Barry Ritholtz sees a grim future for America's housing market with either a drift lower or a decade of flat pricing.

Irvine Home Address … 3892 CLAREMONT St Irvine, CA 92614

Resale Home Price …… $425,000

I took my love and I took it down

I climbed a mountain and I turned around

And I saw my reflection in the snow covered hills

'Till Landslide brought me down

Stevie Nicks — Landslide

Prices have fallen in a landslide, and owners everywhere find themselves buried under mountains of debt. Some will reflect on their circumstances and realize their own foolish expectations for appreciation prompted them to borrow until the market brought them down. Some will not. Digging out after the landslide will be difficult because the market is not going to elevate people back to an equity position on its own. Borrowers are going to have to dig themselves out by paying down their debts.

Back in March of 2009, I wrote the post, Real Estate's Lost Decade. Many have noted the similarities between our policy responses to the credit bubble and Japan's of the 1990s.

Japan simultaneously inflated massive financial bubbles in real estate and stocks during the late 1980s. The slow deflation of this bubble and the general economic malaise that impacted Japan during the years that followed became known as the “Lost Decade.” The United States is facing a similar set of circumstances in the aftermath of the Great Housing Bubble. So far, we have been following the same policy actions as the Japanese did. Perhaps our officials have come to believe a Lost Decade is preferable to the next Great Depression.

Today, I want to demonstrate how easy it would be to have a similar result in our own housing market. By lowering interest rates to artificially low levels, the Federal Reserve hopes to stabilize the housing market; however, weaning the housing market off these subsidies will need to be a slow process to prevent real estate prices from taking another nosedive. Gradually increasing interest rates back to long-term norms will result in an erosion of buying power that prevents price appreciation. I want to be clear about the implications of this; we are not looking at a decade to get back to peak prices, we are looking at a decade of stagnate prices at the bottom.

I included the following chart as a projection of the future:

The Lost Decade

Realistically, no market ever goes totally flat. Although Irvine is heading down that road right now.

When considering the options facing policy makers, the powers-that-be decided further price drops were preferable to letting prices fall to market-clearing levels. I discussed those options in a February 2009 post titled, Fire and Ice.

First, let's take off the table any ideas of a return of sustained or rapid appreciation before prices return to fundamental valuations. The only people who suggest such ideas are self-serving liars and those who chose to believe them. Anything is possible, but this outcome is so unlikely that I will not waste any print discussing it.

Above is a look at the Fire and Ice scenarios for Irvine median home prices. There is a tendency when looking at charts like this one to assume that one scenario is aggressive and the other conservative, so the truth must be in the middle. Don't make that assumption. Prices could easily crash below fundamental valuations as I described in How Bad Could Bad Get. If you think this is not possible, I suggest you check out Christopher Thornberg's predictions (PDF) he just delivered to the BIA of Orange County. He is predicting a 32+% decline from today's prices, that is over 50% off the peak. He is more bearish than I am; he may be right.

Take a look at the grey line in the graph above. That is the fundamental value. It is calculated based on income growth (which has now stopped), 6% interest rates, and a 30-year conventionally-amortized, fixed-rate mortgage with a 20% down payment and a 28% DTI. That is where house prices would be if we would not have had a real estate bubble. The Federal Reserve is working to raise this line by lowering interest rates, but even a drop to 4.5% will not raise it enough to intersect those falling lines at a significantly higher price point. Prices will fall to this line before they find support.

Those predictions were made two and a half years ago. Each of these scenarios is playing out somewhere in America. The Armageddon scenario is happening in Las Vegas.

The Fire scenario is playing out in most of the US.

And the Ice scenario is happening here in Orange County.

I am not the only market observer and analyst to reach these same conclusions.

“Drift Lower” Is BEST-Case Scenario for Housing, Ritholtz Says

By Peter Gorenstein | Daily Ticker – August 12, 2011

“An economy in which you have homeless people and empty homes doesn't make any sense and that's where we're heading,” Nobel laureate Joseph Stiglitz told the Daily Ticker earlier this week.

With home prices continuing to fall in most of the country and sales volume off 13% last quarter compared to prior year, the housing problem, if not getting worse, is certainly still a major mess for America.

True, foreclosure filings dropped 35% last month – to the lowest level in four years – says RealyTrac, but that is in part due to a bottleneck of proceedings caused by the robo-signing induced moratorium.

“The data suggests home prices will continue to drift lower for a couple of years – maybe just go sideways for a decade,” says FusionIQ CEO Barry Ritholtz, who predicts another jump in foreclosures unless and until the weak jobs market picks up.

I agree with Barry to a point. Regardless of what happens in the jobs markets, foreclosures are going to pick up again because the shadow inventory is so large. I agree with Barry that if the job market doesn't pick up, we will see another jump in delinquencies which are the precursor to more foreclosures.

In fact, there are so many delinquent homes and underwater homeowners the federal government is looking into renting their share of them in an attempt to stabilize home prices and ravaged neighborhoods. The Federal Housing Finance Agency says it is seeking input from investors on how to rent the 248,000 homes the owned by government-controlled mortgage firms Fannie Mae (FNMA) and Freddie Mac (FMCC) and the Federal Housing Administration.

Ritholtz is not convinced of the programs merits, based on the governments track record as landlords. “The federal government has subsidized and built low income housing and rented it,” he says. “It hasn't been a successful program for them I hate to see them go down that same road.”

Ritholtz has another idea: Attract new homeowners to the country. He suggests the government should reduce the anti-immigrations measures created after the 9/11 attacks and allow more skilled workers to immigrate into the country. “You want to get rid of excessive supply, the way to do it is to create demand,” he says.

The government and the federal reserve has done everything it can to create demand by lowering interest rates, printing money, and exploding the national debt. The only thing they can do further is to follow Paul Krugman's advice and spend, spend, spend until the voters take the checkbook away.

Make it easier for educated people to live the American dream and those homes will be filled, Ritholtz declares. “That to me makes much more sense than getting into the business of being landlords.”

Below is the interview with Barry Ritholtz. Remember the post, Should the GSEs rent REO instead of selling at very low prices? These guys think having the GSEs becoming America's landlord is a very bad idea.

Day after day, I relay the grim truth of the problems in the housing market. I am not anti-ownership as I am buying properties in Las Vegas and helping my family do the same. And I am not a permabear as I am very bullish on buying Las Vegas real estate. Buying and holding real estate can be very emotionally and financially rewarding, but only if the price is right, and only if the motivation is not to capture appreciation and its associated HELOC booty. If I sound like a broken record, its because I don't want to see people repeat the mistakes of the housing bubble.

Prices are not going up any time soon. Don't buy real estate because you think they will be.

$322,000 in MEW without spending a dime on improvements

The owners of today's featured property paid about $256,000 back in 1999 (the actual purchase price is an estimate from tax data and loan data). They used a $248,000 first mortgage and a $$7,000 down payment. They refinanced on 5/14/2002 with a $270,000 first mortgage and withdrew their tiny down payment.

On 10/7/2005, they refinanced with a $570,000 first mortgage. Since they obviously did not spend this money on home improvements, where did the $300,000 go?

They didn't save it to make future loan payments.

Foreclosure Record

Recording Date: 09/07/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 06/04/2010

Document Type: Notice of Default

They have been squatting since early 2010.

This property is in what used to be known as Culverdale, now known as Westpark I. It was built in the early 70s adjacent to the 5 freeway at Culver drive. I profiled a house on this street in September of 2007 in a post aptly titled, You Ugly.

Parts of my description of that house also applies to today's featured property:

This listing is the least desirable single family detached home in Irvine. Everything about this property is a negative:

• It is 36 years old. (now 40 years old)
• There is no back yard. …
• The house itself is right on the 405 on ramp at Culver. A location guaranteed to have maximize noise and air pollution as people accelerate onto the freeway.
• If that wasn't bad enough, it is adjacent to a huge power pole with enough electricity running through it to make your hair stand on end and give your children brain cancer. Perhaps the hum of the power lines drowns out the freeway noise. Who knows?

I would not live in this house.

At $179/SF, someone will perceive this to be a bargain and buy the property. With all its negatives, there is still a price where someone will deal with its issues in order to live in Irvine. Perhaps $425,000 is the right number? Even an FHA buyer could live here for about $2,200 per month. Someone will probably buy it as a rental. It may even be cashflow positive, a rarity in Irvine. Personally, I will pass.

——————————————————————————————————————————————-

This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707

949.769.1599

sales@idealhomebrokers.com

Irvine House Address … 3892 CLAREMONT St Irvine, CA 92614

Resale House Price …… $425,000

Beds: 5

Baths: 2

Sq. Ft.: 2376

$179/SF

Property Type: Residential, Single Family

Style: Two Level, Contemporary

View: Faces North, Faces South

Year Built: 1971

Community: Westpark

County: Orange

MLS#: P792026

Source: SoCalMLS

On Redfin: 3 days

—————————————————————————–

WESTPARK — PRICED WAY BELOW MARKET BECAUSE BUYER WILL HAVE SIGNIFICANT DEFERRED MAINTENANCE TO REPAIR. .. .MAJOR FIXER SOLD 'AS-IS' — SHORT SALE. Large home with FIVE bedrooms and 'great bones' with potential! Front courtyard/patio entry. Formal living room w/ beautiful stairway needs finish detail; formal dining room converted to large storage/walk-in pantry. Informal eating area off kitchen to Den/Family Room. Inside laundry room. Garage with work areas. Enclosed patio/workshop — can be converted back. Rear yard w/ raised garden planters. Large master bedroom & dressing area & small walk-in closet. Three other bedrooms + another LARGE bedroom suite upstairs. Attic space w/ pull-down stairs. Diamond in the rough! Home needs lots of TLC and a buyer with vision! INVESTOR's FLIP opportunity. EXCELLENT SCHOOLS. .. walk the kids!

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Proprietary IHB commentary and analysis

The realtor is so desperate they are even appealing to flippers. Funny.

Resale Home Price …… $425,000

House Purchase Price … $255,670

House Purchase Date …. 4/27/1999

Net Gain (Loss) ………. $143,830

Percent Change ………. 56.3%

Annual Appreciation … 4.1%

Cost of Home Ownership

————————————————-

$425,000 ………. Asking Price

$14,875 ………. 3.5% Down FHA Financing

4.19% …………… Mortgage Interest Rate

$410,125 ………. 30-Year Mortgage

$116,389 ………. Income Requirement

$2,003 ………. Monthly Mortgage Payment

$368 ………. Property Tax (@1.04%)

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

$89 ………. Homeowners Insurance (@ 0.25%)

$472 ………. Private Mortgage Insurance

$75 ………. Homeowners Association Fees

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

$3,007 ………. Monthly Cash Outlays

-$315 ………. Tax Savings (% of Interest and Property Tax)

-$571 ………. Equity Hidden in Payment (Amortization)

$22 ………. Lost Income to Down Payment (net of taxes)

$73 ………. Maintenance and Replacement Reserves

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

$2,216 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$4,250 ………. Furnishing and Move In @1%

$4,250 ………. Closing Costs @1%

$4,101 ………… Interest Points @1% of Loan

$14,875 ………. Down Payment

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

$27,476 ………. Total Cash Costs

$33,900 ………… Emergency Cash Reserves

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

$61,376 ………. Total Savings Needed

——————————————————————————————————————————————————-

Ocwen has come up with a new program to forgive principal in exchange for an equity participation interest in future appreciation.

Irvine Home Address … 38 CARTIER AISLE Irvine, CA 92620

Resale Home Price …… $449,000

Take a piece of my life

Take a piece of my soul

Take a piece of my face

So I can never grow old

And take a piece of my world

Take a piece of my heart

Take a piece of my brain

So I can never be smart

The Pretty Reckless — Everybody Wants Something from Me

Borrowers facing foreclosure feel like their lender wants a piece of them. Either they must keep making onerous payments, or they must give up their family homes. Neither option is palatable, but lenders will not provide better options because it will foster moral hazard and irresponsible borrowing in the future.

In the post Foreclosure is a superior form of principal reduction, I noted the following:

Excessive debt is the problem

Ever since the Great Housing Bubble began to deflate, everyone has incorrectly identified the problem as foreclosure. The real problem is not foreclosure, the real problem is that borrowers have excessive debts due to the huge loans lenders underwrote that inflated the housing bubble. Foreclosure is not the problem, it is the cure. Further, there is only one reason foreclosure is seen as the problem: people have to move out of their homes after a foreclosure, and I have demonstrated how private hedge funds and other parties could solve that problem.

One way or another, the banks are going to write down huge amounts of bad debt. Nothing can save them, and we shouldn't try. Principal reductions are the worst possible solution to the problem of excess debt left over from the Great Housing Bubble. Principal reductions merely gives foolish borrowers a pass. If the borrowers go through foreclosure, they have consequences that minimize moral hazard:

1. Borrowers will be forced to rent, at least for a time.
2. Borrowers will have reduced access to consumer credit as the foreclosure lowers their FICO score.
3. Borrowers will have to save and be prudent in order to meet the standards of home ownership and get another loan.

All of those consequences — inadequate though they may be — are eliminated if the GSEs merely reduce principal. The borrowers who have the most to gain are those who borrowed most foolishly, and the people paying the price are (1) prudent borrowers and (2) those who didn't borrow at all. Next time around, there will be no prudent borrowers, and everyone will participate. Who is going to pass on free money?

Any program which touts principal reduction has the built-in problem of moral hazard. The less people are punished for their foolish decisions, the more likely they are to repeat them. Further, others witnessing the rewards of the foolish will emulate them in the future. The program discussed today attempts to remedy this problem. I'll let you decide if you believe they are successful.

Ocwen unveils new principal reduction program

by JON PRIOR — Tuesday, July 26th, 2011, 11:37 am

Ocwen Financial Corp. launched a new modification program to reduce the principal on a mortgage for delinquent borrowers, while compelling them to share in the future appreciation of the home's value with the investor.

When lenders are faced with enormous losses on commercial loans, one alternative they generally consider in lieu of foreclosure is to take an equity-participation position. This provides them the recovery benefit of future appreciation without having to foreclose and take title.

Commercial lenders do this because they don't have the management expertise to run a commercial center, and it is easier to keep a motivated owner in place who will work to make the project successful while it is underwater.

Residential loans are different because it doesn't take any special expertise to own a house, but lenders are considering the same solution because it will allow them to defer recognizing losses, and if they can get the borrower to resume making payments, even at a reduced amount, it may be better than forcing a foreclosure auction and writing down the debt.

Mortgage modifications will only be available for homeowners in negative equity.

No owner with equity would want to give up their future appreciation. Loan owners with high payments but sufficient equity to escape are more likely to sell and move on.

Atlanta-based Ocwen holds a $74 billion servicing portfolio after acquiring Litton Loan Servicing and HomEq. Ocwen launched the Shared Appreciation Modification program as a pilot in August 2010, a program the company believes will make a major dent in the roughly 14 million mortgages currently in negative equity, according to Moody's Analytics.

Another cure-all for the housing market? This program will not make a significant dent in any problem, but it does provide a better alternative for borrowers who want to stay in their homes than current loan modification programs that are merely Option ARMs in disguise.

Through the program, Ocwen will write down qualified loans to 95% of the underlying property's market value. The amount written down is forgiven in one-third increments over three years as long as the homeowner remains current. When the house is later sold or refinanced, the borrower will be required to share 25% of the appreciated value with the investor.

This is really a fair deal for deeply underwater borrowers who would prefer not to leave their homes. Of course, the details matter, and if the loan owner is still making onerous payments, then they still have significant incentive to default. Do the payments drop each year as the loan balance is forgiven?

“Like all modifications, SAMs help homeowners avoid foreclosure. But they also restore equity. That's a significant benefit to the customer and, we believe, the economy and housing market. Psychologically, it's important too,” said Ocwen CEO Ronald Faris. “Our analytics tell us that an underwater mortgage is one-and-a-half to two-times more likely to default than one with at least some positive equity.”

Negative equity is an oxymoron lenders use to give psychological comfort to borrowers who have nothing. Positive equity is a redundant term that should also be eliminated from proper speech.

Owners with equity generally won't strategically default. Although, i strongly suspect such owners will be more likely to sell immediately once they do have equity because the incentives now favor selling out.

Once the owner is back above water, they can remain in their home and give up 25% of future appreciation, or they can sell their home, buy a comparable property, then keep all future appreciation. What would you do?

I think this will help lenders slowly take their write downs while keeping borrowers paying on underwater properties for three years. In that respect, it helps the bank on both fronts. If these equity participation positions are being sold to investors, I doubt these investors will see much return as most borrowers will sell to get out from under this obligation.

SAM is one of the first principal reduction programs initiated by a private company without the prodding of a government agency. Other servicers have sporadically used Hardest Hit Fund and Home Affordable Modification Program dollars to write down principal, but only in select states.

Since August, Ocwen said 79% of the borrowers accepted the offer with a redefault rate of 2.6%. Ocwen said it has regulatory clearance to push the program into 33 states.

If you give desperate underwater homeowners a lifeline, they will take it. They tout a 2.6% redefault rate over the last year as being low — and it is much lower than redefault rates on most loan modifications — but a 2.6% default rates even after principal is reduced is still quite high.

J.T. Smith, the chief investment officer for the boutique investment bank Aristar Funding Group said there are many still unknown parts of how Ocwen will structure the modifications such as tax liens and future title issues, but granting the borrower 75% of the appreciation is “very generous.”

Probably too generous. It will be difficult to find investor who want to pay much money for a small portion of appreciation particularly given the high likelihood of early redemption.

“This program is a win for the borrower and very, very generous of Ocwen and investors,” Smith said. “Silent seconds are a more equitable solution, so Ocwen borrowers should take these modifications and run with it.”

This program will also serve to cut off future HELOC borrowing. The equity share position will undoubtedly be calculated as the difference between the first mortgage and the resale value exclusive of any future encumbrances. It will be very difficult for borrowers to obtain HELOCs as the new lender will be in a third mortgage position subordinate to the equity-share's claim.

Consumer organizations supported the program as well. Marcia Griffin, president of HomeFree-USA, a community-based homeownership development group, called the program “visionary.”

“The homeowner benefits from a stable housing situation and the investor is positioned to share in the future appreciation of the home's value. In addition, communities nationwide will benefit from fewer foreclosures,” Griffin said.

John Taylor, CEO of the National Community Reinvestment Coalition, said other servicers should follow suit.

This still leaves the question of who pays for this. There is no way the investors are covering the cost of the write down in order to obtain a hoped-for 25% of the recovery. At best, investors in a scheme like that might offer 5% of the amount written off. The lender must still absorb a huge write down to make this program work. The real benefit for lenders is a controlled and measured rate of write down they can budget for.

“This innovative modification program offers meaningful help for underwater borrowers. The simplicity and rationale of the SAM is striking: the homeowner maintains the equity that would otherwise be lost in the foreclosure process, and servicers and investors maintain a performing asset,” Taylor said.

A spokesman for Ocwen did not immediately disclose how many borrowers the program is expected to reach.

Write to Jon Prior.

Follow him on Twitter @JonAPrior.

All principal reduction programs contain moral hazard because foolish borrowers are not facing the consequences of their mistakes. Foreclosure is the best form of principal reduction. However, this program does provide some consequences, watered down through they may be. It's a reasonable compromise in a situation with no easy answers.

More HELOC abuse and squatting

The owners of today's featured property borrowed beyond their means, and they have been rewarded with two years of free money and two years of free housing.

• This property was purchased on 7/21/2003 for $427,000. The owners used a $322,700 first mortgage, a $61,600 second mortgage, and a $42,700 down payment.
• On 8/27/2004 they obtained a $187,000 HELOC.
• On 5/16/2005 they obtained another $187,000 HELOC.
• On 3/30/2007 they refinanced with a $500,000 first mortgage.
• Total mortgage equity withdrawal is $115,700.
• Total squatting is at least 28 months.

Foreclosure Record

Recording Date: 02/18/2011

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 09/17/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 10/07/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 07/02/2009

Document Type: Notice of Default

——————————————————————————————————————————————-

This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707

949.769.1599

sales@idealhomebrokers.com

Irvine House Address … 38 CARTIER AISLE Irvine, CA 92620

Resale House Price …… $449,000

Beds: 3

Baths: 3

Sq. Ft.: 1764

$255/SF

Property Type: Residential, Condominium

Style: Two Level

Year Built: 1989

Community: Northwood

County: Orange

MLS#: P791767

Source: SoCalMLS

Status: Active

On Redfin: 1 day

——————————————————————————

Largest Model W/ Main Floor Bedroom/Full Bath, Private Tropical Gated Front Courtyard Entry, Open & Spacious Floorplan W/ high Vaulted Ceiling & Lots of Windows, Huge Master Suite W/ High Volum Ceiling, spacious Kitchen w/ Lots of Cabinets, Seperate Breakfast Nook Area, Wood Flooring Downstairs, Private Location, Very Low HOA, No Mello Roos, Close to Everythings.

——————————————————————————————————————————————-

Proprietary IHB commentary and analysis

Close to Everythings? High Volum Ceiling? Seperate?

Resale Home Price …… $449,000

House Purchase Price … $427,000

House Purchase Date …. 8/7/2002

Net Gain (Loss) ………. ($4,940)

Percent Change ………. -1.2%

Annual Appreciation … 0.6%

Cost of Home Ownership

————————————————-

$449,000 ………. Asking Price

$15,715 ………. 3.5% Down FHA Financing

4.31% …………… Mortgage Interest Rate

$433,285 ………. 30-Year Mortgage

$126,492 ………. Income Requirement

$2,147 ………. Monthly Mortgage Payment

$389 ………. Property Tax (@1.04%)

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

$94 ………. Homeowners Insurance (@ 0.25%)

$498 ………. Private Mortgage Insurance

$140 ………. Homeowners Association Fees

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

$3,268 ………. Monthly Cash Outlays

-$340 ………. Tax Savings (% of Interest and Property Tax)

-$591 ………. Equity Hidden in Payment (Amortization)

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

$76 ………. Maintenance and Replacement Reserves

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

$2,437 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$4,490 ………. Furnishing and Move In @1%

$4,490 ………. Closing Costs @1%

$4,333 ………… Interest Points @1% of Loan

$15,715 ………. Down Payment

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

$29,028 ………. Total Cash Costs

$37,300 ………… Emergency Cash Reserves

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

$66,328 ………. Total Savings Needed

——————————————————————————————————————————————————-

A growing chorus of commenters are recognizing that allowing the free market to work will restore balance to the housing market.

Irvine Home Address … 28 TAQUITZ #36 Irvine, CA 92602

Resale Home Price …… $543,700

Swimming in the deep and trying to keep from turning blue,

Danger, danger, hoping not to drown

(Somebody get me out of here)

Makes me wanna die,

I've got the worst hangover from you

Hey Monday — Hangover

Debt is the hangover from the big housing party of the 00s. Like a cloud of pestilence lingering over the markets, the excessive debts borrowers took on during the bubble are making the decade after a time of suffering and borrower's remorse. Unfortunately, nobody wants to take the foreclosure medicine necessary to clear the air.

Regular readers of the IHB will find no surprises in the op-ed piece that follows, but the clear-headed logic of this writing is difficult to find in the mainstream media.

A free-market fix to the nation's housing hangover

The nation's mortgage hangover is particularly bad in the Golden State. It's time to let the free market fix the problem.

By Nicole Gelinas — July 31, 2011

There's a reason California hasn't seen as much of an economic recovery as some states: It has a serious debt problem.

The nation's mortgage hangover is particularly bad in the Golden State. From 2000 to mid-2006, home prices across the nation doubled, outpacing inflation six times. In the Los Angeles area, things were much more extreme: Home prices nearly tripled. Prices in San Diego and San Francisco beat the nation too. And even though home prices have now plummeted, much of the debt that funded the bubble remains and is still hampering the economy.

The crisis has not affected all states equally. Some parts of the country have a lot of homeowners who owe more than their houses are worth, but they also had far lower home prices at the height of the bubble, so the amount each borrower owes is relatively low. In other places, such as New York, fewer homeowners are “underwater.” But because housing costs are high, these homeowners each owe a lot.

California ranks in the top five of both categories. Nearly a third of California homeowners with mortgages — 2.1 million families — owe more than their homes are worth, according to CoreLogic. And each of those borrowers is underwater by an average of about $93,000.

Only a deep and painful crash with a very slow recovery will purge the kool aid from the California housing market. The devastation here is truly remarkable, and the foolishness of both borrowers and lenders is just as amazing..

This all adds up to $196 billion in dead-weight debt in California that isn't backed by property value. If home prices were to fall by an additional 5% — not an unlikely scenario — that figure would rise to $225 billion.

It isn't hard to see why lenders have embarked on the amend-extend-pretend dance. There isn't enough money in our banking system to recognize the losses in California alone.

To put the numbers in perspective: $200 billion is more than twice the $79 billion in general obligation bond debt that Californians owe. State bonds, though, generally pay for something useful, like road repairs. Dead mortgage debt doesn't pay for anything but a forehead-slapping “what were we thinking?“

LOL! That is one of the best statments of the situation I have read in a while.

Mortgage debt is nothing but a drain on the California economy. This “investment” produces nothing of value, but the flow of funds out of California does serve to reduce demand for goods and services and keep the economy down.

It would cost California's underwater homeowners more than $12 billion annually over 30 years to pay off this debt, even at today's super-low interest rates. That's money that people can't save for retirement or their kids' education, or can't put into businesses to create jobs.

We are now Japan. Banks can't afford the write down the bad debts, so we let them fake it, and borrowers can't afford to pay down the debts without austerity in every other aspect of daily life. The result will be years of poor economic growth caused by weak consumer spending.

No magic wand can make all this debt go away, nor should it. Some people have good reasons for paying debt on bubble-era valuations.

They have reasons, but they aren't necessarily good reasons with basis in reality.

They like their houses, or they think it would be a moral failing to leave.

That is changing. Strategic mortgage default has become common and accepted in 2011.

Maybe they figure house prices will regain bubble-era heights in less time than it would take to repair credit scores after defaulting.

The double-dip will remove this form of denial.

For people who aren't sure, though, it's past time for Washington to stop prolonging the suffering that comes with uncertainty. How? By letting the free market work.

Hallelujah! Fix the Housing Market: Let Home Prices Fall.

Washington has attempted to intervene since the start of the crisis, but the interventions have only prolonged the pain. And elected officials have been reluctant to do the one thing that would make a difference: forcing lenders to accept responsibility for their bad lending practices.

In 2008 Washington relaxed accounting rules which allowed lenders to mark their holdings to fantasy prices. Lenders embarked on the amend-extend-pretend dance and sought ways to shift the losses to taxpayers and the federal reserve.

Take the 2009 home buyer tax credit, which dangled an $8,000 credit to first-time home buyers. The bust had just exposed the consequences of reckless borrowing, so what did Washington do? It encouraged more people to take on debt to buy homes that were still overvalued, and encouraged the banks to fund that indebtedness.

Bear rally buyers paid $30,000 to $40,000 more for properties in order to obtain a $8,000 tax credit. Now these buyers are underwater and trapped in their homes. I advised buyers against purchasing during this time period despite the constant bottom-calling from bulls. Renters who headed my advice are happy today.

And let's look at the Federal Reserve Board's actions. By keeping interest rates at close to zero percent since 2008, the Fed has allowed banks to borrow nearly for free. All that cheap money has kept banks from having to cut their losses by either seizing and selling off properties that are underwater or reducing loan amounts so that people can stay in their homes. Instead, they have strung out their bad loans. But that can't go on forever.

Actually, banks have been writing down their debts slowly and methodically. At the rate they are going, it will take another decade to write down the bad debts unless house prices rise by magic — or brute force of printed money.

Another Washington program, the Home Affordable Modification Program, was supposed to encourage banks to modify loans for underwater homeowners. But the modifications that lenders offered seldom addressed the problem. Many offers involved extending teaser interest rates, or tacking on defaulted amounts to the end of a mortgage's life.

Loan modifications are Option ARMs by another name. We all know how well the Option ARM worked out the first time, so there is little reason to believe loan modification programs will fare any better. The real purpose of these programs is to buy time for the banks and placate voters who want to believe Washington is trying to cure their self-inflicted wounds.

Washington has not used its leverage to push lenders to write down the amount owed. Instead, the biggest beneficiaries of Washington's modification program have been mortgage “servicers,” the folks who handle paperwork for lenders to modify loans.

To see how bizarre the government's strategy is, consider this: Recently, federal regulators exacted a $108-million settlement from Countrywide, once the nation's largest mortgage lender. The money is because Countrywide, now owned by Bank of America, has behaved incompetently, at best, in servicing defaulted mortgages.

Yet over the last year, through the Home Affordable Modification Program, federal taxpayers have spent nearly $132 million in “incentive payments” to Countrywide and its investors and borrowers to reward the company for its superficial mortgage adjustments.

The government is finding any way it can to funnel money to the banks to keep them solvent. This practice will likely continue until banks are solvent again.

The Federal Housing Administration too has done its part to keep the bubble inflated, nearly doubling the size of mortgages eligible for a government-insured lending program, to $729,750, up from $417,000, starting in the fall of 2008.

This move is the only thing which sustained the housing market in coastal California since 2008. There was no jumbo loan market, and without this move, transaction volume would have fallen to near zero, and prices would have crashed hard. Now that the conforming limit is coming down and the jumbo market is at least present, house prices will need to adjust to the new equilibrium of fewer buyers using more expensive financing. With all the squatters in high-end homes who need to be foreclosed on, the coastal markets are the most at risk.

People can put as little as 3.5% down for such loans, meaning that a slim decrease in house prices traps them underwater too.

It's time to end these market-distorting charades. If President Obama won't say so, one of his White House rivals should seize the moment.

No politician is going to enthusiastically embrace lower house prices and the pain that will entail. They have no choice but to allow it to happen, but none of them will encourage it if they want to get elected.

House prices need to find their lows. That would give buyers confidence to jump back in at prices they could afford without sacrificing their futures to debt. To help prices find their new normal,

So far buyers have been willing to sacrifice their futures to debt. It is a way of life in California most believe they can overcome by taking on even more debt.

banks need to modify loans by reducing the amount owed.

No, they don't. No principal reduction program works without serious moral hazard issues.

When that doesn't make sense, banks should foreclose on delinquent owners promptly and legally. The current high number of bad loans in limbo guarantees economic chaos.

Nicole Gelinas is a contributing editor to the Manhattan Institute's City Journal.

Yes, foreclosures are essential to the economic recovery.

A retail flip

The IHB had its beginnings in September of 2006 profiling retail flips gone bad. By early 2007, the flipper who paid retail prices and attempted to sell quickly for a profit disappeared from the market.

Retailing flipping is very hard because it's very difficult to buy a property far enough under value to obtain a margin. It's hard when buying wholesale at the auction.

This is the first retail flip I have seen in over four years. Given the razor thin margins and the double-dip in home prices, I doubt this seller will pull it off.

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This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707

949.769.1599

sales@idealhomebrokers.com

Irvine House Address … 28 TAQUITZ #36 Irvine, CA 92602

Resale House Price …… $543,700

Beds: 3

Baths: 3

Sq. Ft.: 1826

$298/SF

Property Type: Residential, Condominium

Style: Two Level, Mediterranean

Year Built: 2002

Community: Northpark

County: Orange

MLS#: P789348

Source: SoCalMLS

Status: Active

On Redfin: 12 days

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* * * REDUCED * * * JUST REMODELED AND UPDATED MONTICELLO 3/3 UNIT IN THE VILLAGE OF NORTHPARK SQUARE. REGULAR SALE!! NO WAITING!!! MOTIVATED SELLER!! GREAT LOCATION. .. NO ONE ABOVE OR BELOW. HAS A ONE BEDROOM AND FULL BATHROOM ON THE MAIN FLOOR. MAIN BATHROOM JUST UPDATED WITH NEW LIGHTS, NEW BRONZE FAUCETS, AND NEW MIRRORS. OPEN AND SPACIOUS KITCHEN WITH CENTER ISLAND, BREAKFAST COUNTER, ALL WITH NEW GRANITE COUNTER TOP, NEW BRONZE FAUCETS, AND ALL NEW STAINLESS APPLIANCES. MASTER BEDROOM BOASTS A SPACIOUS WALK-IN CLOSET AND OVERSIZED SOAKING TUB WITH A SEPARATE SHOWER UNIT, WITH ALL NEW LIGHTS AND BRONZE FAUCETS. FIREPLACE IN THE LIVINGROOM. NEW HARDWOOD/LAMINATE FLOORING. CROWN MOLDING. NEW ELECTRICAL LIGHT FIXTURES. NEW DESIGNER PAINT. 2-CAR ATTACHED GARAGE WITH DRIVEWAY AND DIRECT ACCESS. WALKING DISTANCE TO BECKMAN HIGH. COMMUNITY AMENITIES INCLUDE THREE PARKS, JUNIOR OLYMPIC POOL, BBQ AND PINIC AREAS, BASKETBALL COURT, TOT LOT. .. .

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Proprietary IHB commentary and analysis

Resale Home Price …… $538,800

House Purchase Price … $481,000

House Purchase Date …. 6/27/2011

Net Gain (Loss) ………. $25,472

Percent Change ………. 5.3%

Annual Appreciation … 70.1%

Cost of Home Ownership

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$538,800 ………. Asking Price

$107,760 ………. 20% Down Conventional

4.53% …………… Mortgage Interest Rate

$431,040 ………. 30-Year Mortgage

$93,930 ………. Income Requirement

$2,192 ………. Monthly Mortgage Payment

$467 ………. Property Tax (@1.04%)

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

$112 ………. Homeowners Insurance (@ 0.25%)

$0 ………. Private Mortgage Insurance

$294 ………. Homeowners Association Fees

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

$3,115 ………. Monthly Cash Outlays

-$366 ………. Tax Savings (% of Interest and Property Tax)

-$565 ………. Equity Hidden in Payment (Amortization)

$181 ………. Lost Income to Down Payment (net of taxes)

$87 ………. Maintenance and Replacement Reserves

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

$2,453 ………. Monthly Cost of Ownership

Cash Acquisition Demands

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$5,388 ………. Furnishing and Move In @1%

$5,388 ………. Closing Costs @1%

$4,310 ………… Interest Points @1% of Loan

$107,760 ………. Down Payment

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

$122,846 ………. Total Cash Costs

$37,500 ………… Emergency Cash Reserves

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

$160,346 ………. Total Savings Needed

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Loan owners who shed their debts are being targeted by marketers who recognize this group now has greater disposable income, and they remain committed to repaying consumer debt.

Irvine Home Address … 10 LEDA Irvine, CA 92604

Resale Home Price …… $449,900

My sister got lucky, married a yuppie

Took him for all he was worth

Now she's a swinger dating a singer

I can't decide which is worse

But not me baby, I've got you to save me

Oh yer so bad, best thing I ever had

In a world gone mad, yer so bad

Tom Petty and the Heartbreakers — Yer So Bad

Lenders want to portray strategic defaulters as unreliable deadbeats and frighten by claiming they will never get another loan. The truth is that strategic defaulters are tomorrow's new business. In the short term, these former borrowers will have more disposable income as their debt service payments are eliminated. In the long term, this group will be targets for lenders looking to grow their businesses again. The cycle will repeat.

I have long maintained the economy will not recover until the excess debt of the housing bubble is purged. I noted in Foreclosures are essential to the economic recovery:

As long as the debt on real estate is excessive and capital is tied up in non-performing assets, the economy will suffer. It's really that simple. The solution is equally simple: foreclose on delinquent borrowers wiping out the debt and extract the remaining capital value. With the excess debt removed, borrowers can use their wage income to buy goods and services rather than giving it to the bank. When the mis-allocated capital is returned to the market, new investment will be spurred in areas where capital is most needed. Right now, we don't need more real estate.

Lower debt service obligations create more disposable income. During the housing bubble, debt expansion created disposable income, but with that stimulus gone for the foreseeable future, people are going to have to buy goods and services with their wage income — the way it's supposed to be.

Strategic Defaulters: Your Strange and Growing New Market Segment

High-Income Earners Move From Owning to Renting. This Can't Be Good

[Why? Why is owning superior to renting? The HELOC booty?]

By: Matt Carmichael — Published: June 27, 2011

When Tracy Bremmer, director of decision sciences at Experian, talks about mortgage defaults, she has more than reams of data behind her. She has personal experience. She tell a story, embellished slightly but still representative, of a “neighbor” who bought their house near the height of the boom only to see it lose 40% of its value, plunging their mortgage so far underwater it would take years to surface. Then they noticed the house across the street from them for sale for roughly half of what they paid for theirs. So they bought it, and just stopped paying their original mortgage.

Yes, that story is fictitious. Buy-and-bail was common during the 90s, but lenders cracked down on the practice early in this bust by requiring the borrower to qualify to make payments on both properties. There has been very little buy-and-bail this time around.

This family is semi-fictitious but is not alone. Ethics, morality and possible straight-up savvy aside, we started thinking about these “strategic defaulters” as a newly trending consumer segment, as they tend to become a strange new class of renters:

Data being released later today from Experian will show that in the first half of 2010, an estimated 275,000 people just walked away from mortgages they could afford to keep paying because they had become such awful investments. That adds up to roughly 17% of defaulters. While that figure is down 35% from the first half of 2009, as evidence of a double-dip housing crash mounts, “we expect the incidence of strategic defaulting to go up,” said Ms. Bremmer.

The double-dip will almost certainly bring about more strategic default. Many people who will strategically default over the next few years delayed their defaults in 2009 and 2010 due to the bear rally. This group believed house prices were coming back, and their denial gave them false hope of future equity. As they realize their shortest path to home equity is through strategic default, many will opt to quit paying their mortgages.

Estimates of the number of mortgages under water in the U.S. hover just over 1 in 4 but that could jump to half in the coming years. Recent data from Corelogic suggests that almost 10% of mortgages originated just last year are already in the negative equity range. The Federal Reserve shows average homeowner equity at just 38% down from 61% a decade ago. We could go on, but you get the idea. A lot of home owners are hosed.

But back to those strategic defaulters. These are no deadbeats in a traditional sense. The Experian data show that they are more likely to have had a jumbo-sized mortgage, have had excellent credit scores, have had more than one house or investment property, and have a higher than average household income. They also stay current on all their other bills. If you look at the incidence in these charts, the proportion of strategic defaulters keeps going up.

Not just are these renting-former-owners a good target market for traditional marketers looking to sell product, lenders will also come to see them as a good target for new credit. Creditors want borrowers who pay their bills. By and large, this group will. They defaulted on their mortgages because lenders gave them bad mortgages and in the process inflated the bubble which burst and put these strategic defaulters so far underwater that default was their best option. For as much as lenders would like to punish this group, they won't. They are a source of profitable new business.

They should be owning and spending like home owners. But they're not, and for up to the next seven years they might have a hard time finding a mortgage while their credit recovers. “As many strategic defaulters as there are,” said Ms. Bremmer, “there are many more people who are short-selling. Those people are renting, too.”

The short-sellers are not necessarily in as strong a financial position as the strategic defaulters, but they're still joining this new own-to-rent class.

During the foreclosure process, which can take 6 to 18 months, they will live in their house essentially for free. So they'll save for a new down payment, eventually get kicked out and rent, and fundamentally behave differently than their demographic rightly should. The list of product categories impacted by this is lengthy.

Realistically, very few will save the money for a new down payment. Most will blow it and become accustomed to an unsustainable lifestyle without a housing payment. Those that do manage to save the money will be the rare success stories. And they will also become targets for lenders trying to recoup the lost mortgage debt.

How big of a deal is this for marketers?

Each year roughly 5% of homeowners move. That number has been down the past few years and is now closer to 4%. As the housing crisis drags on, more people are going to want to move for traditional “non-market” reasons such as new jobs, better schools, kids, divorce etc. They might have been stuck in their under-water house but eventually that pressure will build, and if they aren't able to sell or even short-sell, this will seem like a more and more attractive (or perhaps only) alternative.

Many people will strategically default because they feel they must move regardless of the mortgage debt on their home. At first they will try to reason with the bank and attempt a short sale, but when those fail, they will walk.

Experian's report is aimed at helping banks identify the strategic defaulters so they can head some of this off and either press them harder to make the payments they can afford or at least start the foreclosure process more quickly on those who have no interest in ever making another payment.

In the meantime, we think it's a fascinating new segment and we're going to keep an eye on this and the marketing implications of a potential shift in our fundamental notion of what it means to be a homeowner.

Our fundamental notions of what it means to be a homeowner changed once people began to regard their homes and investments and piggy banks. Rather than being a stable foundation for family security, a house became a commodity to be bought and sold, and an ATM machine to be tapped when money is needed. This perversion of home ownership will take years to correct. The only antidote to this kool aid is a long and painful decline in house prices where the perceived investment value falls to near zero.

$232 SF in Irvine

By Irvine standards, I consider this house a relative bargain. The cost of ownership at $2,517 for an FHA buyer is near rental parity. For a conventional buyer, this property is well below rental parity.

Communities like El Camino Real with no Mello Roos and low or no HOAs are the best values in Irvine. This property has a relatively high HOA for El Camino Real as it is located in the condo development between the shopping center on Culver and the high school. Foreclosures in this development are common, and low prices abound.

With 4.31% interest rates, the low cost of ownership near rental parity will find buyer interest. Prices here may still go lower, but buyers looking to save money versus renting will help put in the bottom.

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This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707

949.769.1599

sales@idealhomebrokers.com

Irvine House Address … 10 LEDA Irvine, CA 92604

Resale House Price …… $449,900

Beds: 3

Baths: 2

Sq. Ft.: 1943

$232/SF

Property Type: Residential, Single Family

Style: Two Level, Traditional

Year Built: 1977

Community: El Camino Real

County: Orange

MLS#: S668162

Source: SoCalMLS

Status: Active

On Redfin: 8 days

——————————————————————————

* * * * The Most Popular, Spacious Family Home With Huge Family Room and Great Value For The SQ/Footage In Irvine. 3 Bedrooms & 2.5 Bathrooms, Catheral Ceilings, Wood Flooring Thru-out Downstairs, New Carpet, Fresh Paint. Large Living Rm with Fireplace, Formal Dining Rm, Kitchen with New Appliances. New Blinds and Ceiling Fans Tru-out, 2 Fireplaces NEWER ROOF, Large enclosed Backyard Facing the Greenbelt. 2 Car Attached Garage With Work Bench and Ample Storage Cabinets. * * * * Walk to 2Pool, 2Spa, 2Tennis Courts, School, Park, Library and Shopping * * * *

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Proprietary IHB commentary and analysis

Catheral Ceilings?

Resale Home Price …… $449,900

House Purchase Price … $135,000

House Purchase Date …. 12/29/1993

Net Gain (Loss) ………. $287,906

Percent Change ………. 213.3%

Annual Appreciation … 6.9%

Cost of Home Ownership

————————————————-

$449,900 ………. Asking Price

$15,747 ………. 3.5% Down FHA Financing

4.31% …………… Mortgage Interest Rate

$434,154 ………. 30-Year Mortgage

$129,638 ………. Income Requirement

$2,151 ………. Monthly Mortgage Payment

$390 ………. Property Tax (@1.04%)

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

$94 ………. Homeowners Insurance (@ 0.25%)

$499 ………. Private Mortgage Insurance

$215 ………. Homeowners Association Fees

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

$3,349 ………. Monthly Cash Outlays

-$341 ………. Tax Savings (% of Interest and Property Tax)

-$592 ………. Equity Hidden in Payment (Amortization)

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

$76 ………. Maintenance and Replacement Reserves

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

$2,517 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$4,499 ………. Furnishing and Move In @1%

$4,499 ………. Closing Costs @1%

$4,342 ………… Interest Points @1% of Loan

$15,747 ………. Down Payment

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

$29,086 ………. Total Cash Costs

$38,500 ………… Emergency Cash Reserves

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

$67,586 ………. Total Savings Needed

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