Loan modification programs are failing because borrowers are not willing to abandon their entitlements. The government will respond by allowing people to keep their discretionary spending on consumer goods, cars, vacations, massages and the like — and taxpayers will be asked to subsidize it.

Irvine Home Address … 33 TALL HEDGE Irvine, CA 92603

Resale Home Price …… $1,299,900

Just let it die

With no goodbyes

Details don't matter

We both paid the price

Tears in my eyes

You know sometimes

It'd be like that baby

Mariah Carey — Don't Forget About Us

Lenders really need to let go. They blew it. It's over. Just let it die. Both the lender and the borrower pay a price — or at least they are supposed to. Instead, we bail them out, and we pay the price. Don't forget about us who pay for their mistakes.

Part of the price we pay is obvious in the accounting for the various bailouts, but much of the price we pay is hidden in higher home prices, greater public indebtedness, and in the subsidized entitlements of borrowers everywhere.

Government backed loan modification attempts are ill-conceived because bailouts create moral hazard. However, the bailouts and the resulting moral hazard can be disguised inside the black box of obfuscation and paperwork of the HAMP program. If the banks and bureaucrats raise the standard of entitlement allowed under the loan modification program, more people will qualify — and more people will be sustaining their indulgences on your tax dollar.

If people are not forced to cut back discretionary spending before they obtain a government bailout, taxpayers are subsidizing their discretionary spending. The standards of what constitutes discretionary spending from essential spending depends greatly on the the spender's sense of entitlement.

Personally, I really like to play golf. (I am on the course today for "business.") I don't spend the $150 per week I would like to on golf because it isn't an entitlement, and I can't afford to treat it as one. However, if I owned a house loan, and if my sense of entitlement made it right, I could consider my weekly round of golf an essential. Since this entitlement creates a hardship for me, I can petition my lender for a break on my loan payments. After all, their loan payment is discretionary spending and the US taxpayer is picking up the cost.

Do you see the problem?

Everyone draws their own conclusions about what is essential and what is discretionary. The reviewers of the HAMP programs have broad guidelines and common sense, but they will succumb to the political pressure to get results and push people through the system. The HAMP program reviewers path of least resistance is allow petitioning borrowers their indulgences when borrowers ask for loan modifications. The HAMP program reviewers will achieve great results — at great taxpayer expense.

To understand what is causing this problem, let's review the HAMP program courtesy of Calculated Risk and his contributor Shnaps:

HAMP applicants tanned and juiced

CR Note: The following is from long time reader Shnaps. Shnaps has been working in the mortgage industry in various capacities "since people were extending the antennas on their mobile phones". Shnaps currently serves in a key role related to HAMP at one of the largest non-prime mortgage servicers in the Nation.

Shnaps writes:

One aspect of the Making Home Affordable loan modification program known as ‘HAMP’ is almost always taken for granted in its wide reporting – that the borrowers in fact need ‘help’. Moreover, it is generally taken for granted that those seeking modification under HAMP simply cannot afford their monthly mortgage payment. It is assumed that they have made great sacrifices, assumed they have already cut back drastically on discretionary expenses, assumed that they have already gone over their monthly budgets with a fine-toothed comb to eliminate all but the most necessary expenditures in an effort to keep their home. So prepare to be shocked – shocked! – as I share with you that I have seen first-hand that this assumption is oftentimes greatly, seriously flawed.

Since many frugal homeowners and renters, particularly the unemployed or underemployed, have no access to entitlements loan owners take for granted as part of their privileged lives, there is an assumption that the high fliers will have their wings trimmed back to the same standard of living as the workers who are paying the bills.

Since I don't send my child to a private school, I assume that if my tax dollars are going to subsidize a loan owner's mortgage, that loan owner would need to take their child out of private school before my subsidy kicks in.

Not so.

At least, not for long. The current standard does require borrowers to demonstrate they have abandoned their entitlements, and big surprise, they are not willing to cut back! People want their loan modification in order to maintain their entitled lives.

Let me begin with a word to the wise for HAMP applicants: unless you believe Snooki is now in charge of approving HAMP applications, it might be a good idea to cut back a bit on some of the creature comforts to which you have become accustomed at least a month before submitting your HAMP modification application.

Allow me to explain. The guidelines for servicers participating in HAMP stipulate that the borrower must submit a “hardship affidavit”. This, ostensibly, is to serve as their sworn testimony that they have been driven into default due to some particular hardship they encountered, and despite making every possible sacrifice, they can no longer “maintain payment on the mortgage and cover basic living expenses at the same time". (see HAMP Directive)

To demonstrate this, applicants are required to submit recent paystubs and bank statements. The statements are to help further corroborate the income they report (lest they forget to include all of their paystubs) and also to demonstrate that their monthly expenses are as described on their application. Which is to say that they have already ‘cut back to the bone’ and STILL are unable to make ends meet.

So how do these look in practice? The very first ‘HAMPlication’ that your correspondent pulled up recently showed a wanton disregard for minimizing spending. On the contrary, it looked like “cutting back” for this applicant does not involve such Draconian cuts as eliminating:

• visits to the tanning salon

• the nail spa

• some kind of gourmet produce market (have you seen the price of arugula?)

• various liquor stores

• A DirecTV bill that must involve some serious premium programming or pay-per-view events (or both?).

• And over $1,700 in retail purchases, including: Best Buy, Baby Gap, Brookstone, Old Navy, Bed, Bath & Beyond, Home Depot, Macy’s, Pac Sun, Urban Behavior, Sears, Staples, and Footlocker.

And that was just in one month! They were seeking to reduce a $1,880 mortgage payment that had just gotten to be a real cramp to their ability to keep a roof over their heads.

This woman could stock Mariah Carey's closet….

I have documented hundreds of cases of HELOC abuse and borrower entitlement. We know many people took on Option ARMs as a way to reduce their housing cost below rental parity, and most of these people would take out another if they were still offered. Between the payment savings and the HELOC abuse, many borrowers built lives of luxury and entitlement that they don't want to give up. They are owed it; it is their borrower's birthright.

I’d like to say this is the exception, but it’s much closer to the norm. Many people who request HAMP modifications submit bank statements that demonstrate little if any “belt-tightening” going on.

Somehow, we now expect the same people who asked for ‘liar’s loans’ to be truthful on when it comes to ‘hardship affidavits’?

I discussed that phenomenon in Reverse Liar Loans. The incentive to lie is huge, and now it is on the other side of the ledger.

Success of HAMP depends on expanding entitlement

The success if HAMP is hampered by the standard of entitlement. The only way to increase the effectiveness of HAMP is to increase the lifestyle entitlement allowed under the system; otherwise, borrowers are going to walk away.

Let's say the woman in the above example told the lender, "No, I refuse to give up the spending. If you don't modify my mortgage, I will continue to squat until you foreclose." Some borrowers are using attorneys to send this message right now. The banks are too overwhelmed with foreclosures to bargain so they amend-pretend-extend until such time they can force the borrowers out.

HAMP must succeed

In any negotiation, you must know your next-best alternative to a negotiated agreement. For lenders, they have two options: (1) allow the borrower to squat in the home, or (2) foreclose and take the losses. Option one is appealing if they can get the borrower to agree to repay later — empty though that promise may be. Borrowers know this, so they use it to game the system. Option two used to be unavailable because of depleted capital ratios and government moratoria. It is still not desirable, but now lenders are strong enough to foreclose if they determine the borrower is truly a deadbeat.

I reported Monday that Bank of America to Increase Foreclosure Rate by 600% in 2010. If you assume straight-line increase in the foreclosure rate, they will foreclose on less than 300,000 borrowers. They currently have 1,200,000 in default, and that number is growing daily.

7,500 — January, 2010

10,375 — February, 2010

13,250 — March, 2010

16,125 — April, 2010

19,000 — May, 2010

21,875 — June, 2010

24,750 — July, 2010

27,625 — August, 2010

30,500 — September, 2010

33,375 — October, 2010

36,250 — November, 2010

42,000 — December, 2010

282,625 — Total 2010 BofA foreclosures

When you consider the math, Bank of America — and this goes for the other lenders who are all in the same difficult spot — must have the HAMP program succeed. If they have to foreclose on all their delinquent borrowers, prices will be crushed — along with the entitled dreams of their owners.

This is particularly true in the yet-to-be-deflated markets like Orange County or the Bay area. Prices in those markets were inflated by debt, and they will be deflated by its removal. By delaying the removal, lenders hope to keep prices high and prevent the downward spiral of strategic defaults sure to accompany a price collapse.

Making HAMP work

Making HAMP succeed requires one simple thing: allow borrowers to keep more of their entitlements. Fewer borrowers qualify when the program qualifications are onerous, and the only way to reduce the burden on borrowers and qualify more for the program is to let borrowers keep their lifestyles.

We are establishing a multi-year entitlement for over-extended homeowners paid for by frugal homeowners and renters. You won't see it — except maybe here — because the terms will be buried in some obscure HAMP agreement we needed to save the us from the second Great Depression, right?

We will let the woman in the example above keep her $1,700 a month for buying consumer goods because it stimulates the economy. We will continue to let loan owners send their children to private schools and take big vacations — live an entitled life well beyond the people who are actually working to pay for it — to stimulate the economy or some other bullshit reason.

The moral hazard we are creating is huge. Lenders know they can do whatever they want, and now borrowers know they can overextend themselves and the government will bail them out too. What incentive is there for prudent lending and restrained borrowing? None.

The rich bankers get richer; the entitled loan owners keep their indulgences; the frugal who might want to have the same lifestyles are being burdened with taxes and debt to pay for the entitled, and in paying, they deny themselves the very things the government bailouts are providing to others.

I think that is wrong.

I also think that is how this problem gets resolved.

Squatting Irvine Style

Last weekend, I featured a property squatter living in Newport Coast. On Friday, I have a post coming out on one in Laguna Beach. Today, I want to look at a stylish squatter in our own back yard.

• This property was purchased on 1/28/2005 for $1,638,500. The owner used a $1,000,000 first mortgage, a $473,300 second mortgage, and a $165,200 down payment.
• On 9/15/2005 he refinanced with a $1,323,000 Option ARM with a 1% teaser rate. Steward Financial made the loan. Great stewards of money, right?
• On 9/15/2005 he also obtained a stand-alone second for $245,700 also from the good stewards.
• On 2/28/2006 he obtained a HELOC for $357,396. It is unclear whether or not the second mortgage was rolled into the HELOC.
• Total property debt is at least $1,680,396 plus negative amortization and many months of squatting.
• Total mortgage equity withdrawal is $207,096. Not bad for a near-peak purchase.

Remember, my numbers may be $357,396 too low.

And, as Paul Harvey used to say, here is "the rest of the story."

Foreclosure Record

Recording Date: 11/23/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 08/19/2009

Document Type: Notice of Default

Foreclosure Record

Recording Date: 06/30/2009

Document Type: Notice of Rescission

Foreclosure Record

Recording Date: 01/23/2009

Document Type: Notice of Default

This debtor has not made a consistent payment since September 2008 at the earliest. He has been squatting for at least a year and a half and likely much longer.

Do you think he has had any good parties?

Squatting in luxury like this would be great!

I want to kick back with a Margarita, enjoy the view, and watch the proletariat go to work to pay for me to relax and enjoy Margaritas. Who says it's bad to be a debt slave?

Irvine Home Address … 33 TALL HEDGE Irvine, CA 92603

Resale Home Price … $1,299,900

Home Purchase Price … $1,638,500

Home Purchase Date …. 1/28/2005

Net Gain (Loss) ………. $(416,594)

Percent Change ………. -20.7%

Annual Appreciation … -4.4%

Cost of Ownership

————————————————-

$1,299,900 ………. Asking Price

$259,980 ………. 20% Down Conventional

5.11% …………… Mortgage Interest Rate

$1,039,920 ………. 30-Year Mortgage

$272,538 ………. Income Requirement

$5,653 ………. Monthly Mortgage Payment

$1127 ………. Property Tax

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

$108 ………. Homeowners Insurance

$350 ………. Homeowners Association Fees

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

$7,613 ………. Monthly Cash Outlays

-$1508 ………. Tax Savings (% of Interest and Property Tax)

-$1224 ………. Equity Hidden in Payment

$521 ………. Lost Income to Down Payment (net of taxes)

$162 ………. Maintenance and Replacement Reserves

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

$5,564 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$12,999 ………. Furnishing and Move In @1%

$12,999 ………. Closing Costs @1%

$10,399 ………… Interest Points @1% of Loan

$259,980 ………. Down Payment

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

$296,377 ………. Total Cash Costs

$85,200 ………… Emergency Cash Reserves

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

$381,577 ………. Total Savings Needed

Property Details for 33 TALL HEDGE Irvine, CA 92603

——————————————————————————

Beds:: 3

Baths:: 0004

Sq. Ft.:: 2863

$0,454

Lot Size:: 4,912 Sq. Ft.

Year Built:: 2004

On Redfin:: 209 days

MLS#:: S587843

Property Type:: Residential, Single Family

Community:: Turtle Ridge

——————————————————————————

Very nice 2 level detached home in Turtle Ridge. This offers a gourmet kitchen with granite countertops and travertine floors, master bedroom with retreat and spa like master bath, solid wood staircase, tumbled marble in baths, incredible views and much, much more.

Perhaps, I am not over it

Someone recently quipped in the comments that I do not appear to be over the housing bubble. They are probably right.

I am over the fact that we created a housing bubble, and I have come to accept the greed, incompetence and willful ignorance that overcame everyone involved; however, our government's response to the collapse of the housing bubble still pisses me off.

It is wrong.

Someone needs to speak out against what they are doing, and rather than look to someone else, I am doing it.

Perhaps if the powers-that-be stopped creating moral hazard with an array of bailouts and market props, I might fade into the Internet and go away — but that isn't what they are doing! I will continue to point out the problems they create until they stop doing it. I wish it didn't make me so angry. Fortunately, I am good at expressing it and letting it go… at least until I read the next news story about some stupid bailout, and I get angry all over again….

Bank of America made headlines with its principal forgiveness program. The real news is that they are preparing to blast debtors out of their bunkers of entitlement.

Today's featured property is another epic HELOC abuser. Should these people qualify for principal reduction?

Irvine Home Address … 17 CARRIAGE Dr Irvine, CA 92602

Resale Home Price …… $715,000

{book1}

The more I know, the less I understand

All the things I thought I knew, I'm learning again

I've been tryin' to get down

to the heart of the matter

But my will gets weak

and my thoughts seem to scatter

But I think it's about…forgiveness

Forgiveness

Even if, even if you don't PAY me anymore

Don Henley — The Heart of the Matter

Lenders are trying to figure out how their massive Ponzi Scheme collapsed. They are relearning lending again because everything they thought they knew was wrong. When you get down to the heart of the matter, borrowers are carrying too much debt which is killing them financially and emotionally. It is about forgiveness. Even if it means debtors don't pay anymore.

Forgiveness never comes easy, and in lending it never comes cheap. These debts will be forgiven, and the toxic loans that spawned them will be cleansed from the system — mostly through foreclosure. Home debtors are hoping for principal forgiveness without consequence. That isn't going to happen. Lenders only forgive as a last resort, and there are consequences for the borrower. When it's done, lenders turn to the US taxpayer to make them whole again.

A 600% increase in foreclosures

I attended a local Building Industry Association conference on Friday 26 March 2010. The west coast manager of real estate owned, Senior Vice President Ken Gaitan, stated that Bank of America, which currently forecloses on 7,500 homes a month nationally, will increase that number to 45,000 homes per month by December of 2010.

After his surprising statement, two questioners from the audience asked questions to verify the numbers.

Bank of America is projecting a 600% increase in its already large number of monthly foreclosures.

This isn't unsubstantiated rumor; this comes straight from one of the most powerful men in Bank of America's OREO department (yes, that really is what they call it). It appears they have too many properties already.

Perhaps this is a good time to start a Trustee Sale service…. One of the panelists who works for a building company said he was flipping houses with his personal money. He noted that in some markets, he can buy a house at auction for less money than builders are paying for finished lots. That is a bit crazy.

There was encouraging news from some in the reality-based community at the conference. Builders are buying up projects in Southern California, so the land market has found a bottom. Prices are still speculative, but the builders are buying to have buildable inventory, so in select markets real demand exists for finished lots and properties with partial improvements.

There was a certain amount of positive spin at the event, which is natural given the beleaguered stated of the Southern California building industry. Jeff Collins at the OC Register covered the more bullish opinions.

It is still not enough

Last week I noted that Lenders Start More Foreclosures to Catch Up with Delinquencies. Consider the size of the problem: 1.2 million Bank of America homeowners are in default. Even if they forclosed on 45,000 a month for a full year, that is only 540,000 foreclosures. What about the other 660,000 people in default? I think their number — large as it may seem — is actually wishful thinking. It is worse than that. (thanks jules)

Principal reductions are a public relations diversion

Everyone is abuzz with the news that Bank of America is forgiving principal. As you might imagine, many will apply and few will be helped. Moral hazard dictates that irresponsible borrowing that results in free money will cause more irresponsible borrowing; after all, it isn't borrowing, it's a gift. If banks start giving away money, everyone will do whatever is necessary to obtain it.

I contend the principal reduction program is a public relations diversion. Let's look at the numbers. By Bank of America's own admission, the program will assist 45,000 customers — a sum equal to the monthly foreclosure rates they are anticipating by the end of the year. If they are foreclosing on more people each month than would be helped by the principal reduction program, then the program is merely a pleasant facade intended to divert attention from the huge volume of foreclosures they will push through.

Bank of America to Reduce Mortgage Balances

Bank of America said on Wednesday that it would begin forgiving some mortgage debt in an effort to keep distressed borrowers from losing their homes.

The program, while limited in scope and available by invitation only, signals a significant shift in efforts to deal with the millions of homeowners who are facing foreclosure. It comes as banks are being urged by the White House, members of Congress and community groups to do more to stem the tide.

The Obama administration is also studying whether to provide more help to people who owe more on their mortgages than their homes are worth.

Bank of America’s program may increase the pressure on other big banks to offer more help for delinquent borrowers, while potentially angering homeowners who have kept up their payments and are not getting such aid.

You think? Responsible borrowers should be pissed. The more irresponsible and foolish borrowers were, the greater their principal forgiveness.

As the housing market shows signs of possibly entering another downturn, worries about foreclosure are growing. With the volume of sales falling, prices are sliding again. When the gap increases between the size of a mortgage and the value that the home could fetch in a sale, owners tend to give up.

Cutting the size of the debt over a period of years, however, might encourage people to stick around. That could save homes from foreclosure and stabilize neighborhoods.

“Banks are willing to take some losses now to avoid much greater losses later if the housing market continues to spiral, and that’s a sea change from where they were a year ago,” said Howard Glaser, a housing consultant in Washington and former government regulator.

The threat of a stick may be helping banks to realize that principal write-downs are in their ultimate self-interest. The Bank of America program was announced simultaneously with the news that the lender had reached a settlement with the state of Massachusetts over claims of predatory lending.

The program is aimed at borrowers who received subprime or other high-risk loans from Countrywide Financial, the biggest and one of the most aggressive lenders during the housing boom. Bank of America bought Countrywide in 2008.

Bank of America is trying this principal reduction program with Option ARM holders because they know these people are all going to default. Anything they can do to minimize the losses on these properties, including delaying foreclosure and hoping for appreciation, is preferred to absorbing these losses when prices are very low. Of course, it will not work, but it it worth a shot. They have little to lose by trying.

Borrowers have nothing to lose either. The Bank of America program is an attempt to stop the hopelessly underwater from strategically defaulting. It is their only hope.

The devil is in the details

Bank of America officials said the maximum reduction would be 30 percent of the value of the loan.

Those people who are more than 30% underwater are considered the walking dead. They should default. If you don't qualify for this program because you are too far underwater, what hope do you have?

I heard recently that Hemet, California, has a significant number of borrowers more than 50% underwater. Back in 2006-2007, I was involved with the Valley Economic Development Corporation working to bring business to Hemet and San Jacinto. I remember a brochure we created touting the relative affordability of local housing. At the time, the median income was $45,000 per year, and the median home price was $405,000.

Most who paid $405,000 for a house back then used Option ARMs because they could leverage nine-times their income to obtain a property. Now that the median home price is around $175,000 — which is close to four-times income — many residents owe more than double what their house is worth.

They said the program would work this way: A borrower might owe, say, $250,000 on a house whose value has fallen to $200,000. Fifty thousand dollars of that balance would be moved into a special interest-free account.

As long as the owner continued to make payments on the $200,000, $10,000 in the special account would be forgiven each year until either the balance was zero or the housing market had recovered and the borrower once again had positive equity.

Let's see how a Southern California borrower would be effected by this program. Let's assume a $500,000 house price and a $400,000 first mortgage with a $100,000 second. The second is not subject to this agreement, so we already have our first major hurdle to overcome. When Bank of America lowers the value of its first mortgage, are they taking into account the indebtedness of the second? If they don't, payments are still not affordable.

Assume the borrower received $200,000 in potential principal reduction. Now they are paying on a $200,000 first and a $100,000 second which brings their combined loan-to-value under 100%. The $200,000 of deferred principal gets reduced by $10,000 a year until values increase. Absent appreciation, it will take 20 years to dig out. That is a long time to rent their home from the bank with zero equity.

Here is where it gets fuzzy — on purpose I'm sure — Let's say the borrower stays with the program for ten years. The deferred principal is now $100,000, and the total indebtedness is $400,000 minus amortization. Let's further assume that prices have appreciated, and the property is now worth $400,000. What happens?

1. Does the principal forgiveness end and the account with the principal deferment is permanently fixed at the point of crossover? How do we know when this occurs? Is Bank of America going to order yearly appraisals just prior to forgiving the debt to make sure the owner is still underwater?
2. Once Bank of America discovers the borrower is no longer underwater, can they recapture forgiven principal if the borrower continues to live in the property? In short, does the bank get the appreciation to recover the forgiven debt, or does the borrower get to keep it?
3. How is this deferred principal paid off? Is this a permanent zero-interest loan paid off when the property is sold? Does the deferred principal get added back to the original mortgage once the borrower is no longer underwater? What happens to the borrower's payment?

If those questions are resolved in favor of borrowers, I would be surprised. To the degree that the borrower benefits is the degree to which moral hazard is encouraged.

Too little too late

Bank of America said its new program would initially help about 45,000 Countrywide borrowers — a fraction of the 1.2 million Bank of America homeowners who are in default. The total amount of principal reduced, it estimated, would be $3 billion.

The bank said it would reach out to delinquent borrowers whose mortgage balance was at least 20 percent greater than the value of the house. These people would then have to demonstrate a hardship like a loss of income.

These requirements will, the bank hopes, restrain any notion that it is offering easy bailouts to those who might otherwise be able to pay. “The customers who will get this offer really can’t afford their mortgage,” Mr. Schakett said.

LOL! Every borrower in Bank of America's books is going to seek a bailout. That is moral hazard! That is why you don't bail people out. The only way to discourage this is to create a program nobody qualifies for… I guess they did that, didn't they?

But Steve Walsh, a mortgage broker [LOL!] in Scottsdale, Ariz., who said he had just abandoned his house and several rental properties, called the program “another Band-Aid. It probably would not have prevented me from walking away.”

That is the other problem Bank of America must contend with. Many of the people who took out these loans were speculators who are going to walk no matter the terms because their speculative venture did not turn out as planned.

… Reducing principal is widely endorsed, in theory, as a cure for foreclosures. The trouble is, no one wants to absorb the costs. [No kidding?]

When the administration announced a housing assistance program in the five hardest-hit states last month, officials explicitly opened the door to principal forgiveness. Despite reservations expressed by the Treasury, the White House and Housing and Urban Development officials have continued to study debt forgiveness in areas with lots of so-called underwater homes, according to two people with knowledge of the matter.

"Continued study" is code for "we are not going to do anything, but we want you to think that we might." It is part of the dangling-carrot policy designed only to keep debtors paying.

On a national scale, such a program risks a political firestorm if the banks are unable to finance all the losses themselves. Regulators like the comptroller of the currency and the Federal Reserve have been focused on maintaining the banks’ capital levels, which could be hurt by large-scale debt forgiveness.

“You have to be very careful not to design a program that would change people’s fundamental behavior across the country in a destabilizing way or would be widely perceived as unfair to people who are continuing to pay,” Michael S. Barr, an assistant secretary of the Treasury, said early this year.

Moral Hazard can't be avoided

No program exists, nor can one be designed, that does not create moral hazard and gross unfairness. That is why this issue is so difficult.

This process must be allowed to run its course. Bank of America will manage its public relations and try to look like they are working to prevent foreclosures.

In reality, Bank of America is gearing up to remove the loan owners and squatters. Expect to see a steady increase in foreclosures all year continuing for the foreseeable future.

Should we give HELOC abusers principal reductions?

The owner of today's featured property would likely qualify under the terms of the Bank of America agreement. Let's take a careful look at the behavior of these borrowers and see if this is something we should encourage with bailouts and handouts.

• This property was purchased on 7/30/199 for $348,500. The owners used a $313,350 first mortgage and a $35,150 down payment.
• On 10/14/1999 they obtained a HELOC for $30,000 which allowed them to withdraw their down payment.
• On 3/7/2002 they opened a HELOC for $50,000.
• On 3/28/2003 they refinanced their first mortgage for $322,000.
• On 3/17/2004 they obtained a HELOC for $120,000.
• On 10/26/2004 they refinanced their first mortgage for $462,750.
• On 10/12/2006 they refinanced their first mortgage for $625,000.
• On 11/14/2006 they obtained a HELOC for $100,000.
• Total property debt is $725,000.
• Total mortgage equity withdrawal is $436,650 including their down payment.

It is obvious from the photos these people did not spend this money on property improvements. Where did it all go?

We all know this money went to conspicuous consumption and keeping up with the Joneses just like it did for everyone else. Do you want to see them get a principal reduction to pay for it?

I don't.

Irvine Home Address … 17 CARRIAGE Dr Irvine, CA 92602

Resale Home Price … $715,000

Home Purchase Price … $348,500

Home Purchase Date …. 6/30/1999

Net Gain (Loss) ………. $323,600

Percent Change ………. 105.2%

Annual Appreciation … 6.8%

Cost of Ownership

————————————————-

$715,000 ………. Asking Price

$143,000 ………. 20% Down Conventional

5.11% …………… Mortgage Interest Rate

$572,000 ………. 30-Year Mortgage

$149,907 ………. Income Requirement

$3,109 ………. Monthly Mortgage Payment

$620 ………. Property Tax

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

$60 ………. Homeowners Insurance

$0 ………. Homeowners Association Fees

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

$3,838 ………. Monthly Cash Outlays

-$764 ………. Tax Savings (% of Interest and Property Tax)

-$673 ………. Equity Hidden in Payment

$287 ………. Lost Income to Down Payment (net of taxes)

$89 ………. Maintenance and Replacement Reserves

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

$2,777 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$7,150 ………. Furnishing and Move In @1%

$7,150 ………. Closing Costs @1%

$5,720 ………… Interest Points @1% of Loan

$143,000 ………. Down Payment

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

$163,020 ………. Total Cash Costs

$42,500 ………… Emergency Cash Reserves

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

$205,520 ………. Total Savings Needed

Property Details for 17 CARRIAGE Dr Irvine, CA 92602

——————————————————————————

Beds: 4

Baths: 2 full 1 part baths

Home size: 2,250 sq ft

($318 / sq ft)

Lot Size: 4,912 sq ft

Year Built: 1999

Days on Market: 4

MLS Number: P727630

Property Type: Single Family, Residential

Community: West Irvine

Tract: Ambw

——————————————————————————

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

This beautiful Fieldstone home, tucked nicely away at the end of a long driveway, has a really functional floorplan with a big living room, a great family room with built-in bookcases that opens directly into the kitchen with center island, and a private, peaceful backyard. Upstairs bedrooms are roomy, and the vast master bedroom has a bathroom with double sinks, separate tub & shower, and a HUGE walk-in closet. One of the upstairs bedrooms has a giant alcove perfect as a retreat or home office. Even the walk-in pantry located off the kitchen is really big! Located in an award-winning school district, and with NO association dues, this happy home will be the site of many great neighborhood parties for years to come!

I get the impression that the man of the house was not responsible for its decoration….

I want to thank my wife for not making me sleep in a room like that one.

BTW, I highly recommend reading Squatting Newport Coast Style, the post from Saturday. It will make your blood boil:

1. $2,500,000+ in HELOC abuse.
2. Delusional seller who has chased the market down more than 50%.
3. Gaming the system to squat in luxury for a year and a half.

Inspired by last year's series on HELOC abuse, I started looking for upcoming trustee sales to see who has been squatting in luxury. Today's featured property is one of many I found.

Irvine Home Address … 5 LONGBOAT Newport Coast, CA 92657

Resale Home Price …… $2,988,900

{book1}

She calls out to the man on the street

"Sir, can you help me?

It's cold and I've nowhere to sleep,

Is there somewhere you can tell me?"

He walks on, doesn't look back

He pretends he can't hear her

Starts to whistle as he crosses the street

Seems embarrassed to be there

Oh

Think twice

'Cause it's another day for you and me in paradise

Phil Collins — Another Day In Paradise

Last year we looked at $3,367,500 HELOC Abuse from Hollywood, $5,000,000 HELOC abuse from Laguna Beach, $7,000,000 HELOC abuse in Newport Coast, 18 different properties in Huntington Beach, and several properties in San Clemente. Everyone was rightfully outraged, but that was not the end of the madness. Many HELOC abusers who cannot make their payments are now staying on in these properties squatting on your tax dollars.

While renters and the other "little people" suffer during the Great Recession, the entitled rich squat in their luxury homes and enjoy another day in paradise.

Today's featured property has it all:

1. $2,500,000+ in HELOC abuse.
2. Delusional seller who has chased the market down more than 50%.
3. Gaming the system to squat in luxury for a year and a half.

HELOC Abuse

The original sales price is not clear from my records, but it looks as if the buyers paid about $1,200,000 in 1997. There was a $900,000 loan which I assume was 80% of the total purchase price. The original owners were a couple, and after the point where only the wife is on title in 2004 — presumably after a divorce — the HELOC abuse became truly remarkable.

• On 3/11/2004 the wife appears alone on title, and the first mortgage is $999,800.
• On 8/30/2004 she refinanced with a $1,000,000 first mortgage.
• On 12/28/2005 she refinanced with a $2,170,000 first mortgage.
• On 2/1/2006 she got a HELOC for $250,000.
• On 8/22/2006 she refinanced with an Option ARM for $2,500,000.
• On 11/15/2006 she opened a HELOC for $490,000.
• On 8/1/2007 she refinanced with another Option ARM for $3,225,000.
• On 10/22/2007 she opened a HELOC for $500,000.
• Total property debt is $3,725,000.
• Total mortgage equity withdrawal is $2,725,200 during a four-year stretch.

That is $681,300 per year in cash to spend to enjoy this beautiful property for doing nothing. Great gig if you can get it.

Delusional market chasing

This listing price history speaks for itself:

Date	Event	Price
Mar 20, 2010	Relisted	—
Mar 08, 2010	Delisted	—
Feb 04, 2010	Relisted	—
Feb 02, 2010	Delisted	—
Jan 20, 2010	Price Changed	$2,988,900
Sep 22, 2009	Price Changed	$3,900,000
Aug 26, 2009	Price Changed	$4,900,000
Sep 02, 2008	Price Changed	$5,300,000
Aug 21, 2008	Price Changed	$5,700,000
Jun 26, 2008	Price Changed	$5,998,800
Jun 10, 2008	Listed	$6,100,000

A 300% markup followed by a 50% reduction. Is that delusion, ignorance, or stupidity?

Gaming the system

Foreclosure Record

Recording Date: 07/23/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 04/27/2009

Document Type: Notice of Rescission

Foreclosure Record

Recording Date: 04/21/2009

Document Type: Notice of Default

Foreclosure Record

Recording Date: 03/23/2009

Document Type: Notice of Rescission

Foreclosure Record

Recording Date: 03/18/2009

Document Type: Notice of Default

Foreclosure Record

Recording Date: 03/17/2009

Document Type: Notice of Default

To be in default on 3/17/2009, the borrower has missed payments since at least December 2008 and likely much earlier.

Where did you live for the last 16 months? Did you live this well? Did you pay for it?

These loans are above the conforming limit, so perhaps we will not pay for it, but somehow I imagine lenders will find a way to take bailout money for these losses. You are probably going to pay for Washington Mutual's loss on this property with your tax money as part of the backstop agreement when Chase took WAMU over. Your tax money is supporting a HELOC abusing squatter living in luxury in Newport Coast… Just so you know….

IHB News

As you noticed last week, we are now able to buy at trustee sale and sell to families that require financing. I intend to write a series of posts to detail everything soon. This will be a slow rollout. I would rather under-promise and over-deliver.

Housing Bubble News from Patrick.net

Los Angeles Area Rent/Buy Ratios (patrick.net)

Housing market's upswing at risk of collapsing (chron.com)

Mortgage delinquencies rise to nearly 14 percent (finance.yahoo.com)

Households Facing Foreclosure Rose in 4th Quarter (nytimes.com)

Housing's big "shadow" up to 10M more houses could be for sale (finance.yahoo.com)

Half of U.S. House Loan Modifications Default Again (bloomberg.com)

House loan modification program oversold: watchdog (reuters.com)

Obama Loan-Modification Effort Failed Miserably (businessweek.com)

Treasury defends houseowner assistance plan (reuters.com)

Treasury, Ahem, Clarifies Goals for the Mortgage Mod Program (propublica.org)

Underwater "Owners" Will Never Surface Again (centralvalleybusinesstimes.com)

James K. Galbraith: Oh Please, Greenspan (huffingtonpost.com)

Real Estate ETFs Face Uphill Battle (minyanville.com)

Existing house sales dip in Panama City, FL (newsherald.com)

Man convicted on 160 counts of realty fraud (signonsandiego.com)

Realtor suspected in foreclosure theft (columbiatribune.com)

US new house sales hit record low (news.bbc.co.uk)

Sales of New U.S. Houses Dropped to Lowest on Record (bloomberg.com)

Sun Belt Loses Its Shine in Migration Data (online.wsj.com)

Arizona Officials Apportion Bailout Funds and Wrestle with Moral Hazard (irvinehousingblog.com)

California has 1.7 Million Additional Houses priced under $249,000 (financemymoney.com)

What if It Was ALL Just a Big Bubble? (timiacono.com)

Positive cash flow in rental properties (johntreed.com)

Obama Loan Program May Extend Foreclosure Crisis (bloomberg.com)

The Housing Crisis and the Resentment Zone (economix.blogs.nytimes.com)

BofA to start reducing mortgage principal (finance.yahoo.com)

U.S. banks pay lip service to second mortgages (blogs.reuters.com)

Treasury Takes First Steps to Reshape Fannie and Freddie (nytimes.com)

Kansas City Fed's Hoenig Endorses Volcker, Blasts "Too Big To Fail" (Mish)

High-End Repo Man Takes Back Toys From the Over-Leveraged Rich (online.wsj.com)

Why political futures markets got the health care bill so wrong (slate.com)

Toll road operator files for Chapter 11 (signonsandiego.com)

The Rising Cost of Public Higher Education (phdcomics.com)

The Case for Ending the Mortgage Deduction (nytimes.com)

Noe Valley "Dreamhouse": One raffle you might not want to win? (sfgate.com)

Renting Can Be A Smart Investment (PDF)

HAMP applicants who don't really need the money (calculatedriskblog.com)

Fannie, Freddie messy government tie tough to cut (reuters.com)

Why Fannie and Freddie Continue to Cost Taxpayers Billions (huffpostfund.org)

Will Misrepresented Mortgage-Backed Bonds Come Home to Roost? (seekingalpha.com)

Bernanke Wants to End Bank Reserve Requirements Completely: Does it Matter? (Mish)

AIG Increases Pay for Most Top Managers Who Remained (businessweek.com)

How Middle Class Evaporated in Last 40 Years (mybudget360.com)

Global Housing Prices: More Room to Fall? (imf.org)

Influx of listings set to cool Canadian housing market (theglobeandmail.com)

German pensioners guilty of abducting financial adviser (news.bbc.co.uk)

San Francisco Bay Area Rent/Buy Ratios (patrick.net)

New round of foreclosures threatens housing market (washingtonpost.com)

Defaults and foreclosures bounce up (nctimes.com)

Notices of default up 24% in San Diego county (signonsandiego.com)

Microcosm of the Housing Crisis on an Arizona Street (nytimes.com)

A Florida Sprawl Development's Road to Foreclosure (eyeonmiami.blogspot.com)

In Metro Detroit, 47 percent of properties are under water (detnews.com)

In Boston, a Lender Steps in After Foreclosures (dealbook.blogs.nytimes.com)

Finding in Foreclosure a Beginning, Not an End (nytimes.com)

House Builders Can't Compete With Foreclosures (forbes.com)

America's most underwater housing markets (finance.yahoo.com)

Poll Shows Little Confidence in Housing Recovery (fastpitchnetworking.com)

Five Financial Trends Keeping California Home Prices Depressed (doctorhousingbubble.com)

Reply to NYT article claiming that paying off your mortgage is bad idea (slycapital.wordpress.com)

More troubles coming for Portland commercial real estate (blog.oregonlive.com)

The Incredible Lightness of the SP 500 (theautomaticearth.blogspot.com)

Inflation? Where? (Mish)

Contrarian Trade of the Decade: the U.S. Dollar (Charles Hugh Smith)

Too-Big-to-Fail Banks Will Spark New Crisis (bloomberg.com)

House Call: To Buy or Not to Buy (smartmoney.com)

More Ugly Housing Data (safehaven.com)

Supply of Foreclosed Houses Increases (calculatedriskblog.com)

Option ARMs pose threat to housing market (latimes.com)

Loan Spread Points to Limits on U.S. Housing (bloomberg.com)

CA Housing is Double-Dipping Right Now! (mhanson.com)

House values in Phoenix may fall again because of 'shadow inventory' (azcentral.com)

Many South Florida house sellers still asking too much (miamiherald.com)

Some homedebtors facing prospect of repeated foreclosures (latimes.com)

Credit scores can drop after getting loan help (finance.yahoo.com)

Why On Earth Would I Attempt A Short Sale? (housingstorm.com)

Should You Buy or Rent? (realestate.yahoo.com)

Renters' advantage (thenewstribune.com)

US Headed For Commercial Real Estate Crash Of Unprecedented Magnitude? (beforeitsnews.com)

Sale Fraud, Squatter Stimulus, and Buying Before Foreclosing (mybudget360.com)

Trust, Underwater (nytimes.com)

The Misinformed Tea Party Movement (forbes.com)

Irvine Home Address … 5 LONGBOAT Newport Coast, CA 92657

Resale Home Price … $2,988,900

Home Purchase Price … $1,125,000

Home Purchase Date …. 11/19/1997

Net Gain (Loss) ………. $1,684,566

Percent Change ………. 165.7%

Annual Appreciation … 7.8%

Cost of Ownership

————————————————-

$2,988,900 ………. Asking Price

$597,780 ………. 20% Down Conventional

5.11% …………… Mortgage Interest Rate

$2,391,120 ………. 30-Year Mortgage

$626,654 ………. Income Requirement

$12,997 ………. Monthly Mortgage Payment

$2590 ………. Property Tax

$250 ………. Special Taxes and Levies (Mello Roos)

$249 ………. Homeowners Insurance

$600 ………. Homeowners Association Fees

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

$16,687 ………. Monthly Cash Outlays

-$1918 ………. Tax Savings (% of Interest and Property Tax)

-$2815 ………. Equity Hidden in Payment

$1199 ………. Lost Income to Down Payment (net of taxes)

$374 ………. Maintenance and Replacement Reserves

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

$13,526 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$29,889 ………. Furnishing and Move In @1%

$29,889 ………. Closing Costs @1%

$23,911 ………… Interest Points @1% of Loan

$597,780 ………. Down Payment

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

$681,469 ………. Total Cash Costs

$207,300 ………… Emergency Cash Reserves

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

$888,769 ………. Total Savings Needed

Property Details for 5 LONGBOAT Newport Coast, CA 92657

——————————————————————————

Beds: 4

Baths: 4 full 1 part baths

Home size: 5,300 sq ft

($564 / sq ft)

Lot Size: 10,508 sq ft

Year Built: 1994

Days on Market: 656

MLS Number: U8002650

Property Type: Single Family, Residential

Community: Newport Coast

Tract: Esor

——————————————————————————

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

COMPLETELY REMODELED IN 2008: NEW PAINT AND CARPET, GRANITE TOPS, AND KITCHEN CABINETS. THIS SPECTACULAR MEDITERRANEAN CUSTOM ESTATE OFFERS BREATHTAKING VIEWS OF OCEAN AND CITY LIGHTS. FROM THE LUXURIOUS AND ELEGANT INTERIOR TO THE BEAUTIFUL YARD WITH ROCK POOL, WATERFALLS, SPA AND OUTDOOR BUILT-IN BARBEQUE, THIS HOME IS PERFECT FOR ENTERTAINMENT. HOME OFFICE LIBRARY AND SURROUND SOUD SYSTEM ARE JUST A FEW EXTRA THINGS THIS HOME HAS TO OFFER. LOCATED IN THE PRESTIGIOUS GUARD-GATED COMMUNITY OF PELICAN RIDGE AND BUILT BY BRIAN FOSTER.

People concoct all variety of foolish plans to make riches in real estate. Most of them involve some form of appreciation dependency. When their plans fail, what happens to them?

Today's featured property is a short sale likely going to trustee sale on April 1.

Irvine Home Address … 95 Mission, Irvine, CA 92620

{book1}

Ah, look at all the lonely people

Ah, look at all the lonely people

Eleanor Rigby picks up the rice in the church where a wedding has been

Lives in a dream

Waits at the window, wearing the face that she keeps in a jar by the door

Who is it for?

Father McKenzie writing the words of a sermon that no one will hear

No one comes near.

Look at him working, darning his socks in the night when there's nobody there

What does he care?

Eleanor Rigby died in the church and was buried along with her name

Nobody came

Father McKenzie wiping the dirt from his hands as he walks from the grave

No one was saved

All the lonely people

Where do they all come from?

All the lonely people

Where do they all belong?

The Beatles — Eleanor Rigby

There is a deep sadness in emotional impoverishment and loneliness. There is a tragic sadness in foolishness that leads to financial destitution. By seeing what these people did wrong, we can avoid the same mistakes.

Underwater mortgages drain equity, dampen retirement

By Stephanie Armour, USA TODAY

When Jennifer and David Wakefield bought their home at the end of 2005, they believed its value would rise. After all, the couple they'd bought it from made a $100,000 profit in just three years.

But instead, the housing market foundered, and the house in Oviedo, Fla., that the Wakefields bought for about $230,000 is now worth just $115,000. Jennifer Wakefield says she's put off hopes of moving to a larger home. She once thought she could use a home-equity loan to help cover the $30,000 cost of adopting a child, but now there's no equity to tap into.

"We're in the middle of adopting our first child and would have loved to have used a home-equity loan to borrow from — if we had home equity," says Wakefield, 32. "Now, we're faced with coming up with $30,000."

This woman fully expected her house to provide her the money to have a child. The house pays for the children? I had it figured the other way around; shouldn't the ability to shelter the child come first?

Gone are the days when households relied on their homes' ever-rising values as family piggy banks that would pay for everything from new cars to college tuition. Legions of borrowers who once thought they could count on equity in their homes as a financial safety net are finding there's nothing there. Instead, they're discovering it may take years before their homes are worth as much as they owe on them.

A typical borrower who is "underwater" won't see positive gains in equity until 2015 to 2020, depending on the market, according to a study of 10 major metro areas by First American CoreLogic for USA TODAY.

"It's a rude awakening. There's a total change in thinking going on," says Amy Bohutinsky of Zillow.com, a real estate website. "People got caught up in the idea you could borrow against your homes, but they no longer think of them as savings accounts. We're going through a big psychological shift. Will this recession change how we think about our homes? Are they an investment vehicle or a place to live?"

I wrote about Our Changing Relationship to Debt back in July of 2008. "By 2010, people will realize the thought patterns of the bubble, the religion of real estate, are no longer operative. As this slow process of change grinds forward, people will start thinking in terms of taking on manageable debts with an eye toward paying it off to build equity the old fashioned way through retiring debt. This will be a big change for the market."

'What if I want to move?'

At 39, Tage Woehl already fears for his family's financial future.

Woehl, of Eastlake, Calif., is about $80,000 underwater on a home he and his wife, Imelda, bought for $430,000 in 2003. He's locked into a 5.99% fixed-rate mortgage that no bank will refinance.

To hold down other expenses, the Woehls go without cable TV, and he's holding onto his 1999 Dodge Intrepid, which has 188,000 miles on the odometer. The Woehls' daughter, Nika, is only 4, but Woehl, an accountant, already is worrying about how he'll afford college tuition in 13 years. He says he feels like he's lost his financial life jacket: "It's not too comforting."

Woehl says it sometimes feels unfair that other homeowners who don't pay their mortgages on time get federal bailout assistance in the form of mortgage modifications and lower monthly payments.

"I'm the one who's paying every month, and when all is said and done, I'm scraping by," he says. "We can't refinance. We're upside-down now. What if I want to move? I'd like to be closer to my job."

Another side of moral hazard; the responsible get screwed, and they are pissed about it. As a renter, I could move anywhere in the country in 60 days. The millions who are trapped underwater couldn't move in the next 60 months. How many house debtors are enduring long commutes when they could be renting a nicer property nearer work for less money?

But it's also older borrowers without young children who are frustrated by their financial situation and feel stuck because they are underwater on their homes.

Vicky Dicristo, 64, bought her home in Soquel, Calif., in 2006 for $535,000 with plans to fix it up, live in it awhile, then sell and buy a nice retirement home in Arizona, where she has family. She bought the home with a five-year, interest-only, adjustable-rate mortgage at a 5.9% interest rate.

Her home is now worth $350,000, according to the local assessor's office. And Dicristo, who was laid off nearly two years ago from her job as a mortgage loan underwriter, has lost the $135,000 she put down on the house as well as the more than $15,000 she put into renovating the home with new floors.

"I lost $150,000," Dicristo says. "I haven't been able to make payments, either. I thought I was going to be able to sell it and move to a less expensive area. That had been my plan when I bought it, to move to someplace like Arizona and pay all cash. But that whole plan fell apart."

Whether this woman recognizes it or not, she is a retail property flipper. She planned to ride the equity wave into a free property. The fact that people like her thought this was possible amazes me. She, and millions with the same faulty plan, helped drive up prices. This plan only works if property values where you are flipping are going up at a much faster rate than where you want to be. California really is a magical place, right?

For Dicristo, losing equity in her home has meant losing the cash she sank into it and losing much of her retirement dream.

"Emotionally, this has had a very big impact on me," she says. "It's changed how I view housing."

The Unceremonious Fall from Entitlement. Her plan was not based on reality, and her "dream" of retirement was simply a dream, a fantasy created in her own mind. If she doesn't create the fantasy — if prices had never bubbled — she would not have filled her head with silly ideas about a retirement not to be, and she would not be suffering right now.

When foreclosure looms

Losing equity has also cost Henry Oviedo, 75, an engineer, his retirement dream.

He bought his home in 2005 in Owings, Md., for $642,000. It did not have a complete basement, so he spent nearly $100,000 to put in an office, a small theater, a bathroom, a fitness room and a big living room. He took out a five-year, adjustable-rate mortgage at 5.85% interest.

He pimped the place out and now he can't afford it.. Stupid.

When he went to refinance recently, his home was appraised at $590,000.

Oviedo says he has been unable to get his home refinanced because he is upside-down. Nor has he been able to get his mortgage modified. Oviedo is now paying $3,200 a month, but come November, he could face higher payments when the 5.85% rate on his mortgage will be adjusted.

He must retire this year, and Oviedo says his Social Security check won't be enough to pay his mortgage. His wife, Giselda, is unemployed.

This guy took on $642,000 in debt about six years prior to retirement? That was his plan? Was the house going to be his breadwinner? How do you retire with $642,000 in debt?

"I am very worried," he says. "I put $100,000 into the house. It's very uncertain what is going to happen. I would have liked to have had this as my home in retirement, but I am going to have to go into foreclosure."

If this fool would not have put $100,000 into the house, he would still have $100,000 for his retirement, albeit in a house a bit less pimped out. The lower payment might have been affordable to him.

The problem of negative equity is getting worse. The average equity amount that an underwater borrower was in the hole for in the fourth quarter of 2009 was $70,700, up from $69,700 the previous quarter.

Without equity in their homes, many homeowners no longer have collateral for personal loans that financed new cars, vacations, home improvements and college educations before the housing bust.

Home-equity lending has plummeted. Lenders made $77 billion in home-equity loans or lines of credit in 2009, down from $430 billion during the housing boom in 2006, according to Inside Mortgage Finance.

"That's not likely to change any time soon until equity picks back up," says Guy Cecala, CEO of Inside Mortgage Finance.

HELOCS are dead

Many people buying today believe they will have HELOC riches soon. This will change slowly. As interest rates go up, HELOCs — if they are still made widely available — will be much less desirable.

If you locked in to a first mortgage at 5% and your house has gone up $100,000 in value, are you going to open a HELOC at 7% and take on the added payment? You see, falling interest rates that allowed first-mortgage refinancing at ever-decreasing rates allowed many borrowers to increase debts without increasing payments. That ability goes away when interest rates creep up. When people open HELOCs in the future, they will not be refinancing their first mortgages, and the HELOC debt is an additional payment that eats into monthly cashflow. HELOC borrowing is dead for the foreseeable future.

The negative equity problem also is threatening future inheritances. Many homeowners who counted on their home equity as a substantial part of the estate they'd pass on to their heirs are now worrying about the welfare of their spouses and children after they die.

Bob Riley had thought the equity in his home would provide for his wife, Dawn, and provide an inheritance for his three adult children. Now he fears it will just be a financial albatross for them.

Equity is never an albatross; debt is an albatross. If he wanted to provide an inheritance, he should have worked to pay off the debt.

His home is one of the 2.2 million in Florida with negative equity. He and Dawn, of Tallahassee, spent $220,000 five years ago and took out a fixed mortgage on their four-bedroom, one-story home that backs up to a lake and includes a 1-acre yard for their two dachshunds.

A nearly identical home across the street recently sold for about $180,000, and Bob guesses they're at least $20,000 underwater on their house. He used to work as a concrete salesman but is currently out of work. Dawn sells insurance.

It's frustrating, Bob says, because there's a home they'd like to buy with more square footage that's newer, but they'd have to write a check just to get out of their house. He says they've paid off all their bills and are now trying to decide whether to continue paying the mortgage.

"It'll take years for the equity to get back," he says.

Four or five other homeowners in his neighborhood, he says, have simply walked away and left their properties to the bank. And there are other hard realities to come to terms with.

Reverse Mortgages

Bob, 60, says he'll have no home value to pass on to Dawn or his three grown children.

He had thought he could take out a reverse mortgage on the home. That's when a homeowner who is older than 62 borrows money from his or her home. It isn't paid back until the owner dies, sells the home, or permanently moves out.

"I can't retire. I'm looking for work," Bob says. "I thought whatever we'd have, I'd pass away and leave the house to her, and she'd have a reverse mortgage to live off of. Now we don't know what we're going to do."

Reverse mortgages are a financial cancer. If this man's plan was to leave his wife a reverse mortgage, he was planning to leave her with a financial cancer which would have consumed the house and left her trapped and penniless. Downsize and diversify before taking on financial cancer.

What will become of all the foolish people?

Each of the people mentioned in the article made foolish plans. What will become of them? The young may recover, but the old will almost certainly endure a fall from entitlement. The lifestyles they enjoyed or envisioned are gone.

These cases are sad but instructive.

Irvine Home Address … 95 Mission, Irvine, CA 92620

This property is in backup or contingent offer status.

SPACIOUS THREE BEDROOM END UNIT, attached only on one side and very private. Painted throughout, very clean and spacious. Has a front courtyard off the dining room and small courtyard off of downstairs bedroom. Huge MASTER BEDROOM, with handsomely done master bath. Twin vanities, huge tub and LARGE WALK-IN CLOSET. Spacious kitchen with modern cesearstone countertops and stone backspash. Has a wine captain, stainless appliances including a refrigerator. Custom fans throughout. Windows have formal casing and the master bedroom has plantation shutters. In an excellent Woodbury location: WALK TO ELEMENTARY SCHOOL, the resort The Commons' with 5 private pools, private tennis courts, incredible amenities. Photos soon.

HELOC abuse

I didn't think a loan owner who bought at the peak would be able to squeeze out a few pennies, but then again, I constantly underestimate lender stupidity. On 9/25/2006 the owners obtained a $640,000 first mortgage and a $150,000 stand-alone second. The got $40,500 out of their nine months of ownership before the music stopped. Once the cash cow stopped giving milk, they stopped paying and found a new way to milk it. They haven't made a payment in well over a year.

Foreclosure Record

Recording Date: 03/09/2010

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

Trustee Sale

The margins on the more desireable properties are certainly smaller. With little or no time or cost required to fix these properties up, flippers are merely arbitraging the cash and resale markets. It isn't rocket science.

Comparable Trustee Sales	Auction Date	Amount
92 TOWNSEND — A 0 bed Condominium — 0	12/3/2009	$ 451,000
68 TOWNSEND — A 0 bed Condominium — 0	2/3/2010	$ 501,000
84 TOWNSEND — A 0 bed Condominium — 0	9/23/2009	$ 502,200
89 WINDING WAY — A 0 bed Condominium — 0	2/10/2010	$ 515,597
53 CHANTILLY — A 0 bed Condominium — 0	10/21/2009	$ 523,100
Comparable Resales	Resale Date	Amount
115 Spanish Lace — A 3 bed 1,960 SF CONDO — 2006	12/09/2009	$ 550,000
84 Townsend 1 — A 3 bed 2,100 SF CONDO — 2005	12/22/2009	$ 594,000
81 Mission — A 3 bed 1,960 SF CONDO — 2005	8/28/2009	$ 560,000
57 Flamenco — A 3 bed 2,165 SF CONDO — 2005	1/07/2010	$ 598,000
53 Chantilly — A 3 bed 1,960 SF CONDO — 2006	12/31/2009	$ 625,000
Comparable Rentals	Rental Date	Amount
62 Shadowplay — 3 bed SF CONDO — 2,146	33	$ 2,900
28 Pink Sage — 3 bed A SF CONDO — 1,745	66	$ 2,800

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