The housing markets that have not crashed are the areas where squatters abound.

Irvine Home Address … 15 TROVITA Irvine, CA 92620

Resale Home Price …… $819,900

I wanna be consequence free

I wanna be where nothing needs to matter

I wanna be consequence free

Wouldn't it be great, if the band just never ended

We could stay out late and we would never hear last call

We wouldn't need to worry about approval or permission,

we could – slip off the edge and never worry about the fall

Great Big Sea — Consequence Free

I am shocked by the squatting. I really am. It never occurred to me that lenders would simply give away homes to people. Do lenders really believe they can do this without dramatic long-term consequences on borrower behavior?

Back in 2004 to 2007 I was very confident the market would crash. The Option ARM was an obvious Ponzi loan, and it was only a matter of time before the market imploded. To me, it seemed like a really foolish time to buy because I knew the decline in value would put me underwater. If I had known that I could borrow 100% of the money, possibly get some HELOC booty, then squat indefinitely while the lenders denied there was a problem, I might have made different choices.

The most foolish and imprudent borrowers are the ones getting most rewarded by the banks amend-extend-pretend policies, particularly those in the jumbo loan neighborhoods. There have been almost no foreclosures over $800,000 since the crash started because lenders know there are so few buyers to absorb all the product. They have bulldozed homes in a virtual sense by simply pretending the houses are not there.

The moral hazard this creates is obvious and pervasive. If you are a distressed borrower, why are you making payments? Lenders will not foreclose on you, and with little effort, you can gain a year or more of free living. There isn't much incentive to struggle. Also, for those of you who didn't participate in the madness, why wouldn't you next time around? You know when lenders do this again, you will be given the same free pass as your predecessors. Why not borrower imprudently and squat when the Ponzi scheme collapses? I think it's wrong, but I also can't think of a compelling reason not to do it.

Shadow Problem: Home Price Declines May Land in Cities That Largely Avoided Them

By Nick Timiraos

Housing markets that have escaped the brunt of home-price downturns may not be home free.

A new report shows that the “shadow inventory” of homes, with delinquent mortgages that have yet to go through the foreclosure process, is growing fastest in areas that have so far avoided the biggest home-price declines, according to a report by ratings agency Standard & Poor’s.

The areas where prices have not crashed yet are the areas without many subprime loans and subprime foreclosures. The alt-a and prime loans, particularly interest-only and Option ARMs, that are blowing up now are not going through foreclosure, and the owners are being allowed to squat.

Mortgage companies could be forced to reduce their prices on these foreclosued homes as they work through that supply, and as more of those homes sell, that could continue to put pressure on prices. At the top of the list: the New York City area, where at the current rate it would take 103 months to clear the shadow inventory of loans that are more than 90 days delinquent or in foreclosure. That’s nearly 3.5 times the national average.

“The big problem of course in the New York metro area is that we have not had the re-pricing that the West Coast has had,” says Daniel Alpert, managing partner at Westwood Capital LLC, an investment fund. “This is very similar to what happened in the early 90s where the crisis moved regionally from one area to another.”

I guess we have seen this before.

After the New York region, Miami has the largest backlog with a 62-month supply. But unlike New York, Miami’s shadow inventory has fallen from its March 2008 peak of 129 months. New York’s backlog has held at more than 100 months since early 2008.

Indeed, cities that avoided the worst of the housing downturn so far—and which have seen fewer distressed sales—are now seeing a bigger increase in shadow inventory, as prices adjust in some of those late-to-the-party markets. Phoenix and Las Vegas, which have had the sharpest price corrections, also have among the lowest levels of shadow supply, at 18.5 and 21.4 months, respectively.

The biggest increase in shadow inventory came in Dallas, which had a 43-month supply, up from 19 months in September 2008. Other cities with big increases in recent months include Atlanta, Boston, Denver and Charlotte. Shadow inventory has remained elevated, but hasn’t increased much, in both Seattle and Portland.

Nationally, foreclosure timelines have swelled over the past two years as lenders deal with rising piles of delinquent loans and as they are under pressure to modify those loans and avoid foreclosures. But so-called “judicial” states that require banks to get a court order in order to foreclose, including New York, New Jersey and Florida, have seen foreclosure timelines grow even larger.

In the post There are 36,000+ Distressed Properties in Orange County, I pointed out the huge disparity between delinquency rates, currently running at 8.4%, and foreclosure rates, currently running at 2.37%. There are 3 times as many borrowers delinquent as there are in foreclosure. The supposed health of our local real estate market is an illusion created by lenders and enjoyed by squatters.

What will cause a change?

Realistically, there is only one thing that will force this to change: strategic default. As long as lenders are permitted to avoid foreclosure and fail to liquidate their properties, and as long as the struggling borrowers continue to struggle until their implosion, this situation will persist. The banks benefit because they can slowly liquidate their inventories without drastically reducing prices, and delinquent borrowers benefit by squatting and avoiding housing payments. The prudent borrowers, the struggling borrowers who continue to make payments and ultimately the US taxpayer are the ones who are hurt. In other words, most of the readers of this blog are the ones being screwed.

The nightmare scenario for lenders is a sea change in borrower attitudes. As the reality of squatters becomes more widely publicized, and as struggling borrowers see the benefits others obtain by stopping making payments, widespread accelerated default could force a change. The only reason borrowers keep making payments, particularly struggling borrowers, is because they fear foreclosure. Once that fear is gone, why would anyone keep paying? They won't. That is what would force a change in lender policies.

It's still a cartel

The lenders are acting in unison right now because they are all enjoying the benefits of restricting inventory to bring up prices. However, not all lenders are equally healthy, and the weaker lenders have a stronger incentive to liquidate than they have to hold on to their REO. Once they feel they have reasonable pricing and available volume, they will step up their liquidation efforts, and the cartel will weaken its grip. Once the cartel starts to crumble, some lenders may speed up their liquidation to get out while they still can. If things get really out of control, we could see a stampede for the exits.

Transition to short sales

One phenomenon we are witnessing in the trustee sale market is a dramatic decline in NODs and NOTs. As Sean O'toole from ForeclosureRadar.com points out, “Given the staggering number of delinquent home loans, foreclosure activity should be rising, not falling as we found again this month” says Sean O’Toole, founder and CEO of ForeclosureRadar.com. “We have recently witnessed a number of cancellations where the owners have vacated the property and are clearly not working to modify their loan or complete a short sale. The most telling statistic that we present today may be that it takes lenders two months longer to foreclose then it did a year ago.”

This is surprising because earlier this year, lenders were planning to increase their foreclosure activity. Since the foreclosure backlog is enormous, the losses are less in a short sale, and the new HAFA program facilitates short sales by paying everyone off, banks are making a concerted effort to push more people through the short sale process. Ultimately, I believe we will see the foreclosure notices pick up again because short sales alone will not clear out the inventory. A short sale requires a participating owner, and many properties with delinquent borrowers are empty, or the owners are simply squatting without bothering to contact the lender. The only way to clear out squatters who do not communicate with the lender is through foreclosure. The banks are not going to give homes away… at least I don't think so. If they are, I want one too.

The broken chain of Ponzis

The collapse of the lending Ponzi scheme only reflects on the bagholder. However, there were many who played the Ponzi game and got out before they became the greatest fool.

• The owners from the 90s started with a $375,000 first mortgage on 9/22/1998.
• They took out a stand-alone second for $79,400 on 4/28/2000.
• On 10/15/2001 they refinanced with a $593,750 first mortgage.
• And on 7/5/2002 they obtained a $40,571 stand-alone second.
• The owners from the 90s extracted $259,321.

Do you think those owners suddenly became frugal when they sold for $1,050,000 on 7/23/2004? I doubt it.

• The foreclosed owners paid $1,050,000 on 7/23/2004, and they used a $787,500 first mortgage, a $175,000 second mortgage, and a $87,500 down payment.
• On 4/12/2006 they refinanced with a $750,000 first mortgage and a $240,000 stand-alone second.
• Total property debt was $990,000.
• Total mortgage equity withdrawal is $27,500.
• Total squatting at least 13 months.

Foreclosure Record

Recording Date: 07/10/2008

Document Type: Notice of Sale

This property was purchased by Aurora loan services on 5/20/2009 and either rented or left empty for the last year. I guess they believe prices are firm enough to dispose of this inventory. Either that or they believe they better get out while the getting is still good.

Irvine Home Address … 15 TROVITA Irvine, CA 92620

Resale Home Price … $819,900

Home Purchase Price … $1,050,000

Home Purchase Date …. 6/23/2004

Net Gain (Loss) ………. $(279,294)

Percent Change ………. -21.9%

Annual Appreciation … -4.0%

Cost of Ownership

————————————————-

$819,900 ………. Asking Price

$163,980 ………. 20% Down Conventional

4.84% …………… Mortgage Interest Rate

$655,920 ………. 30-Year Mortgage

$166,689 ………. Income Requirement

$3,457 ………. Monthly Mortgage Payment

$711 ………. Property Tax

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

$68 ………. Homeowners Insurance

$144 ………. Homeowners Association Fees

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

$4,380 ………. Monthly Cash Outlays

-$839 ………. Tax Savings (% of Interest and Property Tax)

-$812 ………. Equity Hidden in Payment

$304 ………. Lost Income to Down Payment (net of taxes)

$102 ………. Maintenance and Replacement Reserves

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

$3,136 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$8,199 ………. Furnishing and Move In @1%

$8,199 ………. Closing Costs @1%

$6,559 ………… Interest Points @1% of Loan

$163,980 ………. Down Payment

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

$186,937 ………. Total Cash Costs

$48,000 ………… Emergency Cash Reserves

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

$234,937 ………. Total Savings Needed

Property Details for 15 TROVITA Irvine, CA 92620

——————————————————————————

Beds: 4

Baths: 3 baths

Home size: 3,033 sq ft

($270 / sq ft)

Lot Size: 5,564 sq ft

Year Built: 1980

Days on Market: 4

Listing Updated: 40337

MLS Number: U10002570

Property Type: Single Family, Residential

Community: Northwood

Tract: Cc

——————————————————————————

According to the listing agent, this listing is a bank owned (foreclosed) property.

WELCOME HOME TO THE CITY OF IRVINE AND TO WHAT MAY WELL BE THE VERY BEST CITY IN ORANGE COUNTY.THIS IS A SINGLE FAMILY HOME LOCATED IN THE CANYON CREEK COMMUNITY OF THE NORTHWOODS SECTION OF IRVINE. THE PROPERTY IS A SINGLE FAMILY HOME THAT FEATURES FOUR BEDROOMS PLUS A DEN/STUDY, AND 3 BATHROOMS. THE REAR YARD IS AN ENTERTAINERS DELIGHT WITH BOTH A POOL, AND SPA. BEST OF ALL, YOU ARE PART OF A GATED ASSOCIATION THAT CREATES THE FEELING OF BEING ON PERMANENT VACATION IN AN EXCLUSIVE RESORT. YOU WILL ENJOY THE ASSOCIATION POOL, SPA, AND TENNIS. THE LOCATION IS FANTASTIC YOU ARE CLOSE TO ALL THE GREAT THINGS IN IRVINE; PARKS, SCHOOLS, RECREATION AND SO MUCH MORE. SO COME HOME TO IRVINE, AND START TO LIVE THE ORANGE COUNTY LIFESTYLE TODAY. THE PROPERTY NEEDS RENOVATION.THE BUYER SHOULD INVESTIGATE THE PROPERTY WITH PROFESSIONAL INSPECTORS, AND SHOULD REQUEST ALL PROPERTY INFORMATION FROM THEIR AGENT.

ALL CAPS and stock phrases.

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

There are a number of housing bills moving through the California State legislature. Their effect if passed will be to further delay the foreclosure process.

Irvine Home Address … 20 ROSE TRELLIS Irvine, CA 92603

Resale Home Price …… $1,250,000

{book1}

Burn burn, house on fire

I'm so sick and tired

I can still remember your sound

And it's cut cut cutting me down

I'm locked and loaded

You're so milk and roses

And i am just a letdown of your hound

And It's cut cut cutting me down

Like slow poison

Cut down like slow poison

The Bravery — Slow Poison

The housing bust has been a slow trickling of mortgage poison. Too large a dose and prices crash, and too little… well, that means the banks allow a lot of squatting, a poison bound to find its way to the US taxpayer.

California Senate Passes Foreclosure Legislation

by JON PRIOR — June 4, 2010

The California State Senate passed legislation this week in an effort to prevent avoidable foreclosures.

Senate Bill (SB) 1275 requires mortgage servicers to notify borrowers of a right to seek options that would avoid foreclosure and attach an application for a loan modification or other alternatives before issuing a notice of default (NOD). Also before filing an NOD, servicers must evaluate a borrower who submits a written request for a loan modification. For those denied one, a separate letter must be mailed to the borrower informing them of the denial and reasons why.

This is some added paperwork for lenders, but it isn't onerous. Lenders already have a lengthy checklist of items for their loan files. Adding a couple of lines to the list and a few sheets of paper won't be too painful.

The bill was authored by Sen. Mark Leno (D-San Francisco) and Senate President Pro Tem Darrell Steinberg (D-Sacramento). The bill will now move to the California State Assembly for consideration by the Assembly Banking Committee.

Eligible mortgages must have been originated before Jan. 1, 2009 and must be a single-family, owner-occupied residential property.

Interesting that this bill doesn't apply to new mortgages. I guess if you bought last year, they can still kick you to the curb under the old rules.

Under the bill, servicers must file a new declaration of compliance before recording the NOD. It is a checklist of all of the requirements completed before the NOD is filed. If this new document is not filed, damages could be awarded to the borrower, and the foreclosure could be voided.

If they slipped in borrower damages, this will become an attorney graft measure.

Also, if the home is sold at auction out of servicer error, recourse is provided in the form of a private right of action. It allows eligible homeowners to seek limited damages and could even reverse the foreclosure sale. Before the bill passed, there was no recourse for erroneous foreclosure sales.

What exactly is an erroneous foreclosure? Aren't these people delinquent on their loans? Don't the banks have foreclosure rights at their discretion?

According to the Center for Responsible Lending, servicers are initiating the foreclosure process while handling borrower’s requests for resolutions.

“Simple fairness dictates that no one should lose their home while they are in the middle of trying to save it,” said Paul Leonard, director of the California office of the Center for Responsible Lending.

I might agree with the above statement if the borrower is genuinely trying to save their home. If they are just gaming the system, I don't like the idea of giving them tools to game it longer.

California Set to Vote on Foreclosure Mediation Bill

by JON PRIOR — June 2, 2010

A bill that establishes a foreclosure mediation program in California passed committee and will reach the California State Assembly floor this week.

Assembly Bill 1639 was introduced by a trio of Democratic members of the assembly — Pedro Nava (Santa Barbra), Ted Lieu (Torrance) and speaker emeritus Karen Bass (Los Angeles). If passed, the bill would establish the Facilitated Mortgage Workout (FMW) program. Through it, lenders are required to meet with borrowers to develop a modification plan before foreclosure.

Required to meet? What happens when borrowers refuse? Or when they agree and cancel to drag out the process? A requirement to meet is almost guaranteed to be a way to delay the process.

The loan must have originated before Jan. 1, 2009, and the home must be occupied by the borrower as a principal residence. The principal balance on the mortgage cannot exceed $729,750.

The jumbo loan market is so screwed.

The bill passed the Assembly Appropriations Committee last week.

“This legislation sends a strong message to the banking and mortgage industry — that business as usual is not working. We will force the industry to do more to help struggling California families facing foreclosure,” Nava said. “This legislation will require face to face meetings between homeowners and their lenders—so that a mutually acceptable plan can be implemented that keeps families in their home.”

What if the plan is not mutually acceptable? What bargaining power does the borrower really have? If borrowers don't like the deal they are presented, can they say no? What happens then?

The bill also requires lenders to include information regarding the program with the notice of default. The borrower must return a form to the administrator of the program requesting a mediation within 30 calendar days of receiving the notice of default and must send other information within 15 days of the request. Borrowers must deposit with the administrator of the program 50% of the current mortgage payment each month while he or she participates in the FMW program.

The assembly just guaranteed no borrowers will sign up for the program. The allure of strategic default and negotiated short sale is that the borrowers get to squat. If they actually have to make a partial payment, participation will drop off dramatically.

Lenders must meet with the borrower within 14 days of contact with the borrower. The program expires Jan. 1, 2014. According to RealtyTrac, an online foreclosure marketplace, one in 192 homes received a foreclosure filing in April 2010. It’s the fourth highest foreclosure rate in the country.

“This crisis has devastated thousands of California families and communities. We have to take a new approach to help families remain in their homes,” Nava said.

This Nava is posturing bureaucrat. His quotes are rather silly, but they appeal to a desperate constituency.

In better news, this headline excited me:

California Eyes Statewide Mortgage Reform

Wracked by distressed home sales in the wake of massive foreclosure volumes across the state, California may become the first state to implement a state-wide piece of mortgage reform legislation

The California State Assembly passed AB 260, a bill reforming mortgage lending and specifically banning predatory lending practices, according to a report filed at the California Chronicle today.

"We must enact landmark reforms to address the systemic failures in California's subprime mortgage industry," said California Assembly member Ted Lieu, according to the Chronicle. "These failures have not only devastated California's economy, they have contributed to a national and international financial meltdown."

So far, I appreciate the sentiment. We really do need to do something to prevent the house price casino from taking over. With unrestricted HELOC withdrawal at 100% value still a legal possibility (unlike Texas), then we will again inflate a housing bubble. Unfortunately, although the lead-in was promising, the proposals were not.

The legislation, if enacted, will create a fiduciary duty standard for mortgage brokers, eliminate compensation incentives that encourage the steering of borrower into risky loans, and establish regulations on prepayment penalties. The overall goal is to eliminate subprime lending, a leading cause of the state's foreclosure woes.

Are they really going after subprime lending? I don't think so. Can you imagine the uproar from advocates of low-income housing?

Putting a minimum standard of performance on mortgage brokers is a good thing, but that will do nothing to prevent the next housing bubble. As rhetoric to help pass legislation, it is probably effective, but it is not a protection against market bubbles they are selling it as.

California saw one in 138 housing units receive a new foreclosure filing in April, the third-highest state ranking, according to RealtyTrac.

The state experienced its 10th consecutive month of pick up in home sales during April, with foreclosures accounting for 53.6% of all southern California's resales in the month. California's foreclosure notices–the first step in the foreclosure process–dropped 18% in the month, indicating foreclosure sales may be on their way to slowing, despite the continued high volume of foreclosures in the state.

Write to Diana Golobay.

The shift away from foreclosure notices will not be permanent. Banking industry people I have spoken with have told me there will be a shift toward more short sales in 2010 since the foreclosure pipeline is already full past capacity. Lenders are struggling to find the level of market absorption that does not lower prices. The increasing inventory will continue to increase until lenders see prices weaken, then they will pull back. As the inventory increases, we will see if the banking cartel can hold it to a manageable level.

Another Ponzi that spent the house and squatted for a long, long time

I have a sneaking admiration for the guys who skillfully manipulated the system to extract the largest possible amount of cash and then squat for as long as possible. Although I find the behavior atrocious, I am impressed that they figured it out.

• Todays featured Ponzi bought this property on 12/9/2004 for $1,381,000. He used a $1,000,000 first mortgage a $242,600 second mortgage, and a $138,400 down payment.
• On 12/7/2005 he refinanced with a $1,267,500 Option ARM with a 1.25% teaser rate.
• On 12/7/2005 he also obtained a $97,500 HELOC.
• On 6/1/2006 he opened a $518,023 HELOC.
• On 6/13/2006 he got a $97,500 HELOC. It looks as if he applied and obtained HELOCs from two different banks at the same time.
• Total property debt is $1,880,033.
• Total mortgage equity withdrawal is $640,433.
• Total squatting is at least 24 months.

Foreclosure Record

Recording Date: 05/19/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 02/16/2010

Document Type: Notice of Default

Foreclosure Record

Recording Date: 11/06/2009

Document Type: Notice of Rescission

Foreclosure Record

Recording Date: 12/08/2008

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 09/02/2008

Document Type: Notice of Default

In his first two and a half years of living in this house, it provided him with a $250,000 per year spending stipend. Once the money ran out, he was able to stay there another two years — free.

I wonder how he feels about that?

Irvine Home Address … 20 ROSE TRELLIS Irvine, CA 92603

Resale Home Price … $1,250,000

Home Purchase Price … $1,381,000

Home Purchase Date …. 12/9/2004

Net Gain (Loss) ………. $(206,000)

Percent Change ………. -9.5%

Annual Appreciation … -1.8%

Cost of Ownership

————————————————-

$1,250,000 ………. Asking Price

$250,000 ………. 20% Down Conventional

4.91% …………… Mortgage Interest Rate

$1,000,000 ………. 30-Year Mortgage

$256,179 ………. Income Requirement

$5,313 ………. Monthly Mortgage Payment

$1083 ………. Property Tax

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

$104 ………. Homeowners Insurance

$410 ………. Homeowners Association Fees

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

$7,286 ………. Monthly Cash Outlays

-$1449 ………. Tax Savings (% of Interest and Property Tax)

-$1222 ………. Equity Hidden in Payment

$474 ………. Lost Income to Down Payment (net of taxes)

$156 ………. Maintenance and Replacement Reserves

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

$5,245 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$12,500 ………. Furnishing and Move In @1%

$12,500 ………. Closing Costs @1%

$10,000 ………… Interest Points @1% of Loan

$250,000 ………. Down Payment

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

$285,000 ………. Total Cash Costs

$80,400 ………… Emergency Cash Reserves

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

$365,400 ………. Total Savings Needed

Property Details for 20 ROSE TRELLIS Irvine, CA 92603

——————————————————————————

Beds: 4

Baths: 3 full 1 part baths

Home size: 3,400 sq ft

($368 / sq ft)

Lot Size: 6,252 sq ft

Year Built: 2004

Days on Market: 88

Listing Updated: 40254

MLS Number: S609494

Property Type: Single Family, Residential

Community: Turtle Ridge

Tract: Ledg

——————————————————————————

Affordable 4 bedroom 3.5 bath Ledges home with approximately 3400 sqfeet of elegance behind the guarded gates of the prestegious Summit At Turtle Ridge. Huge master suite upstairs. Extra large gourmet kitchen with a sunny breakfast room. State of the art stainless steel appliances. Oversized family room with fire place. Large formal dining room and Living room. 2 Bedrooms and 1.5 Bath down and 2 Bedroom Suites upstairs. No Casitas. Beautiful courtyard. Fabulous resort like association facilities with club house,Gym, pool and spa. Peaceful walking trails throughout the neighborhood.

prestegious?

The GSEs were government entities for years, then the government attempted to take them private and deny taxpayers were on the hook for a collapse. Now that we know that illusion was a fantasy, are we going to try to spin the same yarn?

Irvine Home Address … 8 CALICO Irvine, CA 92614

Resale Home Price …… $699,000

{book1}

Give me time to reason,

give me time to think it through

Passing through the season,

where I cheated you

Aqua — Turn Back Time

We are giving Congress plenty of time to think through the GSE problem. Unfortunately, as we pass through this season, the GSEs continue to cheat taxpayers out of billions of dollars.

Our view on housing finance: Don't let Fannie and Freddie return to old neighborhood

As bailouts go, nothing quite matches the torrent of taxpayer money still pouring into Fannie Mae and Freddie Mac, the housing giants that now guarantee nearly half of the nation's $11.7 trillion in mortgages.

To cover loans that go sour, the federal government has already doled out almost $145 billion, and the non-partisan Congressional Budget Office estimates the final tab will be about $381 billion. That's about half the size of the 2008 bank bailout but, unlike that bailout, most of this money won't get paid back. And even now, there's little talk in Washington about how to fix the problem.

Make careful note of the difference between the GSE bailouts and other bank bailouts. The original TARP bailout was a loan, and most of that is being paid back or through a series of accounting tricks will look like it is being paid back. The GSE bailout is fundamentally different; the GSE bailout is where the losses are finally tallied and paid. The GSEs along with AIG will be the repository of losses for the Great Housing Bubble and the associated finacial system meltdown.

Fannie and Freddie can't be allowed to collapse. The fragile housing market would collapse along with them.

This is unfortunately true. Of course, those who want to see the status quo maintained will make this argument long past the time while it is true.

Nor can they go forever as wards of the state, soaking up taxpayer cash.

Actually they can. The GSEs could become a permanent market prop and absorbing all future losses caused by speculation in the residential real estate market. The only thing stopping that outcome will be political pressure on Congress to change it. If the GSEs or the FHA lose enough money, perhaps something will be done, but for now, these entities are being used as the vacuum cleaner sucking up all the toxic mortgage dirt from the housing bubble.

They also should not be allowed to go back to their unusual former status as publicly traded companies that are also "government-sponsored enterprises." That's why they got in trouble in the first place, paying outsized compensation and backing risky mortgages because politicians of both parties prodded them to do so.

I also believe they should not go back to what they were, but not for the reasons stated above. I don't think they can go back to being private. Would anyone believe the government will not step in again? Isn't that a license to gamble with public money?

Fannie and Freddie need to be rethought entirely, if not eliminated outright. And the time to start planning for that is now.

If the companies are eliminated, the process would have to be gradual. Fannie and Freddie are pretty much alone in propping up the housing market, backing three-quarters of the new loans being made this year.

For that reason, a less radical approach may be in order — one that would make mortgage money available at affordable interest rates while limiting taxpayer exposure to bad loans.

That is exactly what must happen. How to do it is the challenging part.

One intriguing possibility is to gradually replace Fannie and Freddie with non-profit cooperatives owned by banks. That is how MasterCard and Visa used to be structured, and how the 12 regional Federal Home Loan Banks are structured today. Those regional institutions — which lend money to banks, which then lend to home buyers — weathered the financial storm in part because of an ownership structure that keeps banks liable for loans they make.

The Obama administration has opted to largely ignore the dilemma for the time being. Failing to deal with the fate of Fannie and Freddie is the most glaring omission in the financial reform bill President Obama hopes to sign by July 4.

Delay could be problematic because, as time passes, a necessary sense of urgency will undoubtedly fade. At that point, expect the companies — and their powerful allies in Congress and the housing industry — to start lobbying for a return to the way things were.

Once people get used to the government backstop for their gambling activities, it will be very difficult to remove. The political pressure will only come from mounting losses, and $400,000,000,000 is a lot of money to lose.

Despite what their critics assert, Fannie and Freddie were not primarily responsible for the financial crisis.

The Right likes to bring this up periodically. The GSEs were not responsible for inflating the housing bubble. The housing bubble was inflated by private-label securities backed by credit default swaps and blessed by ratings agencies. The GSEs were losing significant market share and entered risky borrowing late. The GSEs were reacting to the market not establishing it.

They were late to the game in subprime mortgages and always focused mostly on backing standard, fixed-rate mortgages. But these institutions were founded on faulty premises.

Their "American dream" mission of profitably making risk disappear, so that banks would lend and people could buy their own homes, was always a fantasy. They merely took risks from banks and piled it on the taxpayers. Now everyone is paying the price.

The shifting of risk onto the taxpayer is exactly what everyone in real estate wants to see continue. If mortgage risk were properly priced, interest rates would certainly move higher. However, with GSE debt being a defacto government security, the distinction between a 10-year Treasury Note and a GSE mortgage-backed security pool becomes moot: the government will pay both without limitation.

I usually agree with Dean Baker. He was one of the first in Washington to recognize the housing bubble, and his writing has been accurate and insightful. However, I disagree with him on this one.

Opposing view on housing finance: Go back to the old design

A main goal of financial reform should be to promote simplicity and efficiency. In the case of housing finance, this means keeping Fannie Mae and Freddie Mac as publicly run companies.

The logic here is straightforward. Fannie Mae was created as a public company in the Depression to establish a secondary mortgage market. Before its creation, banks in various regions could often find themselves overloaded with mortgages and lacking the capital to make new loans.

By buying mortgages from banks, Fannie Mae allowed banks to issue more mortgages while limiting their exposure to risks from the housing market. Fannie Mae played a central role in supporting the postwar housing boom that hugely expanded homeownership.

That was their original function. But now that the secondary market is firmly established, are the GSEs still necessary? Would the secondary market disappear if the GSEs were eliminated. I think not.

The efficiency of Fannie Mae was lessened when it became a quasi-public company, alongside its newly created competitor Freddie Mac. This meant Wall Street-type salaries in the millions and tens of millions, instead of the six-figure paychecks that top-level government bureaucrats draw. It also created an incentive to take excessive risk, since the government would bear the downside from losing bets.

That is certainly a large problem, and the only way I see to eliminate it is to get rid of the GSEs entirely.

Fannie and Freddie got themselves into trouble in the housing bubble by first failing to recognize the bubble and second by jumping into junk mortgages near the end of the bubble. Contrary to claims of political conservatives, the decision to get into the subprime mortgages had little to do with helping moderate-income families buy homes. It was a desperate effort to recover market share from the investment banks.

That is an accurate assessment.

Fannie and Freddie can continue to play an important role in promoting home ownership by going back to the original design. They should be boring publicly owned companies that buy and hold mortgages. Securitization in the context of a government-owned company simply adds unnecessary expense and complication. It is completely unnecessary to supply capital for mortgages, since the companies can raise it directly by selling their own stock and bonds.

The only way I could see keeping the GSEs if they stopped selling mortgage insurance and instead became holders of mortgages as Dean Baker describes. As long as they provide mortgage insurance similar to the FHA and the GSE insured mortgages are securitized, the potential for inflating another housing bubble is greatly increased.

If private issuers can meet the needs of a secondary market better or more efficiently than Fannie and Freddie, then they will have the opportunity to do so. But, the United States does not need a financial industry that cannot compete successfully with government bureaucrats.

Dean Baker is co-director of the Center for Economic and Policy Research, a progressive think tank in Washington, D.C.

My View: The GSEs cannot go back to the old design

I can remember watching Ben Bernanke testifying before Congress prior to the nationalization of the GSEs. In his testimony, he was incredulous that investors would act as if the GSEs had the implied backing of the US government when they explicitly did not. Perhaps he was the only man in Washington who was surprised when it turned out that the GSEs did have the backing of the US government because when their collapse was imminent, the government stepped in and took them over, and as a consequence, assumed all their liabilities.

How could we plausibly maintain the illusion that we would not do it again? If the GSEs are ever turned back over to the private sector, it will be a laughable facade just as it always was. For the last several decades, the government tried to maintain the illusion that they were not liable for the GSEs, but when a crisis hit, the government immediately stepped in. There simply is no way to establish with any credibility that the government will not do this again, particularly now that there is precedence for it.

If would not surprise me that politicians will want to spin these entities off at some future date. The stock might have value, and the sale might recoup a tiny fraction of the losses. Removing these liabilities from the federal balance sheet will also be appealing, but it will be an illusion — and a rather obvious one at that.

A conservative borrower

The owners of this property owe $550,000 as they extracted a relatively prudent $138,000 in mortgage equity withdrawal. That is conservative by Irvine standards — horrible by any rational standard, but conservative by Irvine standards.

Irvine Home Address … 8 CALICO Irvine, CA 92614

Resale Home Price … $699,000

Home Purchase Price … $515,000

Home Purchase Date …. 5/15/2003

Net Gain (Loss) ………. $142,060

Percent Change ………. 35.7%

Annual Appreciation … 3.9%

Cost of Ownership

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$699,000 ………. Asking Price

$139,800 ………. 20% Down Conventional

4.91% …………… Mortgage Interest Rate

$559,200 ………. 30-Year Mortgage

$143,255 ………. Income Requirement

$2,971 ………. Monthly Mortgage Payment

$606 ………. Property Tax

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

$58 ………. Homeowners Insurance

$380 ………. Homeowners Association Fees

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$4,015 ………. Monthly Cash Outlays

-$723 ………. Tax Savings (% of Interest and Property Tax)

-$683 ………. Equity Hidden in Payment

$265 ………. Lost Income to Down Payment (net of taxes)

$87 ………. Maintenance and Replacement Reserves

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$2,961 ………. Monthly Cost of Ownership

Cash Acquisition Demands

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$6,990 ………. Furnishing and Move In @1%

$6,990 ………. Closing Costs @1%

$5,592 ………… Interest Points @1% of Loan

$139,800 ………. Down Payment

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$159,372 ………. Total Cash Costs

$45,300 ………… Emergency Cash Reserves

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

$204,672 ………. Total Savings Needed

Property Details for 8 CALICO Irvine, CA 92614

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Beds: 4

Baths: 1 full 2 part baths

Home size: 2,300 sq ft

($304 / sq ft)

Lot Size: n/a

Year Built: 1984

Days on Market: 5

Listing Updated: 40332

MLS Number: S619220

Property Type: Condominium, Townhouse, Residential

Community: Woodbridge

Tract: We

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**WOW**FABULOS** 4 BR UPGRADED home, desirable one bedroom downstairs. Cul-de Sac location off the loop across from the park & pool. 3rd story Attic conversion with approx.400 sqft with window,AC, Fan & phone line, great for bonus/office/den. Customize loft/landing features office with built in bookcase and cabinets.Formal Dining Rm, Family Rm & Kitchen overlook lovely hardscaped & landsaped yard. Great size yard for entertaining. Pergo flooring throughout.MA BR with walk in closet and closet organizers.Many windows makes this a lite & brite home. Inside laundry with window & outside door to the yard. Cozy fireplace & built in speakers in family rm, spacious living rm with high ceilings. Custom walk-in pantry.2 car garage with finished garage attic for storage.UPGRADED bathrooms & Kitchen. Walk to all of the wonderful Woodbridge Amenities. Walking distance to all Schools.

You have to admire the realtor who can put a particularly jarring misspelling in ALL CAPS and between asterisks. **WOW**FABULOS**

lite & brite? OMG! Do you think the realtor did that to get my attention? It worked.

I was contacted by a reader recently who asked about the recent trend toward eliminating formal reception rooms. I use that room in my place for an office, but I like the game room approach. Looks like fun.