Category Archives: Library

Second Home Communities Are Ravaged by Foreclosures

Properties in second-home communities are falling into foreclosure at high rates. Unlike Irvine where a substitute buyer may be active in the market, second-home markets cannot be supported by the local population making a fraction of the money the original owners make.

Irvine Home Address … 12 HARTFORD Irvine, CA 92604

Resale Home Price …… $299,000

{book1}

It was 1989 my thoughts were short my hair was long

Caught somewhere between a boy and man,

She was 17 and she was far from in-between

It was summertime in Northern Michigan

Splashing through the sandbar, talking by the campfire,

It's the simple things in life like when and where

We didn't have no Internet but man I never will forget

The way the moon light shined upon her hair

Kid Rock — All Summer Long

I grew up in a small town in Wisconsin named Friendship. Isn't that a great name for a sleepy, rural community? I am going back there two weeks from today to recharge at Friendship Lake and climb the Friendship Mound, my spiritual home.

Do you see the rock face in the photos? That is the face of the Friendship Mount that looks down on the small community of 698 people. In my will, my final request is for my ashes to be released to the breeze on that rock.

I have always been attached to this place. In my quest to abandon my own attachments, this one has been very difficult to let go. I moved away when I was 11, back at 18, away again at 21. Whenever I think about "home," this community is what comes to my mind.

Have you ever spun donuts in your car on a frozen lake? Sat in an ice shanty drinking beer and pretending to fish?

Have you ever walked for miles through the woods without seeing civilization? Or met up with a curious deer?

I find that if I am away too long, I forget what is real. I lose my connection to the simple things in life that matter. I get too busy to stop and feel the ecstatic joy of being alive.

When I go back, the sun rises at about 5:00 AM and sets about 9:00 PM leaving many hours of sunlight to fill the day. Summer in the Northwoods is a very special time.

Life is slow in Friendship, Wisconsin. Nothing of import happens there, no big decisions are made, and the wheels of commerce barely turn, which is why I live here in Irvine rather than there in my tiny home town.

Some day, I will likely own property in Friendship. Unlike the equity locusts of the housing bubble, I don't plan to take the money out of the equity of my primary residence to do it. That mistake was common in the housing bubble as baby boomers flush with equity invaded towns like Friendship and drove property values sky high. Now that the bills are coming due, many people are simply not paying them and allowing their lake homes to go into foreclosure.

A quiet foreclosure trend in Minnesota: lake homes

Recession discourages buyers as cabin prices, sales drop

Updated: 06/07/2010 12:16:40 AM CDT

Getting the chance to sell a lake home in northern Minnesota was once a cause for celebration among real estate agents.

"Now, it's like, 'Oh, no, another lake shore listing,' " said Kay Bowman, a real estate agent with Century 21 Land of Lakes in Grand Rapids.

A few years ago, prices for lake homes were climbing at double-digit rates as buyers seemed convinced that all cabins in the land of 10,000 lakes soon would be gone. Sellers at the time also could count on demand from buyers who tapped equity from primary residences in the Twin Cities or elsewhere to finance a purchase up north.

But nowadays, selling a lake home is no day at the beach. Vacation home prices have fallen, buyers are waiting for bargains, and bank foreclosures — once unheard of on certain lakes — dot the shorelines, providing low-price competition for other sellers.

One of every 10 vacation homes purchased nationally in 2009 was in foreclosure, the highest such rate in five years, according to the National Association of Realtors. Real estate agents say there's a similar trend in Minnesota, although they point out that foreclosures aren't the only reason for slow sales at the lake.

"It's consumer confidence — sales are down for almost all big nonessential purchases," said Mike Peller, president of the Duluth Area Association of Realtors.

"We are down approximately 40 percent in values since 2007," said Marc Kuhnley, an agent in the Brainerd Lakes area with Edina Realty. "Of course, that 40 percent isn't off a true value — it's off of a false value that was driven by the market."

This reporter and the quoted Realtor seem to get it: there was a housing bubble.

… Five years ago, people buying lake homes had plenty of equity in their first home to draw on, Swierczek pointed out. Plus, buyers were more confident about their own financial health, as well as that of the housing market.

That's all changed.

… A report this spring from Minneapolis-based HousingLink suggests bank foreclosures were making appearances lakeside. Several counties in cabin country were among those with the biggest jump in bank foreclosures between the first quarters of 2009 and 2010.

For example, Lake County — the picturesque home to Two Harbors, Split Rock Lighthouse and miles of pristine Lake Superior shoreline — saw a 650 percent jump in bank foreclosures in the first quarter, according to HousingLink.

The rate of increase is much more dramatic than the actual numbers, since the county's foreclosure count jumped from just 2 to 15. Still, county officials say vacation homes now are among the mix of bank foreclosures in an area that had just two properties repossessed by banks during all of 2000.

Year-to-date in 2010, Lake County has conducted 30 foreclosure sales.

… In the Brainerd Lakes area, banks are involved in about two of every five sales of waterfront property, whether by way of foreclosure or a short sale, estimated Marc Kuhnley, the Edina Realty agent. The listings have helped push prices downward — particularly at the spendy end of the market.

A lake home in the Brainerd Lakes area originally listed for nearly $1.7 million sold after two years on the market for $999,000, Kuhnley said. Another home originally listed for nearly $1.8 million is now down to about $1.3 million after three years on the market.

"Currently, there are 80 lake properties over $1 million dollars on the market up here," Kuhnley said. Homes in that price bracket are selling at a rate of about six per year, he added, so it could take a long time to burn through the supply.

It will take a long time locally to absorb the jumbo loan properties. It will take forever to sell them in communities where none of the local wage earners can afford them.

"We are seeing a lot more bank-owned properties in the Brainerd Lakes area market, which is predominately lakeshore homes that are second residences," said Terry Pederson, an agent with Re/Max Lakes Area Realty in Crosslake. "If you're a buyer, it couldn't be a better time."

That's bullshit. Prices will come down much more in these markets. This housing market has to go from being the repository of free money of mortgage equity withdrawal to buyers who must now make two payments. That probably a 90% reduction in the potential buyer pool.

… "People aren't coming up here to buy," she said. "So, you have this great volume of homes that we didn't used to see. If you could list something on the lakeshore, you used to say, 'Oh, great, I have a lakeshore listing.' "

… Nearby sellers get the point.

"It is very slow," said Thomas Bloomquist, an Itasca County resident who is trying to sell a four-bedroom home with 200 feet of shoreline along a small lake in rural Grand Rapids. This year marks the third consecutive spring that Bloomquist's home has been on the market, with a current list price of $279,000.

Bloomquist works as a foreclosure prevention counselor with a nonprofit group in Duluth, so he knows that federal efforts to prevent foreclosures are focused only on primary residences.

A foreclosure prevention counselor who is underwater and listing a second home at a WTF listing price? That is funny.

It's understandable, he added, since a second home or cabin is "not a real need; it's a want."

… "With the collateral damage from employment losses and so many households down to one wage earner," he said, "that luxury of having the second home just isn't there."

Christopher Snowbeck can be reached at 651-228-5479.

Did she go buy a second home?

The owner of todays featured property paid $127,000 back in 1994, and she only borrowed $70,650 to do it. She completely ignored the housing bubble until on 5/9/2005 she refinanced with a $200,000 first mortgage. What do you think she needed the money for? Whatever she did, it is costing her this condo.

Foreclosure Record

Recording Date: 05/20/2010

Document Type: Notice of Default

Irvine Home Address … 12 HARTFORD Irvine, CA 92604

Resale Home Price … $299,000

Home Purchase Price … $127,000

Home Purchase Date …. 2/10/1994

Net Gain (Loss) ………. $154,060

Percent Change ………. 135.4%

Annual Appreciation … 5.2%

Cost of Ownership

————————————————-

$299,000 ………. Asking Price

$10,465 ………. 3.5% Down FHA Financing

4.91% …………… Mortgage Interest Rate

$288,535 ………. 30-Year Mortgage

$61,278 ………. Income Requirement

$1,533 ………. Monthly Mortgage Payment

$259 ………. Property Tax

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

$25 ………. Homeowners Insurance

$273 ………. Homeowners Association Fees

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

$2,090 ………. Monthly Cash Outlays

-$144 ………. Tax Savings (% of Interest and Property Tax)

-$352 ………. Equity Hidden in Payment

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

$37 ………. Maintenance and Replacement Reserves

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

$1,651 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$2,990 ………. Furnishing and Move In @1%

$2,990 ………. Closing Costs @1%

$2,885 ………… Interest Points @1% of Loan

$10,465 ………. Down Payment

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

$19,330 ………. Total Cash Costs

$25,300 ………… Emergency Cash Reserves

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

$44,630 ………. Total Savings Needed

Property Details for 12 HARTFORD Irvine, CA 92604

——————————————————————————

Beds: 2

Baths: 1 full 1 part baths

Home size: 1,000 sq ft

($299 / sq ft)

Lot Size: n/a

Year Built: 1977

Days on Market: 17

Listing Updated: 40318

MLS Number: P735817

Property Type: Condominium, Residential

Community: El Camino Real

Tract: Hp

——————————————————————————

This lovely townhouse style end unit has it all!!!! There are two large bedrooms upstairs with a walk in closet, has laminate floors downstairs, eating area kitchen,spacious patio, spearate laundry room,view of greenbelt from upstair bedroom, close to pool, and playground.

spearate? Do you think the realtor used enough exclamation points?

I hope you have enjoyed this week, and thank you for reading the Irvine Housing Blog: astutely observing the Irvine home market and combating California Kool-Aid since 2006.

Have a great weekend,

Irvine Renter

There are 3,600+ Distressed Properties in Irvine

Many are celebrating the end of the real estate bust. But what about all those delinquent borrowers? Isn't that still a problem?

Irvine Home Address … 19 BENNINGTON Irvine, CA 92620

Resale Home Price …… $632,400

{book1}

I will creep

Into your thoughts

Like a bad debt

That you can't pay

Take the easy way

And give in

Morrissey — The More You Ignore Me, The Closer I Get

Many buyers today believe that the variety of government props to the market have saved the day and house prices have resumed their steady, upward climb. The changing mix of sales has certainly propped up the median price. The cost per square foot — which is a better indication of what people are getting for their money — has not changed much. Since early 2009 when the Federal Reserve started buying mortgages to lower interest rates, prices have stabilized. They bounced last spring and pulled back during the winter, and it looks to be repeating the cycle this year.

In 2009, pricing was held up at very low transaction volumes. In 2010, the volume is picking up a little, but inventory is creeping up as well. Can this spring rally can hold as we push through 800 properties for sale?

The bottom line is that prices will hold up as long as inventory is not released too quickly. It can be absorbed by the depleted buyer pool, at least that is the advice economists are giving banks.

Foreclosure Glut: Is 'Shadow Inventory' Really a Threat?

Millions of New Foreclosures Will Stifle, Not Crush Housing Market, Say Economists

By DALIA FAHMY

June 7, 2010

Every once in a while, the term "shadow inventory" makes it into the business headlines. Invariably, stories warn of a looming flood of foreclosures that will drag the housing market down as soon as homeowners begin to feel optimistic again.

But what is shadow inventory — and is it really such a big threat?

Different experts have different definitions. Some only include homes that have already been repossessed by banks and are awaiting distressed sales. Others include those whose owners are long-overdue on mortgage payments, while others still count homes whose owners would like to sell but are waiting for conditions to improve.

8 Million More Foreclosures May Be Waiting

"The definition of shadow inventory has gotten out of control," says Rick Sharga, senior vice president at RealtyTrac, an online market for distressed homes.

As a result, estimates of homes in the shadows vary widely between 2 million and 8 million. By comparison, approximately 5.5 million homes are expected to change hands this year, of which about a third are in some kind of distress.

High estimates usually include include repossessed homes that have not yet been listed for sale, homes that have been moved from the delinquent bucket and into foreclosure, and homes that are more than 60 days delinquent.

The latest report is that 8.4% of Orange County mortgage holders are delinquent on their payments. There are about 75,000 homes in Irvine and about 45,000 mortgages. If only 6% of those are delinquent, that amounts to 2,700 homes. If Irvine matches the 8.4% rate of Orange County, then 3,780 homeowners are delinquent. This is not a theoretical problem. It is a massive inventory of homes that must get pushed through the resale market.

"Theoretically you could say up to 7 million homes are in the pipeline, but not all of them will go into the market and if even if they do, not all of them will hit at once," says Sharga. Given the current pace of sales, Sharga believes shadow inventory could be cleared by the end of 2013, at which point the housing market can begin a real recovery.

RealtyTrac's president is saying no recovery until 2013. If by recovery he means we break out of this bottoming formation, his estimation is as good as any. It will vary market to market.

Shadow Inventory Can Be Lethal

The problem with shadow inventory is that it does not simply represent additional supply. It's supply of the worst kind: distressed homes that are often in hard-hit regions, often in a state of disrepair. Homes in foreclosure have more power to drag down real estate prices and keep them depressed for years to come.

"If you can buy a cheap foreclosed home next door to a normal home, many people will choose to buy the discounted home," says Celia Chen, housing analyst at Moody's Economy.com. She estimates that 4.6 million homes are currently waiting in the shadows, almost a whole year's worth of housing supply.

Months of supply on its own doesn't sound so bad. Unfortunately, this inventory is still growing and it is being sold at a rate that will not clear it for many years, at the rate of current sales, it will take 60 months just to clear Irvine, and it is one of the better markets.

Shadow Inventory Stuck In Limbo

Like many other analysts, Chen believes we still have a long way to go before real estate prices begin recovering. Some expect a recovery to begin in the middle of next year, others don't see it coming for several more years.

There are many reasons that shadow inventory is so difficult to gauge.

For one thing, financial institutions that own distressed mortgages are not saying exactly how many homes they hold. Firms have generally been releasing their supply of distressed homes slowly into the market for fear of crushing prices.

Another problem is that nobody knows exactly how many homes will make it out of the government's "Home Affordable Modification Program." Chen estimates that only 45 percent of the 1.2 million loans that are aiming for a modification will actually succeed, while the rest will likely end up in foreclosure.

While these numbers certainly are cause for concern, the good news is that this shadow inventory is unlikely to cause a shock to the system similar to the initial crash.

That last sentence was pure emotional comfort with little basis in fact or history. For prices to remain firm, and unstable cartel of banking interests must keep them that way.

No Nuclear Event in Housing

"Much as during the arms building between the U.S. and the Soviet Union, neither one ever launched a nuclear attack for fear of causing complete destruction," says RealtyTrac's Sharga. "You're not going to see a nuclear event happen in the housing market either."

There will not be a nuclear event if the banks continue withholding inventory and allowing people to squat. That is the price paid by the banks and ultimately the taxpayer. The collapse of the cartel may not be nuclear, but it could certainly drive prices down.

Esmael Adibi, economics professor at Chapman University says shadow inventory is actually a good thing because it means that financial institutions – primarily lenders and investors who own the delinquent mortgages – are holding on to the inventory instead of dumping it into the market.

A good thing? I have heard Dr. Adibi speak before, and I could picture him saying that. First, this is good for whom exactly? Banks? They must love having a bazillion delinquent loans? Buyers who have to pay higher prices? Dr. Adibi sits on the board of at least one bank, and they do listen to his advice. Look for the banks he advises to sit on their REO and be the last to liquidate. This is his endorsement of widespread squatting.

Adibi says financial institutions are not only holding on to their inventory in order to avoid crushing the market, but also because they believe they might get a better deal once prices have recovered slightly.

"Can you imagine if all those homes ended up in the market now?" he says. "Things would be much worse."

Yes, I can imagine that pretty well, and "much worse" is a matter of perspective. A conspiracy to keep prices elevated and keeping families priced out of them is not my idea of "much better." Notice also that he said they are holding out for better deals. This is cartel behavior, but what happens when some of the members of the cartel want to get out quicker? What about those banks whose business plan is not to hold this inventory until prices come back?

Prices are about as good as they are going to get for banks for quite some time. Low interest rates make reasonable payments on huge loans. Look at today's property. A $632,400 property only costs the owner a little over $2,500 a month to own. The payment is no longer the problem; the amount financed is staggering. As long as payment affordability is reasonable, people will buy homes. If the banks can prevent too many of them from entering the market, prices will not fall.

What about the 3,600 distressed properties in Irvine?

I recently wrote that Nearly 500 Properties Are Currently Scheduled for Foreclosure Auction In Irvine. There are about 900 properties in the foreclosure pipeline about about 2,700 in shadow inventory. Last month we sold 228 properties, and this is the prime selling season. In any market where distressed inventory has exceeded 50%, prices have cratered, so if we chipped away at the 3,600 number with about 120 sales a month, it will take 30 months to clear out the garbage — assuming we don't add any more to it.

How common are the Ponzis? Is the number of truly distressed debtors only 3,600 in Irvine. Based on the sample we encounter here daily on the blog, I estimate the number to be higher. Of all the people you know, what percentage are Ponzis? Is it less than 10% or more like half? The more common the Ponzis, the greater the likelihood of a protracted real estate bust. Too many people took on too much debt so they could pretend and look rich. There is far less wealth here than commonly believed. People here are very good at faking it.

Used, abused, and left for garbage

  • The owners of today's featured property drained it like their neighbors. The property was purchased on 7/31/1991 for $309,000. The owners financing is unknown but they probably put 20% down and financed $247,200.

  • My records pick up with a $100,000 HELOC on 7/16/2002.

  • On 4/26/2004 they refinanced the first mortgage for $275,000, so the owners were conservative up to then.

  • On 5/11/2004 they opened a $100,000 HELOC.

  • On 4/15/2005 they refinanced with a $589,600 first mortgage.

  • On 12/12/2005 they opened a $139,000 HELOC.

  • On 8/20/2007 they refinanced with a $630,000 first mortgage and a $125,000 HELOC.

  • Total property debt is $755,000.

  • Total mortgage equity withdrawal is $507,800 if they maxed out the HELOC.

  • Total squatting time is at least 18 months.

Foreclosure Record

Recording Date: 07/20/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 04/14/2009

Document Type: Notice of Default

Foreclosure Record

Recording Date: 04/13/2010

Document Type: Notice of Sale (aka Notice of Trustee's Sale)

I want to call your attention to the last two notices. Note that the NOT was refiled one day before the 1 year period was up. This is evidence of the bank doing nothing to stop the squatting.

Irvine Home Address … 19 BENNINGTON Irvine, CA 92620

Resale Home Price … $632,400

Home Purchase Price … $309,000

Home Purchase Date …. 7/31/1990

Net Gain (Loss) ………. $285,456

Percent Change ………. 104.7%

Annual Appreciation … 3.6%

Cost of Ownership

————————————————-

$632,400 ………. Asking Price

$126,480 ………. 20% Down Conventional

4.91% …………… Mortgage Interest Rate

$505,920 ………. 30-Year Mortgage

$129,606 ………. Income Requirement

$2,688 ………. Monthly Mortgage Payment

$548 ………. Property Tax

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

$53 ………. Homeowners Insurance

$0 ………. Homeowners Association Fees

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

$3,289 ………. Monthly Cash Outlays

-$458 ………. Tax Savings (% of Interest and Property Tax)

-$618 ………. Equity Hidden in Payment

$240 ………. Lost Income to Down Payment (net of taxes)

$79 ………. Maintenance and Replacement Reserves

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

$2,531 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$6,324 ………. Furnishing and Move In @1%

$6,324 ………. Closing Costs @1%

$5,059 ………… Interest Points @1% of Loan

$126,480 ………. Down Payment

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

$144,187 ………. Total Cash Costs

$38,800 ………… Emergency Cash Reserves

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

$182,987 ………. Total Savings Needed

Property Details for 19 BENNINGTON Irvine, CA 92620

——————————————————————————

Beds: 4

Baths: 2 full 1 part baths

Home size: 2,503 sq ft

($253 / sq ft)

Lot Size: 6,215 sq ft

Year Built: 1979

Days on Market: 3

Listing Updated: 40331

MLS Number: S619509

Property Type: Single Family, Residential

Community: Northwood

Tract: Md

——————————————————————————

Great opportunity to buy in Northwood. Good floorplan, living room, family, dining room, 2 fireplaces, inside laundry and large backyard. No HOA or Mello Roos. Desirable school district.

The California Legislature Moves to Slow Foreclosure Process Again

There are a number of housing bills moving through the California State legislature. Their effect if passed will be to further delay the foreclosure process.

Irvine Home Address … 20 ROSE TRELLIS Irvine, CA 92603

Resale Home Price …… $1,250,000

{book1}

Burn burn, house on fire

I'm so sick and tired

I can still remember your sound

And it's cut cut cutting me down

I'm locked and loaded

You're so milk and roses

And i am just a letdown of your hound

And It's cut cut cutting me down

Like slow poison

Cut down like slow poison

The Bravery — Slow Poison

The housing bust has been a slow trickling of mortgage poison. Too large a dose and prices crash, and too little… well, that means the banks allow a lot of squatting, a poison bound to find its way to the US taxpayer.

California Senate Passes Foreclosure Legislation

by JON PRIOR — June 4, 2010

The California State Senate passed legislation this week in an effort to prevent avoidable foreclosures.

Senate Bill (SB) 1275 requires mortgage servicers to notify borrowers of a right to seek options that would avoid foreclosure and attach an application for a loan modification or other alternatives before issuing a notice of default (NOD). Also before filing an NOD, servicers must evaluate a borrower who submits a written request for a loan modification. For those denied one, a separate letter must be mailed to the borrower informing them of the denial and reasons why.

This is some added paperwork for lenders, but it isn't onerous. Lenders already have a lengthy checklist of items for their loan files. Adding a couple of lines to the list and a few sheets of paper won't be too painful.

The bill was authored by Sen. Mark Leno (D-San Francisco) and Senate President Pro Tem Darrell Steinberg (D-Sacramento). The bill will now move to the California State Assembly for consideration by the Assembly Banking Committee.

Eligible mortgages must have been originated before Jan. 1, 2009 and must be a single-family, owner-occupied residential property.

Interesting that this bill doesn't apply to new mortgages. I guess if you bought last year, they can still kick you to the curb under the old rules.

Under the bill, servicers must file a new declaration of compliance before recording the NOD. It is a checklist of all of the requirements completed before the NOD is filed. If this new document is not filed, damages could be awarded to the borrower, and the foreclosure could be voided.

If they slipped in borrower damages, this will become an attorney graft measure.

Also, if the home is sold at auction out of servicer error, recourse is provided in the form of a private right of action. It allows eligible homeowners to seek limited damages and could even reverse the foreclosure sale. Before the bill passed, there was no recourse for erroneous foreclosure sales.

What exactly is an erroneous foreclosure? Aren't these people delinquent on their loans? Don't the banks have foreclosure rights at their discretion?

According to the Center for Responsible Lending, servicers are initiating the foreclosure process while handling borrower’s requests for resolutions.

“Simple fairness dictates that no one should lose their home while they are in the middle of trying to save it,” said Paul Leonard, director of the California office of the Center for Responsible Lending.

I might agree with the above statement if the borrower is genuinely trying to save their home. If they are just gaming the system, I don't like the idea of giving them tools to game it longer.

California Set to Vote on Foreclosure Mediation Bill

by JON PRIOR — June 2, 2010

A bill that establishes a foreclosure mediation program in California passed committee and will reach the California State Assembly floor this week.

Assembly Bill 1639 was introduced by a trio of Democratic members of the assembly — Pedro Nava (Santa Barbra), Ted Lieu (Torrance) and speaker emeritus Karen Bass (Los Angeles). If passed, the bill would establish the Facilitated Mortgage Workout (FMW) program. Through it, lenders are required to meet with borrowers to develop a modification plan before foreclosure.

Required to meet? What happens when borrowers refuse? Or when they agree and cancel to drag out the process? A requirement to meet is almost guaranteed to be a way to delay the process.

The loan must have originated before Jan. 1, 2009, and the home must be occupied by the borrower as a principal residence. The principal balance on the mortgage cannot exceed $729,750.

The jumbo loan market is so screwed.

The bill passed the Assembly Appropriations Committee last week.

“This legislation sends a strong message to the banking and mortgage industry — that business as usual is not working. We will force the industry to do more to help struggling California families facing foreclosure,” Nava said. “This legislation will require face to face meetings between homeowners and their lenders—so that a mutually acceptable plan can be implemented that keeps families in their home.”

What if the plan is not mutually acceptable? What bargaining power does the borrower really have? If borrowers don't like the deal they are presented, can they say no? What happens then?

The bill also requires lenders to include information regarding the program with the notice of default. The borrower must return a form to the administrator of the program requesting a mediation within 30 calendar days of receiving the notice of default and must send other information within 15 days of the request. Borrowers must deposit with the administrator of the program 50% of the current mortgage payment each month while he or she participates in the FMW program.

The assembly just guaranteed no borrowers will sign up for the program. The allure of strategic default and negotiated short sale is that the borrowers get to squat. If they actually have to make a partial payment, participation will drop off dramatically.

Lenders must meet with the borrower within 14 days of contact with the borrower. The program expires Jan. 1, 2014. According to RealtyTrac, an online foreclosure marketplace, one in 192 homes received a foreclosure filing in April 2010. It’s the fourth highest foreclosure rate in the country.

“This crisis has devastated thousands of California families and communities. We have to take a new approach to help families remain in their homes,” Nava said.

This Nava is posturing bureaucrat. His quotes are rather silly, but they appeal to a desperate constituency.

In better news, this headline excited me:

California Eyes Statewide Mortgage Reform

Tuesday, June 2nd, 2009, 10:15 am

Wracked by distressed home sales in the wake of massive foreclosure volumes across the state, California may become the first state to implement a state-wide piece of mortgage reform legislation

The California State Assembly passed AB 260, a bill reforming mortgage lending and specifically banning predatory lending practices, according to a report filed at the California Chronicle today.

"We must enact landmark reforms to address the systemic failures in California's subprime mortgage industry," said California Assembly member Ted Lieu, according to the Chronicle. "These failures have not only devastated California's economy, they have contributed to a national and international financial meltdown."

So far, I appreciate the sentiment. We really do need to do something to prevent the house price casino from taking over. With unrestricted HELOC withdrawal at 100% value still a legal possibility (unlike Texas), then we will again inflate a housing bubble. Unfortunately, although the lead-in was promising, the proposals were not.

The legislation, if enacted, will create a fiduciary duty standard for mortgage brokers, eliminate compensation incentives that encourage the steering of borrower into risky loans, and establish regulations on prepayment penalties. The overall goal is to eliminate subprime lending, a leading cause of the state's foreclosure woes.

Are they really going after subprime lending? I don't think so. Can you imagine the uproar from advocates of low-income housing?

Putting a minimum standard of performance on mortgage brokers is a good thing, but that will do nothing to prevent the next housing bubble. As rhetoric to help pass legislation, it is probably effective, but it is not a protection against market bubbles they are selling it as.

California saw one in 138 housing units receive a new foreclosure filing in April, the third-highest state ranking, according to RealtyTrac.

The state experienced its 10th consecutive month of pick up in home sales during April, with foreclosures accounting for 53.6% of all southern California's resales in the month. California's foreclosure notices–the first step in the foreclosure process–dropped 18% in the month, indicating foreclosure sales may be on their way to slowing, despite the continued high volume of foreclosures in the state.

Write to Diana Golobay.

The shift away from foreclosure notices will not be permanent. Banking industry people I have spoken with have told me there will be a shift toward more short sales in 2010 since the foreclosure pipeline is already full past capacity. Lenders are struggling to find the level of market absorption that does not lower prices. The increasing inventory will continue to increase until lenders see prices weaken, then they will pull back. As the inventory increases, we will see if the banking cartel can hold it to a manageable level.

Another Ponzi that spent the house and squatted for a long, long time

I have a sneaking admiration for the guys who skillfully manipulated the system to extract the largest possible amount of cash and then squat for as long as possible. Although I find the behavior atrocious, I am impressed that they figured it out.

  • Todays featured Ponzi bought this property on 12/9/2004 for $1,381,000. He used a $1,000,000 first mortgage a $242,600 second mortgage, and a $138,400 down payment.

  • On 12/7/2005 he refinanced with a $1,267,500 Option ARM with a 1.25% teaser rate.

  • On 12/7/2005 he also obtained a $97,500 HELOC.

  • On 6/1/2006 he opened a $518,023 HELOC.

  • On 6/13/2006 he got a $97,500 HELOC. It looks as if he applied and obtained HELOCs from two different banks at the same time.

  • Total property debt is $1,880,033.

  • Total mortgage equity withdrawal is $640,433.

  • Total squatting is at least 24 months.

Foreclosure Record

Recording Date: 05/19/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 02/16/2010

Document Type: Notice of Default

Foreclosure Record

Recording Date: 11/06/2009

Document Type: Notice of Rescission

Foreclosure Record

Recording Date: 12/08/2008

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 09/02/2008

Document Type: Notice of Default

In his first two and a half years of living in this house, it provided him with a $250,000 per year spending stipend. Once the money ran out, he was able to stay there another two years — free.

I wonder how he feels about that?

Irvine Home Address … 20 ROSE TRELLIS Irvine, CA 92603

Resale Home Price … $1,250,000

Home Purchase Price … $1,381,000

Home Purchase Date …. 12/9/2004

Net Gain (Loss) ………. $(206,000)

Percent Change ………. -9.5%

Annual Appreciation … -1.8%

Cost of Ownership

————————————————-

$1,250,000 ………. Asking Price

$250,000 ………. 20% Down Conventional

4.91% …………… Mortgage Interest Rate

$1,000,000 ………. 30-Year Mortgage

$256,179 ………. Income Requirement

$5,313 ………. Monthly Mortgage Payment

$1083 ………. Property Tax

$375 ………. Special Taxes and Levies (Mello Roos)

$104 ………. Homeowners Insurance

$410 ………. Homeowners Association Fees

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

$7,286 ………. Monthly Cash Outlays

-$1449 ………. Tax Savings (% of Interest and Property Tax)

-$1222 ………. Equity Hidden in Payment

$474 ………. Lost Income to Down Payment (net of taxes)

$156 ………. Maintenance and Replacement Reserves

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

$5,245 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$12,500 ………. Furnishing and Move In @1%

$12,500 ………. Closing Costs @1%

$10,000 ………… Interest Points @1% of Loan

$250,000 ………. Down Payment

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

$285,000 ………. Total Cash Costs

$80,400 ………… Emergency Cash Reserves

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

$365,400 ………. Total Savings Needed

Property Details for 20 ROSE TRELLIS Irvine, CA 92603

——————————————————————————

Beds: 4

Baths: 3 full 1 part baths

Home size: 3,400 sq ft

($368 / sq ft)

Lot Size: 6,252 sq ft

Year Built: 2004

Days on Market: 88

Listing Updated: 40254

MLS Number: S609494

Property Type: Single Family, Residential

Community: Turtle Ridge

Tract: Ledg

——————————————————————————

Affordable 4 bedroom 3.5 bath Ledges home with approximately 3400 sqfeet of elegance behind the guarded gates of the prestegious Summit At Turtle Ridge. Huge master suite upstairs. Extra large gourmet kitchen with a sunny breakfast room. State of the art stainless steel appliances. Oversized family room with fire place. Large formal dining room and Living room. 2 Bedrooms and 1.5 Bath down and 2 Bedroom Suites upstairs. No Casitas. Beautiful courtyard. Fabulous resort like association facilities with club house,Gym, pool and spa. Peaceful walking trails throughout the neighborhood.

prestegious?

Can the GSEs Exist Outside of Government Conservatorship?

The GSEs were government entities for years, then the government attempted to take them private and deny taxpayers were on the hook for a collapse. Now that we know that illusion was a fantasy, are we going to try to spin the same yarn?

Irvine Home Address … 8 CALICO Irvine, CA 92614

Resale Home Price …… $699,000

{book1}

Give me time to reason,

give me time to think it through

Passing through the season,

where I cheated you

Aqua — Turn Back Time

We are giving Congress plenty of time to think through the GSE problem. Unfortunately, as we pass through this season, the GSEs continue to cheat taxpayers out of billions of dollars.

Our view on housing finance: Don't let Fannie and Freddie return to old neighborhood

As bailouts go, nothing quite matches the torrent of taxpayer money still pouring into Fannie Mae and Freddie Mac, the housing giants that now guarantee nearly half of the nation's $11.7 trillion in mortgages.

To cover loans that go sour, the federal government has already doled out almost $145 billion, and the non-partisan Congressional Budget Office estimates the final tab will be about $381 billion. That's about half the size of the 2008 bank bailout but, unlike that bailout, most of this money won't get paid back. And even now, there's little talk in Washington about how to fix the problem.

Make careful note of the difference between the GSE bailouts and other bank bailouts. The original TARP bailout was a loan, and most of that is being paid back or through a series of accounting tricks will look like it is being paid back. The GSE bailout is fundamentally different; the GSE bailout is where the losses are finally tallied and paid. The GSEs along with AIG will be the repository of losses for the Great Housing Bubble and the associated finacial system meltdown.

Fannie and Freddie can't be allowed to collapse. The fragile housing market would collapse along with them.

This is unfortunately true. Of course, those who want to see the status quo maintained will make this argument long past the time while it is true.

Nor can they go forever as wards of the state, soaking up taxpayer cash.

Actually they can. The GSEs could become a permanent market prop and absorbing all future losses caused by speculation in the residential real estate market. The only thing stopping that outcome will be political pressure on Congress to change it. If the GSEs or the FHA lose enough money, perhaps something will be done, but for now, these entities are being used as the vacuum cleaner sucking up all the toxic mortgage dirt from the housing bubble.

They also should not be allowed to go back to their unusual former status as publicly traded companies that are also "government-sponsored enterprises." That's why they got in trouble in the first place, paying outsized compensation and backing risky mortgages because politicians of both parties prodded them to do so.

I also believe they should not go back to what they were, but not for the reasons stated above. I don't think they can go back to being private. Would anyone believe the government will not step in again? Isn't that a license to gamble with public money?

Fannie and Freddie need to be rethought entirely, if not eliminated outright. And the time to start planning for that is now.

If the companies are eliminated, the process would have to be gradual. Fannie and Freddie are pretty much alone in propping up the housing market, backing three-quarters of the new loans being made this year.

For that reason, a less radical approach may be in order — one that would make mortgage money available at affordable interest rates while limiting taxpayer exposure to bad loans.

That is exactly what must happen. How to do it is the challenging part.

One intriguing possibility is to gradually replace Fannie and Freddie with non-profit cooperatives owned by banks. That is how MasterCard and Visa used to be structured, and how the 12 regional Federal Home Loan Banks are structured today. Those regional institutions — which lend money to banks, which then lend to home buyers — weathered the financial storm in part because of an ownership structure that keeps banks liable for loans they make.

The Obama administration has opted to largely ignore the dilemma for the time being. Failing to deal with the fate of Fannie and Freddie is the most glaring omission in the financial reform bill President Obama hopes to sign by July 4.

Delay could be problematic because, as time passes, a necessary sense of urgency will undoubtedly fade. At that point, expect the companies — and their powerful allies in Congress and the housing industry — to start lobbying for a return to the way things were.

Once people get used to the government backstop for their gambling activities, it will be very difficult to remove. The political pressure will only come from mounting losses, and $400,000,000,000 is a lot of money to lose.

Despite what their critics assert, Fannie and Freddie were not primarily responsible for the financial crisis.

The Right likes to bring this up periodically. The GSEs were not responsible for inflating the housing bubble. The housing bubble was inflated by private-label securities backed by credit default swaps and blessed by ratings agencies. The GSEs were losing significant market share and entered risky borrowing late. The GSEs were reacting to the market not establishing it.

They were late to the game in subprime mortgages and always focused mostly on backing standard, fixed-rate mortgages. But these institutions were founded on faulty premises.

Their "American dream" mission of profitably making risk disappear, so that banks would lend and people could buy their own homes, was always a fantasy. They merely took risks from banks and piled it on the taxpayers. Now everyone is paying the price.

The shifting of risk onto the taxpayer is exactly what everyone in real estate wants to see continue. If mortgage risk were properly priced, interest rates would certainly move higher. However, with GSE debt being a defacto government security, the distinction between a 10-year Treasury Note and a GSE mortgage-backed security pool becomes moot: the government will pay both without limitation.

I usually agree with Dean Baker. He was one of the first in Washington to recognize the housing bubble, and his writing has been accurate and insightful. However, I disagree with him on this one.

Opposing view on housing finance: Go back to the old design

By Dean Baker

A main goal of financial reform should be to promote simplicity and efficiency. In the case of housing finance, this means keeping Fannie Mae and Freddie Mac as publicly run companies.

The logic here is straightforward. Fannie Mae was created as a public company in the Depression to establish a secondary mortgage market. Before its creation, banks in various regions could often find themselves overloaded with mortgages and lacking the capital to make new loans.

By buying mortgages from banks, Fannie Mae allowed banks to issue more mortgages while limiting their exposure to risks from the housing market. Fannie Mae played a central role in supporting the postwar housing boom that hugely expanded homeownership.

That was their original function. But now that the secondary market is firmly established, are the GSEs still necessary? Would the secondary market disappear if the GSEs were eliminated. I think not.

The efficiency of Fannie Mae was lessened when it became a quasi-public company, alongside its newly created competitor Freddie Mac. This meant Wall Street-type salaries in the millions and tens of millions, instead of the six-figure paychecks that top-level government bureaucrats draw. It also created an incentive to take excessive risk, since the government would bear the downside from losing bets.

That is certainly a large problem, and the only way I see to eliminate it is to get rid of the GSEs entirely.

Fannie and Freddie got themselves into trouble in the housing bubble by first failing to recognize the bubble and second by jumping into junk mortgages near the end of the bubble. Contrary to claims of political conservatives, the decision to get into the subprime mortgages had little to do with helping moderate-income families buy homes. It was a desperate effort to recover market share from the investment banks.

That is an accurate assessment.

Fannie and Freddie can continue to play an important role in promoting home ownership by going back to the original design. They should be boring publicly owned companies that buy and hold mortgages. Securitization in the context of a government-owned company simply adds unnecessary expense and complication. It is completely unnecessary to supply capital for mortgages, since the companies can raise it directly by selling their own stock and bonds.

The only way I could see keeping the GSEs if they stopped selling mortgage insurance and instead became holders of mortgages as Dean Baker describes. As long as they provide mortgage insurance similar to the FHA and the GSE insured mortgages are securitized, the potential for inflating another housing bubble is greatly increased.

If private issuers can meet the needs of a secondary market better or more efficiently than Fannie and Freddie, then they will have the opportunity to do so. But, the United States does not need a financial industry that cannot compete successfully with government bureaucrats.

Dean Baker is co-director of the Center for Economic and Policy Research, a progressive think tank in Washington, D.C.

My View: The GSEs cannot go back to the old design

I can remember watching Ben Bernanke testifying before Congress prior to the nationalization of the GSEs. In his testimony, he was incredulous that investors would act as if the GSEs had the implied backing of the US government when they explicitly did not. Perhaps he was the only man in Washington who was surprised when it turned out that the GSEs did have the backing of the US government because when their collapse was imminent, the government stepped in and took them over, and as a consequence, assumed all their liabilities.

How could we plausibly maintain the illusion that we would not do it again? If the GSEs are ever turned back over to the private sector, it will be a laughable facade just as it always was. For the last several decades, the government tried to maintain the illusion that they were not liable for the GSEs, but when a crisis hit, the government immediately stepped in. There simply is no way to establish with any credibility that the government will not do this again, particularly now that there is precedence for it.

If would not surprise me that politicians will want to spin these entities off at some future date. The stock might have value, and the sale might recoup a tiny fraction of the losses. Removing these liabilities from the federal balance sheet will also be appealing, but it will be an illusion — and a rather obvious one at that.

A conservative borrower

The owners of this property owe $550,000 as they extracted a relatively prudent $138,000 in mortgage equity withdrawal. That is conservative by Irvine standards — horrible by any rational standard, but conservative by Irvine standards.

Irvine Home Address … 8 CALICO Irvine, CA 92614

Resale Home Price … $699,000

Home Purchase Price … $515,000

Home Purchase Date …. 5/15/2003

Net Gain (Loss) ………. $142,060

Percent Change ………. 35.7%

Annual Appreciation … 3.9%

Cost of Ownership

————————————————-

$699,000 ………. Asking Price

$139,800 ………. 20% Down Conventional

4.91% …………… Mortgage Interest Rate

$559,200 ………. 30-Year Mortgage

$143,255 ………. Income Requirement

$2,971 ………. Monthly Mortgage Payment

$606 ………. Property Tax

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

$58 ………. Homeowners Insurance

$380 ………. Homeowners Association Fees

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

$4,015 ………. Monthly Cash Outlays

-$723 ………. Tax Savings (% of Interest and Property Tax)

-$683 ………. Equity Hidden in Payment

$265 ………. Lost Income to Down Payment (net of taxes)

$87 ………. Maintenance and Replacement Reserves

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

$2,961 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$6,990 ………. Furnishing and Move In @1%

$6,990 ………. Closing Costs @1%

$5,592 ………… Interest Points @1% of Loan

$139,800 ………. Down Payment

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

$159,372 ………. Total Cash Costs

$45,300 ………… Emergency Cash Reserves

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

$204,672 ………. Total Savings Needed

Property Details for 8 CALICO Irvine, CA 92614

——————————————————————————

Beds: 4

Baths: 1 full 2 part baths

Home size: 2,300 sq ft

($304 / sq ft)

Lot Size: n/a

Year Built: 1984

Days on Market: 5

Listing Updated: 40332

MLS Number: S619220

Property Type: Condominium, Townhouse, Residential

Community: Woodbridge

Tract: We

——————————————————————————

**WOW**FABULOS** 4 BR UPGRADED home, desirable one bedroom downstairs. Cul-de Sac location off the loop across from the park & pool. 3rd story Attic conversion with approx.400 sqft with window,AC, Fan & phone line, great for bonus/office/den. Customize loft/landing features office with built in bookcase and cabinets.Formal Dining Rm, Family Rm & Kitchen overlook lovely hardscaped & landsaped yard. Great size yard for entertaining. Pergo flooring throughout.MA BR with walk in closet and closet organizers.Many windows makes this a lite & brite home. Inside laundry with window & outside door to the yard. Cozy fireplace & built in speakers in family rm, spacious living rm with high ceilings. Custom walk-in pantry.2 car garage with finished garage attic for storage.UPGRADED bathrooms & Kitchen. Walk to all of the wonderful Woodbridge Amenities. Walking distance to all Schools.

You have to admire the realtor who can put a particularly jarring misspelling in ALL CAPS and between asterisks. **WOW**FABULOS**

lite & brite? OMG! Do you think the realtor did that to get my attention? It worked.

I was contacted by a reader recently who asked about the recent trend toward eliminating formal reception rooms. I use that room in my place for an office, but I like the game room approach. Looks like fun.

Safe Haven Buying: Kool Aid Intoxication of the Housing Bust

High-end squatters are starting to be pushed from their houses. Will the added inventory bring down high-end prices, or will the high end be a safe haven?

Irvine Home Address … 65 GRANDVIEW Irvine, CA 92603

Resale Home Price …… $2,799,000

{book1}

You wanna stay out with your fancy friends.

I'm tellin' you it's got to be the end,

Don't bring me down,no no no no no,

I'll tell you once more before I get off the floor

Don't bring me down.

Electric Light Orchestra — Don't Bring Me Down

You want to buy with your fancy friends? I'm tellin' you the rally's got to end. Don't bring them down. I'll tell you once more as prices bounce off the floor, they will go down.

Prices have crashed nationwide because buying only made sense as long as prices were going up. Once the rally stopped, prices were doomed to crash because the only alternate reason to buy is to save money versus renting. In many areas of the country, prices are low enough that buying makes sense because it is cheaper to own than to rent. Locally, that is not the case.

During the rally kool aid intoxication caused people to buy to capture appreciation, but this is not the only manifestation of kool aid intoxication. Now, some people are buying merely because prices have not gone down. This reason is just as crazy because it isn't grounded in anything tangible. The herd is seeking protection from the crash, and people are buying in areas simply because other people are buying and holding up prices. This isn't careful analysis, it is herd-following foolishness.

Back in 2007, many real estate boards had heated arguments between bulls and bears. The bulls would pull up charts showing the huge preceding rally as evidence that prices would go up forever. It is hard to argue with a chart, but past performance is no guarantee of future outcomes, and just as the bears predicted, prices fell off a cliff.

Those who argue for safe-haven speculation make the same argument: prices haven't fallen therefore they will not fall. The bulls ignore the huge inventory of distressed properties as if it isn't there. "I'll believe it when I see it," they say. How much more obvious does it need to be? We can see years worth of inventory in the foreclosure pipeline, and although we don't have addresses of the shadow inventory, First American CoreLogic does, and they say 8.4% of Orange County mortgage holders are delinquent on their payments. That doesn't seem particularly safe to me.

New Trulia Real Estate Index: Rent vs. Buy

Today Trulia announced America’s Top 10 Cities to Buy vs. Rent and the Top 10 Cities to Rent vs Buy. Trulia calculated the price-to-rent ratio using the average list price compared with average rent on 2 bedroom apartments, condos and townhomes listed on Trulia.com. To create the list, Trulia analyzed the largest 50 cities in America, by population.

Top 10 Cities to Buy vs. Rent

City Price-to-Rent Ratio
1. Minneapolis, Minnesota 8
2. Arlington, Texas 8
3. Miami, Florida 8
4. Fresno, California 8
5. San Antonio, Texas 8
6. Mesa, Arizona 9
7. Jacksonville, Florida 9
8. Phoenix, Arizona 10
9. El Paso, Texas 10
10. Las Vegas, Nevada 11

“At the peak of the real estate bubble, cities like Miami, Phoenix and Las Vegas were not affordable for many. Now the opposite is true,” said Pete Flint, co-founder and CEO of Trulia. “Home sellers in these hard hit areas are forced to lower their prices to compete with all the foreclosures on the market. As a result , these unattainable markets are so affordable it makes better financial sense to buy than rent.”

Yes, it is better to own than to rent in all of the places listed above. I would also include most of Riverside County. Prices in these areas are well below rental parity. Renters in these areas pay a premium for the freedom of movement and lack of liability — as they should. Renting is supposed to cost a premium. Ownership is a burden; taxes, maintenance, debt service, transaction costs, and illiquidity.

Top 10 Cities to Rent vs. Buy

City Price-to-Rent Ratio
1. New York, New York 33
2. Omaha, Nebraska 26
3. Seattle, Washington 25
4. Portland, Oregon 22
5. San Francisco, California 22
6. Oklahoma City, Oklahoma 21
7. Kansas City, Missouri 20
8. San Diego, California 20
9. Cleveland, Ohio 20
10. Dallas, Texas 19

“It is not a surprise to see cities like New York and San Francisco on the ‘Rent’ cities but I was surprised to see areas like Omaha, Oklahoma City and Kansas City on our rental list, “said Flint “We’re not suggesting that it’s unwise to buy in these areas, though – just that it’s significantly more expensive than renting. In many of these cities, even though home buying is much more costly than renting, prices are still much lower than they have been in a long, long time.”

To see the Top 50 City Rent v Buy Index, please click here to download.

Trulia.com’s Rent vs. Buy Index – Interpretation Key

Price-to-Rent Ratio of 1-15: It is much less expensive to own than to rent a home in this city Price-to-Rent Ratio of 16-20: It is more expensive to own a home in this city are The total costs of ownership of a home in this city are greater than the costs of renting, but it might still make financial sense depending on the situation. Price-to-Rent Ratio of 21+: The total costs of owning a home in this city are much greater than the costs of renting.

Definitions: Total costs of home ownership include mortgage principal and interest, property taxes, hazard insurance, closing costs at time of purchase and ongoing HOA dues and private mortgage insurance, where applicable. Total costs of homeownership include an offset for the tax advantages of homeownership, including mortgage interest, property tax and closing cost deductions.

Total costs of renting include rent and renter’s insurance.

I was surprised to see San Diego is still unaffordable. Prices have crashed pretty hard there as they led Orange County on the way up and on the way down. If ownership is still more expensive than rent, that market may experience more pain.

One of the weaknesses of the Trulia method is that it does not take into account changes in affordability based on interest rates. With our current 5% interest rates, price to rent ratios near 20 are close to rental parity.

A Fresh Look at Rent vs. Buy

"Why on Earth would you buy down here when you can rent?" asked a friend of mine in Miami Beach not long ago. "Buying is so over."

He promptly moved to Manhattan for work reasons–and bought a $1 million loft on the Upper West Side.

Note the typical behavior. People want to buy when prices are up, and turn more wary when they've collapsed. Logically it makes no sense.

Mathematically, it makes no sense either. The various strata of the market are spread out based on incomes and amounts borrowed. During the housing bubble, the low end increased in price because first-time homebuyers whose income could only afford a $200,000 were instead given a $500,000 mortgage. The added $300,000 pushed up all prices in the marketplace. The natural spread between the low end and the high end was maintained.

However, during the bust, the low end of the market has collapsed, and the high end has held up because lenders decided to let high-end borrowers squat. The result is a wide dispersion of market prices, far wider than what is normal. Market dynamics indicate that the substitution effect will restore the natural balance of prices by lowing prices at the high end. Since many high-end borrowers are delinquent on their loan payments, the only reason the high end has not collapsed so far is that the supply has been withheld by banks not approving short sales and not foreclosing on squatters.

Research out Thursday adds some hard numbers.

Real estate website Trulia.com has looked at major real estate markets across the country and asked: Is it cheaper to buy, or to rent?

By Trulia's math my friend was moving in exactly the wrong direction.

Rent in Manhattan: Home prices there are way too high, says Trulia. (Ditto San Francisco.)

Buy in Miami. And Phoenix. And Las Vegas. And most of the other places that have been flattened by the crash. Homes there are cheap compared to rents.

The cross-over point is about 15 times annual rent, the company believes. In other words, as a rough rule of thumb, homes are probably fairly valued in a city when they cost about 15 times a year's rent. So, for example, if you're paying $10,000 a year to rent a place, think twice about buying a home that costs more than $150,000. Dean Baker, economist at the Washington, D.C. think-tank The Center for Economic and Policy Research, came to a similar conclusion in research on the subject in recent years. Fifteen times is the historic average, he said.

With 5% interest rates, the crossover is closer to 20 than 15. I used to write often about a gross rent multiplier of 160 (I used monthly rent rather than yearly). As interest rates dropped to 5%, the 160 GRM increased to about 220, a number well above historic norms.

So what's the multiple in New York right now?

About 32 times, says Trulia. The average two-bedroom condo or townhouse in New York city costs about 32 times as much to buy as it does to rent. Other major markets over 20 times include Seattle (24 times), San Francisco (22 times) and Portland, Ore. (22 times).

On the other hand Miami list prices are now about eight times annual rents, says Trulia. Phoenix is about 10 times and Las Vegas about 11.

The most beaten down markets are where the best deals are to be had.

Trulia's data need to be taken with some caveats.

Trulia looked at list prices rather than actual transaction prices, so its figures for prices may be too high.

Furthermore drawing the cut-off point at 15 times rents may be on the low side.

Mr. Baker, in conversation yesterday, said that figure assumes that you're only going to stay in your home for the typical seven years. If you stay a lot longer, he says, the transaction costs of buying and selling become less and less important. That makes owning more attractive.

Nonetheless the Trulia analysis seems directionally correct. Work done by the C.E.P.R. last year came to similar conclusions: Namely that markets like New York and the California coast remained expensive compared to rents, while the hardest hit markets now look cheap.

And Trulia's research emphasizes two points that are absolutely spot on.

First, homeowners need to look first and hardest at present cashflow. The cult of homeownership made no sense. If renting is much cheaper than buying, think seriously about it.

Second: The markets that have fallen the furthest now look like good places to buy, while those that seem to be "safest" aren't. As the saying goes: There is no such thing as a "safe" investment, merely one whose risks are not yet apparent. It's a principle that a lot of people forget time and again.

Write to Brett Arends at brett.arends@wsj.com

When the spread between low-end and high-end prices becomes as extreme as it is now, market forces and the substitution effect will force this spread to tighten — either low-end prices must go up significantly or high-end prices must come down. Both scenarios suggest speculating at the high end is not a good idea.

Safe-haven speculation is kool aid intoxication

In The Great Housing Bubble, I described the three typical beliefs of a bubble:

  1. The expectation of future price increases.

  2. The belief that prices cannot fall.

  3. The worry that failure to buy now will result in permanent inability to obtain the asset.

The belief that prices cannot fall is the fallacy behind safe-haven speculation. This erroneous belief is supported by a host of other fallacies including:

  1. They Aren’t Making Any More Land

  2. Everyone Wants To Live Here

  3. Prices Are Supported By Fundamentals

  4. It Is Different This Time

Doesn't this all sound familiar? Long-time readers of the IHB used to see this nonsense frequently in 2007 when denial ruled the market. It disappeared for a couple of years, but it is resurfacing again. This is kool aid intoxication, a disease proven to be harmful to speculator's net worth.

Safe-haven buying is not true investment, it is speculation. It is purchasing property based on faith rather than math. It is following the herd rather than studying and analyzing financial performance. There is no logic to it, but there is the allure of emotional comfort from making the same mistake everyone else does. Everyone who bought in 2006 thought they were going to be rich following the herd. Most of them were slaughtered.

I wish the safe-haven argument were true

In case you didn't notice, the IHB also operates in the real estate sales market. Since most readers of this blog are interested in Irvine real estate, it would benefit my business greatly to embrace buying in Irvine as a safe haven. I don't for one simple reason: safe-haven speculating is foolish. Don't do it. It will cost you dearly.

If you want to buy in Irvine today, know the risks. Prices may go down further (they probably will), and the best case is tepid appreciation or an extended period of flat prices. With the low payments from 5% interest rates, many properties are affordable, but buyers may find themselves underwater while the distressed properties are pushed through the market and interest rates rise. Any buyers planning to buy should expect to stay put for at least five to seven years. If there is any chance of moving three years from now, would-be buyers should rent instead.

Air in the high end

Not many years ago, there was not much debt in the high-end market. Borrowers rarely took out loans over $1,000,000 partly because they were more difficult to qualify for and partly because you couldn't deduct amounts over $1,000,000. In neighborhoods with houses over $1,000,000, it was very unusual to see debt distress because there wasn't much debt used. People would buy into these exclusive neighborhoods with large amounts of cash. Not anymore.

Many nice tract-home neighborhoods became elevated to the $1,000,000 club by borrowed money. People used to sell their homes and port $500,000 in equity to buy a $1,100,000 home. During the housing bubble, they would borrow $2,000,000 with an Option ARM and push prices of homes up to the ridiculous prices we see today. The problem with this is simple: the debt buyers cannot be replaced with equity buyers. Some neighborhoods may survive, but the more debt a neighborhood has, the more it will fall — when lenders finally get around to pushing out the squatters.

  • Today's featured property was purchased near the peak on 10/16/2006 for $3,518,000. The owners used a $2,814,167 first mortgage, a $351,771 HELOC, and a $352,062 down payment. Think about that — these people only put about $350K of their own money in a $3.5M purchase.

  • On 12/8/2006 they obtained a HELOC for $356,078 to get access to their full down payment.

  • On 6/14/2007 they obtained a HELOC for $742,400.

  • Total property debt is $3,556,567

  • Total squatting time is at least 11 months.

Foreclosure Record

Recording Date: 04/06/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 09/24/2009

Document Type: Notice of Default

I recently published a list of about 60 properties with NODs filed where the debt is over $1,000,000. Who is going to buy all of these properties? If there were cash buyers to replace the deadbeats, don't you think the lenders would have foreclosed?

Irvine Home Address … 65 GRANDVIEW Irvine, CA 92603

Resale Home Price … $2,799,000

Home Purchase Price … $3,518,000

Home Purchase Date …. 10/16/2006

Net Gain (Loss) ………. $(886,940)

Percent Change ………. -20.4%

Annual Appreciation … -6.2%

Cost of Ownership

————————————————-

$2,799,000 ………. Asking Price

$559,800 ………. 20% Down Conventional

4.91% …………… Mortgage Interest Rate

$2,239,200 ………. 30-Year Mortgage

$573,637 ………. Income Requirement

$11,898 ………. Monthly Mortgage Payment

$2426 ………. Property Tax

$567 ………. Special Taxes and Levies (Mello Roos)

$233 ………. Homeowners Insurance

$395 ………. Homeowners Association Fees

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$15,518 ………. Monthly Cash Outlays

-$1825 ………. Tax Savings (% of Interest and Property Tax)

-$2736 ………. Equity Hidden in Payment

$1061 ………. Lost Income to Down Payment (net of taxes)

$350 ………. Maintenance and Replacement Reserves

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$12,368 ………. Monthly Cost of Ownership

Cash Acquisition Demands

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$27,990 ………. Furnishing and Move In @1%

$27,990 ………. Closing Costs @1%

$22,392 ………… Interest Points @1% of Loan

$559,800 ………. Down Payment

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$638,172 ………. Total Cash Costs

$189,500 ………… Emergency Cash Reserves

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$827,672 ………. Total Savings Needed

Property Details for 65 GRANDVIEW Irvine, CA 92603

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Beds: 6

Baths: 6 full 1 part baths

Home size: 5,600 sq ft

($500 / sq ft)

Lot Size: 12,683 sq ft

Year Built: 2006

Days on Market: 34

Listing Updated: 40318

MLS Number: P734433

Property Type: Single Family, Residential

Community: Turtle Ridge

Tract: Lacm

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

Million $$ Views Luxury Estate – La Cima Model 1X on Single Loaded Street w Ocean/City Lights & Breathtaking Views * Welcome Entry Courtyard adjoints an Open Air Dining Loggia w Fireplace * 6 BR 6.5 BA + Hm Theater + Bonus Rm 4 Car Garage * Main Floor Master Suite * Complete Saparate Living Suite The Casita is a Private Oasis * 2nd Story Private Access to a spacious Living Rm w Open Kitchen * Super Launddry Rm * Lot of Custom upgrades.

Saparate? Launddry?

Does that description read like a $2,799,000 property?

How about this back yard?