Category Archives: Library

Housing Subsidies, Debt Expansion, and the Death of American Liberty

Today we examine housing subsidies and how they contribute to the growth of debt and the slow erosion of liberty in America.

Irvine Home Address … 11 SUNSET Riv Irvine, CA 92604

Resale Home Price …… $739,000

{book1}

And I don't think it'll be so bad

And I know it won't be so bad

'Cause the man said "that's the way it is"

And the man said "it don't get better than this" no no no

Sell out, with me oh yeah,

Sell out, with me tonight,

Reel Big Fish — Sell Out

Properties are encumbered with too much debt, and buyers in markets where prices have not crashed are being asked to pay much higher prices as a percentage of their incomes than generations past. Today's buyers are being asked to pay for the excesses of those that came before them and sell out to the money changers.

Mom, Apple Pie and Mortgages

By ROBERT J. SHILLER

Published: March 5, 2010

FOR decades, the federal government has subsidized housing — particularly owner-occupied housing. This has been especially true during the continuing financial crisis, with Fannie Mae, Freddie Mac and the Federal Housing Administration propping up the housing market by issuing guarantees for investors on most new mortgages.

But what is the long-term justification for putting taxpayers on the line to subsidize homeownership? Is this nothing more than a sacred cow in American society — a political necessity because so many voters own homes and are mindful of their resale value?

How much of our government's response is tyranny of the majority? Are the owning taxpayers paying this subsidy comfortable with the face of housing entitlement today?

This time, the best answer isn’t found in traditional economics but rather in American culture: a long-standing feeling that owning homes in healthy communities is connected to individual liberties that embody our national identity. Historically, homeownership has been associated with freedom, while renting — often in tenements or mill villages — has been linked to the oppression of a landlord.

In his classic 1985 book, “Crabgrass Frontier,” Kenneth T. Jackson of Columbia University delineated the complex train of thought that over the last two centuries has produced the American belief that homeownership encourages pride and good citizenship and, ultimately, preservation of liberty. These attitudes are enduring.

The middle road is often a path between two evils. In the left ditch is the weakness of landlord dependency, rent controls, and other government subsidies of transitory housing. In the right ditch is an array of market subsidies to encourage home ownership, even if that form of home ownership is really money rentership — and, pardon my cynicism, our lending overlords want it that way. Wouldn't you want to have 40% of society's earnings if you could get it?

People forget they are merely substituting one form or weakness for another; landlord oppression is one evil, and lender oppression is another. Somewhere along the way, we lost ourselves. We escaped one form of bondage and fell into another. Why did we do it?

Back in 1899, in “The Theory of the Leisure Class,” Thorstein Veblen described homeownership, particularly of large and expensive dwellings, as “conspicuous consumption.” By that, he meant that it was undertaken substantially for the purpose of impressing others by showing the amount of money one can afford to waste on space one doesn’t need.

What is specifically American here — though it’s increasingly seen in other countries, too — may be the modern sense of equal citizenship, engendered by the illusion that we can sustain conspicuous housing consumption even among a majority of the people.

In short, this all has a great deal to do with culture, and little to do with financial wisdom. After all, financial theory suggests that people should not own their own homes, at least not in the way that many do today.

We are witnessing the final stages of a societal change. We have embraced debt as if it is capital or wealth; the change has been gradual, and the individual steps toward this end seemed natural and necessary; however, a significant number of people no longer distinguish between debt and wealth and truly believe obtaining debt bestows wealth and power.

"Twelve voices were shouting in anger, and they were all alike. No question, now, what had happened to the faces of the pigs. The creatures outside looked from pig to man, and from man to pig, and from pig to man again; but already it was impossible to say which was which." — George Orwell, Animal Farm.

We are generation pwned. Lenders seek the maximum debt-to-income ratio people are willing and able to support. The lure of appreciation and HELOC spending increases borrower willingness far beyond borrower ability and this willingness (or kool aid intoxication) helps keep prices inflated and debt loads large. Lenders and realtors exploit our modern American delusions, and everyone pays higher housing costs as a result. What good is a large income if so much is spent on housing? Aren't the lenders the real beneficiaries?

It’s time to take back The American Dream

By Greg Fielding:

On home prices, Shiller writes:

If many of these homes needed to be converted to rental units, home prices might well drop.

The Emperor’s clothes are beautiful indeed.

Though the policies are economically insane, they are worth the cost in order to perpetuate “a long-standing feeling that owning homes in healthy communities is connected to individual liberties that embody our national identity.”

In other words, the concept of “The American Dream of Homeownership” is worth spending trillions to uphold because it is a central to our culture.

Really?

Is our National Identity really defined by lust for a material good?

Consider the alternatives…

Americans: Smart and Hard-Working

Americans: Gracious and Strong

Americans: Helping Each Other

Americans: Character and Perserverance

No, we’re Americans: People who want to Buy Houses

How twisted and materialistic have we become as a culture to openly define ourselves by something we own?

As a renter, I am offended. As a citizen and a taxpayer, I am outraged.

Shiller suggests that The American Dream is too sacred…that our fragile national ego would collapse if its credibility were threatened. But, he’s wrong. The jig is up and the public knows it. In fact, they are asking for it, desperately wanting to find some financial purity after a decade of decadence. Social mood is shifting.

Shiller mistakenly suggests that home prices are worth propping up. But the problem isn’t that home prices are falling, it’s that home prices are still too high. Falling prices and foreclosures aren’t the problems, but the solutions, not the illness, but the cure.

The time has come to shout out that the Emperor has no clothes: The American Dream is simply a marketing campaign, a gimmick, perpetuated by industry groups and their lobbyists. That a home can define one’s success or national identity is simply a symbollic, mutually-shared illusion.

Well said.

Low-cost housing has benefits

The economy in Riverside County is dismal. Nearly 20% of Riverside County employment was in the building industry, and since about 40-60% of workers in homebuilding are unemployed (that is my anecdotal estimate), there is significant distress in both the employment and the housing markets. But that sorry state of affairs is ripe for recovery. Expanding or forming businesses in Riverside County currently enjoy inexpensive labor and they can attract more with inexpensive housing. Orange County and Irvine do not have those advantages.

Many are focused on maintaining inflated home values without considering the broader societal impact. We may be forced to choose between our house values and our jobs if the economy remains soft because house prices are such a deterrent to business expansion. Also, if all future generations really are priced out forever, is that an accomplishment bubble buyers will look back on with pride? The parties to the bubble have reduced future generations to debt slavery. I see little benefit in that.

Irvine Home Address … 11 SUNSET Riv Irvine, CA 92604

Resale Home Price … $739,000

Home Purchase Price … $350,000

Home Purchase Date …. 5/22/1991

Net Gain (Loss) ………. $344,660

Percent Change ………. 111.1%

Annual Appreciation … 4.0%

Cost of Ownership

————————————————-

$739,000 ………. Asking Price

$147,800 ………. 20% Down Conventional

5.01% …………… Mortgage Interest Rate

$591,200 ………. 30-Year Mortgage

$153,191 ………. Income Requirement

$3,177 ………. Monthly Mortgage Payment

$640 ………. Property Tax

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

$62 ………. Homeowners Insurance

$147 ………. Homeowners Association Fees

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

$4,026 ………. Monthly Cash Outlays

-$777 ………. Tax Savings (% of Interest and Property Tax)

-$709 ………. Equity Hidden in Payment

$288 ………. Lost Income to Down Payment (net of taxes)

$92 ………. Maintenance and Replacement Reserves

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

$2,921 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$7,390 ………. Furnishing and Move In @1%

$7,390 ………. Closing Costs @1%

$5,912 ………… Interest Points @1% of Loan

$147,800 ………. Down Payment

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

$168,492 ………. Total Cash Costs

$44,700 ………… Emergency Cash Reserves

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

$213,192 ………. Total Savings Needed

Property Details for 11 SUNSET Riv Irvine, CA 92604

——————————————————————————

4 Beds

3 baths Baths

2,544 sq ft Home size

($290 / sq ft)

5,700 sq ft Lot Size

Year Built 1975

21 Days on Market

MLS Number S605701

Single Family, Residential Property Type

El Camino Real Community

Tract Dc

——————————————————————————

PRICE REDUCED…MOTIVATED…This handsome home has three large Bedrooms and two Baths up, and one Bedroom and a full bath down-Outstanding curb appeal with manicured landscaping,a newer concrete tile roof,roll-up Garage Door & A DOUBLE PANELED, LEADED AND BEVELED GLASS FRONT DOOR-There is a formal Entry-The lower level has dramatic vaulted ceilings and a split-level floor plan-The home is VERY LIGHT AND OPEN IN FEELING!-Located on a quiet inside cul de sac- There is a formal Dining Room and separate eating area in the Kitchen-The Master Suite is larger than most you will see and has a Sitting Room/Office area/Dressing room/Walk-in Closet and Bath-The Air Conditioning/Furnace and Water Heater are 18 months new-Children can walk to school crossing only one residential street – The Kitchen is large and sunny with a wall of pantry storage. The large back yard is perfect for a childrens' play yard. There are no homes overlooking the back of the house. Standard sale.

The writer mentioned the plan is light, open, large and sunny without saying "light and bright." Thank you. It can be said without tired cliches.

I like playing golf, but I prefer to leave the greens on the golf course.

Sales Volume Limp as Local Inventories Rise

The precarious balance of supply and demand in our local housing market is sustained at low sales volumes by low inventories. Is the new inventory coming to market upsetting that balance?

Irvine Home Address … 29 CHARITY St Irvine, CA 92612

Resale Home Price …… $1,449,000

{book1}

The walls start breathing

My minds unweaving

Maybe it’s best you leave me alone.

A weight is lifted

On this evening

I give the final blow.

When darkness turns to light,

It ends tonight,

It ends tonight.

The All-American Rejects — It Ends Tonight

The array of government market supports are tentatively scheduled to be removed from the market. Unfortunately, the tax credit for houseowners is not helping sales, and many are worried about what will happen to the housing market when tax credits expire? People have good reason to worry because the housing market is still dependent upon government support to maintaining our inflated current prices.

realtors blather on about pent up demand, but in reality, there is very little demand because (1) many people were pulled forward during the bubble and (2) many who were not pulled forward during the bubble are either unemployed or underemployed and thereby not contributing to demand. The end result is low sales volumes that will persist until either prices are much lower or the economy recovers and those not foreclosed upon or bankrupted during the bubble start buying houses.

Pending Sales of Existing Houses Decline

March 4 (Bloomberg) — Fewer Americans than expected signed contracts to purchase previously owned homes in January, indicating the extension of a tax credit is doing little to lure buyers.

The index of purchase agreements, or pending home sales, dropped 7.6 percent after a revised 0.8 percent increase in December, the National Association of Realtors announced in Washington. Other reports today showed factory orders increased and first-time jobless claims declined.

The drop in contract signings adds to evidence the housing market at the center of the worst recession since the 1930s is struggling to rebound after reports last week showed unexpected declines in purchases of new and existing homes. The market may get another blow this month when the Federal Reserve ends planned purchases of mortgage-backed securities.

“When you take away all the support from the housing market, the underlying demand for housing is a lot weaker than we thought,” said Mark Vitner, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “We clearly pushed some demand forward, and there wasn’t that much demand to pull forward anyway. The housing recovery is going to be very, very slow.”

Mr. Vitner's analysis is right on; what little demand was left over has either been pulled forward during the bubble or it has since been pulled forward with the glut of government supports. Any decline in sales during the first half of the year fails to match the historic pattern and causes concern among the rational.

February Sales

“The abnormally severe and prolonged winter weather, which affected large regions of the U.S., hampered shopping activity in February,” Lawrence Yun, the group’s chief economist, said in a statement. “We will see weak near-term sales followed by a likely surge of existing-home sales in April, May and June.”

The Realtors’ report showed declines in January pending sales in all four regions, led by a 13 percent slump in the West. Contract signings fell 8.9 percent in the Midwest, 8.7 percent in the Northeast and 2.1 percent in the South.

Pending home sales are considered a leading indicator because they track contract signings. The Realtors’ existing- home sales report tallies closings, which typically occur a month or two later. The pending sales data go back to January 2001, and the group began publishing the index in March 2005.

Reports last week showed the housing market may be faltering. Sales of previously owned homes unexpectedly dropped 7.2 percent in January after a record decline a month earlier, according to Realtors group’s report Feb. 26. New-home sales slumped to an all-time low, the Commerce Department said Feb. 24.

Does Lawrence Yun have any credibility with anyone? Is there even one person who believes him? Isn't he a stuffed shirt?

Credit Extended

President Barack Obama and Congress extended the first-time buyer credit in early November to cover deals signed by April 30 and closed by June 30, and expanded it to include some current homeowners.

Among other concerns for the housing outlook, the Fed said it plans to end a program later this month to purchase mortgage- backed securities, which helped contain borrowing costs.

The rate on a 30-year fixed mortgage dropped to 4.71 percent in early December, the lowest level since Freddie Mac started keeping weekly records in 1972. The rate has hovered around 5 percent since then.

Is anyone surprised that Ben Bernanke refinanced his ARM to a fixed-rate mortgage late last year? Interest rates for fixed-rate mortgages are at bottom, and anyone who has not refinanced into fixed-rate financing should do so now.

Southern California Sales Volume and Price

Dr. Housing Bubble recently wrote a post on The Housing Metrics of Southern California – Seasonal Home Sales, Inflation Adjusted Home Prices, Tens of Thousands Living Rent Free, and the Japanese Experience. The chart below comes from that post:

From the good Doctor:

This is a fascinating look at the market. Even during the boom we clearly see the seasonal pattern in sales. Each fall and winter sales drop as more people take inventory off the market. Spring and summer overall are bigger sale months because of school schedules, family commitments, and just a general acceptance that this is when more inventory enters the market. But you’ll notice in 2006 that the trend radically shifted. The crash hit and sales plummeted. An interesting phenomenon occurred where the median sale price didn’t peak until the middle of 2007 well into the monthly sale crash. So it would appear that sales would actually lead future prices.

Irvine Inventory

At the Irvine Housing Blog, we have been tracking inventory since January 2007. The chart of inventory is shown below.

If you think back to what was happening in our market, the inventory graph reveals much about the strength of our market.

In 2006, the market topped, sales volumes declined, and inventory increased.

Beginning 2007, inventories were already elevated and the market contained a dwindling qualified buyer pool and tightening credit standards; consequently, when a normal amount of spring listings hit the market, sales volumes were low, and inventories ballooned.

By 2008, many late buyers were underwater, and discretionary buyer viewed the price drop as a temporary apparition; therefore, many sellers did not bother listing their properties, and many that were listed had WTF asking prices nobody could afford. The result was a continued decline in sales volume and lower prices.

By 2009, the crisis prompted the government into providing an array of market subsidies designed to improve affordability and prevent further price declines. The same problems that existed in 2008 persisted into 2009 and became worse due to rising unemployment, strategic default, and a number of other problems.

Now in 2010, we are seeing inventory rise again, but we are still well below historic norms. Current pricing is sustained by restricted inventory and low sales volumes. If either inventory or sales volumes increase, it will adversely impact prices. Some of our recent inventory is discretionary sellers asking WTF prices that will never transact, but a significant amount of this new inventory is appearing as trustee sale flips that previously has been withheld from the market. Will the lending cartel be able to sustain prices, or with the incentive to cheat and sell while prices are still high force more inventory on the market and push prices lower?

At its current trajectory, inventory should break the 30 month trend of declining inventory very soon. In both 2008 and 2009, the seasonal inventory increase was abruptly reversed, and prices were able to remain firm. Will that happen again?

Irvine Home Address … 29 CHARITY St Irvine, CA 92612

Resale Home Price … $1,449,000

Home Purchase Price … $888,000

Home Purchase Date …. 3/25/2003

Net Gain (Loss) ………. $474,060

Percent Change ………. 63.2%

Annual Appreciation … 7.1%

Cost of Ownership

————————————————-

$1,449,000 ………. Asking Price

$289,800 ………. 20% Down Conventional

5.01% …………… Mortgage Interest Rate

$1,159,200 ………. 30-Year Mortgage

$300,371 ………. Income Requirement

$6,230 ………. Monthly Mortgage Payment

$1256 ………. Property Tax

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

$121 ………. Homeowners Insurance

$230 ………. Homeowners Association Fees

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

$7,836 ………. Monthly Cash Outlays

-$1521 ………. Tax Savings (% of Interest and Property Tax)

-$1390 ………. Equity Hidden in Payment

$565 ………. Lost Income to Down Payment (net of taxes)

$181 ………. Maintenance and Replacement Reserves

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

$5,672 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$14,490 ………. Furnishing and Move In @1%

$14,490 ………. Closing Costs @1%

$11,592 ………… Interest Points @1% of Loan

$289,800 ………. Down Payment

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

$330,372 ………. Total Cash Costs

$86,900 ………… Emergency Cash Reserves

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

$417,272 ………. Total Savings Needed

Property Details for 29 CHARITY St Irvine, CA 92612

——————————————————————————

4 Beds

2 full 1 part baths Baths

2,910 sq ft Home size

($498 / sq ft)

6,223 sq ft Lot Size

Year Built 1995

108 Days on Market

MLS Number S596674

Single Family, Residential Property Type

Turtle Rock Community

Tract Cw

——————————————————————————

Beautiful Plan 1: Professionally maintained gardens, decorator paint, brand new granite countertops, refinished hardwood floors and brand new never lived on designer carpet throughout. This home is truly move in ready. The yard is lined with Fuji apple tree's that bear great apples every year, Orange, tangerine and lemon tree's are also part of the back yard. If you are looking for a multiple purpose home to entertain, easy everyday living and easy to keep clean this is the one! This home is located in the best part of Concordia, best of the Irvine School system, always on the top 10 safest city list. Gated community with hill lined street and nice views. Centrally located to schools, shopping, freeways, toll Roads and minutes to the beach. Another bonus is that the association dues are low and there is no mello-roo's tax. This is a great place to raise a family and you are guaranteed University High which is a top high school. THIS IS THE ONE!!

This is chasing the market down:

Property History for 29 CHARITY St

Date	Event	Price
Mar 05, 2010	Price Changed	$1,449,000
Feb 10, 2010	Price Changed	$1,475,000
Jan 26, 2010	Price Changed	$1,498,000
Jan 18, 2010	Price Changed	$1,515,900
Jan 13, 2010	Price Changed	$1,534,900
Jan 11, 2010	Price Changed	$1,542,900
Jan 05, 2010	Price Changed	$1,547,900
Jan 01, 2010	Price Changed	$1,548,900
Nov 27, 2009	Price Changed	$1,549,900
Nov 19, 2009	Listed	$1,575,000
Mar 25, 2003	Sold (Public Records)	$888,000
May 23, 1995	Sold (Public Records)	$524,500

At this rate, the house should reach its current resale value by 2020. Does any rational person believe this property has gone up in value about 80% since 2003?

Uncle Sam Endorses Cash-For-Keys

Uncle Sam has embraced cash-for-keys as part of its initiative to streamline the short sale process. Can we expect to see many more successful short sales soon?

Irvine Home Address … 58 WOODLEAF Irvine, CA 92614

Resale Home Price …… $359,000

{book1}

Stop your stalling,

And just give me more than you should,

Before we're all in

The same mess I knew we would;

I will not call you,

'Cos I know he'll answer the phone;

There's something stunning

About the way we lie till it's gone.

Snow Patrol — Steal

Now that the US taxpayer is absorbing the losses from the US housing and mortgage markets, someone in Washington has decided it is more cost effective to pay everyone off at short sale rather than forcing foreclosure. More transactions may be coming if short sales are expedited, and that is probably a good thing.

Program Will Pay Homeowners to Sell at a Loss

By DAVID STREITFELD

Published: March 7, 2010

In an effort to end the foreclosure crisis, the Obama administration has been trying to keep defaulting owners in their homes. Now it will take a new approach: paying some of them to leave.

This latest program, which will allow owners to sell for less than they owe and will give them a little cash to speed them on their way, is one of the administration’s most aggressive attempts to grapple with a problem that has defied solutions.

More than five million households are behind on their mortgages and risk foreclosure. The government’s $75 billion mortgage modification plan has helped only a small slice of them. Consumer advocates, economists and even some banking industry representatives say much more needs to be done.

For the administration, there is also the concern that millions of foreclosures could delay or even reverse the economy’s tentative recovery — the last thing it wants in an election year.

Taking effect on April 5, the program could encourage hundreds of thousands of delinquent borrowers who have not been rescued by the loan modification program to shed their houses through a process known as a short sale, in which property is sold for less than the balance of the mortgage. Lenders will be compelled to accept that arrangement, forgiving the difference between the market price of the property and what they are owed.

“We want to streamline and standardize the short sale process to make it much easier on the borrower and much easier on the lender,” said Seth Wheeler, a Treasury senior adviser.

Reach for your wallet; the government is streamlining….

Cash for Keys from Uncle Sam

To bring the various parties to the table — the homeowner, the lender that services the loan, the investor that owns the loan, the bank that owns the second mortgage on the property — the government intends to spread its cash around.

Under the new program, the servicing bank, as with all modifications, will get $1,000. Another $1,000 can go toward a second loan, if there is one. And for the first time the government would give money to the distressed homeowners themselves. They will get $1,500 in “relocation assistance.”

There it is; Uncle Sam is paying people to pack their stuff and get out of the taxpayer's property — and it is the taxpayer's property given that the taxpayer is the only party putting money into the deal to pay everyone off. Didn't we all know it would come to this? How much longer before Uncle Sam gives up on this loan modification crap and cranks up the foreclosure meat grinder?

The owners of second mortgages must be thrilled with this program. The second mortgage is worth practically nothing when the property is underwater. Investors who expect little or nothing are getting a significant payout from Uncle Sam. I assume Goldman Sachs bought every underwater second mortgage in the country leading up to this policy change.

Cutting out flippers

This program will succeed by cutting out the cash market at foreclosure. Short sales are resales and subject to financing, so prices are higher and loss recoveries greater — at least in theory.

Should the incentives prove successful, the short sales program could have multiple benefits. For the investment pools that own many home loans, there is the prospect of getting more money with a sale than with a foreclosure.

For the borrowers, there is the likelihood of suffering less damage to credit ratings. And as part of the transaction, they will get the lender’s assurance that they will not later be sued for an unpaid mortgage balance.

For communities, the plan will mean fewer empty foreclosed houses waiting to be sold by banks. By some estimates, as many as half of all foreclosed properties are ransacked by either the former owners or vandals, which depresses the value of the property further and pulls down the value of neighboring homes.

I think the statement about being better for a borrower's credit rating is dubious. How much better is it to stiff a lender for $50,000 if you do it on good terms? Short sales often come with some kind of long-term repayment agreement or acknowledgment of debt. Rarely is it a clean break.

The last statement about benefiting the community is true. Empty houses serve no one. A short sale keeps the property occupied and maintained and keeps continuity in neighborhoods and communities.

With the large amount of distressed inventory, expediting short sales will become a necessity. If every distressed property goes through foreclosure and remains empty for a significant time, everyone involved loses, except perhaps the trustee sale flippers who will be asked to clean up the mess.

Irvine Home Address … 58 WOODLEAF Irvine, CA 92614

Resale Home Price … $359,000

Home Purchase Price … $490,000

Home Purchase Date …. 1/24/2006

Net Gain (Loss) ………. $(152,540)

Percent Change ………. -26.7%

Annual Appreciation … -7.3%

Cost of Ownership

————————————————-

$359,000 ………. Asking Price

$12,565 ………. 3.5% Down FHA Financing

5.01% …………… Mortgage Interest Rate

$346,435 ………. 30-Year Mortgage

$74,419 ………. Income Requirement

$1,862 ………. Monthly Mortgage Payment

$311 ………. Property Tax

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

$30 ………. Homeowners Insurance

$362 ………. Homeowners Association Fees

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

$2,565 ………. Monthly Cash Outlays

-$308 ………. Tax Savings (% of Interest and Property Tax)

-$415 ………. Equity Hidden in Payment

$25 ………. Lost Income to Down Payment (net of taxes)

$45 ………. Maintenance and Replacement Reserves

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

$1,911 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$3,590 ………. Furnishing and Move In @1%

$3,590 ………. Closing Costs @1%

$3,464 ………… Interest Points @1% of Loan

$12,565 ………. Down Payment

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

$23,209 ………. Total Cash Costs

$29,200 ………… Emergency Cash Reserves

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

$52,409 ………. Total Savings Needed

Property Details for 58 WOODLEAF Irvine, CA 92614

——————————————————————————

3 Beds:

2 Baths:

1,267 Sq. Ft.:

$283/ Sq. Ft.

– Lot Size:

Property Type: Residential, Condominium

One Level, Other Style:

Community: Woodbridge

Orange County:

S607874 MLS#:

$0,000 0

——————————————————————————

Property has newer flooring, newer paint and all neutral colors. Master bathroom has been completely remodeled. Great location. One level with great floor plan. Quick cleaning and ready to move in! Very nice – Buyer's will be happy for years to come.

What does the photo above tell you about the occupant?

Adjustable Rate Mortgage Resets Foretell Major Problems in California's Housing Market

The ARM Problem has not gone away. Today we examine an updated ARM reset schedule and consider its impact on our local housing market.

Irvine Home Address … 89 WINDING Way Irvine, CA 92620

Resale Home Price …… $615,000

{book1}

it's time for me to get away from here

just thought you oughta know the end is near

did you honestly think it would've worked at all

cuz evrything i've seen has only made me fall

there ain't much i can do now that i've seen the truth

there ain't much i can do now they've made me into

one of you

REPENT

for the kingdom of oblivion is at hand

REGRET

not a thing for all's as it was planned

REJECT

false gods false hopes and false ideals

RESET

push the button game over no more time to steal

Left Spine Down — Reset

Wouldn't life be much easier if we could hit a reset button and wipe away the excesses of the housing bubble? In the housing bubble era, reset is associated with a bad thing that happens to adjustable rate mortgages. I remember last year a few astute observers much wiser than me chastised me for worrying about adjustable rate mortgages because they were all resetting to lower rates — problem solved. Foolish me. I must be a Chicken Little sounding a false alarm, right?

I wrote most recently about The ARM Problem in the summary post Option ARM story. The problem with adjustable rate mortgages resetting and recasting to higher payments has diminished in importance because many of the loans have defaulted early, so now the major problem is shadow inventory. The ARM problem is still with us, and much of our shadow inventory — and ultimately foreclosure and resale inventory — is spawned from this lending monster.

$1 trillion worth of ARMs still face resets

By Zach Fox

While several industry observers worry about negative equity and unemployment driving foreclosures, a couple of experts point out that interest rates on mortgages remain a cause for concern.

Credit Suisse made waves in 2007 among housing bears with a chart that estimates the volume of adjustable-rate mortgages to face a reset each month. An updated version of the chart, which was provided to SNL, shows resets remain a worrying force over the next few years.

Most of the resets are expected to occur through 2012. Between 2010 and 2012, the chart indicates that $253.25 billion of option ARMs will adjust, while Alt-A loans totaling $163.71 billion will reset over that time. Altogether, $1.010 trillion worth of ARMs will reset or recast during the three-year period.

"Option ARM resets are still pending. … Nothing much has happened yet because rates were so low that resets were pushed back," Chandrajit Bhattacharya, head of non-agency RMBS and ABS strategy at Credit Suisse, told SNL.

That is not entirely true. Many of these loans are still pending, but the borrowers are not paying. The reset chart is not adjusted for shadow inventory. Many of the loans facing reset are already in default. Numerous of the light blue (Option ARMs) have already defaulted as have many of the light green (Alt-A loans).

Borrowers who already have seen their ARMs reset might be sitting on their hands and not refinancing into fixed-rate products, McBride said. Because mortgage rates have been so low recently, resets can actually lower, not raise, monthly payments. When that happens, borrowers might feel little urge to refinance into a fixed-rate product that would cost more per month.

This is the real problem; people will do anything, no matter how foolish, to lower their monthly payment because they believe the government will bail them out if interest rates move against them. Why wouldn't they? Moral hazard caused by lending bailouts emboldens both lenders and borrowers and ultimately increases the cost of the bailouts demanded.

"The avoidable scenario is interest rates start to go up over the next couple of years, and all of a sudden, millions of homeowners who are stuck in adjustable rate mortgages and haven't been able to refinance out of them become sitting ducks for big payment increases," McBride said. "And then here we go again. It's like 2007 all over again. And again, the HARP program is key to avoiding that iceberg, and we're headed right for that iceberg, and no one's turning the wheel because everyone's focused on mortgage modifications."

"If you look at it, there's almost probably 5 million borrowers sitting there in some sort of delinquency right now who have yet to be foreclosed upon. So if you say [the Home Affordable Modification Program] is going to save only a small fraction of that, the rest of them have to go through in some form of foreclosure or distressed sale," Bhattacharya said. "So it's definitely not over by any means."

Credit Suisse projects 10 million foreclosures over a five-year period starting in 2008.

To put the ARM resets schedule in context, these timelines represent the totality of the carnage the markets face from ARMs, but the actual foreclosures related to these loans may occur early due to unemployment, negative equity or a number of other reasons. Shadow inventory emerges from this schedule and pulls destruction forward. Loan modifications, which are supposed to be the market savior, increase the problem with terms that have escalating interest rates and increasing payments. So why is this a big deal here in California?

… option ARMs are concentrated in just a few states. A Fitch Ratings study from Sept. 8, 2009, reported that three-quarters of all option ARMs were in California, Florida, Nevada and Arizona.

Don't worry; Irvine has none of those problems, right?

More Foreclosures are Coming

From the OC Register: Foreclosures now are just 'tip of the iceberg':

[Bruce] Norris told hundreds of investors attending a seminar he held in Costa Mesa this past weekend that numbers indicating the appearance of firming home prices and fewer foreclosure auctions are “illusions.”

Government repayment and loan modification programs make foreclosure numbers appear lower for now, but are delaying the inevitable inability or disinclination of homeowners in trouble to hang on to property that has dropped in value by hundreds of thousands of dollars, he says.

Meanwhile, he says, redefaults on loan modifications are “sabotaging” government efforts.

Mortgage delinquencies will continue “skyrocketing,” he says, because:

“The resets of the Option-Arm loans will cause a larger number of foreclosures than the subprime loans.

“Resets are part of the problem, but a bigger concern is the owners who owe more on their home than it’s worth.

“Commercial loans and credit card losses will soon add to the problem.”

Unemployment is a signifcant factor. He says: “I think we will fall back into recession by the end of 2010, and the unemployment rate and underemployment rate will be about 20% in 2011.”

Owners are finding it more and more acceptable not to make their house payments. The mindset, according to Norris: ” ‘I see my next door neighbor has stopped making his payment, and he just bought a camper.’ You can see that coming. We haven’t really been through the biggest part of the problem.”

Updated ARM Reset Schedules

For historical reference, I superimposed the new reset chart onto the old one to see how the original projections have changed.

In the cleaned up graphic below shows the next four years of adjustable rate mortgage resets.

More reason to believe the Bernanke Put, the implied protection of mortgage interest rates, is going to be kept in place.

The results of amend-pretend-extend are apparent, and in case the obvious is overlooked, restructured loans only postpone bank losses.

The amend-pretend-extend policy is like shoveling snow; the more you push the snow, the larger the build-up on the front of the shovel. Eventually, you will need to stop and remove the snow or you get stuck. Similarly, pushing ARMs out further simply adds to the problem and makes correcting the problem costlier.

Lenders believe that a rolling loan gathers no loss, so they would push the problem back endlessly if they could. Eventually, appreciation may bail them out, but the existence of these loans and the inevitability of higher interest rates will weaken appreciation or kill it entirely. Also, despite the foolishness of it, many of these loans are being underwritten today as affordability products. Rather than eliminating ARMs at the bottom of the interest rate cycle, we are expanding their use.

If the ARM problem becomes large enough, politicians will deem it too-big-to-fail and engineer another bailout. At this point it is difficult to advise people to take on conservative financing and do the right thing. So much moral hazard exists that I can not persuasively argue with someone considering an ARM loan. The system is there to be gamed, and everyone seems OK with that. Personally, I find it appalling.

Irvine Home Address … 89 WINDING Way Irvine, CA 92620

Resale Home Price … $615,000

Home Purchase Price … $736,000

Home Purchase Date …. 5/25/2006

Net Gain (Loss) ………. $(157,900)

Percent Change ………. -16.4%

Annual Appreciation … -4.5%

Cost of Ownership

————————————————-

$615,000 ………. Asking Price

$123,000 ………. 20% Down Conventional

5.01% …………… Mortgage Interest Rate

$492,000 ………. 30-Year Mortgage

$127,487 ………. Income Requirement

$2,644 ………. Monthly Mortgage Payment

$533 ………. Property Tax

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

$51 ………. Homeowners Insurance

$274 ………. Homeowners Association Fees

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

$3,802 ………. Monthly Cash Outlays

-$453 ………. Tax Savings (% of Interest and Property Tax)

-$590 ………. Equity Hidden in Payment

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

$77 ………. Maintenance and Replacement Reserves

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

$3,076 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$6,150 ………. Furnishing and Move In @1%

$6,150 ………. Closing Costs @1%

$4,920 ………… Interest Points @1% of Loan

$123,000 ………. Down Payment

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

$140,220 ………. Total Cash Costs

$47,100 ………… Emergency Cash Reserves

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

$187,320 ………. Total Savings Needed

Property Details for 89 WINDING Way Irvine, CA 92620

——————————————————————————

3 Beds

2 full 1 part baths Baths

2,000 sq ft Home size

($308 / sq ft)

n/a Lot Size

Year Built 2006

2 Days on Market

MLS Number S607533

Condominium, Residential Property Type

Woodbury Community

Tract Wdgp

——————————————————————————

Highly upgraded Woodbury Townhome with highly sought after location!!! Like a model home.. Premium Location in Garland Park track across from Woodbury Park,Woodbury Commons Club,& Woodbury Elementary School. Gourmet kitchen with granite counter tile, upgraded cabinetary, stainless appliances and huge island. Formal dining room with living and family room. Master Bedroom has roman tub & separate large shower & large Walk-in Closet. Designer Paint. Highest quality hardwood Flooring and upgraded carpet. The Association Amenities Include BBQs, Clubhouse, Pools, Tennis and Sport Courts. Come and Enjoy Living in Woodbury.

Does the geometry of this picture look correct to you?

Do you like the carpet cleaning patterns? They look like rake patterns in Japanese rock gardens.

California Continues to Tax Forgiven Recourse Debt

Today we look at one family in San Diego hoping for debt forgiveness that isn't going to happen.

Today's featured property is a nice Woodbridge cottage bouncing off the illusory bottom.

Irvine Home Address … 4 SWEET RAIN Irvine, CA 92614

Resale Home Price …… $629,000

{book1}

Love is like oxygen

You get too much you get too high

Not enough and you're gonna die

Love gets you high

Time on my side

I got it all

I've heard that pride

Always comes before a fall

Sweet — Love Is Like Oxygen

Appreciation is like oxygen, you get too much prices get too high, not enough and your gonna die — or at least be forced to pay down debts — a fate antithetical to a borrowing dependant lifestyle.

Recently, I wrote about The Coming Tax Nightmare Over Forgiven Mortgage Debt in California, and recently another story was written about the Hefty tax bill may hit those who lost home.

San Diegans who have lost their homes through foreclosure or short-sales thought they had emerged from the dark times and could start rebuilding their lives.

Then the state tax man came calling.

With less than six weeks before taxes are due, an estimated 16,000 former homeowners statewide will owe $15 million in extra income taxes this year and $29 million through 2012.

Today we look at one family lamenting the $20,000 tax bill they must pay for their failed speculation.

[March 2, 2010 | Photo by Charlie Neuman. Bonnie and Clyde are facing a California tax bill of up to $20,000 because, they have found, the state treats short-sales differently than the IRS.]

Phyllis Roth, 63, a tax preparer, said she did not realize until recently that the state would treat the short-sale differently than the Internal Revenue Service would. She estimates her state taxes at $15,000 to $20,000.

“I didn’t call anybody,” she said. “I was looking online and didn’t see anything. That’s what happens when you rely on yourself.”

Brilliant marketing for her tax preparation business, "Let me help you miss a $20,000 tax obligation. I did."

For the Roths, who continue to own a previous home and have other assets, their nearly $200,000 in losses does not cancel out their other holdings. The couple said they normally operate conservatively and only bought the home, which they lived in while their son continued to live in their first house, so they could sell it at a profit and pad their retirement accounts.

“If we have to pay it, we’ll pay it,” Phyllis Roth said of the taxes. “It’s less money to retire on, but it’s not the end of the world.”

If we have to pay it? Sure, let's take our broken State budget and carve out a tax break for HELOC abusers and everyone else who lost money speculating in the housing market. That should provide a great incentive for frugality and curb speculation. Not.

Congress exempted most homeowners from the extra federal tax through 2012, and the state followed suit for 2007 and 2008 but did not extend the provision last year. The state Assembly may vote tomorrow on a bill to repeal the tax, but Gov. Arnold Schwarzenegger vetoed such a bill last year over unrelated provisions.

“The state of California is seriously upside down financially, and I think the governor will probably veto it again,” Nemeth said.

H.D. Palmer, a spokesman for the Department of Finance, said Schwarzenegger remains opposed to the bill in its present form but has not announced whether he will veto it again. Other versions of the tax repeal are in the hopper and could be passed next month, legislators’ analysts said.

Failure to halt the tax could cost Jack and Phyllis Roth of Fletcher Hills as much as $20,000 in state income taxes this year — they paid $781 last year — because of the home they sold short in Flinn Springs in November. They bought it in 2004 for $545,000, invested $50,000 in improvements, and then saw its value fall by one-third before they sold it for $410,000. The result was about $190,000 in net loss that was forgiven by the Roths’ lender.

Notice the words the reporter selected, "They bought … invested." They did neither of those things; they borrowed. These people put no money down, borrowed another $50,000, sold for a $190,000 loss, and they are complaining because they might lose $20,000 of their money in taxes. We are not saving an already injured party from further pain, we are removing the only real pain these people will feel.

[schadenfreude alert] The state Franchise Tax Board has received an increasing number of calls from former homeowners who are discovering the giant tax bills they face, said spokeswoman Denise Azimi. Azimi said the former homeowners can work out a payment schedule, though the state charges 4 percent interest on such stretched-out payments.

If the tax is repealed eventually, the taxpayers could seek a refund, but for now, they have to pay what is due by April 15 or face a penalty.

Sen. Lois Wolk, D-Davis … who chairs the Senate Revenue and Taxation Committee, said it was appropriate to group all tax conformance measures into one bill. But if her bill is vetoed again, she indicated she would act to get the cancellation of debt tax repealed.

“We’re certainly not going to allow homeowners to have to pay significantly more tax when they’ve had to relinquish their homes through short-sales (and foreclosures),” Wolk said.

Why not? People who have non-recourse purchase money mortgages are not getting a tax bill. It is only investors, speculators, multiple-property owners, HELOC abusers and others with recourse loans who are getting a break. They are not a group who needs subsidies.

Insolvency

Every borrower will try to establish insolvency as defined by the Internal Revenue Service:

Do not include a canceled debt in income to the extent that you were insolvent immediately before the cancellation. You were insolvent immediately before the cancellation to the extent that the total of all of your liabilities exceeded the FMV of all of your assets immediately before the cancellation. For purposes of determining insolvency, assets include the value of everything you own (including assets that serve as collateral for debt and exempt assets which are beyond the reach of your creditors under the law, such as your interest in a pension plan and the value of your retirement account). Liabilities include:

The entire amount of recourse debts, and

The amount of nonrecourse debt that is not in excess of the FMV of the property that is security for the debt.

As defined by the IRS, insolvency is a condition of negative net worth; in other words, if you have no assets for the IRS to take, they will leave you alone. True or not, the incentive to feign and declare insolvency is huge.

How many people are filling false tax returns claiming insolvency when in reality, they just don't want to pay, and they hope they can cheat and get away with it?

Irvine Home Address … 4 SWEET RAIN Irvine, CA 92614

Resale Home Price … $629,000

Home Purchase Price … $290,000

Home Purchase Date …. 7/7/1998

Net Gain (Loss) ………. $301,260

Percent Change ………. 116.9%

Annual Appreciation … 6.7%

Cost of Ownership

————————————————-

$629,000 ………. Asking Price

$125,800 ………. 20% Down Conventional

5.06% …………… Mortgage Interest Rate

$503,200 ………. 30-Year Mortgage

$131,132 ………. Income Requirement

$2,720 ………. Monthly Mortgage Payment

$545 ………. Property Tax

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

$52 ………. Homeowners Insurance

$137 ………. Homeowners Association Fees

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

$3,454 ………. Monthly Cash Outlays

-$467 ………. Tax Savings (% of Interest and Property Tax)

-$598 ………. Equity Hidden in Payment

$249 ………. Lost Income to Down Payment (net of taxes)

$79 ………. Maintenance and Replacement Reserves

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

$2,717 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$6,290 ………. Furnishing and Move In @1%

$6,290 ………. Closing Costs @1%

$5,032 ………… Interest Points

$125,800 ………. Down Payment

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

$143,412 ………. Total Cash Costs

$41,600 ………… Emergency Cash Reserves

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

$185,012 ………. Total Savings Needed

Property Details for 4 SWEET RAIN Irvine, CA 92614

—————————————————————————-

3 Beds

2 full 1 part baths Baths

1,567 sq ft Home size

($401 / sq ft)

3,024 sq ft Lot Size

Year Built 1980

5 Days on Market

MLS Number L32256

Single Family, Residential Property Type

Woodbridge Community

Tract Ch

——————————————————————————–

Detached 3 bedroom home in Woodbridge. Steps to South Lake facility. Light and airy ineterior. All white kitchen with breakfast bar for extra seating. Formal livingroom with fireplace. Extra spacious family room with built ins. French doors and window shutters throughout. Mirrored wardrobe doors in the master bedroom. HOA ammeneties include: South Lake, pool, park, tennis, club house, etc…

ineterior? ammeneties?

I like the well-kept neighborhoods with these cottages.

Irvine Housing Blog No Kool Aid

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