The taxpayers are absorbing bad bank debt through the TARP loan modification program. It is a direct transfer of wealth from Main Street to Wall Street.

Irvine Home Address … 5212 SKINNER Ave Irvine, CA 92604

Resale Home Price …… $699,000

{book1}

I won't ever leave while you want me to stay

Nothing you could do that would turn me away

Hanging on every word

Believing the things I heard

Being a fool

You've taken my life, so take my soul

That's what you said and I believed it all

I want to be with you as long

As you want me to

I won't move away

Ain't that what you said?

Ain't that what you said?

Ain't that what you said?

Liar, liar, liar

Three Dog Night — Liar

The newest liar loan is sponsored by the US government. The HAMP loan modification program is merely documenting the bad loan underwriting standards that collapsed to bring down the housing bubble. The effect of these loan modifications is to transfer the bad debt from the lender to the US government. In short, it is government orchestrated theft. Taxpayer money is being given to the banks. And what's worse, the poorer the loan quality on the banks books, the bigger the bailout.

The New Liar Loan

Does anyone really think that homeowners can afford to pay 60% of their income for housing? Apparently, the architects of the latest loan modification program called HAMP do. Government officials are touting that they are saving the housing industry by modifying more than 1 million loans to date, and converting 170,000 of those to "permanent" status, with many more to come.

Those so-called "permanent modifications" cost the Borrower 31% of their income today, but the Borrower still has 61% of their income going to total debt obligations (credit card, HELOC, car payment, etc.). These statistics, known as the Back-end Debt to Income ratio, can be found on page 6 located PDF here. Although not disclosed, we believe most of these loans exceed 100% LTV today as well. This is nothing more than a fully documented version of the same garbage that took down the banking system two years ago, and this time the Federal government rather than Countrywide and New Century are underwriting it. Almost all of these Borrowers will eventually re-default.

Last Friday, I wrote about The Mechanism For Diverting Bank Losses to the US Taxpayer. This program is a manifestation of the same thing. Take a toxic mortgage, modify it with a government guarantee certain to fail, and a toxic mortgage is moved from a bank balance sheet to the government's balance sheet. It is a direct transfer of wealth from the US government to the banks in a thinly disguised rip off.

It is very obvious that the architects of HAMP are short-term focused, and are tricking us into thinking they are solving the problem by calling these permanent modifications. Until these loans are renamed, let's call them "Liar Loans 2," except this time the liar is the Bank of the United States rather than the Borrower because this modification is anything but "permanent". We do believe that stabilizing home prices and the banking system are critical to the recovery of the U.S. economy, but let's at least tell the truth about what is being done.

The truth is that the banks are off-loading their toxic crap. First, about $1,200,000,000,000 was purchased by the Federal Reserve indirectly through their GSE purchases, and now billions more are being recycled directly through bogus government loan modification attempts.

I wonder how many of these will be done without borrower knowledge or consent? The bank could modify the loan themselves, and when the borrower continued to be delinquent, the bank could then turn to the US government to make them whole.

Did you realize each loan modification made this transfer of liability and it is designed to fail?

What this means for you is that the housing recovery that is being touted by elected officials is far from assured. There will be fewer homeowners thrown out on the street this month than would have occurred otherwise, but they will be tossed out later. The modification programs have helped stabilize home prices around the country, mostly because they have created so much confusion that people can live in their home for free for one year or more, and are buying time for thousands of banks to continue improving their balance sheets with earnings from good loans, while deferring the write-off of bad loans. The biggest beneficiaries of this program are the banks with the largest Home Equity Loan portfolios, which are also the banks needed to provide capital to businesses to start hiring again.

The banks are embarking on a program of widespread borrower squatting until loans can be modified. Last week we looked at The Lender Decision Tree and Limited Resale Inventory. They are choosing squatting over foreclosure because when they foreclose, declining neighborhood values encourage too much strategic default. Of course, the squatting causes its own issues including moral hazard, but the banks are so desperate they are choosing moral hazard to stay alive — a zombie existence.

This is the problem of zombie banks. Rather than allocating capital toward making good, new loans, banks must constantly buffer their loan loss reserves to cover the losses on the very stupid loans from the past. New banks can make new loans. Zombie banks cover losses on old loans. If we had nationalized the banks back in 2008, we would have eliminated the zombie banking problems.

How does this change things? We will be adding 170K additional future foreclosures to our forecast, with many more to come, and guiding our clients through these turbulent times by analyzing every indicator we can get our hands on. Despite the negative tone of this email, there are and will continue to be plenty of opportunities to make money, particularly taking advantage of the distressed selling that will go on for years, but having a long term investment horizon. Also, the national housing market is becoming more local than ever, which means those with local market knowledge, or the ability to roll up all of the local factors into a national view, will make the most money. In other words, those who do their homework will get straight A's.

Unfortunately, the real estate industry's only prospect for growth for the foreseeable future is in distressed properties. One of the effects of this property loan distress is going to be continuing deflation as lenders finally take the painful write downs they are trying to avoid.

Future interest rates

We are at the bottom of the interest rate cycle, and it is very unlikely that mortgage interest rates will go much lower, but I don't see rates rising very high very fast either. Part of the reason is that I believe the The Bernanke Put: The Implied Protection of Mortgage Interest Rates is very real, but I also think we have some huge deflationary headwinds blowing. The amount of second mortgage debt on the books of the banks is very troubling. The losses are certain to be much larger than the banks are currently willing to admit.

Also, the commercial real estate bust has barely started. The only hope lenders have with commercial loans is that many of them were personally guaranteed by wealthy people or corporations that will stand by the losses. The write downs for commercial mortgages has only just begun, and as the cycle drags on, many small and mid-sized banks are going to get wiped out. There are Midwestern banks with entire portfolios of California raw land deals. The assets in many instances have a near negative current value, but loans on the books of these lenders is in the millions. Marking to reality is going to be very painful, and squatting has ruled the day. Most of the raw land deals in California are tied up in some underwater banking limbo.

The yet-to-be-recognized loan losses are very deflationary. Loan losses are the destruction of lender capital. The loan itself may have been imaginary money, but the losses are very real. This deflationary pressure will keep interest rates low for as long as it lasts. The commercial real estate bust is in front of us, not behind us.

Some loan modifications can and should work

Loan modification programs fail because borrowers are generally better off in default. Some can't afford the debt service under any circumstances. They can get out from under their debt and be much better off than hanging on for fantasies of better days to come. However, when borrowers have plenty of equity and if they could afford their payments under normal circumstances, then loan modifications are a good solution. Unfortunately, there aren't many people who have equity and can afford the debt under normal repayment terms.

The owner of today's featured property purchased for $275,000 on 3/22/1999. Or at least that is what my data source shows. I don't think this is right. I think he paid $345,000 based on the $276,000 first mortgage, $28,000 second mortgage. I suspect there was also a $41,000 down payment, but I can't be sure. I doubt this was cash-out purchase in 1999.

The mistake this owner made was taking out an Option ARM for $320,000 on 11/2/2007. He may have fallen on hard times when he opened a HELOC on 6/19/2008 for $80,000. This owner went through the entire bubble without refinancing, so he didn't start refinancing for HELOC abuse.

Foreclosure Record

Recording Date: 01/27/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 05/11/2009

Document Type: Notice of Default

This guy defaults on his Option ARM, but he still has 50% equity in the property, so foreclosing on him simply forces him to sell. This is a borrower for whom loan modification program are designed. He needs his Option ARM converted to a low-interest fixed-rate mortgage so he can stay in his house. He could afford the smaller mortgage under stable terms. He did for seven years without Ponzi borrowing.

I support loan modifications for borrowers like this guy. Unfortunately, he is the exception rather than the rule. Most are over extended Ponzis waiting for their bailout to continue building their huge pile of debt to support their fake lives.

He was given a small private loan to cure his default.

Foreclosure Record

Recording Date: 02/22/2010

Document Type: Notice of Rescission

Perhaps he has come to accept that he can't afford this house any longer and he must sell. That is sad… Well, it is sad to a point. He is still going to sell and pocket $350,000 for being an owner during the housing bubble.

When loan modifications don't work, borrowers are really screwed

In the year since the program got rolling, it has generally failed to lower payments. Of the 3.4 million eligible loans, 228,000 have been permanently reduced, while 155,000 have been rejected during the trial period, according to Treasury Department data compiled by the nonprofit Pro Publica.

"If they're rejected, collection starts again immediately," said Ali Tarzi, housing supervisor for the San Diego nonprofit Community Housing Works.

Robles said his payments were lowered by about one-third for nine months, and he paid them all on time. In February, he got a letter saying he'd been rejected from the program because he had too much in savings to qualify.

Then he got the bill for $10,500, the sum of the difference between nine months of lowered payments and the amount he was supposed to pay, plus interest charges and late fees. He also learned his credit rating had fallen steeply, thanks to two reports of being 60 days overdue, and two of being 30 days overdue.

"I was like, how can you do that?" he said. "I never missed a payment!"

Treasury guidelines say that when borrowers go into a trial modification, their credit status should freeze: If the borrowers are delinquent, they stay delinquent; and if they're current, they stay current, though the guidelines allow lenders to report that the payment is being modified, which causes a small credit hit.

Irvine Home Address … 5212 SKINNER Ave Irvine, CA 92604

Resale Home Price … $699,000

Home Purchase Price … $275,000

Home Purchase Date …. 3/22/1999

Net Gain (Loss) ………. $382,060

Percent Change ………. 154.2%

Annual Appreciation … 8.1%

Cost of Ownership

————————————————-

$699,000 ………. Asking Price

$139,800 ………. 20% Down Conventional

5.01% …………… Mortgage Interest Rate

$559,200 ………. 30-Year Mortgage

$144,900 ………. Income Requirement

$3,005 ………. Monthly Mortgage Payment

$606 ………. Property Tax

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

$58 ………. Homeowners Insurance

$0 ………. Homeowners Association Fees

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

$3,669 ………. Monthly Cash Outlays

-$735 ………. Tax Savings (% of Interest and Property Tax)

-$671 ………. Equity Hidden in Payment

$273 ………. Lost Income to Down Payment (net of taxes)

$87 ………. Maintenance and Replacement Reserves

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

$2,624 ………. 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

$40,200 ………… Emergency Cash Reserves

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

$199,572 ………. Total Savings Needed

Property Details for 5212 SKINNER Ave Irvine, CA 92604

——————————————————————————

Beds: 4

Baths: 2 full 1 part baths

Home size: 2,324 sq ft

($301 / sq ft)

Lot Size: 6,240 sq ft

Year Built: 1972

Days on Market: 81

Listing Updated: 40310

MLS Number: P722993

Property Type: Single Family, Residential

Tract: Rc

——————————————————————————

GREAT LOCATION IN IRVINE. THIS HOME NEEDS A LITTLE TLC, BUT HAS A GREAT FLOOR PLAN AND LARGE YARD.A WINE CELLAR IS IN BACK YARD. A HUGE FAMILY ROOM OFFERS AN AREA FOR THE ENTIRE FAMILY TO RELAX. THIS PROPERTY HAS BEEN REDUCE $25000 AND WE ARE LOOKING FOR A FAST SALE.

The mortgage statistics out of Riverside County are pretty grim. Will the substitution effect pull prices down here in Irvine?

Irvine Home Address … 40 SALT BUSH Irvine, CA 92603

Resale Home Price …… $4,995,000

{book1}

And I'm here to remind you

Of the mess you left when you went away

It's not fair to deny me

Of the cross I bear that you gave to me

You, you, you oughta know

And I'm not gonna fade as soon as you close your eyes

And you know it

And every time I scratch my nails down someone else's back

I hope you feel it…well can you feel it

Alanis Morissette — You Oughta Know

Lenders,

How do you feel about the banks?

I am seeing the argument put forward frequently that we need to coddle the banks because if they lose money, we all suffer. Many are suggesting that Individual borrowers should continue to make payments when they are hopelessly underwater and they can rent something much cheaper elsewhere in order to preserve neighborhood property values and prevent the banks from going under. That is rubbish. People don't owe their neighbors or the banks anything.

The lenders created this mess, and they need to experience the consequences of their foolish lending otherwise they will do nothing to learn from their mistakes and prevent doing it again. They loaned too many people too much money under unstable loan terms. They deserve the pain they get. They do not deserve our tax dollars or assistance.

The more I pay attention to this issue the more I become annoyed at the banks. They inflate bubbles with their loans. They create the Ponzis. They enable the squatters. They conspire to keep prices artificially high and keep prudent families out of reasonably priced homes. I have a problem with their behavior and how it impacts all of us.

Fitch finds Calif. at both extremes in mortgages

Copyright © 2010 The Associated Press. All rights reserved.

NEW YORK — California has the best-performing U.S. region in mortgage performance as well as some of the worst, according to a study by Fitch Ratings.

Results of the ratings agency's study of all securitized non-agency California mortgage loans were released Wednesday.

Among the findings, it said the Bay Area region of San Francisco, San Mateo and Redwood City has a 60-day mortgage delinquency rate of just 4 percent. That was No. 1 among the 382 metropolitan statistical areas tracked by Fitch.

Recent price trends have helped. While California home prices are under stress and further declines are likely, San Francisco home prices have increased by 12 percent over the past year.

I don't know the listed markets to comment, but I I do note that it pays to live in neighborhoods with others with 800 FICO scores. The lower the delinquency rate the better the values are holding up; although, the real correlation is to foreclosures: the higher the rate of foreclosure the lower the resulting property values.

Banks stopped foreclosing after they kicked out all the poor, subprime borrowers. The middle- and upper-middle- class borrowers who were given Alt-A loans and Option ARMs have simply been allowed to squat. Lenders have made a conscious decision to allow the Ponzis to squat in cities like Irvine because they know foreclosing on them will reduce prices.

This isn't a story of the rich getting richer… well, that did happen too, but the poor certainly did get poorer. The borrowers given subprime loans all went delinquent like their higher wage earning counterparts in Alt-A and prime borrowing pools, but the subprime crowd was actually foreclosed upon, and values in these areas cratered as expected. Of course, that means those markets have found a market clearing price, and the lives of the people can be rebuilt and go on.

The Alta-A and prime borrowers took out toxic loans like Option ARMs and interest-only financing with low down payments. Despite recent reports to the contrary, toxic loans and low down payment speculation did inflate the housing bubble. The only difference between these neighborhoods and the subprime neighborhoods is the foreclosures. The middle class and the working affluent are being given a pass.

At the other end of the spectrum is the Riverside-San Bernardino-Ontario (Riverside) region, at 367th among all U.S. metro areas with a 60-day delinquency rate of 23 percent.

Nearly one in four borrowers is not paying their mortgage. One in four. Unemployment is not that high. Despite reports that strategic default is a small percentage of delinquencies, how do lenders explain a 23% delinquency rate without strategic default? The people in the land of the dirt people are not stupid. They recognize when the economics favor walking away, and they do.

Ninety percent of Riverside mortgages are now "underwater," Fitch said, and

Only one borrower in nine has any equity in Riverside County. Wow! I guess it pays not to be a loan owner out there….

nearly 60 percent of borrowers owe more than 150 percent of the value of their homes.

It will take forever for house prices to recover enough for these people to survive without scuba gear. They won't even qualify for a principal reduction program because they are too far underwater. This is the primary reason so many strategic defaults are occuring.

Fitch said California mortgage trends are important for both new and existing securities in the rest of the nation, since the state has about 40 percent of overall mortgage origination volume.

What happens in California determines what happens to the banks. It is in the banks best interest to maintain the Ponzi scheme anywhere it hasn't already imploded. You know they must be desperate when their only option is widespread squatting, and they chose that option. Banks typically are not in the business of buying homes for people and letting them live there for nothing. Yet that is what they are doing. The banks bought all these homes at ridiculous prices, allowed Ponzis to move in, and now they are just letting them live there. Amazing.

Riverside County Substitution Effect

Yesterday, I was in south Corona on the terrace of the Retreat Golf Club overlooking the finishing holes and the surrounding real estate development. It is a sea of McMansions of a quality as high as anything in Irvine. Buyers can have a 4,152 SF home with a prime location looking down on a golf green perched on the edge of a lake for under $600,000. There is a price where people say to themselves, "I can get an 1,800 SF condo touching another 1,800 SF condo in Irvine, or I can go get a 4,000 SF McMansion in Corona for the same price." When the disparity gets very high, like it is now, people substitute for the larger home in the less desirable location.

If you want to speculate on where prices will go up in the future, you can bet on the improvements in our traffic corridors. When improvements go in, real estate values go up in the areas serviced by the improvements. A classic example from history is the construction of the Brooklyn Bridge and the impact it had on property values in Brooklyn. The slow ferries that made commuting slow and expensive gave way to speedy and inexpensive land travel.

There is a bottleneck where the 241 meets the 91 that backs up for hours. If you have ever waited in that line, you know the maddening experience of the people who bypass the entire wait and try to cut in at the last minute. The police patrol it heavily, but I am surprised there are not more road-rage shootings at this location. The daily wait at that location is the primary thing preventing more people from living in Riverside County and working in Orange County.

Much of the real estate value in Orange County remains due to this bottleneck because it strongly inhibits the substitution effect. If cars could quickly and efficiently move to and from Orange and Riverside Counties, much of the real estate value would leak out of Orange County to the nearest transportation system locations in Riverside County. Improvement in our transportation system would be great for commerce, but it would almost certainly raise real estate values in Riverside County at the expense of properties in Orange County.

Is the perception of premium self-reinforcing?

Is it possible that areas where prices have not fallen attracts other money that prevents prices from falling? Is there a premium for being premium? If someone had suggested this to me a year ago, I would have laughed, but there certainly are buyers in the market motivated by the apparent flight to quality. The real question is, "are there enough zealot buyers acting on faith instead of math to support the entire market?" We won't know the answer until the foreclosure and delinquencies problems are resolved. I don't think so.

I have one major problem with this idea. One sign of kool aid intoxication is that people bought property simply because prices were going up. People had no idea why prices were going up, but prices were, and this induced more buying which was actually the cause of prices going up. Isn't buying because prices are not going down the same thing? Isn't buying into a market crash in areas that have not crashed yet another manifestation of buying on faith? Isn't that the very essence of kool aid intoxication?

The fact that we may have witnessed a temporary bottom and a bear rally does not mean that the move we are seeing is based on any underlying fundamentals of the market.

Everything about this real estate market move is an illusion. However, many believe we will fake it 'til we make it. I can't argue with that. We might.

I still believe prices will go down as the cartel loses its grip on the market, but I am surprised at the effectiveness of their squatting program. By allowing Ponzis to squat, they are sustaining values and preventing widespread strategic default in many areas. Only time will tell if this fix was a good solution or an enduring one.

Losing $1,619,700 sucks

This is the biggest loss I have seen to date on an Irvine property, and the owner is the one losing the money, not the bank.

• Today's featured property was purchased on 4/3/2007, the eve of the subprime implosion. The owners used a $3,750,000 first mortgage and a $2,565,000 down payment.
• On 8/2/2007 they refinanced with a $3,400,000 first mortgage. They actually paid their mortgage down. They earn an A for mortgage management. I doubt that is much comfort to them.

No mortgage equity withdrawal, and no squatting. This deal has not worked out as well for them as it has for others….

Irvine Home Address … 40 SALT BUSH Irvine, CA 92603

Resale Home Price … $4,995,000

Home Purchase Price … $6,315,000

Home Purchase Date …. 4/3/2007

Net Gain (Loss) ………. $(1,619,700)

Percent Change ………. -20.9%

Annual Appreciation … -7.2%

Cost of Ownership

————————————————-

$4,995,000 ………. Asking Price

$999,000 ………. 20% Down Conventional

5.07% …………… Mortgage Interest Rate

$3,996,000 ………. 30-Year Mortgage

$1,042,522 ………. Income Requirement

$21,623 ………. Monthly Mortgage Payment

$4329 ………. Property Tax

$750 ………. Special Taxes and Levies (Mello Roos)

$416 ………. Homeowners Insurance

$475 ………. Homeowners Association Fees

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

$27,593 ………. Monthly Cash Outlays

-$2395 ………. Tax Savings (% of Interest and Property Tax)

-$4740 ………. Equity Hidden in Payment

$1981 ………. Lost Income to Down Payment (net of taxes)

$624 ………. Maintenance and Replacement Reserves

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

$23,064 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$49,950 ………. Furnishing and Move In @1%

$49,950 ………. Closing Costs @1%

$39,960 ………… Interest Points @1% of Loan

$999,000 ………. Down Payment

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

$1,138,860 ………. Total Cash Costs

$353,500 ………… Emergency Cash Reserves

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

$1,492,360 ………. Total Savings Needed

Property Details for 40 SALT BUSH Irvine, CA 92603

——————————————————————————

Beds: 5

Baths: 5 full 2 part baths

Home size: 7,150 sq ft

($699 / sq ft)

Lot Size: 20,150 sq ft

Year Built: 2006

Days on Market: 28

Listing Updated: 40280

MLS Number: U10001628

Property Type: Single Family, Residential

Tract: Shdc

——————————————————————————

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

This property is in backup or contingent offer status.

Live La Dolce Vita in Shady Canyon at this tremendous Tuscan-inspired estate on one of the enclave's most sought-after oversized lots. Gracing the top of a scenic promontory, the property soaks in panoramic vistas of the verdant hillsides – while also offering the ultimate in privacy at the end of a cul-de-sac with only one neighbor. Encompassing more than 7,100 square feet of relaxed elegance, the estate provides 5 bedrooms and 5 and 2-half baths, including a secluded guest casita. Designed for alfresco living in all seasons, the estate features expansive living 'suites,' where disappearing doors create a seamless transition from indoor to outdoor spaces. A stylish formal living room opens to a sheltered loggia and to the sparkling hillside pool/spa, cabana and sun-drenched dining terrace beyond. Even the lantern-lit entry portico, with its breathtaking reclaimed brick barrel-vaulted gallery, sets the stage for unparalleled entertaining.

These photographs are beautiful.

.