Category Archives: Library

Banks Refuse to Recognize HELOC and Second Mortgage Losses

Holders of HELOCs and second mortgages are going to lose a great deal of money. So far, few of these losses have been recognized, and lenders are in no hurry to do so.

Irvine Home Address … 41 MOJAVE Irvine, CA 92602

Resale Home Price …… $900,000

{book1}

This bloody road remains a mystery

This sudden darkness fills the air

What are we waiting for?

Won't anybody help us?

What are we waiting for?

We can't afford to be innocent

Stand up and face the enemy

It's a do or die situation

We will be Invincible

This shattered dream you cannot justify

We're gonna scream until we're satisified

What are we running for?

We've got the right to be angry

What are we running for?

When there's no where we can run to anymore

Pat Benetar — Invincible

None of us knows how the housing bust will play out. Some contend it already has, but those living in the reality-based community know we have a tremendous problem with delinquencies lenders are unable to resolve. What are we waiting for? Lenders to take losses.

The delinquency problem will be resolved through a combination of loan modifications, short sales and foreclosures. Those are the only three viable options. Loan modifications are proving to fail, so that leaves short sales and foreclosures. Either solution will push prices lower.

Short sale approval takes many months, and many times, no approval is given. Lenders fail to foreclose on houses even when the borrowers quit paying and make no effort to work out a deal. These strange lender behaviors are caused by the same root problem: pending losses exceed the value of capital in our banking system.

When short sales are not approved, and when squatters are allowed to stay in property without paying, resale transactions do not occur that would ordinarily would be happening. Therefore, sales volumes are well below normal.

Our local inventory is still very low relative to historic norms.

Prices are only sustained by very low inventories which are a result of lenders refusing to foreclose. The inventory we do have looks more abundant than it really is because a significant portion of that inventory is short sales that have been sitting on the market for months with 20 waiting offers.

Lenders are not going to let borrowers squat until prices come back. Why would they? If they are not going to get any wage income from the borrower, it makes more sense financially to boot them out, rent the property to a paying tenant and wait for appreciation to bail them out. They are going to receive the benefit of appreciation either way, so they might as well get some income from the occupant.

Once lenders can absorb the losses on their financial statements, they will begin to push squatters out. The only question is when this will happen. Since Bank of America to Increase Foreclosure Rate by 600% in 2010 and The Debt Star Has Cleared the Planet, it looks as if now is the time. Or perhaps it is more accurate to say that now is the beginning of a process that will go on until the excess debt is cleared from the system.

Second Lien Position is a total loss

Lenders are concerned about losses on their first mortgage portfolios, but the array of market props has likely provided a stable floor in many markets (not ours) that should limit losses. However, second mortgages — and that includes HELOCs — only recoup their capital after the first mortgage is paid in full. If the first mortgage takes any loss at all, the second mortgage is completely wiped out.

When you look at a lender's balance sheet, they show loans as an asset. The value of that asset is based on the likelihood of repayment and the claim to underlying capital in foreclosure. In the case of second mortgages and HELOCs, the likelihood of repayment is very low, and the value of the claim to underlying collateral is less than zero. In short, holders of second lien mortgages are screwed.

Refusal of holders of second lien mortgages to recognize their losses is the primary barrier to market clearing through increased short-sale volume.

Look at a short sale transaction from the perspective of a second lien holder: If the house sells, the second lien is wiped out, so the asset is worth nothing. If the second lien holder blocks the sale, there is a chance, either someone will pay them something to go away, or appreciation will bail them out. They have no incentive to consummate a transaction today that wipes them out, and they have every incentive to block the sale until a better day. The only power they have in the negotiation is the power of no, and since they have everything to lose and nothing to gain, they say no most of the time.

HAFA is designed to give something to second lien holders to get them to participate in the short sale process. If lenders take the government payoff through HAFA, short sales will occur in large numbers. If lenders do not take the deal, foreclosures will clear out the rest. Since the short sale nets something whereas the foreclosure nets nothing, lenders are strongly encouraged to take what they can get.

The HELOC Bust: Next Problem for Big Banks?

By Charles Feldman Apr 13th 2010

Say it ain't so. If a prediction from a leading research firm turns out to be accurate, three of the country's biggest banks are poised for colossal losses of up to $30 billion — this time because of their exposure to home-equity loans.

The research firm, CreditSights Inc., says that Bank of America, Wells Fargo and JPMorgan Chase — the three biggest U.S. consumer banks — are particularly vulnerable to "changes in the consumer cycle," reports Britain's Telegraph. And HELOCs, as the home-equity loans are known, are shaping up to be the next problem area in housing.

HELOCs and seconds are just now surfacing as problems because lenders have ignored the truth of these loans with a few years of mark-to-fantasy accounting. The problem was always there. Its shape was formed years ago. Now is the first time the media has paid any attention to it, so more bank write downs from HELOCs and seconds is merely the next of the many housing market problems the media is finally making the weary masses aware of.

In case you forgot how we got here:

Irresponsible lending caused this problem.

In the last quarter of 2009, late payments on home-equity loans hit record highs, according to the American Bankers Association. The loans, typically taken out on top of a primary mortgage, are a source of dispute among lenders and those who advocate reducing mortgage principal to stem foreclosures — and the subject of a Congressional hearing being held today. Second loan holders are forced to take a loss when the first mortgage loan is modified, which they are loathe to do.

JPMorgan Chase CEO Jamie Dimon, says Bloomberg, told investors in the bank's annual report in February that quarterly writedowns in home-equity lending "could reach $1.4 billion" this year. But CreditSights believes the HELOC problem could be so bad that the three banks could see their 2010 profits — estimated at $30 billion — completely wiped out, the Telegraph reported.

Do you see the game the Federal Reserve is playing? By giving banks money at 0% and allowing them to earn 5%, the Federal Reserve allows them to make billions of extra dollars. Unfortunately, they lost so much money from their bubble foolishness, that an entire years earnings will only cover their losses on HELOCs and seconds (if the estimates are correct). What about their derivative losses? What about the commercial real estate losses they have not written down yet? Despite the common belief that inflation will come, the deflationary winds are still blowing hurricane force.

CreditSights, by the way, reputedly predicted the housing downturn back in 2006, so people are taking notice of its latest warning.

In an interview with Bloomberg, CreditSights' senior bank analyst Baylor Lancaster said: "While a lot of people are looking for dramatic improvement in the short term, one area that still has to be worked through in a material way is home equity." The writedowns from HELOCs are not likely to show up in earnings reports until later this year, Lancaster said.

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.

Charles Feldman is a journalist, media consultant and co-author of the book, "No Time To Think-The Menace of Media Speed and the 24-hour New Cycle." He has written about real estate related issues for several years.

The endless array of failed bailouts and the neverending mortgage crisis occurs to disguise the insolvency of our banks. Lenders have not taken the write downs on what will likely be huge losses on all these loans. I have profile massive losses day after day just here in Irvine. The HELOCs and second mortgages are almost always a total loss, and our market hasn't fallen as much as others.

The dance between lenders and borrowers has gone on for so long because lenders had few viable options in 2008 and 2009. If they would have processed their foreclosures in a timely manner, their losses would have been staggering, bank insolvency would have been exposed, and we would have been forced to nationalize the banking system. By pretending for a couple of years, they made enough money to expose their dirty laundry, take their necessary write downs, and keep their jobs and their bonuses.

Punished for restraint

This property was purchased on 4/21/2004 for $1,175,000. The owners used a $881,250 first mortgage and a $293,750 down payment.

On 12/28/2004 they obtained an $82,200 HELOC.

On 3/27/2006 they refinanced the first mortgage with a $915,000 Option ARM.

On 4/13/2006 they obtained a $200,000 HELOC.

Total property debt is $1,115,000.

Total mortgage equity withdrawal is $233,750.

Today's HELOC abusers are not as bad as most. I give them a D. They put a sizable amount down, but they steadily withdrew it and added to their mortgage balance. They didn't take out more than they paid, so they didn't get back all of their down payment. They probably wish they had because now they are losing their house, their credit is trashed, and their down payment is lost. I hope the down payment money wasn't a gift from parents or something like that. The parents would be pissed.

If this family had been more foolish, they probably could have taken several hundred thousand more than they paid out of the property. They received no reward for prudence. What are they going to do next time?

Irvine Home Address … 41 MOJAVE Irvine, CA 92602

Resale Home Price … $900,000

Home Purchase Price … $1,175,000

Home Purchase Date …. 4/21/2004

Net Gain (Loss) ………. $(329,000)

Percent Change ………. -23.4%

Annual Appreciation … -4.3%

Cost of Ownership

————————————————-

$900,000 ………. Asking Price

$180,000 ………. 20% Down Conventional

5.24% …………… Mortgage Interest Rate

$720,000 ………. 30-Year Mortgage

$191,479 ………. Income Requirement

$3,971 ………. Monthly Mortgage Payment

$780 ………. Property Tax

$333 ………. Special Taxes and Levies (Mello Roos)

$75 ………. Homeowners Insurance

$90 ………. Homeowners Association Fees

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

$5,250 ………. Monthly Cash Outlays

-$981 ………. Tax Savings (% of Interest and Property Tax)

-$827 ………. Equity Hidden in Payment

$374 ………. Lost Income to Down Payment (net of taxes)

$113 ………. Maintenance and Replacement Reserves

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

$3,928 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$9,000 ………. Furnishing and Move In @1%

$9,000 ………. Closing Costs @1%

$7,200 ………… Interest Points @1% of Loan

$180,000 ………. Down Payment

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

$205,200 ………. Total Cash Costs

$60,200 ………… Emergency Cash Reserves

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

$265,400 ………. Total Savings Needed

Property Details for 41 MOJAVE Irvine, CA 92602

——————————————————————————

Beds: : 4

Baths: :3

Sq. Ft.: : 3456

Lot Size: : 5,775 Sq. Ft.

Property Type:: Residential, Single Family

Style:: Two Level, Other

Community: : Northpark

County: : Orange

MLS#: : P717754

Source: : SoCalMLS

——————————————————————————

Beautiful home in Northpark, totally remodeled.

We Haven't Learned the Lessons of the Great Housing Bubble

People learned lifelong lessons about financial management from the Great Housing Bubble. Did they learn the right ones?

The owners of today's featured property learned how to squeeze every last penny from the walls, then they resorted to squatting for the last year and a half.

Irvine Home Address … 14952 GAINFORD Cir Irvine, CA 92604

Resale Home Price …… $460,000

{book1}

I’m marrying money, whose wanna say the best man?

I win on the honey moon and came home with the best tan.

There’s green all over me, in my pockets and left hand.

Green, you should know what I mean

Chamillionaire — Show Me The Money

Did those people who lost their homes during the Great Housing Bubble learn any important lessons? Did people learn that certain financial management techniques don't work very well? Or did people learn that building a Ponzi Scheme is a great way to manage their finances except during those unexpected economic downturns?

People can learn very valuable life's lessons from the mistakes of others. If I didn't believe that, I wouldn't keep writing. However, this blog is not likely to change the way millions of California borrowers live. As long as lenders enable foolishness, we will have fools who will step forward.

Best Protection Against Another Housing Bubble May be a Generation's Painful Lessons

By Robert X Cringely Mar 29th 2010 @ 2:30PM

The market value of your house is down 20 to 30 percent from its peak and could have further still to go. Jobs are scarce and the idea that home values will rise again seems remote. But this, too, shall pass (yes, your home value will eventually recover). And I can tell you exactly why — psychology.

The good news is that for all the economic pain and suffering, we've probably just bought ourselves, as a people, 50 years of immunity to economic depression. The bad news is that this immunity has nothing at all to do with house prices, public policy, Bernanke, Dodd, Geithner, or Obama, much less Paulson or Bush. It would have happened anyway.

The premise of this author's entire argument is that people endured the consequences of their decisions and they have been conditioned not to repeat the same mistakes. This is obviously wrong. The moral hazard of innumerable bailouts has insulated the population from the consequences of their mistakes.

The real lesson people have learned is that they can game the system for personal gain and pass the losses on to everyone else. Any real consequences will be avoided. We have guaranteed ourselves another housing bubble and even more massive bailout.

I'm reminded of a story about Sid Richardson. Back in the 1950s, Richardson, a Texas oilman, was arguably the richest man in the world — the bachelor uncle of today's ultra-rich Bass Brothers. (You though they made that money all by themselves?) Richardson made his fortune from West Texas crude and he owned a refinery in Midland, Texas. One day, a crane operator working on construction at the refinery swung the boom of his crane around and smashed into one of the catalytic cracking towers, knocking the tower clean over. There was a massive oil spill, the kind we'd really worry about today. But this was back in the days when DDT was good and oil spills didn't matter so much. Still, the accident did cause more than $1 million in damage, and since the refinery was self-insured, that million came straight from Sid Richardson's pocket. When the catalytic cracking tower was knocked over, everyone had to come have a look, including Richardson. And when they had all shaken their heads and pointed at the destruction, Richardson finally said it was time to get back to work and he sent the crane operator back up to the cab of his crane.

"You can't send him back to work on that crane!" the refinery manager shouted to Richardson. "The guy can't be trusted."

"Believe me," said Richardson, "he's not going to make that mistake again."

There is a lesson here for all of us, because — just like that crane operator — stressful experiences eventually teach the rest of us lessons, too. But unlike that crane operator, it usually takes us three times to figure things out.

That's what Professor Vernon L. Smith (now of George Mason University) learned decades ago in economics experiments conducted at the University of Arizona — experiments that earned him the 2006 Nobel Prize in Economics. Smith conducted real money experiments with groups of students. In their buying and selling of assets, the students inevitably created asset bubbles that eventually collapsed. Given another try, the same group created a second bubble that also collapsed. But given a third try, the same group consistently showed it had learned its lesson and no more bubbles were created.

… And so this three-strikes-and-you're-out (of danger) apparently works in real life. That explains why American savers and investors suffered through the Florida Land Bubble collapse of 1925 followed by the Wall Street stock bubble crash of 1929 and the consequent bank panic of 1933, before that same group assiduously avoided repeating any of those behaviors on a similar scale for the next 50+ years.

The cause and effect this author identifies is very weak. We have been inflating and deflating bubbles forever. You can pick any point in time and find three economic catastrophes preceding. The reason we had 50+ years of stability following the Great Depression is that we passed Glass-Steagall and other legislation to limit the ability of lenders to inflate Ponzi Schemes. It wasn't until we removed these protections in 1999 that problems began. The 50+ years of stability came from the legislation they passed not the personal lessons they learned.

In that 50 years, we had bubbles and recessions, but we had no huge bubbles and no depressions.

The Great Depression turned Americans, who had not been savers in the 1920s, into savers for the rest of their lives. But what the Depression gave us, generational transitions and Reaganomics took away. Savings rates began to drop in the late 1980s just as the Gipper was on his way back to Santa Barbara.

What does this means for today? Well, our generation has experienced the 1990s dot-com bubble and its pop, the 2000's housing bubble and its pop, and now the Great Recession. We're in our third time and likely due our own bit of subsequent wisdom as a result.

If it were only true….

The irony here, of course, is that while we credit the SEC and FDIC and maybe World War II for saving us from the Great Depression, it may have been that we were simply fed-up. Similarly, whatever Bernanke, Dodd, Geithner, and Obama finally do to reform the current U.S. financial system may matter less to our future prosperity than the painful lessons we've been learning as a people.

It's us, not them.

This is not accurate. Since people and institutions that were bailed out learned the opposite lesson. The pain was not deep enough to create lifelong changes in patterns of behavior. Once the Siren's Song of unlimited consumption tempts a recession weary population, "Don't wait and save when you can have it now…." Have we really endured such hardship that a broad cross-section of society will say no?

Worse, people-learned-their-lesson is the kind of argument lobbyists for lenders will use to convince legislators not to regulate the industry. After all, we don't need legislative reform if people suddenly got smart and stop demanding unstable loan products. Don't hinder commerce.

We'll make the pols look good for a few decades until enough time passes and the cycle of boom and bust starts all over again, as it inevitably will.

But until then, like Sid Richardson's crane operator, our generation — and only our generation — has probably learned our lesson: we aren't going to do that again.

I would be both thrilled and amazed if Californian's choose to behave like Texan's and reject bidding up house prices to obtain mortgage equity withdrawal. I believe we haven't learned a thing. In fact, the more people know, the more foolish they feel for failing to join the party last time.

Show me the money!

The owner of today's featured property had to look no further than the walls of his house to find plenty of money. It is a judgement call between a D and an E for this owner. The periodic use of the housing ATM shows this was part of routine financial planning. The only real debate is whether or not this represents thoughtless spending, or if the owners maintained self delusion about spending their house faster than it could go up in value. In either case, it is foolish because now they are losing their house.

The property was purchased on 9/22/2000 for $265,000. The owner used a $251,750 first mortgage and a $13,250 downpayment.

On 4/12/2004 he becomes they, and they refinanced with a $315,000 first mortgage.

On 9/16/2004 they refinanced with a $381,500 first mortgage.

On 3/30/2005 they obtained a $50,000 stand-alone second.

On 1/5/2006 they refinanced the second and added a $20,000 HELOC.

On 8/2/2006 they refinanced with a $119,100 stand-alone second.

Total property debt is $500,600.

Total mortgage equity withdrawal is $248,850.

Foreclosure Record

Recording Date: 06/25/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 03/20/2009

Document Type: Notice of Default

They got 18 months or more of squatting out of the deal too. They are likely still there.

Irvine Home Address … 14952 GAINFORD Cir Irvine, CA 92604

Resale Home Price … $460,000

Home Purchase Price … $265,000

Home Purchase Date …. 9/22/2000

Net Gain (Loss) ………. $167,400

Percent Change ………. 73.6%

Annual Appreciation … 5.7%

Cost of Ownership

————————————————-

$460,000 ………. Asking Price

$16,100 ………. 3.5% Down FHA Financing

5.24% …………… Mortgage Interest Rate

$443,900 ………. 30-Year Mortgage

$97,867 ………. Income Requirement

$2,448 ………. Monthly Mortgage Payment

$399 ………. Property Tax

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

$38 ………. Homeowners Insurance

$0 ………. Homeowners Association Fees

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

$2,885 ………. Monthly Cash Outlays

-$409 ………. Tax Savings (% of Interest and Property Tax)

-$510 ………. Equity Hidden in Payment

$33 ………. Lost Income to Down Payment (net of taxes)

$58 ………. Maintenance and Replacement Reserves

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

$2,057 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$4,600 ………. Furnishing and Move In @1%

$4,600 ………. Closing Costs @1%

$4,439 ………… Interest Points @1% of Loan

$16,100 ………. Down Payment

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

$29,739 ………. Total Cash Costs

$31,500 ………… Emergency Cash Reserves

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

$61,239 ………. Total Savings Needed

Property Details for 14952 GAINFORD Cir Irvine, CA 92604

——————————————————————————

Beds: 3

Baths: 2 baths

Home size: 1,116 sq ft

($412 / sq ft)

Lot Size: 5,096 sq ft

Year Built: 1971

Days on Market: 186

MLS Number: S592003

Property Type: Single Family, Residential

Community: El Camino Real

Tract: Wl

——————————————————————————

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

This property is in backup or contingent offer status.

Beautiful single story detached home. Remodeled Kitchen with large dining area with breakfast counter and bar with granite. Bathrooms were also remodeled in 2005 with new cabinets with granite counters. Laminate flooring in front room with tile in kitchen. All ceilings are scraped and textured. Vaulted ceiling in the living room with a nice cozy fireplace. Crown molding in master bedroom. Garage attic storage w/hide a ladder. Over 5000 sq ft large lot with newer fence. Gas built in range. Newer roof. No Mello Roos or HOA's. Close to Heritage Park Library and community center.

Failed Bailouts and the Neverending Mortgage Crisis

The bailouts never seem to end, and neither does the flow of irresponsible debtors in need of a bailout.

Irvine Home Address … 10 MOZZONI AISLE Irvine, CA 92606

Resale Home Price …… $294,000

{book1}

Oh, who can take tomorrow, dip it in a dream

Separate the sorrow and collect up all the cream

The Candy Man, oh the Candy Man can

The Candy Man can 'cause he mixes it with love and makes the world taste good

Sammy Davis Jr. — The Candy Man

At the core of every con is a dream. A con artist tempts a victim with dreams of riches or power to come in order to get them to do something today. It wasn't long ago it was only realtors and mortgage brokers who sold the dream. Now, our own government is joining the choir.

Over two years ago, I expressed by deep cynicism over the endless parade of Bailouts and False Hopes. As the bailouts continued, grew in number, and failed miserably, others have come to share my view.

The Permanent Mortgage Crisis

One more housing bailout to prolong the market agony.

Last Friday the White House announced its latest plan to prevent mortgage foreclosures, and earlier this week the famous Case-Shiller index found mostly flat home prices in January with analysts warning about a new wave of foreclosures to come. You can't blame the latest proposal for that outcome, but what about the previous 10 or 20 federal housing rescue plans?

We're supposed to believe that this latest effort to build an artificial floor under home prices will perform better than the Hope Now Alliance announced by President Bush in October 2007;

better than the revised Hope Now program announced two months later;

better than Hope for Homeowners, which was passed by Congress and signed by Mr. Bush in 2008;

better than the foreclosure moratoriums promoted by Fannie Mae, Freddie Mac and Representative Barney Frank into early 2009;

better than the $127 billion that taxpayers have thus far poured into Fan and Fred, much of it for foreclosure relief;

better than the Federal Reserve's purchase of $1.25 trillion in mortgage-backed securities;

better than last year's expansion of the 2008 First-Time Home Buyer Tax Credit to up to $8,000;

better than the billions in stimulus dollars that have been spent "to restore neighborhoods hardest hit by concentrated foreclosures," according to the White House;

better than the $1.5 billion announced earlier this year to state housing finance agencies in the electorally hard-hit areas of Arizona, California, Florida, Michigan and Nevada, and $600 million more this week for other states certified as political disaster areas;

and certainly better than Mr. Obama's year-old Home Affordable Modification Program to offer mortgage modifications to troubled borrowers or his companion program to offer generous refinancing. We could go on, but you get the joke, even if the housing market hasn't.

Here's a heretical thought: What if Washington had simply let housing prices fall on their own to find their natural bottom? The pain would have been more severe more quickly for some owners who bought more expensive homes than they could afford. But the pain might also be over by now as housing markets cleared faster, and housing might be contributing to a healthier economic expansion.

Heresy! Sacrilege!

Instead we are heading toward year five of the housing recession, with Washington proposing even more ideas to prolong the agony. One senior banking regulator we talk to calls it "extending and pretending."

But how long can troubled borrowers even pretend? The latest Mortgage Metrics report from the Comptroller of the Currency shows that most of the loans modified in the first quarter of 2009 had gone bad again within nine months—52% were more than 60 days delinquent.

Nothing has changed. We were talking about the horrendous recidivism rates years ago, and the performance has not improved.

Watching its previous failures, Team Obama will now emphasize reducing principal instead of merely lowering monthly mortgage payments for some years. The White House no doubt noticed that many of the loans modified outside of the various government programs—with aggressive principal reductions—had better re-default rates.

But this doesn't mean that such reductions are always a good idea. Many of these private reductions were the result of legal settlements, not business decisions. Obviously if taxpayers chip in to provide equity to millions of underwater borrowers, the borrowers will have less incentive to default. But how many more borrowers will be motivated to seek assistance when the subsidies become more generous?

A lower mortgage bill is surely a relief to an unemployed worker, but what he really needs is a job, and we see nothing in this plan (or any other Washington scheme) to encourage job creation. To the extent that these payments are merely unemployment benefits laundered through the mortgage system and thus reduce incentives to find work, the jobless rate will stay higher for longer and the entire economy will be worse off.

Think about the new unemployment subsidy we are giving only to loan owners. Why aren't we subsidizing the rent payments of the unemployed? I imagine the apartment owners association would get behind that idea. Renting a lot of money to occupy a home really does put people in a privileged class.

Potentially the most expensive part of this plan for taxpayers is the new Federal Housing Administration refinancing option. (Yes, that is the same FHA that is already struggling under mortgage losses and announced last year that its capital had fallen below the level required by law.) Taxpayers will be required to stand behind a "homeowner" who owes mortgage debt equal to 115% of the value of the home and whose monthly mortgage bill is up to 31% of total income. Message to owners who borrowed responsibly: Next time, don't be such a sap.

You'll also be pleased to know the Administration says the price tag on this latest housing plan won't exceed the $50 billion already earmarked for mortgage relief in the Troubled Asset Relief Program. Just don't expect it to end the mortgage crisis.

These hopeless programs exist only to provide false hope to debtors. To the degree that they are successful is the degree to which we create moral hazard. Who wants to be the responsible one paying the bills next time around? If lenders and borrowers do not experience the consequences of their actions, they will repeat them.

People get caught up in misguided compassion and think that these poor suffering souls need a bailout. They don't. Any bailout is paid for by those not receiving the benefits. It is a direct transfer of wealth from one household to another — state sanctioned theft.

It was bad enough during the bubble to watch the entitled class and their conspicuous consumption, but now we have to pay for it as well.

Subsized Financial Irresponsibility

We have all seen those people who manage their finances by falling short every month and waiting for either a bonus or a tax refund or some other timely windfall to keep them afloat. In the HELOC Abuse Grading System, these people earn a C:

HELOC Abuse Grade C

I hate to give borrowers in this category a "passing" grade, but this is the reality for most Americans. Growing credit card or mortgage debt slowly generally can be compensated for through home price appreciation, and although I consider this a bad idea, I can't really call it HELOC abuse, just foolish HELOC use. Is there a distinction there? I will let you decide.

Financial planners will tell you that most people fail to budget properly for unexpected expenses (they don't save), so when they fall behind a little each month, they put the balance on a credit card and hope they can pay it back with a tax return — or during the bubble with a visit to the housing ATM.

People are still going to manage their bills this way going forward, and there will be pressures to "liberate" this equity to pay for these expenses. The money changers will continue to peddle this nonsense as sophisticated financial management. It is a stupid way to manage debt, and I give it a C.

Years ago people that lived this way were finally chewed up by high interest fees on their credit cards. They survive by finding a point of buoyancy well underwater only coming up near the surface briefly before going on a spending spree and resubmerging themselves.

Once widespread HELOC abuse became the preferred method of financial management, borrowers developed equity surfing techniques to consistently extract equity as it became available and spend it. The owner of today's featured property illustrates how this was done.

The property was purchased on 8/26/2003 for $270,000… That is $270,000 for a 1,000 SF 1 bedroom condo. It isn't clear from my records what the original financing was. Assume it was 100% because it probably was.

On 4/15/2004 the owner refinanced a first mortgage for $288,000. She had to live in this dump for a little over 6 months before she could get a loan for $18,000 more than she paid. This little condo made her about $3,000 per month.

On 12/7/2004 she was able to get a first mortgage for $341,000. She pulled out $71,000 in a little over 1 year.

On 5/24/2005 her lender gave her another $49,500 in a HELOC.

On 3/22/2006 she refinanced again with a $345,000 first mortgage and a $63,000 HELOC

Total property debt is $408,000.

Total mortgage equity withdrawal is $138,000… from a tiny condo in under two years.

Foreclosure Record

Recording Date: 02/09/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 06/08/2009

Document Type: Notice of Default

Don't you feel kind of stupid for not doing this? Back in 2002-2005, you could have bought something — anything — and been given access to hundreds of thousands of dollars in free money. And you know what? Nothing has changed!

If prices start going up, people will demand HELOCs to spend the appreciation. Lenders know they are backstopped by the US taxpayer, so they will gladly make the loans. And borrowers know if the Ponzi Scheme collapses again, they will be given a host of bailouts to choose from to make their lives easier. Even our government, which is supposed to look out for us, is happy to re-inflate the housing bubble because it boosts the economy even if that means more bailouts.

Assuming our leaders continue to fail us — and there is no reason to think they will suddenly change course — there is no downside to buying real estate for those with no assets and a strong desire to spend money. In other words, the more irresponsible you are, the more desirable real estate is. Great system we have, isn't it?

Irvine Home Address … 10 MOZZONI AISLE Irvine, CA 92606

Resale Home Price … $294,000

Home Purchase Price … $270,000

Home Purchase Date …. 8/26/2003

Net Gain (Loss) ………. $6,360

Percent Change ………. 8.9%

Annual Appreciation … 1.2%

Cost of Ownership

————————————————-

$294,000 ………. Asking Price

$10,290 ………. 3.5% Down FHA Financing

5.24% …………… Mortgage Interest Rate

$283,710 ………. 30-Year Mortgage

$62,550 ………. Income Requirement

$1,565 ………. Monthly Mortgage Payment

$255 ………. Property Tax

$50 ………. Special Taxes and Levies (Mello Roos)

$25 ………. Homeowners Insurance

$290 ………. Homeowners Association Fees

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

$2,184 ………. Monthly Cash Outlays

-$149 ………. Tax Savings (% of Interest and Property Tax)

-$326 ………. Equity Hidden in Payment

$21 ………. Lost Income to Down Payment (net of taxes)

$37 ………. Maintenance and Replacement Reserves

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

$1,767 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$2,940 ………. Furnishing and Move In @1%

$2,940 ………. Closing Costs @1%

$2,837 ………… Interest Points @1% of Loan

$10,290 ………. Down Payment

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

$19,007 ………. Total Cash Costs

$27,000 ………… Emergency Cash Reserves

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

$46,007 ………. Total Savings Needed

Property Details for 10 MOZZONI AISLE Irvine, CA 92606

——————————————————————————

Beds: 1

Baths: 1 full 1 part baths

Home size: 1,022 sq ft

($288 / sq ft)

Lot Size: n/a

Year Built: 1990

Days on Market: 375

MLS Number: S569378

Property Type: Condominium, Residential

Community: Westpark

Tract: Cb

——————————————————————————

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

This property is in backup or contingent offer status.

Back on Market. Rare 1 bedroom + Den or 2 bedroom condo. Cozy corner unit with lots of privacy. Only 1 common wall! Efficient floor plan feels a lot larger than actual square footage. Romantic fireplace in living Room. Private patio, upgraded carpet throughout & Large Master Suite. Great Location in Beautiful Gated Community of Corte Bella. Enjoy entertaining your guests in the relaxing court yard, take a dip in one of the many association pool, roast marsh mellows in the fire pit and end the evening soaking in the association spa. Serene, Private Setting with Mediterranean Architecture, Fountains and Courtyards. Convenient walking distance of shopping, recreation & parks. This home is convenient to guest parking and is the easiest for guests to locate within the development.Recent distressed sales have artificially depressed the value of these units. This is a great opportunity for a first time buyer or investor. Seller Needs OUT, let's make a deal.

Recently distressed sales have not artificially depressed values. These sales have driven prices back down toward affordability.

I find it amusing that the realtor is throwing this owner under the bus; after all, this is a distressed sale. You know, like those others that have artificially depressed prices. And like the many more to come….

The National Association of realtors Latest Scare Tactic: Rising Interest Rates

Higher mortgage interest rates will cause loan balances to shrink and prices to decline; although, realtors would prefer to you believe it means you will be priced out forever.

Today's featured property is another equity surfer hoping to sell out with a few dollars before the auction.

Irvine Home Address … 7 West RAVENNA Irvine, CA 92614

Resale Home Price …… $939,000

{book1}

I see the bad moon arising.

I see trouble on the way.

I see earthquakes and lightnin'.

I see bad times today.

Don't go around tonight,

Well, it's bound to take your life,

There's a bad moon on the rise.

Creedence Clearwater Revival — Bad Moon Rising

Rising interest rates are a bad omen for the housing market. When the market is composed only of first-time buyers and renting former owners, no move-up market exists. Very few offers on properties have been submitted over the last few years where the buyer is contingent on selling a home. Without home equity to create a move-up market, pricing is established at the limit of available savings and loan balances. In short, it is set almost entirely by first-time buyers.

When first-time buyers face rising interest rates, their ability to borrow is curtailed. If there were no distressed sales, such an occurrence would cause a drop in volume followed by a drop in prices. When distressed sales are abundant, prices quickly drop to a new clearing price established by current loan terms. In our current market environment, higher interest rates will result in lower prices.

In January of 2010, I wrote about realtor ways in the post Urgency Versus Reality: realtors Win, Buyers Lose. I had just attended a realtor sales meeting where the interest rate gambit first surfaced:

realtor Reason Du Jour

The marketing presentation I attended had many examples of how to manipulate the current situation to create urgency when none exists. One of these pertains to the inevitability of rising interest rates, and it goes something like this:

If a buyer is looking at a $400,000 home, very low interest rates make the payment affordable, but when interest rates go up, it will be harder and harder to finance that $400,000 home. In fact, if interest rates go up a full point, a buyer might lose as much as $100,000 in buying power; therefore, you should buy before interest rates go up.

Hmmm… I nearly raised my hand to ask a follow up question but then I contemplated who my audience was and what they understand about real estate markets and finance, I decided against it. I ask the question here:

OK, if I buy today, the buyer who wants to purchase the house from me in the future when I am ready to move may not be able to borrow as much money. Won't that make my house harder to sell, and might I have to lower the price — a great deal — like the $100,000 mentioned in the example? Isn't the fact that my take-out buyer is going to be much less leveraged working against me?

We all know the answer to those questions (Your Buyer’s Loan Terms), and that was when I had an epiphany: the realtor mind is unconcerned with reality, it is only concerned with urgency, and if urgency conflicts with reality, urgency wins, and buyers lose. Buyers are supposed to believe the realtor cares and that they are looking out for the buyer's best interest; beliefs wholly incompatible with a realtor Mind®™ that places urgency over honesty.

Now that the troops in the field are all trained in how to make the interest rate argument, the NAr is stepping up its faux news stories to scare the masses.

Homebuyers scramble as mortgage rates rise

Higher payments could price many would-be buyers out of the market

By ADRIAN SAINZ and ALAN ZIBEL

WASHINGTON – The era of record-low mortgage rates is over.

The average rate on a 30-year loan has jumped from about 5 percent to more than 5.3 percent in just the past week. As mortgages get more expensive, more would-be homeowners are priced out of the market — a threat to the fragile recovery in the housing market.

Buy now or be priced out forever. They never get tired of that nonsense, do they?

In an environment where sellers do not have to sell, and there is very little inventory, sellers can hold their prices and affordability drops; however, when must-sell inventory hits the market, prices drop to the level of affordability necessary to clear the supply. Because we have more must-sell inventory on the way, higher intersest rates will translate to lower prices.

And if you wanted to refinance at a super-low rate, you may have missed your chance. Mortgages under 4 percent are still available, but only for loans that reset in five or seven years, probably to higher rates.

Rates are going up because of the improving economy and the end of a government push to make mortgages cheaper.

Yes, that is exactly why interest rates are going up.

Right now, investors have few good choices. The Federal Reserve has lowered interest rates to zero to push money out of savings accounts. The next best investment is longer term Government Treasuries, but the Federal Reserve has lowered the returns on those to historic lows to push money out of those as well. With few viable alternatives, money seeking a higher return will gravitate toward government-backed mortgage loans because they are basically as safe as Treasuries because they have explicit government backing.

Government insured mortgage finance is the next rung up the debt ladder from 10-year Treasuries. The only thing preventing an exodus of capital from the mortgage market is lack of a better place to go. The recent stock market reflation rally owns much of its strength to money finding a better return. As new opportunities arise — which is the sign of an economic recovery — money flows from safe assets to riskier assets yielding better returns.

When money leaves a market — as it will with mortgages — yields must rise in that market to attract capital. If yields must be raised to attract capital to residential mortgages, then mortgage interest rates must move higher.

For people putting their homes on the market this spring, rising rates may actually be a good thing. Buyers are racing to complete their purchases and lock in something decent before rates go even higher.

"We are seeing some panic among potential buyers who have not found houses yet," said Craig Strent, co-founder of Apex Home Loans in Bethesda, Md. "They're saying: Man, I should have found a house three weeks ago or last month when rates are lower."

And realtors and mortgage brokers everywhere will stoke that fear to set the market on fire. Scare the crap out of buyers, and they will bid whatever sellers want to obtain the property. When the properties decline in value, they will feel no guilt over their fear mongering.

Decline in purchasing power

It's all about affordability. For every 1 percentage point rise in rates, 300,000 to 400,000 would-be buyers are priced out of the market in a given year, according to the National Association of Realtors.

The rule of thumb is that every 1 percentage point increase in mortgage rates reduces a buyer's purchasing power by about 10 percent.

For example, taking out a 30-year mortgage for $300,000 at a rate of 5 percent will cost you about $1,600 a month, not including taxes and insurance. But the same monthly payment at a rate of 6 percent will only get you a loan of $270,000.

Eureka! Someone finally did the math properly. This "news" story is a NAr press release disguised as news. Do you think any would-be buyers who read it stopped and wondered, "Wouldn't that make a $300,000 home fall to $270,000?" I hope they are asking that question because the answer is yes.

Good economic news is the first reason rates are rising: U.S. government debt, a safe haven during the recession, is losing its appeal as investors turn to stocks and riskier corporate bonds.

Lower demand for debt means the government has to offer a better interest rate to sell its bonds. The yield on the 10-year Treasury note, which is closely tracked by mortgage rates, has hovered around 4 percent all week, the highest since June.

The second reason is the Federal Reserve. Last week, the Fed ended its program to push mortgage rates down by buying up mortgage-backed securities. When demand from the central bank was high, rates plummeted to about 4.7 percent for much of last year. And business boomed for mortgage lenders as homeowners raced to refinance out of adjustable-rate mortgages and into fixed loans.

As of Wednesday, the Mortgage Bankers Association put the national average for a 30-year fixed-rate mortgage at 5.31 percent. One week ago, it was 5.04 percent.

6 percent rates likely

Many analysts forecast rates will rise as high as 6 percent by early next year. If they go much higher, the already shaky housing recovery could stall. And that could slow the broader economic rebound.

Not really. The reason interest rates will go up is because the economy is doing better. All higher mortgage interest rates will do is make home prices go down. That will have little or no impact on what happens in the broader economy; although, it will keep residential investment in check.

In a normal market, with home prices steadily rising, a jump in rates doesn't cause a big dip in demand. That's because people know their homes will eventually rise in value, and are willing to accept a higher mortgage payment.

Yes, some buyers are stupid. With cajoling from the NAr and the belief prices will go to the moon, borrowers often over extend themselves to capture appreciation and live the HELOC good life.

But now home prices are flat nationally and still falling in some places. Potential buyers are nervous about jumping in.

"In this environment, any rise in mortgage rates does significant damage because people don't think they're going to get their money back" if prices fall, said Mark Zandi, chief economist at Moody's Analytics.

That is because they won't get their money back. People are wise to sit on the fence and see how this plays out.

For people who bought their first home in the 1980s, when rates stayed over 10 percent for several years, paying 6 percent for a home loan may seem like a steal. But it's coming as a shock to many first-time homebuyers this spring.

Rising interest rates is also going to put a cramp on HELOC borrowing. That is going to come as a shock to everyone buying their personal ATM machines.

In Overland Park, Kan., Sirena Barlow checks mortgage rates online once a day. She's been shopping for a something around $130,000 and wants to sign a contract this month, to take advantage of a tax credit for first-time homebuyers.

Barlow, a legal assistant, has already told her landlord she's moving, so her stress level is high. Her real estate agent, Michael Maher, has been doing his best to calm Barlow and other clients, but rising rates are making them anxious.

"It's like giving hyperactive kids ice cream," he said. "It has really taken the ones who are focused on buying and amped them up a little bit."

Perhaps that characterization is correct, and this realtor is a Realtor and really is calming his clients. I rather doubt it. realtors for the most part are using any tool they can to motivate buyers including trying to scare them with the spectre of higher interest rates and lower affordability.

Spending themselves out of house and home

Since there is no shortage of wretched HELOC abuse among Irvine's elite, I thought we might look at yet another. Owners like these are the rule rather than the exception. From what I have observed, many loan owners were taking out their equity and spending it in a measured way to consume some significant portion of their appreciation income. Many borrowers overspent their home-price appreciation even when it accrued at the dizzying rates of the housing bubble rally. Those that were more restrained — perhaps they only spent 50% to 70% of their imagined gains — those borrowers are the ones to surfed the equity wave and departed peacefully on shore no better or worse for the journey but with memories of the good times.

I still have difficulty getting my mind around the idea that home-price appreciation is income. California borrowers freely access and spend this money as a gift from the housing market gods. Many borrowers set up plans where they routinely go to the housing ATM as a yearly bonus or housing stipend. These same borrowers are eagerly awaiting the return of widespread appreciation so they can resume cashing out of the housing ATM. Are the banks really going to do that again so soon?

This property was purchased on 11/18/2002 for $655,000. The owners used a $530,000 first mortgage, a $66,750 second mortgage, and a $58,250 down payment.

On 2/2/2004 the first mortgage was refinanced for $605,000.

On 5/12/2005 the first mortgage was refinanced for $620,000.

On 6/20/2007 the first mortgage was refinanced for $745,000.

Total mortgage equity withdrawal is $148,250, a fairly typical Irvine take on the last half of the bubble.

These people were very ordinary in their HELOC spending — conservative you could argue. This is what passes as sophisticated financial management in California.

Foreclosure Record

Recording Date: 11/16/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 08/07/2009

Document Type: Notice of Default

Irvine Home Address … 7 West RAVENNA Irvine, CA 92614

Resale Home Price … $939,000

Home Purchase Price … $655,000

Home Purchase Date …. 11/18/2002

Net Gain (Loss) ………. $227,660

Percent Change ………. 43.4%

Annual Appreciation … 4.6%

Cost of Ownership

————————————————-

$939,000 ………. Asking Price

$187,800 ………. 20% Down Conventional

5.24% …………… Mortgage Interest Rate

$751,200 ………. 30-Year Mortgage

$199,776 ………. Income Requirement

$4,144 ………. Monthly Mortgage Payment

$814 ………. Property Tax

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

$78 ………. Homeowners Insurance

$36 ………. Homeowners Association Fees

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

$5,138 ………. Monthly Cash Outlays

-$1024 ………. Tax Savings (% of Interest and Property Tax)

-$863 ………. Equity Hidden in Payment

$390 ………. Lost Income to Down Payment (net of taxes)

$117 ………. Maintenance and Replacement Reserves

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

$3,759 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$9,390 ………. Furnishing and Move In @1%

$9,390 ………. Closing Costs @1%

$7,512 ………… Interest Points @1% of Loan

$187,800 ………. Down Payment

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

$214,092 ………. Total Cash Costs

$57,600 ………… Emergency Cash Reserves

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

$271,692 ………. Total Savings Needed

Property Details for 7 West RAVENNA Irvine, CA 92614

——————————————————————————

Beds:: 4

Baths:: 0003

Sq. Ft.:: 2528

$0,371

Lot Size:: 6,500 Sq. Ft.

Property Type:: Residential, Single Family

Style:: Two Level, Contemporary

Community:: Westpark

County:: Orange

MLS#:: S594539

Source:: SoCalMLS

——————————————————————————

XLENT QUIET INSIDE TRACK LOCATION, WITH NEW HARDWOOD FLOORING, DESIGNER PAINTS, WITH PROFESSIONAL LANDSCAPING AND BEAUTIFUL POOL, SPA. LARGE CUL-DE-SAC LOT, VERY DESIRABLE FLOOR PLAN AND AWARDS WINNING SCHOOLS.

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

Have a great weekend,

Irvine Renter

Housing Bubble as Political Rugby

Keeping the truth straight is difficult with good information, but once policitians and political operatives get involved with the flow of data, truth can be obscured and elusive.

Today's featured property belongs to a family that skimmed the appreciation and sold just in time to avoid a short sale.

Irvine Home Address … 34 CAPOBELLA Irvine, CA 92614

Resale Home Price …… $745,000

{book1}

Wouldn't it be nice if we were older

Then we wouldn't have to wait so long

And wouldn't it be nice to live together

In the kind of world where we belong

Maybe if we think and wish and hope and pray it might come true (run, run, run)

Baby then there wouldn't be a single thing we couldn't do

Beach Boys — Wouldn't It Be Nice

Wouldn't it be nice if houses really could provide lifelong income? California is truly a remarkable place. People here actually believe permanent, life-sustaining home-price appreciation happens. It does occasionally, and people build a life around it.

Wouldn't it be nice if politicians used real information to make substantive decisions? Instead we get and endless barrage of lies and manipulations. Politicians make realtors look honest.

Housing Bubble as Political Rugby

The housing bubble was a bipartisan failure. Both sides of the political spectrum have tried to blame the other for the housing bubble. It is all nonsense.

The political Right has touted the "Barney Frank inflated the housing bubble" about as far as it can go. The Right likes to forget that Barney Frank was in the impotent minority in the House from 1994-2006. He was a loudmouth who wasn't responsible for anything; although, he was effective as an annoying loudmouth. Personally, I think Barney Frank is a tool, and I wished he were not as powerful as he is today, but the characterizations from the Right about his involvement in the bubble are silly.

The latest evolving narrative on the Left is a populist appeal to blame the evil banks and get that bailout money back home to Main Street where we can bail out some victimized homeowners. That is nonsense too.

Resident Evil: Are Struggling Homeowners as Immoral as the Big Banks?

Richard (RJ) Eskow, a consultant and writer, is a Senior Fellow with the Campaign for America's Future. This post was produced as part of the Curbing Wall Street project. Richard blogs at:

No Middle Class Health Tax

A Night Light

Website: Eskow and Associates

Do homeowners who are underwater on their mortgages deserve to lose their homes? That's what finance commentator Barry Ritholtz says, in a post called "More Foreclosures, Please." Ritholtz must have been channeling his inner Rick Santelli when he wrote that "the boom and bust saw irresponsible and reckless behavior by lenders and home buyers alike," adding that mortgage relief programs for homeowners reward those who were "reckless, speculative, and foolish" while punishing those who are not.

It's not reasonable to put Barry Ritholtz in the same category as Santelli, of course. Ritholtz is a highly informative, widely quoted writer on economic issues. Santelli's the frat-boy trader turned CNBC host whose rant about "rewarding the losers" got a cheer out of some morons on the Chicago Mercantile Exchange (and started the Tea Party movement). But Ritholtz puts financially beleaguered homeowners in the same "moral hazard" dumping ground as the banks who wrote their mortgages, suggesting that both of them "overused leverage, disregarded risk, (and) ignored history." Is that really fair?

Yes, It is.

After all, what kind of information was available to the average home buyer during the last decade? How would the average reasonable person have decided whether to buy a home or what kind of mortgage to use — in, say, 2004?

They probably read articles like the one published in February of 2004 in USA Today ("America's newspaper") with the headline "Greenspan says ARMs might be better deal." "Overall, the household sector seems to be in good shape," said Greenspan, who added that adjustable-rate mortgages might be the right choice for many homeowners. Greenspan enthusiastically promoted the new-style mortgages that later played a big role in the meltdown: "American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage," he said.

Greenspan wasn't just Chairman of the Federal Reserve at the time. He was the man the press kept touting as a genius, the one they called "Maestro." Were homeowners guilty of a "moral hazard" for listening to him? Should they face foreclosure because they weren't reading Nouriel Roubini or Paul Krugman or Joseph Stieglitz?

This just underscores the depth of Greenspan's failure. He was market cheerleader and irresponsible Federal Reserve chairperson largely responsible for unregulated derivatives that inflated the housing bubble. This guy's argument also ignores the more important role of the National Association of realtors. Nobody buying a house during the bubble paid any attention to Alan Greenspan; they were paying careful attention to their realtor telling them house prices were going up. They were also paying attention to their mortgage broker who was telling them they could borrow and spend that money as soon as it appeared from thin air.

Ignorance of the law is no defense, but ignorance of contrarian economic thought circa 2005 should be. If Greenspan and Geithner and Paulson and all the talking heads on CNBC and the other networks couldn't see the bubble, how could the average home buyer?

I can't believe he is making that argument. Ignorance is ignorance, and if it costs someone money, too bad. He is setting up ignorance as some reason people should be given a bailout. That is ignorant.

The truth is, most people buy homes because they need a place to live — and because for generations they've been told that buying a home is preferable to renting. Our tax code is structured to encourage home ownership, and the ownership message is reinforced in everything from news reporting to popular culture. (Think Miracle on 34th Street.)

BULLSHIT!!! (pardon the realtorspeak) People bought during the bubble because they wanted to get the appreciation and spend it. Very few people bought because they needed a place to live during the bubble. It was always a speculative investment they could also live in.

And generalizations about irresponsible, speculative borrowing overlook the fact that the nation's housing problems vary widely by geography. Some areas aren't having a housing bust:

Is a homeowner in Glens Falls, NY any more "reckless, speculative, and foolish" than one a couple of hours down the road in Poughkeepsie? Poughkeepsie experienced a boom in prices followed by a bust, while high-performing Glens Falls experienced a boom with no bust. West of Glens Falls, my home town of Utica did pretty well too, as this chart illustrates:

It probably helps that Utica experienced its financial collapse a long time ago, so housing prices were already unusually low.

Above is a fine example of the intentional use of confusing and misleading data. If you can't dazzle them with brilliance, you can baffle them with bullshit. Obfuscation is helpful when there is no point to be made. The fact that the housing bubble varied by region was caused by many variables, and irresponsible borrowing and speculation are chief among them. This author is throwing up a mud screen of meaningless and confusing data to dupe you into thinking he must be some kind of special expert who understands these things. He is an idiot with an agenda.

Here's something interesting: The areas with stable housing prices had a much lower percentage of nonprime loans than the country as a whole. As the report's authors mention, the explanation for that probably "runs in both directions–an increase in nonprime lending led to more significant home price appreciation, and more rapid home price appreciation led to a rise in nonprime lending."

In other words, it was a cycle: Risky loans drove housing prices up, and climbing housing prices led to greater availability (and selling) of risky loans. That's not a borrower problem — it's a pattern of lender behavior. It's a sign of banks driving a speculative frenzy as a "get rich quick" scheme, then leaving the borrowers with the wreckage.

It takes two to tango. This is clearly a lender problem, and I have argued that Lenders Are More Culpable than Borrowers, but the endless stream of HELOC abusers and squatters I find right here in our affluent community of Irvine, California, show how widespread borrower malfeasance was. Hard-working honest borrowers are not the ones in trouble right now. Speculators and foolishly over-extended borrowers are the ones who are asking for bailouts.

Ritholtz makes some excellent points about the weakness of HAMP (the Home Affordable Modification Program), and its tendency to reward banks for their very real "moral hazard." The biggest problem with the revised HAMP program isn't that it's too generous to troubled homeowners. It's that it's a "pretty please" program that only requires lenders to consider lowering the principal on home loans (or, in the Orwellian language of the program's Fact Sheet, "servicers will be required to consider an alternative Modification approach" – "required to consider" being one of those self-contradicting phrases George Carlin used to rattle off, like "jumbo shrimp.")

But the idea of principal reduction — whether it comes from HAMP or individual lenders like Bank of America — is a reasonable one. Most reductions in principal will still leave homeowners owing more than their house is worth, which should give them their just portion of punishment for any "moral hazard."

The idea of principal reduction is not a reasonable one. It is a really, really stupid idea. They have received no punishment at all for their behavior, and that is exactly why moral hazard is a problem. The only people who think it is a good idea are the people whom might personally benefit from principal reduction. Of course, the author knows this. He is pandering to those people in hopes that they will support him. This is part of the evolving left-wing narrative and populist appeal.

"More foreclosures, please" is exactly what we don't want. Ritholtz is understandably concerned about the unfairness of "rewarding" homeowners who got in trouble in a way that keeps prices higher for those who behaved responsibly. But he paints an overly rosy scenario of bad actors being driven from their homes like poltergeists, so that new and vibrant families can move in — families that can afford the mortgage and have money left over to spend in the local economy. The real solution is going to look less like a ghost story and more like Tim Burton's Beetlejuice, where the ghosts and the living learn to live together happily.

More bullshit. Barry is exactly right, and this guy is exactly wrong.

The millions of homeowners who got in over their heads have already suffered a lot. Let's get them some help. And let's keep the focus on the people who caused this problem: The bankers who got rich off these schemes, and the politicians and regulators who let them do it.

I actually agree with his conclusion that we should focus our efforts on regulating banks and stopping the huge bankster ripoffs. However, the millions of fools who got themselves in trouble deserve not one penny of our tax money in bailouts. Not one penny.

I don't care about party affiliation, and I don't identify with labels of Progressive or Conservative. Any politician who supports bailing out anybody has lost my confidence. This shouldn't be a battle between the side the supports the lenders and the side the supports the common man. Both sides of that argument are wrong. Where is a good Libertarian when you need one….

Calculated HELOC use?

Occasionally someone will defend HELOC abuse as ordinary HELOC use, as if it is okay to spend home equity and use a house like a credit card. If there were no government bailouts, I might be more persuaded, but since we are all paying for the abuses, the line between "use" and "abuse" gets pushed much closer to zero use.

This property was purchased ages ago on 6/22/1993 for $334,000. The original loan information is not present, but we can assume they used a $267,200 first mortgage (80%) and a $66,800 down payment.

On 10/26/1999 they refinanced into a $307,500 first mortgage.

On 1/7/2000 they opened a HELOC for $60,000.

On 3/17/2003 they refinanced with a $424,000 first mortgage.

On 9/14/2004 they refinanced into a $540,000 option ARM. It appears to have blown up 5 years later.

On 12/22/2004 they opened a $116,000 HELOC.

Total property debt is $656,000 plus negative amortization.

Total mortgage equity withdrawal is $388,800.

Foreclosure Record

Recording Date: 02/23/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 01/04/2010

Document Type: Notice of Default

Foreclosure Record

Recording Date: 11/20/2009

Document Type: Notice of Default

This property is scheduled for auction on 20 April 2010. Do you think the sale will close in time or will this go REO?

The borrowers who are about to sell today's featured property obviously grew their mortgage to obtain and spend their equity. They avoided a short sale; although, they spent most of their equity, and their credit is trashed. What lesson have they learned? Why won't they do this again on their next property?

The lesson this family learned is that they could spend their home equity the moment it appeared, and there is no real consequence. Of course, they could be leaving home with several hundred thousand dollars more in a closing check, but they wouldn't have had all the fun with their HELOCs. Do you think this behavior is wise? They do.

Renting with housing income

There is another way to look at this transaction. It may help explain why California homes are so desirable.

Lets say someone rented this home for 10 years with an average rent of about $2,500. It may rent for more now, but it probably rented for less in 2000. A renter would have spent $300,000 on housing during a ten-year period ($2,500 X 12 X 10 = $300,000).

These owners started their HELOC frenzy around the millennium, so they probably paid more in cost of ownership than they would have spent in a rental, so their total cost of ownership would have been closer to $360,000 during the same ten-year period ($3,000 X 12 X 10 = $360,000). At first glance, it would appear that owning was not a big advantage; however, If you factor in the mortgage equity withdrawal of $388,800, their net cost of ownership was less than zero. The house paid for itself.

That's why everyone in California wants a house.

When this family moves out, they are no better or worse off than a renter. They will leave with no equity. But the renter would have endured a housing cost whereas this owner endured none.

Irvine Home Address … 34 CAPOBELLA Irvine, CA 92614

Resale Home Price … $745,000

Home Purchase Price … $334,000

Home Purchase Date …. 6/22/1993

Net Gain (Loss) ………. $366,300

Percent Change ………. 123.1%

Annual Appreciation … 4.8%

Cost of Ownership

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$745,000 ………. Asking Price

$149,000 ………. 20% Down Conventional

5.23% …………… Mortgage Interest Rate

$596,000 ………. 30-Year Mortgage

$158,324 ………. Income Requirement

$3,284 ………. Monthly Mortgage Payment

$646 ………. Property Tax

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

$62 ………. Homeowners Insurance

$41 ………. Homeowners Association Fees

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$4,099 ………. Monthly Cash Outlays

-$811 ………. Tax Savings (% of Interest and Property Tax)

-$686 ………. Equity Hidden in Payment

$309 ………. Lost Income to Down Payment (net of taxes)

$93 ………. Maintenance and Replacement Reserves

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$3,004 ………. Monthly Cost of Ownership

Cash Acquisition Demands

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$7,450 ………. Furnishing and Move In @1%

$7,450 ………. Closing Costs @1%

$5,960 ………… Interest Points @1% of Loan

$149,000 ………. Down Payment

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$169,860 ………. Total Cash Costs

$46,000 ………… Emergency Cash Reserves

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$215,860 ………. Total Savings Needed

Property Details for 34 CAPOBELLA Irvine, CA 92614

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Beds:: 3

Baths:: 3

Sq. Ft.:: 2325

Lot Size:: 4,695 Sq. Ft.

Property Type:: Residential, Single Family

Style:: Two Level, Other

Community:: Westpark

County:: Orange

MLS#:: S606385

Source:: SoCalMLS

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Spectacular Westpark location with 3 spacious bedrooms and a loft. Extremely private with property angled so neighbors cannot see in. Property is light and bright with cathedral ceilings and recessed lighting. The family room features a fireplace and the kitchen has GE Profile stainless steel appliances with dual convection ovens. The home has an in-ground spa and will be perfect for entertaining.