellent location in the back of the development – high cathedral ceilings,guest suite downstairs,pool and spa size yard,two fireplaces,excellent interior location less than 75 yards to park,basketball,volleyball and less than 150 yards to beach club and community pool. Last two sales have been over $975,000. Very low tax rate and HOA dues.
I like Mike's idea to advertise the flip for sale prior to renovation. If a buyer emerges, they can get the property renovated to their taste by the flipper and the costs get rolled into the loan. He does need to lay off the CAPS LOCK, exclamation points, and asterisks though. I wonder if he thinks he can do $20,000 in cosmetic renovations and ask $130,000 more for the property ($975,000). If he can get that, buyers are not very bright.
With election season gearing up, politicians are seeing what voter groups they can buy off. Apparently, the unemployed homedebtors are a significant voter block this time around.
In an acknowledgment that the foreclosure crisis is far from over, the Obama administration on Wednesday pumped $3 billion into programs intended to stop the unemployed from losing their homes.
So what has he done to provide aid to unemployed renters?
Unemployed loan owners already get to squat in relative comfort, eat three meals a day, and surround themselves with creature comforts whereas renters double up with friends or sleep in their cars. Yet, despite this obvious unfairness and disparity of benefits, the government sees fit to provide even more aid to homedebtors while unemployed renters get to sleep in shelters.
And how about you working renters who are continuing to subsidize these people squatting in homes that should be yours. As a working renter waiting for house prices to drop, you are paying the bills of the squatters living in what should be your home. How do you feel about that?
The housing market, which usually helps lead the country out of a recession, is this time helping hold the recovery back. Interest rates are at record lows, but too few can afford to buy or refinance. Unemployed homeowners who live in communities where values have fallen sharply are often unable to sell. Their foreclosures weaken neighborhoods and create a vicious circle by further undermining the market.
Did you notice the subtle emotional lie perpetrated in the sentence above? Foreclosures do not weaken neighborhoods. As written, the sentence conjures up images of slums and shantytowns. The truth is that foreclosures lower prices in neighborhoods, but then employed renters move in and buy these houses and strengthen the neighborhood. Lower prices makes existing homedebtors unhappy because their dreams of home equity wealth are revealed as sad fantasies. Loan owners who surrender their dreams of HELOC riches do not weaken neighborhoods. If anything, making people focus on adding value and working for a living will strengthen neighborhoods.
To try to break this pattern, the Treasury Department said it was adding $2 billion to its Hardest Hit Fund, roughly doubling its size. The fund, first announced by President Obama in February and expanded in March, goes to housing finance agencies in various states to create local aid programs.
Most of the state programs from the first two rounds are barely under way, but Treasury officials said it was clear that more funds were needed.
What they are really saying is that we have not been able to funnel this money to banks fast enough to repair their broken balance sheets. Nobody in the Treasury Department cares about homedebtors staying in their houses, their only concern is for the solvency and profits of lenders.
“In this very deep recession, people have tended to be out of work a little longer,” Herbert M. Allison Jr., assistant secretary for financial stability, said. “That’s why we think this additional relief for people searching for a job is so important.”
So do people submit paperwork and reports detailing their job search efforts in order to get this money? They make stealing from working renters and giving the money to the banks of unemployed loan owners sound noble.
The second program, announced by the Department of Housing and Urban Development, will draw on $1 billion authorized by the new financial overhaul law.
The agency said it would work with local aid groups to offer bridge loans of up to $50,000 to eligible borrowers to help them pay their mortgage principal, interest, insurance and taxes for up to 24 months.The loans will be interest-free.
Free money that can only be given to the banks. Unbelievable….
Somebody explain to me why this program is needed. With the HAMP program, borrowers can lower their interest rate to 2% and defer missed payments and interest by adding to principal like an Option ARM. Is this program intended to squeeze a few more payments out of those who are so hopeless that they can't make their payments under HAMP? If so, this is nothing more than a bridge for lenders to get 24 months worth of payments from the government from borrowers who have no chance of sustaining ownership. In short, it is theft by the banks.
Until now, the Hardest Hit Fund had been projected to help about 140,000 borrowers. Treasury officials said that number would grow with the new infusion of money, but offered no estimate. HUD also did not say how many homeowners would be eligible for its program.
If the new money is spent in the same way as the previous money, both programs would eventually aid about 400,000 borrowers — a large number, but not when set against the 14.6 million unemployed or three million contemplating foreclosure.
So there are 14.6 million unemployed and 3 million facing foreclosure. The government is flying the bird at the 11.6 million unemployed renters and homeowners not facing foreclosure.
Over the last two years, the government has deployed many programs to help housing. It pushed interest rates down, offered tax credits and set up an ambitious mortgage modification program. Yet housing remains feeble and seems poised after a brief respite this year to become weaker again.
“I think all these government programs are helpful, but I wouldn’t look for them to cure the recession or even what ails housing,” said the economist Karl E. Case. “At best, they’re preventing things from getting much worse.”
At best they are delaying the inevitable and finding new and innovative way to give tax dollars to banks.
The Hardest Hit Fund will draw on the $45.6 billion set aside for housing in the Troubled Asset Relief Program, the rescue measure begun at the height of the financial crisis in the fall of 2008. Initially, the fund gave $1.5 billion to five hard-hit states: Arizona, California, Florida, Michigan and Nevada. The second round in March of $600 million went to North Carolina, Ohio, Oregon, Rhode Island and South Carolina.
The expanded list of states eligible for the latest funding includes Alabama, Illinois, Kentucky, Mississippi and New Jersey, as well as the District of Columbia. Each state’s share of the money is based on its population.
Many of the programs involve direct assistance. Ohio, for instance, said it would use its $172 million to aid 15,356 homeowners by helping bring delinquent mortgages current for owners experiencing hardship because of a loss of income. The assistance will last up to 12 months.
The other housing money in the Troubled Asset Relief Program is earmarked for the modification programs ($30.6 billion) and a Federal Housing Administration refinancing program ($11 billion). The administration can shift money between the programs only until Oct. 3, the two-year anniversary of the program.
HUD said it was in the process of determining which communities would receive its money and how exactly the process would work. “We’re still in the design phase,” said Bill Apgar, HUD senior adviser for mortgage finance.
I am appalled by the way our government steals from us to pay for the mistakes of lenders and loan owners. Renters don't speak with a coherent political voice, and responsible homeowners are torn between wanting to see their illusory house prices maintained and not wanting to subsidize the bad behavior of irresponsible borrowers. The result is political inaction to stop the government theft.
Government officials dress up their theft with emotional bullshit about helping homeowners when in reality they are merely helping banks get a few more payments from the hopelessly overextended who are about to become renters again. This does nothing for neighborhoods nor for the borrowers themselves. This policy merely gives money to banks to encourage more bad behavior in the future.
Single women loved condos
Single women got involved in real estate in unprecedented numbers during the housing bubble. And why not? It was easier than applying for another credit card, there was more free money available, and most believed they would never have to pay it back. It really was the best of all possible worlds. Too bad reality doesn't work that way.
The buyer of today's featured property paid $243,000 on 8/15/2003. She used a $194,400 first mortgage and a $48,600 down payment. Not wanting to miss the gravy train leaving the station, she borrowed $360,000 on 8/24/2007 and withdrew her down payment plus $117,000 in spending money. Then she gave it back to the bank.
Foreclosure Record
Recording Date: 01/29/2010
Document Type: Notice of Sale
Foreclosure Record
Recording Date: 10/29/2009
Document Type: Notice of Default
Foreclosure Record
Recording Date: 05/28/2009
Document Type: Notice of Rescission
Foreclosure Record
Recording Date: 03/31/2009
Document Type: Notice of Default
She got to squat for about 18 months before it was purchased at auction for $243,000 on 6/3/2010. The flipper put down some pergraniteel and is trying for a 20% margin. With the recent softness in the market, I doubt they get it.
If you would like to learn how you can get involved with trustee sales, please contact me at sales@idealhomebrokers.com.
***PRICE JUST REDUCED!!!*** A True Turnkey Property with An Incredibly Open And Spacious Floor Plan Boasting High Ceilings, New Paint, New Carpet, CROWN MOLDING thoughout, HIGH END STAINLESS STEEL Kitchen Appliances, and GRANITE Countertops in Kitchen!!! Inside LAUNDRY & Updated BATHROOMS with GRANITE COUNTERS!!! Situated In A Quiet Location Of A Very Desireable Complex Located In The Heart Of Irvine. Close to Restaurants, Theater, Schools And Shopping. Enjoy the Pool, Basketball Court, Tennis Courts and Children's Play Areas on the Condominium Grounds!!! Perfect for First Time Home Buyers & Investors!!!
thoughout? Desireable?
The description is painful. It starts with asterisks and three exclamation points, then it lapses into Title Case with occasional ALL CAPS randomly thrown in for good measure.
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