Category Archives: Library

The Lender Decision Tree and Limited Resale Inventory

Lenders have limited options for dealing with delinquency. So far lenders are holding current price levels by keeping properties from the market.

Irvine Home Address … 7 Capobella Irvine, CA 92614

Resale Home Price …… $675,000

{book1}

Ring, ring, ring goes the telephone

The lights are on but there's no-one home

Tick tick tock it's a quarter to two

And I'm done

I'm hangin' up on you

I can't keep on waiting for you

I know that you're still hesitating

Don't cry for me

'cause I'll find my way

You'll wake up one day

But it'll be too late

Madonna — Hung Up

Borrowers are done paying, and their hanging up on lenders. The lenders are still hesitating, waiting for borrowers to pay. Lenders will wake up one day and start the foreclosure process in earnest. Will it be too late?

The Lender Decision Tree

When lenders make loans, they far prefer borrowers to repay those loans; in fact, their entire business plan relies on it. As long as borrowers are current with their payments, lenders are happy and making money. When borrowers don't make their payments, the end result is a distressed sale. If there are enough of these, market prices are reduced dramatically which causes significant lender losses.

Below is the lender decision tree for delinquent borrowers. Today we will explore this diagram in some detail and discuss the ramifications of the decisions lenders make.

Loan Modifications

Once a borrower stops paying on the loan, the first step in the process is to attempt a loan modification. Many borrowers are using this step as a place to game the system for more time in the property. If the loan modification is successful, then the borrower is made current and everyone is happy. Very few loan modfications are successful mostly because it isn't in a borrower's best financial interest to get temporary relief and sustain the huge debt. Loan modifications are the first step in the amend-pretend-extend dance.

Short Sale

The next option is a short sale. This process generally goes nowhere because Banks Refuse to Recognize HELOC and Second Mortgage Losses. To give a sense of scale of this problem, consider this: "Together with Citigroup the banks hold about 42 percent of the $1.1 trillion in second-home liens. Unlike first mortgages, they are typically not bundled and sold off to investors but kept on the banks' books. The biggest home-equity lender in the U.S. is Bank of America, holding some $138 billion in such loans. Wells Fargo has about $123.8 billion of home-equity loans." These loans are all going to go bad, and it will decimate the banking industry when these losses are finally recognized.

Short sales are not going to be the final resolution of this problem for one main reason: many distressed sellers do not bother to attempt a short sale. First, for those with non-recourse loans, they are foolish to attempt a short sale because buried in the terms of the sale is the abandonment of their non-recourse status. Plus, why would they go through the hassle? The magnitude of the loss doesn't impact the borrower, so there is little incentive for them to participate in the short sale process. Once they decide they are not going to sell and obtain any equity, most people stop paying and stop responding to lender inquiries. If borrowers don't care enough about the property to communicate with the bank, they certainly are not going to get involved in a short sale process.

If a short sale does go through, it is still a distressed sale. It is a sale that probably would not be occurring in the market if the borrower were not in distress. These should be inventory added to the organic inventory of people moving for other reasons. One of the side effects of having 11.2 million properties underwater is that about 25% of our organic sales inventory is removed from the market. People are trapped in their homes.

Squatting and shadow inventory

Once loan modifications and short sales have failed, the only options available to lenders are within the foreclosure process. At this point, borrowers are not making payments, and contractually, lenders have the right to force the sale of the property at public auction. Prior to the Great Housing Bubble, it was inconceivable that lenders would allow borrowers to squat in houses once it became obvious they were not going to repay the loan. Now that over 10% of loans in the United States are delinquent, lender are overwhelmed by the volume. And since lenders know that foreclosing on all those people will cause them catastrophic losses on their second-home lien portfolios in addition to crushing home prices, they are choosing not to do anything. More than one-third of all delinquent borrowers have been delinquent for more than a year. Squatters are everywhere.

The reason lenders are allowing widespread squatting are twofold:

  1. Lenders hope that people in this category will cure their loans with a loan modification. Nobody believes this is the cure to the problem, not even the lenders.

  2. The government benefits by having fewer homeless and no rioting in the streets. The twenty-first century's version of squatter's rights is allowing delinquent homeowners to stay in their homes. It prevents Hoovervilles and provides significant economic stimulus through the temporary elimination of housing expenses. Too bad it totally screws renters who don't enjoy such benefits.

Shadow inventory is foreclosure's purgatory. It prepares delinquent borrowers for the singularity of trustee sale.

Pre-Foreclosure Inventory

Once lenders finally serve notice on the squatters, these properties show up as pre-foreclosure inventory and we can see them on ForeclosureRadar.com. Although the amend-pretend-extend dance is primarily keeping people in shadow inventory, a huge number of properties are bottlenecking in pre-foreclosure.

We have been watching the foreclosure market very closely. Ordinarily, very little inventory exists here because once the process is started, it tends to move forward in an orderly process and is resolved in about five months. Not anymore.

I took a survey of properties scheduled for sale during the first four months of 2010. The dancing is evident. Over 50% of scheduled trustee sales are postponed, some of them are postponed many times. Over 25% are cancelled, presumably due to a loan modification. This is the outcome lenders are dancing to obtain. Less than 25% go to auction on any given day with lenders taking 10% to 15% and third parties getting 5% to 10%. It is the postponements that are most telling.

An IHB reader has contacted me about a property that has been scheduled for trustee sale for over six months. Every two weeks, the sale is postponed for another two weeks. The first mortgage on this property has not been paid since 2008, and the borrower is making no effort to pay. The one and only reason for this postponement is because the lender is unwilling to take the loss. This is happening all over, and the postponement numbers above are testament to this phenomenon.

Unfortunately, due to the endless postponements, we have been unable to put any owner-occupants into any foreclosure properties. For any given property, there is a 93% chance that the auction will be postponed, canceled, or sold back to the bank. This makes a nearly impossible environment to work with families. We will let everyone know when this changes, but for now, that is what we are up against in the foreclosure market. The dance goes on for the sake of those cancellations as lenders hope those loan modifications are successful. Most end up re-defaulting and accumulate in shadow inventory or back here on the path to foreclosure.

Keep in mind that these pre-foreclosure inventory numbers are the visible inventory. Shadow inventory is four times as large.

Limited Inventory

On any given day, less than 25% is released to the public. The effect is to restrict local inventories and cause competition among would-be buyers. Ask anyone active in the market today, and they will tell you that the competition is fierce because so little of the MLS inventory can actually transact. The few reasonably priced properties usually offered by lender REO departments get much attention. Buyers often have to bid over ask and accept onerous terms. Many sellers offer at WTF prices nobody can afford, so they are effectively out of the market. Many properties are short sales that linger for months with twenty offers waiting for the second lien holder to accept a loss. When it doesn't happen, the property heads to foreclosure.

The effect of these conditions is to create limited inventory for the lenders to sell their own properties at inflated prices. If inventory is restricted enough, lenders capture the most motivated buyers. That is the way monopolies, oligopolies and cartels operate. Unfortunately, since this is a cartel, and since there is a huge shadow inventory, each cartel member gains advantage over the others by releasing more inventory. Once the administrative roadblocks are removed, we should see more inventory that moves from shadow inventory to visible inventory and finally through foreclosure and on to the market.

Until the spigot of inventory is opened wider, the flow of properties will be slow, prices will remain inflated, and shadow inventory and squatting will continue unabated. The Ponzis inflated house prices with their quest for appreciation income, and now inflated prices are supported by allowing the Ponzis to squat in their castles of debt. What was the Ponzi economy is now the squatter economy.

Doubling the mortgage

Many Irvine home owners doubled their mortgage during the housing bubble. With free money readily available, many took it, and now they are losing their homes.

  • Today's featured property was purchased on 4/21/1999 for $338,000. The owner used a $270,400 first mortgage and a $67,600 down payment.

  • On 10/17/2000 he opened a HELOC for $55,000.

  • On 9/4/2001 he refinanced with a $275,000 first mortgage and a $150,000 HELOC which he didn't use.

  • On 2/1/2002 he refinanced the first mortgage for $286,500.

  • On 10/4/2002 he refinanced with a $400,000 first mortgage and obtained a HELOC of $50,000.

  • On 9/9/2003 he refinanced with Countrywide and got a $408,000 first mortgage and a $50,000 HELOC.

  • On 4/22/2004 he refinanced with a $420,000 first mortgage.

  • On 1/10/2006 he refinanced with a $525,000 Option ARM with a 1% teaser rate and obtained a $100,000 HELOC.

  • Total property debt is $625,000

  • Total mortgage equity withdrawal is $354,600.

  • Total squatting time is at least 18 months.

Foreclosure Record

Recording Date: 08/07/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 03/17/2009

Document Type: Notice of Default

Irvine Home Address … 7 Capobella Irvine, CA 92614

Resale Home Price … $675,000

Home Purchase Price … $338,000

Home Purchase Date …. 4/21/1999

Net Gain (Loss) ………. $296,500

Percent Change ………. 99.7%

Annual Appreciation … 5.9%

Cost of Ownership

————————————————-

$675,000 ………. Asking Price

$135,000 ………. 20% Down Conventional

5.07% …………… Mortgage Interest Rate

$540,000 ………. 30-Year Mortgage

$140,881 ………. Income Requirement

$2,922 ………. Monthly Mortgage Payment

$585 ………. Property Tax

$67 ………. Special Taxes and Levies (Mello Roos)

$56 ………. Homeowners Insurance

$42 ………. Homeowners Association Fees

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

$3,672 ………. Monthly Cash Outlays

-$717 ………. Tax Savings (% of Interest and Property Tax)

-$640 ………. Equity Hidden in Payment

$268 ………. Lost Income to Down Payment (net of taxes)

$84 ………. Maintenance and Replacement Reserves

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

$2,667 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$6,750 ………. Furnishing and Move In @1%

$6,750 ………. Closing Costs @1%

$5,400 ………… Interest Points @1% of Loan

$135,000 ………. Down Payment

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

$153,900 ………. Total Cash Costs

$40,800 ………… Emergency Cash Reserves

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

$194,700 ………. Total Savings Needed

Property Details for 7 Capobella Irvine, CA 92614

——————————————————————————

Beds:: 3

Baths:: 0002

Sq. Ft.:: 1908

$0,354

Lot Size:: 3,586 Sq. Ft.

Property Type:: Single Family Residential Detached

Stories:: 2

Year Built:: 1987

Community:: Biltmore

County:: Orange

On Redfin:: 237 days

——————————————————————————

As of 15th of March, 2010 this is a short sale. Subject to lender(s) approval of short sale. Upgrade home in Westpark in Irvine CA. This a lovely 2 story home with 3 bedrooms, 2.5 baths and 2 car garage. Tiled floors downstairs, fireplace, kitchen with TV room, refinished cabinets, granite counters and more. Call agent for details.

If you missed the 60 Minutes story on strategic default, you can find it here.

Watch CBS News Videos Online

Greed, Foolish Optimism, and Toxic Mortgages Ruin Financial Lives

Borrowers took on huge debts during the housing bubble from a combination of greed, foolish optimism and an abundance of toxic mortgage options.

Irvine Home Address … 10 HOLLINWOOD Irvine, CA 92618

Resale Home Price …… $975,000

{book1}

Gimme the microphone first, so I can bust like a bubble

Compton and Long Beach together, now you know you in trouble

Ain't nothin' but a G thang, baaaaabay!

Dr Dre and Snoop Dogg — Nuthin But a G Thang

It was all about Greed. The G thang took over. The stories of the Great Housing Bubble are seldom black and white, right or wrong, good or evil. Some of the characters are despicable and deceiptful, but the majority are ordinary folks who succumb to greed, foolish optimism about the future of housing prices, and the market prowess of realtors and mortgage brokers.

Although the media likes to portray loan owners and innocent bystanders who don't deserve the hardship they are facing, the reality is more nuanced. People may not have fully understood the Option ARM, but they certainly did understand that (1) they would have a low payment for a few years, (2) their house would double in value and (3) they would make a fortune — or so they thought.

Few buyers during the bubble contemplated the risks they were taking on. Even today, people are buying with the false assurance that prices have bottomed and that they cannot lose on real estate. ARMs are still popular despite their obvious risks at the bottom of the interest rate cycle, and few people consider the near certainty of an increasing house payment to be a potential problem. Everyone will be make much more in a few years, right?

Many buyers today are making the same mistakes of bubble buyers; they are buying from greed and fear and an overly optimistic set of assumptions about the future of resale prices and interest rates. We are not learning the lessons of history… or are we? How many of today's buyers witnessed the bailouts and numerous government market props and reason that if things go bad the government will step in to bail them out too? The government's response is loaded with moral hazard.

Drowning in home debt

By Lisa Gibbs, senior writerMay 5, 2010: 4:28 AM ET

(Money Magazine) — A transfer in 2005 landed Air Force major Richard Hallbeck, his wife, and two kids in Southern California smack in the middle of the real estate bubble. Home prices in the area had doubled in the past five years and were still climbing. So the Hallbecks swallowed hard and bought an $845,000 four-bedroom in a suburb of Long Beach.

The $3,800 monthly payment was high but affordable on two incomes. (Laurie, now 37, worked as a claims adjuster.) And they figured the market was so strong that when they had to move again, they'd at least break even. "Our house actually appraised over what we paid for it," Richard, 42, recalls wistfully.

Since then, area sale prices have fallen 26% — when properties sell at all. Meanwhile, the recession cost Laurie her job, and the payment on the couple's adjustable-rate mortgage will jump $800 in July. Next year Richard will face mandatory retirement from the Air Force, and his pension will be a third of his current $117,000 income.

Can these people honestly say they "swallowed hard" before they bought this house? That suggests they actually contemplated the risks involved and made an informed decision. This couple, like thousands of other buyers during the bubble were assured by everyone involved in the transaction that everything would be fine, and all of their friends were telling them the same. If they swallowed hard it was to down their celebratory drinks when they got the house. They were about to make a fortune.

All that's got the Hallbecks anxious to move to a more affordable city — like Dayton, where they used to live. But they're just as anxious about how much they could lose on the sale of their house.

A similar home down the street lists for $655,000, $21,000 less than the Hallbecks' outstanding mortgage. At that price, the couple would be out $231,000, including their down payment and closing costs. "The stress has really worn on us," Richard says.

The stress over this huge mistake is exactly why people shouldn't do what this couple did. it is the reason I didn't do what this couple did. They should be stressed. They have already lost a quarter million dollars, and if they sell now, it will also damage their credit. There are consequences for participating in a massive Ponzi Scheme despite the government's best efforts to foster moral hazard by eliminating the consequences.

Nationwide, about one in four home mortgages are now underwater, meaning borrowers owe more than their places are worth. No surprise, California and other bubbly states — Nevada, Arizona, and Florida — lead the nation.

While a bevy of new federal programs aim to help, underwater owners who want to move still face uncomfortable choices: Postpone the move and continue sinking money into a pit; sell for a loss, forfeiting the down payment and some savings to close the deal; desperately try to enter into a short sale; or simply walk away and face the consequences of foreclosure. If you (or your kids) are in this situation, here's how to think about the options.

This article had my attention up to this point. I knew it could go one of two ways: (1) it could discuss the real options truthfully including strategic default, or (2) it could be a load of crap written to appease lenders who want people to stay and keep paying? Any guesses before we move on?

Keep on keeping on

If you don't have to move and can afford the payments, it probably makes sense to soldier on and wait for housing prices to recover, says Denver financial planner Ross Schmidt. Moody's Economy.com projects that prices in 61% of metro areas will return to recent peak levels by 2015.

Here is a half-truth disguised as good advice. First, the projections from Moody's is overly optimistic as shill studies tend to be, and second, the 39% of metro areas where prices will not reach peak levels by 2015 include most of California, Nevada, Arizona and Florida — the areas that bubbled most.

If you live in one of the harder-hit cities — which may take 20 years to rebound — and you're more than 25% underwater, your house won't be a financial asset anytime soon. But as long as you're happy to stay in it for many years, that may not matter.

May not matter? Bullshit. Timing Does Matter. It matters a great deal to the family that will have to do without the significant resources going to a bank for debt service. Lenders need to feel the brunt of their foolish losses. Losing money causes the pain that prevents them from doing it again. Banks should never have extended oversized loans to people who couldn't afford the payments. People renting from the bank at overpriced rates are screwing themselves and enriching stupid, greedy bankers.

In the meantime, you may be able to cut your loan balance — and lower your payments — through a new federal program that refinances existing loans into smaller FHA loans. To qualify, you must be current on payments — but it's up to the lender to agree to it.

I am sure the lenders are lining up to reduce loan balances of those who are paying on time… Not. What possible incentive do lenders have to participate. Unless the borrower becomes a problem to lenders by refusing to pay the note, there is no urgency for lenders to do anything.

The Hallbecks might have been eligible for some of this aid, but Laurie is eager to move with the kids by this fall, rather than waiting until Richard retires — which will be in the middle of the school year.

Beg the bank for a break

What if you need to get out of the house? The Hallbecks initially considered renting their place out. But they'd probably lose money, given the spread between their mortgage payment and rental prices. Becoming a landlord is a risk even in areas where you can cover carrying costs, as you're still on the hook in between tenants, says Maryland financial planner Timothy Maurer.

The fact that rents are much less than the cost of ownership is exactly why this was a stupid purchase to begin with. There was no viable plan B. Renting for negative cashflow is stupid, particularly with an ARM where the negative cashflow can become even more negative.

A cleaner option may be to ask your lender for a short sale, in which it would accept less than the loan amount. To convince the bank, homeowners must show they're at risk of default because they can't make payments or are so deep underwater that they're likely to bail. (With $155,000 in savings outside of retirement accounts, it's unlikely the Hallbecks will qualify.)

Why would a bank agree to a short sale if the borrower has assets? Banks don't want to tell borrowers they don't have to pay the bank even if they can, unless the US taxpayer is paying the difference.

It can take months to arrange a short sale, if you're successful at all. So for best results, work with a "distressed-property specialist," a real estate agent who has experience negotiating with lenders. At realtor.com, select "SFR" under Find a Realtor to search for this type of specialist.

Notice the plug for realtor.com? Who do you think sponsored this story?

Also seek free advice from a certified mortgage consultant, whom you can find via makinghomeaffordable.gov, suggests Melinda Opperman, of Springboard Nonprofit Consumer Credit Management. Such an adviser can help you determine whether your loan type allows the bank to come after you for money later. He or she can also help ensure the loan is reported as "settled" to the credit bureaus. A mortgage listed as "settled for less than agreed" can damage your score the way a foreclosure would.

Not exactly. For the truth, please see How Delinquencies Impair Credit Scores:

After a mortgage delinquency, the two scores [680 and 780] would look like this:

• After 30-day delinquency, 680 score drops to 620 to 640; 780 score declines to 670 to 690.

• After 90-day delinquency, 680 score falls to 595 to 610; 780 score goes to 645 to 665.

• After foreclosure, short sale, or deed-in-lieu, 680 goes to 575 to 595 and 780 drops to 620 to 640.

• After bankruptcy, 680 drops to 530 to 550; 780 declines to 540 to 560.

Speaking of foreclosure, University of Arizona law professor Brent White says walking away may make sense financially if you're more than 40% underwater and could rent a similar house for less than your mortgage bill. But doing so has consequences, not the least of which may be a guilty conscience. Foreclosure stays on your credit report seven years — and can cut a 780 score an average of 150 points, per Fair Isaac. That can affect everything from your insurance premiums to your employment potential to your future ability to buy a house.

Do you think Dr. White really set the bar at 40% underwater? Didn't that strike you as such a high threshold that few find themselves in that situation? I believe the reporter intended it that way. Default rates go up dramatically at the water line. People are generally better off if even a little underwater if rents are less than the cost of ownership.

Guilty conscience? LOL! More lender fantasy and projection. I predicted previously that by the end of 2010, there will be no guilt and no stigma associated with strategic default. Lenders have played on borrower guilt for too long, and borrowers are starting to see if for the manipulative lie that it is.

I have an I-Phone with the local AT&T service. The AT&T network in Irvine really sucks, and the moment Verizon gets the I-Phone to work on its system, I will cancel my AT&T contract and pay the early termination fee. I won't feel any guilt about breaking my contract, and it won't make me immoral.

Eat the loss yourself

For the Hallbecks, the best — and fastest — option may be simply selling the house and paying any difference between the sale price and the mortgage out of pocket, says Maurer. That is a good, if not particularly palatable, choice for homeowners who have significant savings and aren't deeply underwater. Selling this way eliminates any credit risks.

Since Money first spoke to the Hallbecks, they have listed their home and attracted an offer of $655,000. That would've meant shelling out the $21,000 difference, plus some $40,000 in commissions and closing costs. So, the couple decided to hold out for more. "Hopefully," says Richard, "our expectations aren't too high."

I would love to joke about the stupidity of their decision, but with the restricted inventory condition caused by lenders refusing to foreclose and clear out the squatters, some desperate buyer may bid them up enough to get them out at even. This is exactly what the banks want. They need a small army of knife catchers to take advantage of the artificially low interest rates and bail out the banks through direct acquisition.

More than the temporary increase in prices, the bear rally does one other very useful thing for the banks: it gives existing borrowers false hope that them may not be underwater soon. If borrowers really accepted that it will take ages to get back to the surface, many more would strategically default. If lenders and keep borrowers in their homes long enough, borrowers become invested in their own bad decision, and they will stay long beyond the point where staying makes sense.

Guilt and paying the mortgage

Have you ever wondered why people associate guilt with certain terms of mortgage contracts? If you examine the terms in the promissory note and mortgage arrangement, the lender is making a loan, and as a contingency in the event an borrower does not repay the loan, the lender has the right to force a public auction to resell the property to obtain their money.

Prior to our era of widespread squatting, failure to repay the loan resulted in a borrower losing the house they consider their home. A borrower who was capable of making the payment but didn't was causing their family to lose their home.

In normal circumstances, losing the house would not be in the best interest of the family, and it could be argued that losing the house is immoral as it harms the family. However, in our current circumstances with prices in many markets well below the loan balance, losing the family home — which may be emotionally painful — is better for the family than sustaining a crushing debt load.

The old moral reason for paying the mortgage to keep the family home is superceded by the greater moral imperative to provide a financial future unfettered by crushing debt.

There is another way to view this transaction. It is the banks that were immoral when they made loans without regard to a borrower's ability to repay. They put people into homes under terms that were not sustainable, and they caused the pain we are witnessing today. Making the loan was immoral, walking away is the just response.

Raiding the Equity Piggy Bank

  • Today's featured property was purchased for $900,000 on 1/17/2003. The owner used a $650,000 first mortgage and a $250,000 down payment.

  • On 3/31/2004 she liberated some equity with a $730,000 refinance.

  • On 10/29/2004 she refinanced with a $767,000 Option ARM.

  • On 12/22/2005 she obtained a $250,000 HELOC, but she may not have used it.

  • Total property debt is $1,017,000.

  • Total mortgage equity withdrawal is 367,000 including her down payment.

  • Total squatting is at least 1 year.

Foreclosure Record

Recording Date: 03/31/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 09/28/2009

Document Type: Notice of Default

Because of the behavior of owners like this, even those who should be sitting on mountains of bubble equity are broke. There is no move-up market. First-time buyers with significant wage savings are sustaining our housing market. What is typically only a small fraction of buyers now comprises the entire buyer pool.

Irvine Home Address … 10 HOLLINWOOD Irvine, CA 92618

Resale Home Price … $975,000

Home Purchase Price … $900,000

Home Purchase Date …. 1/17/2003

Net Gain (Loss) ………. $16,500

Percent Change ………. 8.3%

Annual Appreciation … 1.0%

Cost of Ownership

————————————————-

$975,000 ………. Asking Price

$195,000 ………. 20% Down Conventional

5.07% …………… Mortgage Interest Rate

$780,000 ………. 30-Year Mortgage

$203,495 ………. Income Requirement

$4,221 ………. Monthly Mortgage Payment

$845 ………. Property Tax

$233 ………. Special Taxes and Levies (Mello Roos)

$81 ………. Homeowners Insurance

$140 ………. Homeowners Association Fees

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

$5,520 ………. Monthly Cash Outlays

-$1035 ………. Tax Savings (% of Interest and Property Tax)

-$925 ………. Equity Hidden in Payment

$387 ………. Lost Income to Down Payment (net of taxes)

$122 ………. Maintenance and Replacement Reserves

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

$4,069 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$9,750 ………. Furnishing and Move In @1%

$9,750 ………. Closing Costs @1%

$7,800 ………… Interest Points @1% of Loan

$195,000 ………. Down Payment

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

$222,300 ………. Total Cash Costs

$62,300 ………… Emergency Cash Reserves

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

$284,600 ………. Total Savings Needed

Property Details for 10 HOLLINWOOD Irvine, CA 92618

——————————————————————————

Beds: 4

Baths: 0003

Home size: 3100

($315 / sq ft)

Lot Size: 6140

Year Built: 2001

Days on Market: 35

MLS Number: P728911

Property Type: Single Family, Residential

Community: Oak Creek

——————————————————————————

Atractive home in Oak Creek, very comfortable and inviting for entertaining. One bedroom and office downstairs. The beautiful home is very nicely layed out. There are many conveniences including an artium with an inground spa, built in BBQ with electric and gas in the beautiful back yead. The gated community offers pools, tennis courts, trails and is walking distrance to shopping. Located on a cul de sac street within the community.

Atractive? layed? artium? inground? yead? distrance?

Clueless Academic Wonders, "Was It Really a Bubble?

I have great respect for many in academia. Some of them actually know what they are talking about. However, I am dismayed whenever I read poor reasoning and a faulty interpretation of data by someone passing themselves off as an expert. It tarnishes the image of academics everywhere.

Irvine Home Address … 27 STARVIEW Irvine, CA 92603

Resale Home Price …… $2,999,000

{book1}

I practice every day to find some clever lines to say

To make the meaning come true

But then I think I'll wait until the evening gets late

And I'm alone with you

The time is right your perfume fills my head, the stars get red

And oh the night's so blue

And then I go and spoil it all, by saying something stupid

Frank Sinatra — Something Stupid

When economists who have no idea what they are talking about get published, it diminishes the entire profession. The gentleman I am picking on today simply has no concept of the underlying causes and motivations of real estate market participants. To start, I want to show one example of his lack of understanding with a paper he wrote about commercial real estate.

Was There a Commercial Real Estate Bubble?

By CASEY B. MULLIGAN

A few economists have likened the commercial real estate market of the last 10 years to the housing cycle. In fact, the commercial and housing markets were fundamentally different.

As recently as last week (see also here), Paul Krugman claimed that the commercial real estate market followed a bubble much like that of the housing market, and thereby concluded that the housing bubble could not be blamed on anything unique to the housing sector.

Mr. Krugman observed that real estate prices went up, and then came down, in both the residential and nonresidential sectors. For example, he has presented the chart below comparing the Case-Shiller index for housing prices with a commercial real estate price index from Moody’s.

In Mr. Krugman’s view, both “bubbles” had some of the same determinants. For example, lenders were hungry for risk, and they fed their appetites by investing in a variety of assets, like houses and office buildings. Thus, he takes comfort in his observations that the two sectors had real estate prices that moved roughly together. Continue reading →

Harvard: Lax Underwriting Standards Did Not Inflate The Housing Bubble

A recent Harvard study concluded, "the boom and bust in housing over the last decade was not primarily caused by low interest rates, reduced downpayment requirements, or laxer underwriting standards"

I cringe with embarrassment for them….

Irvine Home Address … 20 VILLAGER Irvine, CA 92602

Resale Home Price …… $950,000

{book1}

Now I like takin' off

don't like burnin' out

Every time you turn it on

makes me want to shout

We keep getting hotter

movin' way too fast

If we don't slow this fire down

we're not gonna last

Cool the engines

red line's gettin' near

Cool the engines

better take it out of gear

Boston — Cool The Engines

The wisdom of song lyrics eludes everyone in a market rally. Prices can only rise so fast in a stable market. Fundamental constraints can be ignored for a time, but wicked bear markets signal their return when the collective insanity that grips the market wanes.

Academics study the problem, but so far, progress in the field of economics has been very slow and prone to decades long wastes of time on theories like Efficient Markets. Greed and fear are the features that move market prices. What we really need is to learn how to cool the engines; instead, we strive to go faster and we blow the engine apart.

New Harvard Kennedy School Study Questions Direct Link between Lower Interest Rates and Higher Housing Prices

Contact: Doug Gavel

Phone: (617) 495-1115

Date: May 05, 2010

Cambridge MA. — Contrary to the assertions of many economists and others, the boom and bust in housing over the last decade was not primarily caused by low interest rates, reduced downpayment requirements, or laxer underwriting standards, conclude Edward Glaeser, Joshua Gottlieb, and Joseph Gyourko in “Did Credit Market Policies Cause the Housing Bubble?” a new Policy Brief published by the Rappaport Institute for Greater Boston and the Taubman Center for State and Local Government at the John F. Kennedy School of Government at Harvard University.

… “It isn’t that higher mortgage approval rates aren’t associated with rising home values. They are,” they add. “But the impact of these variables, as predicted by economic theory and as estimated empirically over many years, is too small to explain much of the housing market event that we have just experienced.” Specifically, the authors found that the 1.3 percentage point drop in real interest rates between 2000 and 2006 was responsible for only a 10 percent rise in prices, about a third of the average price increases nationally during that time and even a smaller share of the increase in many metropolitan areas, including greater Boston, where prices rose by 54 percent between 2000 and 2006.

I reached the same conclusion when researching the Great Housing Bubble. With a spreadsheet, anyone can input the income data, apply the appropriate debt-to-income ratio and calculate what a proper loan would have been. Add an appropriate 20% down payment, and you arrive at what houses should sell for. This simple math predicts housing prices in less volatile markets. Prices deviate from expectations when irrational exuberance takes over.

If banks didn't allow DTIs above 25%-32%, we would not inflate housing bubbles. In the late 1970s, lenders allowed DTIs to go well over this safe range because both the lenders and the borrowers anticipated more wage inflation. A borrower can take on a 60% DTI if they believe they will be making 10% more in salary each and every year. In a few years, the DTI would be under 30% and falling quickly. In the face of rising wage inflation, taking on debt at fixed interest is very attractive. This is the trap of inflation expectation the Federal Reserve had to bring under control under Paul Volcker.

Irvine debt-to-income ratios 1975-2009

Our latest housing bubble was built on a different mechanism: the toxic loan. DTIs were again allowed to rise above the stable range because the terms of repayment provided borrowers with a manageable DTI on a temporary basis. First it was the interest-only loan, then it was the Option ARM. Once lenders started making loans based on the temporary affordability these loans provided, they inflated a massive housing bubble sure to deflate once the unstable loan terms blew up. The terms of the toxic loans were the direct cause of the housing bubble. The reduced underwriting standards merely allowed lenders to give toxic loans to more people and make the bubble go on a little longer.

Glaeser, Gottlieb and Gyourko did find that the price effect of interest rates was greatest in metropolitan areas such as Boston, San Francisco, New York, and Seattle that have less land, more regulation and/or topography that is not conducive to new buildings. However, that impact was not enough to explain the full magnitude of the housing bubble in those places. They estimate, for example, that reduced interest rates should have caused prices in greater Boston to rise by about 14 percent between 2000 and 2006, significantly less than the actual increase of 54 percent.

The authors also found that contrary to the assertions of many analysts, including Benjamin Bernanke, chairman of the Board of Governors of the Federal Reserve System, reduced downpayment requirements did not greatly contribute to the housing bubble. Rather, they found that on average the share of the purchase price covered by a mortgage was basically unchanged over the course of the boom, rising from about 84 percent in 1998 (before the boom began) to 88 percent at the peak of the bubble in 2006 and then dropping to about 80 percent by 2008 after the bubble had burst. Moreover, the changes were even smaller among the share of people who borrowed as much as possible. Nationally, in 1998 one-quarter of home purchasers put down only about 96 percent of the total purchase price; by 2006 this figure had risen to 99 percent.

While the data do not explain the housing bubble, the authors do contend that the “the relatively modest link between interest rates and housing prices makes us more confident about rethinking [other] Federal housing policies,” most notably the ability to deduct mortgage interest from federal income taxes, a politically popular policy that many analysts believe is inefficient, unfair, and environmentally unsound. They also suggest that states such as Massachusetts that have restrictive local land use laws could reduce the extremity of its housing price cycles via policies that supersede local zoning or reward communities that allow for more housing.

I like their two policy recommendations, but neither one has any chance of passage.

Diana Olick didn't see the wisdom in this study either, and I will let her have the first shot.

Loose Lending Didn't Create the Housing Bubble

"Contrary to the assertions of many economists and others, the boom and bust in housing over the last decade was not primarily caused by low interest rates, reduced down payment requirements, or laxer underwriting standards."

My sixth grade English teacher always told me never to start with a quote, but in this case, how could I not?

Read it again, if you will; I read it three times just to make sure.

Yes, after years of bashing the mortgage industry for lax underwriting, bashing the Federal Government for negligently low interest rates and blaming investors for vacuuming up homes with no-money-down loans, three guys from Harvard say they're all off the hook.

Thank you, Diana. I am not the only one dumfounded at the ignorance of their assertions.

…I found a lot of this quite hard to digest, given the debate I've been covering for the last four years, from peak to trough to recovery. So I called Prof. Glaeser, who very affably took my questions.

Diana: If loose lending and over-borrowing didn't cause the housing bubble, what did?

Prof. Glaeser: The historical relationship between these variables and the housing market is just to small to explain this. In terms of understanding it, we believe that neither we nor anyone else understands this. The mechanics of bubbles, they certainly are associated with all sorts of irrational exuberant beliefs of future price changes. That's' always been true of housing. What specifically caused this thing? A strange cocktail that brought together things that created the bubble.

It is clear that Professor Glaeser does not understand what happened, but there are many people who do understand it. I explained it clearly above, and I will expand more now.

There is a mechanism by which prices are inflated. Prices do not increase by magic. A borrower is given a loan by a lender to buy real estate. The standards the lender applies and the terms of the loan determine who gets the loan and how big it is. It isn't mysterious; It is how our housing market works. All causes of the housing bubble must be explained by their impact on loan terms and standards. In fact, the failure to make this link is the weakness of all housing market analysis based on macroeconomic conditions.

There is a basic connection between what individuals do and the results of the collective actions of individuals. Individual borrowers taking out very large loans from stupid lenders bid up the prices on houses. The collective action of all these individuals is rising market prices and a bubble. I hope everyone who reads this is capable of explaining it to the Harvard professor. All of you now know more than he does.

Diana: But didn't subprime lending drive prices higher by bringing certain fiscally ineligible buyers into the market?

Prof Glaeser: The subprime mortgage market is different than the housing price boom. We think that it did drive prices higher. But even the historical relationship of LTV is a very small fact relative to the boom that occurred.

I pushed the professor on the loose lending some more, and he agreed that it was certainly an ingredient in the cocktail, but not the sole driver of the housing bubble.

One thing I do find interesting about this study is the conclusions they draw from their work.

So what are these researchers are trying to prove? Well that comes at the end of the press release:

While the data do not explain the housing bubble, the authors do contend that "the relatively modest link between interest rates and housing prices makes us more confident about rethinking [other] Federal housing policies," most notably the ability to deduct mortgage interest from federal income taxes, a politically popular policy that many analysts believe is inefficient, unfair, and environmentally unsound .

Prof. Glaeser argues that the mortgage interest deduction is not healthy for the housing market, and, while he didn't say as much, perhaps more dangerous than low, low mortgage interest rates or no-money-down loans. Why? Because it gives borrowers a continuing, long term incentive to borrow more than they should.

How did the home mortgage interest deduction get dragged into this? The professor is correct in his observations, but there is no linkage to his study. If the HMID somehow inflated the bubble, the argument would have greater strength, but since it didn't, the professor's argument looks like a pet idea he included because he couldn't figure out what really caused the bubble and what anyone could do about it.

The truth is lenders giving out Option ARMs and other toxic loans enabled borrowers to inflate prices, and the Desire for Mortgage Equity Withdrawal Inflated the Housing Bubble. The evidence is clear. And the government's response to the problem with HAMP is simply bringing back the Option ARM. Temporary interest rate reductions and principal deferment are the two characteristics of Options ARMs that made them unstable, yet that is the cornerstone of the government's loan modification program.

If the professor wanted to analyze the problem and suggest a change in government policy, he should go after the ridiculous bailouts and loan modification programs rather than proposing a battle against the politically impossible to repeal HMID.

Problem solving begins with a clear grasp of the problem. If the problem is not defined correctly, all solutions that follow are likely to fail. So far, we have defined the problem as foreclosure, so all our solutions are designed to delay or prevent foreclosure, and they have all failed. In reality, our problem is too much debt, and foreclosure is the solution. When policy makers finally realize this, perhaps they will get out of the way and allow the cleansing foreclosures to go forward. We can only wait and hope.

Irvine Home Address … 20 VILLAGER Irvine, CA 92602

Resale Home Price … $950,000

Home Purchase Price … $1,148,000

Home Purchase Date …. 5/28/2005

Net Gain (Loss) ………. $(255,000)

Percent Change ………. -17.2%

Annual Appreciation … -3.8%

Cost of Ownership

————————————————-

$950,000 ………. Asking Price

$190,000 ………. 20% Down Conventional

5.24% …………… Mortgage Interest Rate

$760,000 ………. 30-Year Mortgage

$202,116 ………. Income Requirement

$4,192 ………. Monthly Mortgage Payment

$823 ………. Property Tax

$300 ………. Special Taxes and Levies (Mello Roos)

$79 ………. Homeowners Insurance

$82 ………. Homeowners Association Fees

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

$5,477 ………. Monthly Cash Outlays

-$1036 ………. Tax Savings (% of Interest and Property Tax)

-$873 ………. Equity Hidden in Payment

$395 ………. Lost Income to Down Payment (net of taxes)

$119 ………. Maintenance and Replacement Reserves

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

$4,081 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$9,500 ………. Furnishing and Move In @1%

$9,500 ………. Closing Costs @1%

$7,600 ………… Interest Points @1% of Loan

$190,000 ………. Down Payment

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

$216,600 ………. Total Cash Costs

$62,500 ………… Emergency Cash Reserves

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

$279,100 ………. Total Savings Needed

Property Details for 20 VILLAGER Irvine, CA 92602

——————————————————————————

Beds: 5

Baths: 4 baths

Home size: 3,537 sq ft

($269 / sq ft)

Lot Size: 4,057 sq ft

Year Built: 2002

Days on Market: 104

MLS Number: P716076

Property Type: Single Family, Residential

Community: Northpark

Tract: Bela

——————————————————————————

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

This property is in backup or contingent offer status.

Attention Investors!!! Attention Buyers!!! Looking to Start 2010 with a Bang? Want the Deal of the Year? Nestled in Irvine s Prestigious Northpark Square & Priced to Steal, this HANDSOME Residence boasts STUNNING CURB APPEAL & LUXURIOUS Comforts that Surpass Every Home in this Price Range! Spacious Open floor plan offers 5 Bedrooms & 4 Baths w/2-Car Garage in approx. 3,537 sq.ft. Inviting Living Room & Elegant Dining Room is perfect for Entertaining. Gourmet Kitchen w/Granite Counters & Chef s Island opens to generous Family Room & Breakfast Nook. Spacious Master Suite w/Huge Walk-in Closet plus Large Secondary Bedrooms offers Abundant Closet Space! Wait till you see the HUGE Bonus Room. Near Shopping, Dining, Entertainment & Schools including community Pool, Spa, BBQ s, Sports Courts, Outdoor Amphitheater, Parks, Walking Trails, Bike Trails, Tot Lots & More! Make No Mistake This Home Will Not Last, So ACT FAST! Only ONE like this!!!

That is one of the worst descriptions I have read in quite a while. I ran out of room for graphics. it has almost every convention of bad realtor writing in one paragraph. Stunning!

Defaulting owner

This property may be facing foreclosure due to unemployment. The owner paid way too much back in 2005, but he put $229,600 down. He refinanced and pulled out a little, but he still stands to lose $200,000 when this property sells. He is trying to short sell, and squatting until it happens:

Foreclosure Record

Recording Date: 09/03/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 05/29/2009

Document Type: Notice of Default

Flipping Trustee Sale Houses on Speculation

At times like these when the opportunities to flip properties at trustee sale are available, it is a great way to make superior returns with limited risk. Today we will take a careful look at how it is accomplished.

Irvine Home Address … 2 Elderglen 60, Irvine, CA 92604

T-sale Home Price …… $387,294

{book1}

Millionaire! Billionaire! Trillionaire!

Hardly surprising, you might consider

Loyalties go to the highest of bidders

What's my opinion? I'd give you ten to one

Give me a million, a franchise on fun

But there are millions who often get nowhere

And there's just one secret I think you should share

Tell me! tell me! How to be a millionaire

Tell me! tell me! How to be a millionaire!

Millionaire! Billionaire! Zillionaire!

ABC — How to Be a Millionaire

Trustee Sales

Back in January, I went through the basics of Trustee Sales:

Foreclosure 101: Vesting Title

Foreclosure 101: Non-Judicial Foreclosure

Foreclosure 101: Mechanics of a Trustee Sale

Next we are going to explore the various ways you can participate in the clean up from the Great Housing Bubble:

Foreclosure 201: Buying a Trustee Sale Property as a Primary Residence

Foreclosure 201: Buying a Rental at Trustee Sale

Foreclosure 201: Flipping Trustee Sale Houses on Speculation

Foreclosure 201: Flipping Trustee Sale Houses to a Buyer in Escrow

Foreclosure 201: Buying Trustee Sale Properties Using Conventional Financing

Rental Returns

As I discussed in Buying a Rental at Trustee Sale, capitalization rates of 5% to 6% are common today, particularly in Riverside County or other areas were the bubble has deflated. The real benefit of cashflow investing in real estate is that the income stream is perpetual, and it generally increases over time with local wages. However, 5% to 6% a year is small compared to the short-term returns investors can obtain through flipping trustee sale properties.

Current returns favor flipping

So why not flip the property and make more than 5% in 120 days? Why not take that capital and flip in and out of four properties a year and make more than a 20% rate of return? Cashflow properties rarely offer investors rates of return exceeding 20%.

The only reason is lack of opportunity, and for the next three to five years, there will be no shortage of flip opportunities as California turns over a significant percentage of its housing stock. Perhaps after this debacle is truly behind us and we have mopped up the foreclosures, keeping money tied up in long-term hold properties is warranted, but until the foreclosure wave recedes, investors with the cash to play in this market should consider doing so.

Measuring returns from flipping

How great are the returns from trustee sale flipping and how are returns measured? The answer is: It depends. Returns are tremendous for those who have the time to do their own research, go to the auctions, manage renovations, market the property, and perform a host of related tasks. As these tasks are delegated, the various players take a cut and returns decline. If a flipper wants to delegate all tasks to third parties including management of the entire process, about half the profit goes to the management team, depending on the operator and the deals they offer.

Calculating the return on investment for trustee sale flipping involves two simple formulas we explore below:

Trustee Sale Flipping Annual Rate of Return = Individual property Investment Return X Number of Investments per year

For example, if each property flip returns 6%, and if that money can be flipped three times, the annual rate of return is about 18%. Both the individual property investment return and the number of investments per year can be managed to optimize the annual rate of return. The remainder of this post explores how this is accomplished.

Number of investments per year

Calculating the number of investments per year is as follows:

Days Invested + Days Idle

Days in the Year

The goal of investment management with trustee sale flips is to minimize both Days Invested and Days Idle.

Days invested

There are three main tasks that must be accomplished between the date of acquisition and the date of disposition:

30 — Prepare for sale

30 — Offer for sale and negotiate

45 — Escrow process and closing

105 — Total days invested

Preparing the property for sale involves renovation and clean up. Many flippers concentrate on turn-key properties to reduce preparation time to less than one week, but this also raises bids on those properties.

Offering a property for sale and negotiating offers generally cannot overlap with preparations for sale. If the property is a wreck, it will not photograph or show well. If old photos are on the MLS or available from other sources, some marketing can occur, but it is difficult to prepare and market at the same time. A future post on flipping to a buyer in escrow discusses how this step can be removed entirely.

The opening of escrow to a closing and obtaining the cash from closing usually takes around 45 days. Lender processing time is usually the limiting factor, and lenders will not start that process until the property is in escrow.

The amateur identifier: high resale asking prices

High asking prices are a sign of an amateur flipper who has not considered the time value of money. Fools try to hit home runs; pros try to hit many singles. Flippers swinging for the fences invariably spend too much time marketing the property often spending 90 days fantasizing before they lower their price enough to make a sale. Even if the sale nets more money, the opportunity cost of missing another turn negates the gain.

Idle days and the minimum investment return

The most important financial variable under complete control of the investor is the minimum investment return. Most investors react by declaring their desire to make 20%-30% on the transaction because they see the resale discounts at auction. They forget about sales commissions, back taxes, closing costs, carry costs, renovation costs, transfer taxes and other expenses. The actual profit per deal is substantial, but not as substantial as some believe.

For an investor to make a large minimum investment return, the bid must be very low relative to comps. Other investors examining the same opportunity settle for lesser returns, and the result is higher competing bids. The greedy investor rarely succeeds at auction.

Jousting with Windmills

The desire of investors to obtain outsized returns creates activity with no results, and it sends people to auctions with little or no chance of success. Perhaps attending auctions is entertaining for some, but without results little value is garnered.

Idle money

If the required minimum investment return is too high, finding a deal that matches investment parameters becomes increasingly difficult, and such deals may not be present in the market for long periods of time. Each day money sits idle lowers the rate of return. If it takes two or three months to acquire a property, an investor missed a potential flip. In short, it is wiser to target three turns per year at 6% than a single turn at 18% because the home run investment may never materialize.

The desire to maximize profit on each transaction must be tempered by the desire to put money to work and obtain a superior overall return through increased velocity.

How low should you go?

Few investors demand returns that are too low. The return demanded impacts how long money is idle, but it has no influence on how long money is tied up in the various transactions. it is practically impossible to obtain more than five turns in a single year; three is more reasonable. Lowering the required return minimizes idle time, but once idle time is at its practical minimum, continued lowering of the investment threshold simply increases risk and lowers returns.

Minimum returns versus actual returns

So far the focus has been on establishing a threshold for minimum return. This figure is critical because the minimum return in concert with other costs determine the maximum bid price at auction. Bidding at trustee sale is very similar to bidding on Ebay. When you bid on Ebay, you can establish a maximum bid, and the system will automatically outbid competing bidders by a small increment until your maximum bid amount is reached. Trustee sale bidding works the same.

In the real world, properties rarely sell at the maximum bid amount; either the property is bid higher than the maximum, or the property is acquired at a discount, and on occasion, this discount is quite significant. A minimum acceptable return may be 6%, but it is realistic to obtain 10%, 12% even 15% or more net of costs and fees. The possibility of outsized returns on bargain properties is the allure of trustee sale flipping. Also, since any property may become a bargain (it all depends on other bidders), each transaction has random upside potential. The incentive is to be involved in as many transactions as possible and turn money over as quickly as possible.

IHB Trustee Sale Investor Reports

Today's featured property is a trustee sale flip active in the market. It is a great example of the type of opportunity available today.

Prior to the sale, the published opening bid was $505,449. It was dropped just before the sale, and an investor purchased the property for $290,000. If we had been there, we would have pushed this investor up to $300,000 before we would have walked away. It is likely this would have been a successful acquisition.

Our report contains the same basic information as the other reports, but with a flip, the only items of concern to investors is how much they will have to spend and how much they will make.

The capitalization rate is presented for reference, and on this property it is very good by Irvine standards assuming this could be rented for $2,150 per month. That seems reasonable for an updated 3/2. But it really doesn't matter because this will not be held for rental.

Page 2

The second page details the costs. The trustee sale fees are based on the acquisition price plus any current or back taxes owned on the property. This tax number can be quite significant on an abandoned property or one where the owner has squatted for a long time.

The real estate improvements are often quite significant as well. Most often, these properties will be purchased without seeing the conditions inside. It is wise to budget for a complete cosmetic restoration. There is always the risk of more extensive damage due to water leaks, mold, or damage caused by the foreclosed owner.

The back taxes are easily obtained from the OC tax collector's website.

Carry costs are often overlooked by flippers, but the expenses of taxes, insurance and HOA fees are not suspended during the brief period of ownership. The carry costs depend completely on how long the property is owned by the investor. The shorter the holding time the better.

Many properties only require minor clean up or perhaps a cash-for-keys arrangement with an existing tenant.

Based on comparable sales, the IHB projected this property would sell for about $380,000. With our constricted inventory, this investor has managed to find a buyer willing to pay almost $400,000. That would turn a 6% profit into a 12% profit. The flipper must be very happy.

If the IHB had purchased this for a buyer waiting in escrow, we would have sold the property for $372,106. The property would have been sold in 45 days instead of 105, but the profit would have been only 6%. That is the way it works out some time. The buyer would be very happy, and the investor would have the funds back to turn another flip. The assurance of a quick sale for a known price is worth it for the investor. It really is a win-win.

The investor that purchased today's featured property is going to make a very nice return. This is better than average, but not unreasonable or unusual. The main limiting factor today is the lender's willingness to foreclose. The amend-pretend-extend dance is not over, and although more properties are coming to market, most lenders are prefering denial to action. That will change.

Irvine Home Address … 2 Elderglen 60, Irvine, CA 92604

Resale Home Price … $387,294

Home Purchase Price … $300,000

Home Purchase Date …. 3/3/2010

Net Gain (Loss) ………. $64,056

Percent Change ………. 29.1%

Annual Appreciation … 106.6%

Cost of Ownership

————————————————-

$387,294 ………. Asking Price

$13,555 ………. 3.5% Down FHA Financing

5.19% …………… Mortgage Interest Rate

$373,739 ………. 30-Year Mortgage

$81,937 ………. Income Requirement

$2,050 ………. Monthly Mortgage Payment

$336 ………. Property Tax

$8 ………. Special Taxes and Levies (Mello Roos)

$32 ………. Homeowners Insurance

$209 ………. Homeowners Association Fees

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

$2,634 ………. Monthly Cash Outlays

-$342 ………. Tax Savings (% of Interest and Property Tax)

-$434 ………. Equity Hidden in Payment

$28 ………. Lost Income to Down Payment (net of taxes)

$48 ………. Maintenance and Replacement Reserves

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

$1,935 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————–

$3,873 ………. Furnishing and Move In @1%

$3,873 ………. Closing Costs @1%

$3,737 ………… Interest Points

$13,555 ………. Down Payment

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

$25,039 ………. Total Cash Costs

$29,600 ………… Emergency Cash Reserves

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

$54,639 ………. Total Savings Needed

Property Details for 2 Elderglen 60, Irvine, CA 92604

——————————————————————————–

Beds: 3

Baths: 2 baths

Home size: 1,165 sq ft

($343 / sq ft)

Lot Size: n/a

Year Built: 1978

Days on Market: 8

MLS Number: S612589

Property Type: Condominium, Residential

Community: Woodbridge

Tract: Gl

——————————————————————————–

This property is in backup or contingent offer status.

RARE TRUE SINGLE STORY TOWNHOME WITH NO ONE ABOVE OR BELOW; END UNIT; HUGE YARD WITH CONCRETE PATIO AND GRASSY AREA; GREAT OPEN FLOORPLAN: LIVING ROOM WITH FIREPLACE OPEN TO OFFICE WITH DOUBLE DOORS AND TO DINING ROOM; NICE KITCHEN WITH WHITE CABINETS AND GRANITE COUNTERTOPS; LARGE PANTRY, BREAKFAST BAR AND GARDEN WINDOW. NEW PAINT, LAMINATE FLOORING THROUGHOUT, MIRROR CLOSET DOORS IN ALL 3 BEDROOMS. FULL SIZE LAUNDRY CLOSET. 2-CAR CARPORT RIGHT NEXT TO THE UNIT. READY TO MOVE IN.

Former owner

I am surprised by the number of divorcees who spent their houses. Perhaps I shouldn't be. The stereotype of the irresponsible, entitled, spendthrift ex-wife is based on observation (from shows like Real OC Housewives), and the property records provide plenty of anecdotes. It is what it is.

  • On 12/4/2003 it appears the wife bought out the husband by purchasing the property for $380,000. Of course, she used 100% financing with a $304,000 first mortgage and a $76,000 second.

  • On 10/18/2004 she needed some spending money, so she opened a $90,000 HELOC.

  • On 1/31/2006 she refinanced with a $467,455 first mortgage.

  • One 5/12/2006 she obtained a $27,000 HELOC.

  • Total property debt is $494,455.

  • Total mortgage equity withdrawal is $114,455.

The lender didn't waste any time once they decided to foreclose.

Prior Transfer

Recording Date: 03/03/2010 Sales Price: $290,000

Foreclosure Record

Recording Date: 02/02/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 10/29/2009

Document Type: Notice of Default

The All-Cash Problem

The reason more people don't get involved with flipping houses is that it requires so much money. The market is all cash. The number of people with available liquid reserves to participate in this market is small.

Over the last several weeks, we have been contacted by several buyers who would like to purchase high-end properties at auction. They have large down payments and stellar credit, but they don't have enough cash to close the deal. We have also been contacted by many people wanting to invest in this market, but individually, they either don't have enough to participate in more expensive markets like Irvine or they don't want to put all their money in one property bear the property risk alone.

Perhaps it would be beneficial to pool investor funds to spread risk and service the buyers we know want high-end properties and perhaps get involved with flips like today's featured property. We are not soliciting investors for such a venture as that would be against SEC regulations, but I do wonder, do you think a blind-pool investment fund is a good idea?