There are many ways to view strategic default. Borrowers use mortgages like option contracts giving them a "put" from a lender. It can also be viewed as an insurance contract against downside price movements. Borrowers are merely collecting on their insurance policy.

Irvine Home Address … 26 MIRADOR #59 Irvine, CA 92612

Resale Home Price …… $750,000

{book1}

Where do we go from here now that all other children are growin' up

And how do we spend our lives if there's no-one to lend us a hand

I don't wanna live here no more, I don't wanna stay

Ain't gonna spend the rest of my life, Quietly fading away

Games people play, You take it or you leave it

Things that they say, Honor Brite

If I promise you the Moon and the Stars, Would you believe it

Games people play in the middle of the night

Alan Parsons Project — Games People Play

Do loan owners really want to spend a decade or more under water? It will be difficult to send their children off to college when they make too much for their kids to get aid, but they haven't saved anything because they are paying on a bloated mortgage. At some point, they may decide they don't want to stay, but then they can't move because they can't sell. They spend the rest of their lives quietly fading away.

Many in California will stay because they believe the next housing bubble is right around the corner. Like gamblers at the craps table who were just wiped out, everyone places their bets and hopes for another long run. At least with HELOCs, you never have to worry about leaving chips on the table.

Buyers have no moral duty to lenders

by Brent T. White Brent T. White – Apr. 25, 2010 12:00 AM

Associate professor of law, UA The Arizona Republic

As a result of the housing collapse, many Arizonans have seen their homes lose half of their value. Many owe several hundred thousand dollars more than their homes are worth and are unlikely to dig out of their negative equity hole for decades.

For these homeowners, the American dream has become a nightmare – and their financial future is dim.

To compound the stress and anxiety, when they've called their lender to work out a solution, they've discovered that their lender won't even talk to them about a loan modification or a short sale as long as they are current on their mortgage.

With no help in sight, some of these underwater homeowners have decided that they would be better off letting go of their homes and have stopped making their mortgage payments. Many have done so with the hope that defaulting will finally bring their lender to the table, but they are also resigned to the fact that they will likely lose their homes.

Wait until Cartel Crusher LLC makes its way to Arizona. They appear to need widespread debt destruction to enable them to get on with their lives. I suspect a broadcast message of hope to home debtors to stay in their homes and eliminate the crushing debt would be well received, at least among the indebted.

It has been suggested that such homeowners are immoral or, at least, irresponsible. I disagree.

Before explaining why, it is important to emphasize that the decision to strategically default on a mortgage involves many complex, localized and individualized factors. No one should decide to strategically default on their mortgage without sitting down first with a knowledgeable professional.

I wonder if professor White laughed to himself as he wrote that silly disclaimer.

But let's say that you've actually sat down with a professional to do the calculations and have concluded that defaulting on your mortgage is the only way out of your financial nightmare. Would it be immoral or irresponsible for you to do so?

The arguments against homeowners intentionally defaulting on their mortgages generally center on the same three basic points.

First, underwater homeowners "promised" to pay their mortgages when they signed the mortgage contract. Second, foreclosures lead to depreciation of neighborhoods, so underwater homeowners should hang on in order to help preserve their neighbors' property values. And, third, if all underwater homeowners defaulted, the housing market might crash. Homeowners thus have a social obligation to pay their underwater mortgage in order to save the economy.

While all three of these arguments might hold some initial appeal, none holds water.

I had never considered the final two arguments Dr. White presents because they are so silly, but he does go on to address them.

First, a mortgage contract, like all other contracts, is purely a legal document – not a sacred promise.

Think of it this way: when you got your cellphone, you likely signed a contract with your carrier in which you "promised" to pay a set monthly payment for two years. Would it be immoral for you to break your contractual "promise" to pay for two years if you decided that you no longer needed the cellphone and elect instead to pay the early termination fee? Of course not. The option to breach your "promise" to pay is part of the contract.

Though involving more money and something of great sentimental value to most people, a mortgage contract is simply a contract. Like a cellphone contract, a mortgage contract explicitly sets out the consequences of a breach of contract.

A mortgage is like a cellphone contract? Wow, I broke one of those and paid the fee. When you break it down like that, you see how much of the argument about morality and mortgages is pure emotional bullshit. Commercial lenders deal with default all the time because commercial borrowers are completely unemotional about their decisions to pay or default. Since loan owners get emotional about their houses, lenders have learned to play on that emotional bond to create a bogus moral connection.

In other words, the lender has contemplated in advance that the mortgagor might be unable or unwilling to continue making payments on his mortgage at some point and has decided in advance what fair compensation to the lender would be. Specifically, the lender included clauses in the contract providing that the lender can foreclose on the property and keep any payments that have been made. By writing this penalty into the contract, the lender has agreed to accept the property and any payments already made in lieu of the remaining payments.

Moreover, lenders charge Arizona borrowers on average an extra $800 per $100,000 borrowed because Arizona is a non-recourse state, meaning the lender cannot come after the borrower for a deficiency judgment on a purchase money loan. In other words, borrowers in Arizona pay for the option to default on a purchase money loan without recourse. The lender can only take the house.

That's the agreement. No one forced the lender to make the loan or sign the contract. Indeed, the lender wrote it. And, to be sure, the lender wouldn't hesitate to exercise his right to take a person's house if it was in his financial interest to do so. Concerns of morality or socially responsibility wouldn't be part of the equation.

In short, as far as the law is concerned, choosing to exercise the default option in a mortgage contract is no more immoral than choosing to cancel a cellphone contract. Indeed, exercising the default option in your mortgage contract is similar to cashing in on an insurance policy. You paid for it – and have you a right to exercise it.

I have demonstrated that borrowers used mortgages as option contracts. It is the same idea. Lenders sold downside risk protection to borrowers. They assumed 100% of the risk of price decline, and now lenders want to appeal to borrowers misguided sense of right and wrong to cajole borrowers into paying for the lender's mistakes.

But what about the argument that mortgage default hurts neighborhoods and the economy?

Well, first, in a capitalist society, we don't generally expect individuals to make personal economic decisions for the collective good. Aside from this fact, however, it's unfair, in my opinion, to ask underwater homeowners to prop up neighborhood property values, or the housing market, on their backs – especially if means sacrificing their ability to send their children to college or save adequately for their own retirement.

Distressed sellers are under no obligation to endure pain for the fantasies of their neighbors. If the neighborhood values get inflated by a few stupid buyers enabled by reckless lenders, and if the owners in that neighborhood concoct fanciful dreams of wealth, the people become poisoned with entitlement and HELOC spending and other abuses. In my opinion, distressed sellers are doing the neighbors a favor by removing the air from the bubble. As long as the bubble air is present, lenders have room to enable more HELOC borrowing.

Why take homeowners, and not lenders, to task for putting their own financial interest ahead of the common good? Indeed, if lenders were less intransigent and more willing to negotiate, underwater homeowners wouldn't have to walk away from their homes in order to save themselves from financial ruin. And we wouldn't have to worry about the fragile housing market crashing again.

Why it is that we speak of morality and social responsibility only when talking about the little guy, who must take his lumps for the common good, while financial institutions are free to protect their bottom line?

It just can't be the case that it's morally acceptable for banks to look out for their financial best interest, but it's not OK for the average American do to exactly the same thing.

I covered Dr. White when he came on the national scene with his paper on walking way, Should You Walk Away from Home Debt?

Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis

Brent T. White

Abstract

"Contrary to reports that homeowners are increasingly "walking away" from their mortgages, most homeowners continue to make their payments even when they are significantly underwater. This article suggests that most homeowners do not strategically default as a result of two emotional forces: 1) the desire to avoid the shame and guilt of foreclosure; and 2) exaggerated anxiety over foreclosure's perceived consequences. Moreover, these emotional constraints are actively cultivated by the government and other social control agents in order to induce homeowners to ignore market and legal norms under which strategic default might not only be a viable option, but also the wisest financial decision. Unlike lenders, individual homeowners have thus generally not acted to minimize their losses and have born a disproportionate share of the burden from the housing collapse."

WalkingAway1029.pdf

From the main text:

"This article suggest that most underwater homeowners don't default as a result of two emotional forces: 1) the desire to avoid the shame or guilt associated with foreclosure; and 2) fear over the perceived consequences of foreclosure – consequences that are in actuality much less severe than most homeowners have been led to believe. Moreover, fear, shame, and guilt are not mere "transaction costs" that homeowners calculate according to their own personal tolerance for each. Rather, these emotional constraints are actively cultivated by the government, the financial industry, and other social control agents in order to induce individual homeowners to act in ways that are against their own self interest, but which are – wrongly this article contends – argued to be socially beneficial."

Dr. White gets it.

Games People Play

When I look through the property records I often come across the shady games people play to attempt to dodge responsibilities for their debts. California is a community property state which means marital assets are owned jointly; however, it is common for both husbands and wives to maintain separate lives, particularly if there was an extreme asset imbalance prior to the marriage.

The owners of today's featured property attempted some rather bizarre things to compartmentalize what happens with this property. I can't see how they were successful.

• First, the property was purchased by the husband as his sole and separate property for $428,500 on 2/29/2000. He used a $385,650 first mortgage and a $42,850 down payment.
• On 4/13/2001, he refinnced the first mortgage for $390,000.
• Then on 6/13/2003 the husband sells the property to the wife as her sole and separate property. Perhaps an attorney can comment on how this would work. Seems like commingling to me.
• On 6/2/2004 the wife opens a $100,000 HELOC.
• On 6/2/2005 she obtains $280,000 HELOC.
• On 11/10/2005 the wife sells the property to a family trust owned by both the husband and wife.
• Then on 2/14/2006, the trust sells the property back to the wife as her sole and separate property. I can't see how that is valid, but they tried.
• On the same day, the wife borrowers $800,000 in a first mortgage, and takes out a $150,000 stand-alone second.
• Then on 2/15/2005 — the next day — the wife sells the property back to the trust with the husband. Do they really think they can compartmentalize the debt like that?
• Total property debt is $950,000.
• Total mortgage equity withdrawal is 564,350.
• Total squatting time is at least one year.

Foreclosure Record

Recording Date: 02/11/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 08/12/2009

Document Type: Notice of Default

Irvine Home Address … 26 MIRADOR #59 Irvine, CA 92612

Resale Home Price … $750,000

Home Purchase Price … $428,500

Home Purchase Date …. 2/29/2000

Net Gain (Loss) ………. $276,500

Percent Change ………. 75.0%

Annual Appreciation … 5.2%

Cost of Ownership

————————————————-

$750,000 ………. Asking Price

$150,000 ………. 20% Down Conventional

5.16% …………… Mortgage Interest Rate

$600,000 ………. 30-Year Mortgage

$158,136 ………. Income Requirement

$3,280 ………. Monthly Mortgage Payment

$650 ………. Property Tax

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

$63 ………. Homeowners Insurance

$487 ………. Homeowners Association Fees

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

$4,479 ………. Monthly Cash Outlays

-$808 ………. Tax Savings (% of Interest and Property Tax)

-$700 ………. Equity Hidden in Payment

$305 ………. Lost Income to Down Payment (net of taxes)

$94 ………. Maintenance and Replacement Reserves

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

$3,371 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$7,500 ………. Furnishing and Move In @1%

$7,500 ………. Closing Costs @1%

$6,000 ………… Interest Points @1% of Loan

$150,000 ………. Down Payment

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

$171,000 ………. Total Cash Costs

$51,600 ………… Emergency Cash Reserves

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

$222,600 ………. Total Savings Needed

Property Details for 26 MIRADOR #59 Irvine, CA 92612

——————————————————————————

Beds: 2

Baths: 2 full 1 part baths

Home size: 1,830 sq ft

($410 / sq ft)

Lot Size: n/a

Year Built: 1985

Days on Market: 211

MLS Number: S591359

Property Type: Condominium, Residential

Community: Turtle Rock

Tract: Po

——————————————————————————

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

THIS IS A SHORT SALE!!!!!! Stunning Tuscan Villa with professional chef's kitchen; granite counters; Viking appliances; Enjoy the peaceful serene setting while relaxing in your totally upgraded remodeled home. This is a perfect home in an exclusive gated Turtle Rock neighborhood; This home is gorgeous!!!

No shortage of exclamation points. The realtor must be very excited about this deal. Of course, some ALL CAPS are thrown in for good measure.

There are not many words, but she did manage to use two of my graphics.

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

Many alternatives to large numbers of foreclosures are being proposed by pundits in Washington. Their only common denominator is benefit to the banks.

Irvine Home Address … 30 NIGHTHAWK Irvine, CA 92604

Resale Home Price …… $720,000

{book1}

Once I lived the life of a millionaire,

spending my money, I didn't care

I carried my friends out for a good time,

buying bootleg liquor, champagne and wine

Then I began to fall so low,

I didn't have a friend, and no place to go

So if I ever get my hand on a dollar again,

I'm gonna hold on to it till them eagle's grin

Nobody knows you when you down and out

In my pocket not one penny,

and my friends I haven't any

But If I ever get on my feet again,

then I'll meet my long lost friend

It's mighty strange, without a doubt

Nobody knows you when you down and out

I mean when you down and out

Bessie Smith — Nobody Knows You When You're Down and Out

The indulgent lives of the Great Housing Bubble were last seen during the Roaring Twenties, another era notable for its sequence of financial bubbles. First came the Florida land boom (from Wikipedia):

The Florida land boom of the 1920s was Florida's first real estate bubble, which burst in 1925, leaving behind entire new cities and the remains of failed development projects such as Isola di Lolando in north Biscayne Bay. The preceding land boom shaped Florida's future for decades and created entire new cities out of the Everglades land that remain today. The story includes many parallels to the modern real estate boom, including the forces of outside speculators, easy credit access for buyers, and rapidly-appreciating property values.

That massive bubble was followed by a stock market bust (from Wikipedia):

The Roaring Twenties, the decade that led up to the Crash, was a time of wealth and excess. Despite caution of the dangers of speculation, many believed that the market could sustain high price levels. Shortly before the crash, economist Irving Fisher famously proclaimed, "Stock prices have reached what looks like a permanently high plateau." However, the optimism and financial gains of the great bull market were shattered on "Black Tuesday", October 29, 1929, when share prices on the New York Stock Exchange (NYSE) collapsed. Stock prices plummeted on that day, and continued to fall at an unprecedented rate for a full month.

The October 1929 crash came during a period of declining real estate values in the United States (which peaked in 1925) near the beginning of a chain of events that led to the Great Depression, a period of economic decline in the industrialized nations.

It is interesting that they reversed the order; the real estate bubble came first, and the stock market bubble came after. The Great Depression followed the Roaring 20s, just like night follows day or a hangover follows drinking, the Great Recession follows The Great Housing Bubble. Massive Ponzi schemes and credit binges always end badly.

Foreclosed Dreams

The Obama administration’s remedy for the housing crisis benefits bankers, not homeowners.

By David Moberg

Like millions of other Americans, Alicia and Jorge Hernandez are hanging on to their home by a thread. Six years ago they bought their brick bungalow in a working-class neighborhood on Chicago’s southwest side for $175,000, a bargain compared to homes nearby that sold for $250,000. Jorge, who earned $18 per hour as a roofer, had earnestly avoided debt, but a mortgage broker offered him a fixed interest rate of 5.25 percent on a conventional loan. With a growing family, now including three young children, it seemed like a good deal.

[Kareem Rashed stands outside of a foreclosed home on March 12, 2010 in Bridgeport, Conn. (Photo by Spencer Platt/Getty Images)]

Then the housing bubble burst in 2007. On each block throughout the neighborhood, several families—at first mainly those with sub-prime loans—lost their homes to foreclosure. Housing prices fell sharply. The Hernandez home is now worth $119,000, well below the $146,000 still owed on the mortgage. The construction industry imploded and Jorge, 41, could find only scattered jobs. He now collects about $220 per week in unemployment benefits.

“We are a little bit struggling to make our payments,” says Alicia, 39, her voice breaking as she juggles her two-year-old son. “We’ve cut out what luxuries we could, like cable. Now we have to decide to continue our lifestyle or cut everything and make the mortgage payments.”

The family ran through its savings, then borrowed from relatives as Jorge’s income continued to slide. But unlike many unemployed workers in past recessions, they had no equity in their home as collateral for temporary credit. Early this year, they fell behind on their mortgage by three months.

Alicia looked for an administrative assistant job similar to the one she had after college, but nothing turned up. Then she found a job for $8 per hour at a bulk-mailing subcontractor to the U.S. Census Bureau. But even with that paycheck and Jorge’s unemployment compensation, they owe more than half of their monthly income for the mortgage. “Like many Americans, we were hoping next year would be better,” Alicia says. “We just relied on hope. That was our mistake.”

No, this family did not make a mistake. In fact, they did everything right. This is the very first borrower-in-distress profile I have seen anywhere in the media where the family truly did nothing wrong. The reporter's search was worth while because it is very difficult to find a borrower-in-distress who didn't borrow too much using unstable terms, usually to capture appreciation or to get free money to spend. This borrower was a working-class guy providing for his family. If there is any family that I would like to see benefit from the various bailouts, it would be this family. It is the other ninety-nine out of one hundred that irritate me.

The Hernandez family is the new face of the deepening home mortgage foreclosure crisis—a crisis that is increasingly affecting suburban and upper middle-income homeowners as well.

Note the setup here: the reporter advocates a political position in this article, so it was important that people feel like they are saving this family rather than the HELOC abusing squatters I profile here every day.

In the earlier waves, most foreclosures involved speculators or holders of sub-prime loans that were designed to fail, according to the North Carolina-based Center for Responsible Lending, an advocacy and research organization. Its research shows the fault in the sub-prime collapse lay with the loans, not the people who borrowed the money. Many of them could have qualified for a conventional, fixed-rate mortgage and not defaulted.

Although the new wave of foreclosures this year will involve other exotic mortgages (especially interest-only and payment-option adjustable rate mortgages), most recent serious deliquencies and foreclosures involve conventional loans.

Around three-fifths of homeowners seeking loan modifications under President Barack Obama’s Home Affordable Modification Program (HAMP) cite loss of income as the cause of their hardship. At least one-fourth—and by some estimates one-third, heading toward one-half—of all mortgages are currently “under water,” meaning that they are worth more than the market value of the home. Under those conditions, homeowners have strong incentives to walk away, leaving investors holding their costly mortgage and devalued property.

Very good synopsis of the problem. This author did his homework.

The White House tinkers

Responding in late March to these new trends in the housing crisis, the Obama administration rolled out the latest version of HAMP, which offers new provisions to deal with underwater mortgages and unemployment, some of which might help homeowners like the Hernandez family.

But consumer advocates like the Center for Responsible Lending and the Washington-based National Community Reinvestment Coalition (NCRC) are not happy with the Treasury Department’s proposals. “We continue to tinker around the edges of foreclosure prevention,” says NCRC President John Taylor. “We rush to give banks tax breaks, but we dawdle to help homeowners.”

The fundamental problem is that the Obama administration and Congress are reluctant to use the legal, political and judicial forces at their disposal to cut through the Gordian knot of special interests that block meaningful reforms. Instead, banks, investors, mortgage service companies, rating agencies and other financial interests that caused the problem are encouraged and bribed (“incentivized”) to modify troubled loans voluntarily.

The fundamental problem is that any reform is a bailout loaded with moral hazard. The lack of progress is a great thing, and the administration should be reluctant to institute some reform that will further hurt the prudent at the expense of the foolish.

Neil Barofsky, the special inspector general for TARP, warns that this scheme “risks helping the few, and for the rest, merely spread[s] out the foreclosure crisis over the course of several years, at significant taxpayer expense and even at the expense of those borrowers” who struggle to pay modified loans but eventually default.

I profiled this guy before. He clearly understands the problem.

Dean Baker, co-director of the Center for Economic and Policy Research, advocates giving defaulting homeowners the option of staying in their homes and renting at market rates for five or more years. Besides keeping people in their homes, the right to rent gives them bargaining leverage with banks to modify loans, since bankers have no interest in being landlords.

I really like Dean Baker's idea. If lenders knew their payments could get knocked down to rental levels, they would never loan beyond what the cashflow of the property would warrant. I proposed something similar in The Great Housing Bubble. Lenders created more debt than borrowers could service. This is more difficult to accomplish if lenders are limited by a rental equivalence income stream.

Consumer advocates, such as NCRC, National Peoples Action and the Center for Responsible Lending, fought hard for Congress to give bankruptcy courts the power to modify home mortgages—the only major property excluded from the courts’ oversight. But the proposal was defeated in the Senate, which prompted legislation sponsor Sen. Dick Durbin (D-Ill.) to say the banks “own the place.”

Yes, the banks own the Senate. I do happen to agree that bankruptcy judges should not be able to reduce mortgage principal. It would merely encourage borrowers to overextend themselves and petition for relief later. I do like that it would burn the banks though.

With the support of the NCRC, Rep. Brad Miller (D-N.C.) and 26 other congressional Democrats recently proposed that the Treasury use its existing powers to set up an equivalent to the Home Owners Loan Corporation (HOLC), the successful New Deal-era agency. The new HOLC would use the power of eminent domain to buy up large quantities of distressed loans at their current market value, then modify and refinance them.

I only like that idea if the borrowers are kicked to the curb. The programs sounds like a direct government subsidy to be doled out as political largess in poor Democratic districts.

Both homeowners at risk of foreclosure and the government need such powerful tools to get deals done quickly and to shift the costs of resolving the crisis to investors and institutions that were responsible. Such cost-shifting could weaken some banks, but oddly, it could also be the best option available—it’s certainly better than foreclosure—in most cases for banks and investors, as well as for homeowners.

Everyone seems to think foreclosure is a big problem. It's not. Foreclosure is not the problem; foreclosure is the cure.

Bleeding homeowners

… But many investors or banks hope they can bleed homeowners as long as possible, even though many banks now feel pressure from their growing inventory of distressed loans and the increasing risk of underwater borrowers walking away in strategic default. And they hold out hope for bigger government bailouts, like proposals to pay banks to reduce principal on distressed loans.

Efforts to modify distressed loans started in a modest, ineffective way under former President George W. Bush. The Obama administration has continued to rely on voluntary action by financial interests, and has committed larger amounts of money to support and stabilize home ownership through loan guarantees, purchase of mortgages and mortgage-backed securities, incentives to banks and new homeowners, and its modifying of mortgages through the Making Homes Affordable programs (including HAMP).

An ineffectual solution

… Though homeowner advocates lament the loss of $7 trillion in wealth with the housing crash, much of that was bubble money. Trying to prop up home prices below their historic trends helps no one ultimately, says Baker. …

The efforts to forestall foreclosure need to be stopped, and the foreclosures need to occur unimpeded. Lenders were unconscionably stupid during the housing bubble, and they need to bear the brunt of pain through losses and oppressive regulation or they will repeat their mistakes.

It was obvious to anyone who bothered to care that most borrowers in the bubble era could only afford their homes with Ponzi borrowing; however, lenders did not care. They believed they had no risk. The collateral would appreciate endlessly, the loans were sold to investors, and any other risk could be mitigated with a credit default swap form AIG. With no concern for risk, lenders underwrote really foolish loans.

I am opposed to any effort to save borrowers or lenders. It is sad that families like the one in this article were hurt, but it is not sad that HELOC abusing squatters like today's owners were hurt. We need neither irresponsible lending nor irresponsible borrowing, and bailouts encourage both.

Stop the bailouts!

Yet another HELOC abusing squatter

The owners of today's featured property heard the Siren's Song of unlimited spending money, and they went Ponzi.

• This property was purchased on11/17/1995 for $353,000. The owners used a $335,350 first mortgage and a $17,650 down payment.
• On 11/6/2008 they refinanced with a $316,000 first mortgage — which looks like they paid down debts, but…
• On 12/9/1998 they obtained a $79,000 stand-alone second.
• On 1/14/2002 they obtained a $120,000 HELOC.
• On 1/13/2004 they obtained a $245,000 HELOC.
• On 6/23/2005 they refinancedd their first mortgage for $723,350.
• Total property debt is $723,350.
• Total mortgage equity withdrawal is $380,000.
• Total squatting time is at least 10 months.

Foreclosure Record

Recording Date: 02/11/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 02/04/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 10/27/2009

Document Type: Notice of Default

Have you noticed that someone who withdrew $380,000 and squatted for six months — a horrible example of theft — looks like a mild case? By Irvine standards, these people were not extreme. I couldn't even give them an F because they didn't keep gaming the system. I think they left a couple hundred thousand dollars in the bank vault that they could have appropriated by signing a few more documents.

Irvine Home Address … 30 NIGHTHAWK Irvine, CA 92604

Resale Home Price … $720,000

Home Purchase Price … $353,000

Home Purchase Date …. 11/17/1995

Net Gain (Loss) ………. $323,800

Percent Change ………. 104.0%

Annual Appreciation … 4.9%

Cost of Ownership

————————————————-

$720,000 ………. Asking Price

$144,000 ………. 20% Down Conventional

5.16% …………… Mortgage Interest Rate

$576,000 ………. 30-Year Mortgage

$151,810 ………. Income Requirement

$3,149 ………. Monthly Mortgage Payment

$624 ………. Property Tax

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

$60 ………. Homeowners Insurance

$80 ………. Homeowners Association Fees

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

$3,913 ………. Monthly Cash Outlays

-$775 ………. Tax Savings (% of Interest and Property Tax)

-$672 ………. Equity Hidden in Payment

$293 ………. Lost Income to Down Payment (net of taxes)

$90 ………. Maintenance and Replacement Reserves

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

$2,848 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$7,200 ………. Furnishing and Move In @1%

$7,200 ………. Closing Costs @1%

$5,760 ………… Interest Points @1% of Loan

$144,000 ………. Down Payment

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

$164,160 ………. Total Cash Costs

$43,600 ………… Emergency Cash Reserves

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

$207,760 ………. Total Savings Needed

Property Details for 30 NIGHTHAWK Irvine, CA 92604

——————————————————————————

Beds:: 4

Baths:: 2

Sq. Ft.:: 2076

Lot Size:: 6,077 Sq. Ft.

Property Type:: Residential, Single Family

Style:: One Level, Contemporary

Year Built:: 1976

Community:: Woodbridge

County:: Orange

MLS#:: S610039

——————————————————————————

Highly desired single level home on the park! House is nicely maintained and cared for. Private atrium off two bedrooms! Step down formal livingroom. Wood flooring in entry, kitchen and dining/family room. Master bedroom has walk-in closet. Oversized garage. Nicely landscaped yard mirrors the parks atmosphere from the backyard! Walk to schools and lake. Does need a roof and some corrective work in the master bathroom.

Does need a roof and some corrective work in the master bathroom. WTF? These people took out hundreds of thousands of dollars in HELOC money, and not just didn't they update the property, they refused to do even routine maintenance. What did they spend the money on?

If this gets sold to new owners who plan to run a brothel, they will not need to repaint.

Reader Email

What is that?

1888 NIXON Ave Placentia, CA 92870

I see a monkey's face tilted slightly with his hand reaching over the top and grabbing his forehead or scratching an eyebrow. I see two bulbous eyes with dark pupils, a thin burger-bun mouth and his right ear (on the left).

I also see a child reflected in profile below the window apparently being stalked by the ghost in the mirror.

What do you see?

Fannie Mae is encouraging strategic default in an attempt to qualify more borrowers for future loans. One more example of moral hazard.

Irvine Home Address … 36 PARKCREST Irvine, CA 92620

Resale Home Price …… $915,000

{book1}

I'm saddle sore

Four bits gets you time in the racks

I scream for more

Fools' gold out of their mines

I'm back in the saddle again

I'm back

I'm back in the saddle again

I'm riding, I'm loading up my pistol

I'm riding, I really got a fistful

Aerosmith — Back in the Saddle

Everyone who loses their home in the deflation of the Great Housing Bubble will be counting the days until they are back in the saddle again riding their cash cows. Thanks to recent policy changes, those borrowers ready to play in the next Ponzi scheme won't have to wait too long.

Fannie Mae is changing its policy in a way that will encourage strategic default. The resulting walkaways will increase delinquency and foreclosure rates, lower home values, and cause billions of dollars in losses for the US taxpayer.

Fannie Mae wants to help some troubled borrowers get back into home market

Kenneth R. Harney

Saturday, April 24, 2010

Here's some good news for people who had to give the deed on their house back to the bank because of financial problems, or who have done a short sale to avoid foreclosure [and those thinking about strategic default]: You may not have to wait the typical four or five years to re-qualify for financing to buy another home.

Instead, it could be as little as two years. In a bulletin to lenders April 14, mortgage giant Fannie Mae said it is relaxing rules that prevented loan applicants who have participated in short sales or deeds in lieu of foreclosure from obtaining a new mortgage for extended periods of time. The new rules are scheduled to take effect July 1.

Many borrowers are choosing not to strategically default because they know it would take five full years to get another home loan. Now that Fannie Mae (and probably soon Freddie Mac and FHA) has announced they will only make default cost two years, that is one less reason for underwater homeowners to tough things out.

Take careful note how this changes the equation for those considering strategic default. Here is what happens if they stopped paying today:

1. They could save 12 to 36 months worth of housing payments with the amend-pretend-extend dance.
2. After they go through the foreclosure, they could rent for a couple years at a cost less than the previous payment they quit making years ago.
3. After three years of squatting and two years of inexpensive renting, they could buy a comparable substitute for their former home and pay less for it with money down.
4. In the end, they would have the same house with a much smaller mortgage and plenty of equity.

Strategic default is a huge benefit to the underwater borrower because the waiting time to get back into the market has been substantially reduced. If they had to wait a full five years, they might be better served to wait it out and let the market come back to them — or so they might convince themselves. If they only have to wait two years, it isn't very likely they will miss a huge market rally, and the punishment for their bad borrower behavior fails to be the deterrent it was intended to be.

Do you get the sense that the people at Fannie Mae did not think this through? Did they forget why they had the five-year waiting period to begin with? Are they so desperate for new buyers to clean up their mess that they are willing to encourage much more strategic default? This seems really stupid to me.

Homeowners who have done short sales — such as under the Obama administration's new Home Affordable Foreclosure Alternatives program — will also be able to qualify for a mortgage in as little as two years. Although Fannie Mae officials declined to discuss the reasoning behind the changes, the bulletin to lenders said the company hopes to encourage troubled borrowers to work out solutions that avoid the heavy costs of foreclosure.

How is that supposed to work? That phrase suggests to me that Fannie Mae is well aware of the moral hazard they are creating and is doing it anyway. They are instituting a policy almost certain to increase strategic default, and they give lip service to efforts to prevent it.

Fannie's new standards come with some noteworthy fine print, however. To qualify for a new loan in the minimum two years, most borrowers will need to come up with down payments of at least 20 percent. If they can scrape together only 10 percent for a down payment, the wait will revert to the four-year minimum. And if their down payments are less than 10 percent, the wait could be even longer.

Well, if the borrowers planning to strategically default can squat for long enough to save a 20% down payment — something made much easier by not having any housing costs — then this requirement is not a barrier. I do like that they are encouraging saving.

On the other hand, if borrowers can demonstrate that their mortgage problems were directly attributable to "extenuating circumstances" — such as loss of employment, medical expenses or divorce — they might be able to qualify for new loans with minimum down payments of 10 percent in just two years.

They didn't wait long to add loopholes that everyone will jump through.

Freddie Mac, Fannie's rival in the conventional secondary mortgage market, has slightly different policies on mandatory waiting periods after short sales or deeds in lieu of foreclosure. For borrowers who cannot demonstrate that extenuating circumstances caused their financial problems, Freddie Mac will not approve new mortgages in less than four years. For people who lost their houses to foreclosure because of their financial mismanagement, Freddie's mandatory waiting period remains at five years.

On the other hand, when there are documented extenuating circumstances, the wait at Freddie Mac drops to two years after short sales or deeds in lieu and to three years after foreclosure.

In other words, the other GSEs will also be encouraging strategic default on a grand scale as each of them competes with the others (under the guiding hand of our government) to lower standards until borrowers can get 100% financing stated-income loans the day after a foreclosure or bankruptcy. Let's re-inflate the housing bubble.

Housing and consumer counseling advocates welcomed Fannie's relaxation of rules that had penalized borrowers who lost their houses after layoffs, illness and other unforeseen events.

"This is a positive move," said Marietta Rodriguez, director of homeownership and lending for NeighborWorks America, a national nonprofit network created by Congress to assist with homeowner financial counseling and community development.

"We all know that there are many people who through no fault of their own have to sell," she said, but they were blocked from buying a house again for four years or longer, even though they had rebuilt their credit, had qualifying incomes and were fully capable of handling a mortgage responsibly.

I would estimate one percent lost their house due no fault of their own. Those cases are sad, but it doesn't justify bailing out the other ninety-nine percent who are HELOC abusing squatters who gamed the system. Let's punish them as little as possible and see what happens in another ten years.

Also, did you notice this woman is a spokesperson for a government sponsored aid boondoggle. To me that demonstrates this is being coordinated by officials in the administration. They are telling this woman what to say to make the program sound like a good idea.

The main potential complication in Fannie's new approach, said Rodriguez, is in its credit-rehabilitation requirements. To qualify for a new mortgage, Fannie expects borrowers to reestablish their credit sufficiently to get passing grades from the company's automated underwriting system, which considers credit bureau data, among other factors.

Why don't they just change their underwriting system? This sounds like a problem any programmer could solve for them. They could streamline the process to always say "yes" just like the automated underwriting models of the housing bubble.

But according to Fannie's bulletin to lenders, it will not consider applicants with "nontraditional" credit or "thin files," where there is not enough history on file with the national credit bureaus to generate a risk score.

Rodriguez worries that many homeowners who have lost their houses during periods of high unemployment and stricter underwriting requirements by banks won't have sufficiently "traditional" credit histories — home-equity lines, revolving credit card accounts, personal loans and the like — to pass Fannie's test. After the years of recession, their main credit data may instead be their rent payment histories and telephone and utility bill payments, none of which show up in the national credit bureaus' files.

So the prudent who fail to use consumer credit, borrow for cars, or otherwise allow themselves to be slaves to lenders are punished by the GSEs. That is a great system. They only want to deal with people who have pledged their souls to their lending overlords.

Actually, I expect the credit history requirement to be relaxed. They need new borrowers. Besides, if people are forced to live without credit long enough, they come to realize what a trap it really is. If more people experienced the freedom of zero debt, lenders would make far less money.

Fannie Mae's revised standards may well provide an early second chance at homeownership for thousands of borrowers who assumed they would need to wait much longer than two years. But for those who don't have traditional credit profiles and sufficient down payments, that second chance is likely to be deferred.

If I read that closing properly, Fannie Mae is sending the message that it is acceptable to strategically default as long as former borrowers start saving and behaving well after the fact.

I appreciate messages of redemption. The indebted who rejected the idea of strategic default should reconsider their decision now that Fannie Mae has said it won't punish them for it. The crushing lender losses — which we as US taxpayers will be largely responsible for — should provide the full measure of pain lenders deserve for inflicting this madness upon us all. It may not all be financial for the lenders. Huge taxpayer losses will be the impetus for some truly punitive financial regulation. Lenders will get their comeuppance.

This one is really bad

Sometimes the HELOC abuse, gaming the system, and squatting is so egregious, so unbelievable, that even I am shocked.

The owners of today's featured property really hit the lottery. They bought at the very bottom of the market last time around, they HELOCed every penny out of the property right up to the very peak, then they stopped paying, and they have been squatting since 2008. They squeezed every available dollar out of this deal, and they are still squeezing today.

• Today's featured property was purchased on 8/20/1997 for $349,000. The owners used a $279,100 first mortgage and a $69,900 down payment — borrowers needed down payments back in 1997.
• On 1/3/2000 this couple began the new millenium by embarking on their own personal Ponzi scheme. They opened a HELOC for $150,000.
• On 4/8/2003 they enlarged their HELOC to $200,000.
• On 1/5/2004 they opened another HELOC for $353,500.
• On 4/22/2004 they got another HELOC for $145,000.
• On 2/25/2005 they refinanced their first mortgage for $661,000.
• On 2/23/2006 they obtained a HELOC for $344,000.
• On 9/18/2006 they obtained what appears to be a stand-alone second for $390,000.
• The total property debt is $1,051,000.
• Total mortgage equity withdrawal is $771,900.
• Total squatting is at least 18 months and counting.

Foreclosure Record

Recording Date: 03/26/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 12/21/2009

Document Type: Notice of Default

Foreclosure Record

Recording Date: 06/25/2009

Document Type: Notice of Rescission

Foreclosure Record

Recording Date: 04/20/2009

Document Type: Notice of Default

They are scheduled for auction on May 18, 2010, but if the postponements continue so the banks can dance some more, they will likely continue to squat in the house that already has provided them nearly three quarters of a million dollars in free money.

Think about what these people must believe about themselves and the things they are entitled to. In their minds, they are rich.

Whatever the owners may have done for a living, their house was providing them with a substantial additional living, and once the inflows were cut off, the outflows stopped. After six years of borrowing about $130,000 a year in tax-free income and 18 months of squatting, these owners are accustomed to a lifestyle that they will never have again. Unless, of course, we put them back into a house two years from now and inflate another housing bubble — which could happen.

Is this the kind of behavior we want to see more of? Should we really let this couple back into the housing market in two years? They weren't good examples of financial prudence last time around, and with as much as they were rewarded for this behavior, there is no reason to believe they would do anything differently next time.

Irvine Home Address … 36 PARKCREST Irvine, CA 92620

Resale Home Price … $915,000

Home Purchase Price … $349,000

Home Purchase Date …. 8/20/1997

Net Gain (Loss) ………. $511,100

Percent Change ………. 162.2%

Annual Appreciation … 7.7%

Cost of Ownership

————————————————-

$915,000 ………. Asking Price

$183,000 ………. 20% Down Conventional

5.16% …………… Mortgage Interest Rate

$732,000 ………. 30-Year Mortgage

$192,926 ………. Income Requirement

$4,001 ………. Monthly Mortgage Payment

$793 ………. Property Tax

$150 ………. Special Taxes and Levies (Mello Roos)

$76 ………. Homeowners Insurance

$170 ………. Homeowners Association Fees

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

$5,191 ………. Monthly Cash Outlays

-$985 ………. Tax Savings (% of Interest and Property Tax)

-$854 ………. Equity Hidden in Payment

$372 ………. Lost Income to Down Payment (net of taxes)

$114 ………. Maintenance and Replacement Reserves

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

$3,838 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$9,150 ………. Furnishing and Move In @1%

$9,150 ………. Closing Costs @1%

$7,320 ………… Interest Points @1% of Loan

$183,000 ………. Down Payment

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

$208,620 ………. Total Cash Costs

$58,800 ………… Emergency Cash Reserves

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

$267,420 ………. Total Savings Needed

Property Details for 36 PARKCREST Irvine, CA 92620

——————————————————————————

Beds: 4

Baths: 2 full 1 part baths

Home size: 3,000 sq ft

($305 / sq ft)

Lot Size: 4,927 sq ft

Year Built: 1997

Days on Market: 56

MLS Number: S607304

Property Type: Single Family, Residential

Community: Northwood

Tract: Bain

——————————————————————————

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

This property is in backup or contingent offer status.

Fabulous opportunity in the guard gated community of Northwood Pointe. 4 spacious bedrooms plus extra large bonus room/office. Formal living room and dining room. Kitchen with double oven, cooking island and breakfast nook. Super sized family room with fireplace and built in entertainment center. Corner lot with great curb appeal. A short walk to award winning Canyonview Elementary and Northwood High. Enjoy community pool, parks and trails. Close to shopping, dining, entertainment, 5 fwy and toll roads.