Attorneys in Nevada are being criticized for telling people to act like their neighbors and walk away from their mortgage to obtain free housing.

Irvine Home Address … 62 CONCIERTO Irvine, CA 92620

Resale Home Price …… $438,000

Way over yonder, off in the distance

Towards the mountains there in the west

These longhorn cattle, are gettin' restless

God help us all, if they stampede

Chris LeDoux — Stampede

The greatest fear lenders have concerning the herd of underwater borrowers is that loan owners may stampede to the exit. If the masses come to believe they will get years of free housing — which they will — or if loan owners believe the consequences of default are minor — which they are — or if underwater borrowers believe prices aren't coming back soon — which they aren't — then collectively the masses may all default and totally crush the banks and our banking system.

Lenders have tried everything to prevent borrowers from defaulting. First it was an appeal to morality. This strategy has failed so miserably, that I have concluded the moral issue is really on the side of borrowers. In fact, strategic default is moral imperative to prevent future housing bubbles. Lately, lenders have been resorting to terrorist tactics to prevent default. Despite its limited success, lenders will continue using these tactics as it's the only defense they have left.

Strategic default is gaining momentum, and in places like Las Vegas where most of the housing stock is inhabited by loan owners who would greatly benefit from strategic default, efforts to get the heard to stampede resonate loudly. Show the herd how they benefit financially, and you can get them to move.

Lawyers say public has misconstrued mortgage default ads

By VALERIE MILLER

LAS VEGAS BUSINESS PRESS

Posted: Jul. 29, 2011 | 2:01 a.m.

Updated: Jul. 29, 2011 | 9:48 a.m.

Their television commercials about mortgage defaults ignited a debate about ethics and financial responsibility. Now, the two Las Vegas lawyers behind the ad campaign say people are misunderstanding their message.

The Haines & Krieger TV spots advise homeowners that their friends and family are staying in their homes without paying on their mortgages, and offer to show clients how to do the same.

But George Haines and David Krieger, the lawyers who appear in those ads, say the message is not that those homeowners with the means to pay should skip out on their mortgages.

Actually, yes, the ads do tell loan owners they should skip out on their mortgages. In Las Vegas, with many loan owners 30% to 50% underwater facing payments double a comparable rental, they should strategically default.

These attorneys are being wimps and offering lawyerly evasions. If they really wanted to tell people the truth, they should stand behind their words and the implications. Most of Nevada is so far underwater they should default. It's in the best interest of their families to do so.

Rather, the commercials are offering a lifeline to people who might otherwise lose their homes through foreclosure.

“The ad campaign is geared toward empowering consumers with information they did not have,” Krieger said.

The ad wants to empower people with the information to strategically default. More power to them.

The commercials have brought business to Haines & Krieger, a law firm offering mortgage modifications, bankruptcies and short sales. But that increased business is not just from those people looking to bail on their financial responsibilities, Haines said.

“These are people who are undergoing dire circumstances and need some time in their homes to get their lives together,” he said.

They need some time in their homes? Is there some reason they couldn't spend that time in a rental? These guys should at least make their bullshit pass the giggle test.

Lenders, real estate professionals and consumer advocates have criticized the TV spots. Nasser Daneshvary, the director of the Lied Institute for Real Estate Studies at the University of Nevada, Las Vegas, worries about the devastating ripple effect of people bailing on their mortgages.

“When you dump your house, you increase the odds that your neighborhood will become blighted, or a rental community,” he said. “You are in turn damaging Clark County and the greater community.“

Egad! A rental community! The horror of it.

The blight argument is nonsense. Mr. Daneshvary is wrong on many levels. First, his contention that rental communities are blight is ridiculous. Blighted areas often are inhabited by renters paying low rents because they are undesirable and nobody wants to live there. The blight comes first, and the habitation by renters paying very little comes second. It's not the other way around.

The extension of his argument that renters lead to blight which damages the greater community is insulting to all renters. Based on his statements, I conclude he is a loan owner who probably should strategically default but doesn't have the courage to pull the trigger. If he owns in Las Vegas, he is almost certainly under water. Nearly 90% of owners are.

But the Haines & Krieger partners say their ads are simply letting distressed homeowners know they have options, and need not just sit and wait for eviction after receiving a foreclosure notice.

That is not accurate. Their ad is aimed at people who are currently paying their mortgages but considering default. The target market for this ad has not received a foreclosure notice.

“Most of our clients really can't afford their mortgages and need a modification,” Haines said. “You have people who can't afford their mortgages and can't get the lenders to negotiate with them.”

Krieger says many clients work out loan modifications and avoid foreclosure.

“We don't advocate foreclosure,” Krieger said. “It will ruin their credit.”

Short sale or foreclosure will ruin their credit, and the missed payments required to get a loan modification hurts a borrower's credit too. And the truth is strategic default consequences minor and likely to decrease.

Daneshvary is skeptical of the lawyers' explanation. Viewers, he says, are smart enough to get the point of the TV spots.

“As for the ad itself, as consumers, we know what the message is, 'Follow your neighbor by getting out of monthly payments,' ” he said.

Yes, that is exactly the point of the ad. It's unfortunate the attorneys felt they couldn't simply admit it.

Michele Johnson, president and CEO of Consumer Credit Counseling Service of Nevada and Utah, said she believes the Haines & Krieger spots are encouraging people to strategically default on their mortgages.

Yes, the ads are encouraging strategic default.

“I find it irresponsible advertising,” she said. “I think it certainly attempts to legitimize defaults.”

I'm sorry to inform Ms. Johnson, but defaults have already been legitimized. Strategic mortgage default has become common and accepted in 2011.

The number of people still living in their homes with delinquent mortgages is hard to calculate, Daneshvary adds. Because out-of-state investors bought multiple houses in Southern Nevada during the real estate boom, many foreclosed homes were never occupied full time.

However, Daneshvary estimates about 30 percent of Las Vegas Valley homes are now in some stage of loan delinquency.

A 30% delinquency rate is astonishingly high. It is reasonable given the circumstances. If a 30% delinquency rate is maintained long enough, 90% of the housing stock will turn over as the 30% in delinquency is turned over three times.

The option of strategically defaulting on your mortgage has been gaining in popularity over the last few years.

A Nevada Association of Realtors report released in January found that 23 percent of those surveyed “walked away” as part of a strategic default.

And another 77% failed to admit it… I made that up, but it is not far from the truth.

Johnson points to the damage a mortgage default does to a person's credit: About a 100-point drop in the credit score as a result of the first missed house payment, and another approximately 100 points off when the second mortgage payment is missed.

As I pointed out above, strategic default consequences minor and likely to decrease. The scare tactic on hurting a FICO score doesn't work anymore, just like the morality issue not longer holds sway.

Nonprofit services, including Consumer Credit Counseling, will help people get loan modifications for free, she said.

In response to all the criticism, Haines notes that plenty of Southern Nevadans are already staying in their homes without making payments, regardless of Haines & Krieger's commercials.

ForeclosureRadar.com, a Discovery Bay, Calif.-based tracker of distressed real estate, said recently the average number of days it takes to foreclose on a home in Nevada rose to 319 days, up from 239 days a year ago.

“Why are banks taking so long to foreclose? They don't have their ducks in a row,” Haines said. “It is a product of the banks.”

Contact reporter Valerie Miller at vmiller@lvbusinesspress.com or 702-387-5286.

The banks have their ducks in a row, they simply lack the balance sheet strength to write down all the bad debt, and if they did foreclose on everyone and put the houses for sale, they would so saturate the MLS with product the prices would get pushed back to 1970s levels while the market cleared out.

Bad luck compounded

Every house has a story. The HELOC abuse cases are interesting, but the property records reveal other stories. Today's is very sad. The peak buyers of today's featured property paid $592,000 on 5/31/2006. They couldn't have timed the peak any worse. They borrowed $422,000 and put $170,000 down. The asking price will completely wipe out the down payment. Every penny is gone.

The remaining owner of this property is a widow according to the property records. The stress of losing $170,000 and the family home is bad enough, but this woman also lost her spouse. Very sad. Unfortunately, the market does not care about this widow's problems. I hope someone pays enough for her to get out without damaging her credit as well. The $2,200 monthly cost of ownership is at or below rental parity, and even an FHA buyer's cost of ownership is only $2,800. Somebody will likely pay this price.

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

This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707

949.769.1599

sales@idealhomebrokers.com

Irvine House Address … 62 CONCIERTO Irvine, CA 92620

Resale House Price …… $438,000

Beds: 2

Baths: 2

Sq. Ft.: 1562

$280/SF

Property Type: Residential, Condominium

Style: Two Level, Spanish

Year Built: 2006

Community: Woodbury

County: Orange

MLS#: S663108

Source: SoCalMLS

Status: Active

On Redfin: 42 days

——————————————————————————

Model Perfect very affordable light and bright home located in the fabulous and highly sought after Woodbury Community in Irvine just blocks from the coveted Woodbury Elementary school, community pool, and Woodbury shopping center. 2 balconies including one off the master suite which features a private full bath, great kitchen with lots of cabinets, cozy gas fireplace in the living room, 2 car garage, and much much more!

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Proprietary IHB commentary and analysis

Resale Home Price …… $438,000

House Purchase Price … $592,000

House Purchase Date …. 5/31/2006

Net Gain (Loss) ………. ($180,280)

Percent Change ………. -30.5%

Annual Appreciation … -5.7%

Cost of Home Ownership

————————————————-

$438,000 ………. Asking Price

$87,600 ………. 20% Down Conventional

4.53% …………… Mortgage Interest Rate

$350,400 ………. 30-Year Mortgage

$76,358 ………. Income Requirement

$1,782 ………. Monthly Mortgage Payment

$380 ………. Property Tax (@1.04%)

$200 ………. Special Taxes and Levies (Mello Roos)

$91 ………. Homeowners Insurance (@ 0.25%)

$0 ………. Private Mortgage Insurance

$290 ………. Homeowners Association Fees

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

$2,743 ………. Monthly Cash Outlays

-$298 ………. Tax Savings (% of Interest and Property Tax)

-$459 ………. Equity Hidden in Payment (Amortization)

$147 ………. Lost Income to Down Payment (net of taxes)

$75 ………. Maintenance and Replacement Reserves

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

$2,208 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$4,380 ………. Furnishing and Move In @1%

$4,380 ………. Closing Costs @1%

$3,504 ………… Interest Points @1% of Loan

$87,600 ………. Down Payment

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

$99,864 ………. Total Cash Costs

$33,800 ………… Emergency Cash Reserves

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

$133,664 ………. Total Savings Needed

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

Real estate sellers that can't get their asking price often consider renting the property and waiting for better days. Now even the federal government is considering holding some if its property purchased as REO through the GSEs. Is that a good idea?

Irvine Home Address … 1 West FORTUNA Irvine, CA 92620

Resale Home Price …… $669,000

I've had choices

Since the day that I was born

There were voices

That told me right from wrong

If I had listened

No I wouldn't be here today

Living and dying

With the choices I made

George Jones — Choices

The government has choice to make with its REO. Based on past choices we have seen coming out of Washington, I suspect they will make the wrong choice, but with so much pressure to do the wrong thing, making the right choice is nearly impossible for most politicians.

Government Weighs Turning Foreclosures Into Rentals

By Nick Timiraos — July 22, 2011, 11:28 AM ET

There’s an 800-pound gorilla in the nation’s hardest-hit housing markets: hundreds of thousands of foreclosed properties are selling, and there’s four times as many potential foreclosures behind them.

The Journal writes today that one idea gaining support in Washington is an effort to pull some of those properties off the market and rent them out, either on homes owned by federal agencies or loan giants Fannie Mae and Freddie Mac.

Ordinarily, I would be appalled by this idea. Keeping houses off the market in order to keep prices too high for families to afford is abominable, particularly for the government which is supposed to help facilitate affordable housing. However, in many markets, prices are not too high for families to afford. In Las Vegas, two minimum wage workers can combine incomes to purchase a single-family detached house. Affordability is not a barrier to anyone in Las Vegas. Prices do not need to be lower there to attract families or investors.

In markets like Las Vegas, withholding inventory from the for-sale market and renting them out makes sense. In fact, in any housing market where the cost of ownership is 30% or more less than the cost of rental, these houses should be rented rather than sold. Whenever the cost of ownership and the cost of rental gets out of balance, the market is sending a signal. When owning is significantly less expensive than renting, the market is telling participants to buy. However, in Las Vegas, most of the potential buyer pool just went through foreclosure and can't buy. Therefore the imbalance between the cost of owning and the cost of renting gets worse. Under those conditions, the market is demanding more rentals.

These firms and U.S. banks currently own more than 500,000 foreclosed homes, and there’s another 2 million loans in some stage of foreclosure. The high share of distressed sales in many struggling markets is contributing to continued declines in home prices.

“Can we find a way to try and reduce that overhang or to try to provide incentives for investors to covert them?” said Federal Reserve Chairman Ben Bernanke in testimony to Congress last week.

Ben Bernanke is suggesting providing incentives for investors? I suggested the same thing last year in the post Should Government Mortgage Subsidies Be Offered to Cashflow Investors?, and I was lambasted. My argument was simple: “In housing markets where a significant number of properties are being converted from owner-occupied to rental status, there is no government program or help for this transition to occur. Without government help, prices fall far below fundamental valuations as the imbalance of supply and demand becomes extreme. The only solution is to reduce supply and increase demand. To accomplish this, I propose that the GSEs promote investor programs that reduce the cost of ownership to small investors and encourage them to keep the supply off the resale market.“

Nine months later, and Washington has finally caught up with my ideas.

Critics worry about the risk of the government as landlord. One solution: sell federally backed foreclosures to investors who would have to agree to rent them out for a to-be-determined period of time. Investors would rehab the properties, fill them with tenants, and hire a national property management firm to oversee the day-to-day landlord needs.

Supporters say while the government isn’t set up to be a landlord, neither is it any better prepared to sell thousands of foreclosed properties — something it’s already doing anyway. “Putting these homes in the hands of people who can take care of them and rent them out” would save taxpayer money, says John Burns, who runs a home-building consulting firm in Irvine, Calif.

John Burns is right. We really don't need the government to be involved in this. Real estate cashflow investors will stabilize the housing market all on their own. As I noted in that post: “The best solution does not require a subsidy. Merely eliminate the limit on the number of mortgages a cashflow investor may have, and count 75% of the rental income toward the payment. Eliminating the limit on the number of mortgages costs no money, and it allows those investors with expertise in obtaining and managing properties the ability to acquire more. By counting a portion of the rental income toward qualification, wherever the prices are low enough for cashflow investors to make a profit will quickly get bid up to the limit of available financing.

None of this costs the government anything, and the demand it creates is not artificial based on a financial subsidy that inflates prices. The GSEs are merely eliminating an artificial barrier they created. This demand would seek out the most downtrodden markets and put a floor beneath prices in those areas. Very little of that money would flow into inflated markets like Orange County because so few properties meet the criteria.”

So far, the Fannie and Freddie have disappointed institutional investors by resisting selling homes in bulk at deep discounts. Instead, foreclosures are either sold through regular retail listings or in public auctions, known as trustee or sheriff sales. Those auctions have attracted primarily mom-and-pop investors but also include hedge fund-backed debt buyers.

I hope the GSEs continue to resist giving away properties to institutional investors. Selling to small investors will increase their recovery significantly, and I don't want the competition.

Two years ago, investors increasingly scooped up cheap properties at auctions in the hopes of rehabbing and quickly reselling them for a profit. But declining home values — and increased competition from investors — has made that much harder.

The margins at auction are in decline. In fact, over the last month or so, there has been far too much money chasing too few properties. Lenders have been pushing fewer properties through the auction sites because they are oversaturating the MLS, but the lure of easy money has drawn dumb money to the auction site where prices are being bid up to near retail levels on some properties. Auction markets have ebbs and flows, but the increasing competition has reached a point where many will overpay and lose money never to return.

Meanwhile, the discounts for foreclosed properties in some markets are so attractive “that it looks like the cash flow investors are getting [on rentals] is awfully good,” says Thomas Lawler, an independent housing economist in Leesburg, Va.

One sign that investor demand has picked up for cheap properties that can be rented: in Phoenix, the number of homes selling below $100,000 was up 41% from one year ago in May, while all other sales were down 11.3%, according to DataQuick, a real-estate data firm.

“It doesn’t take too long as an investor to recognize the opportunity: home prices are less, but rents are more,” says Eric Peterson, a former homebuilder and co-founder of Praxis Capital, which has launched a $10 million fund focused on renting out foreclosures. Once prices stabilize and begin rising in a few years, “we’ll be holding a fair amount of inventory, and we’ll be ready to sell.”

The idea has won backing from a number of influential private sector minds. Rental programs could “solve a couple of policy problems with one solution” by also extending qualified tenants an option to one day purchase the homes, said mortgage-bond pioneer Lewis Ranieri in a recent paper with Kenneth Rosen, a housing economist at the University of California at Berkeley.

So where should smart investors look for these rental home deals?

Best cities to invest in rental homes

In Las Vegas, investors willing to take a gamble could win big

Amy Hoak — July 11, 2011, 5:53 p.m. EDT

HomeVestors of America and Local Market Monitor released its list of best markets to invest in rental property, and Las Vegas came out on top. HomeVestors is a real-estate investment company; Local Market Monitor is a forecaster of real-estate markets. Read more: Why investing in rentals could be a good move.

In Las Vegas, home prices are down 45% since their peak in 2006, according to the news release from the companies. Even better for investors: Many people who work in the casino industry are renters.

That means investors can buy homes at low prices and have a sizable pool of renters from which to choose.

Unemployment is a problem in Las Vegas, and rental vacancies are also a problem. Personally, I won't buy any properties with less than a $950 monthly rent, and I won't buy condos. Lower priced condos compete with the apartment complexes which offer better amenities. If and investor has a $1,100 a month single-family detached home, she can always lower the rent $50 to $100 and find a suitable renter. If an investor has a $700 per month condo, lowering the rent will not guarantee finding a renter. For that reason, I only consider detached homes with rents over $950 per month.

“What we’re looking for is how do you rank, based on the return that you get on the rentals, counterbalanced with the risk and what the price is,” said David Hicks, the co-president of HomeVestors, the company whose slogan has long been, “We buy ugly houses.”

The return could be short-term (the cash flow attained by renting out the property), long-term (the appreciation of the property over time) or both, he said. The risks include future potential home-price drops in the market.

What makes Las Vegas a unique market is its potential for both immediate cashflow and long-term appreciation. The current cashflow is obvious, but the long-term appreciation potential is based on the idea that prices are far below their long-term trendline, and once the problems with both supply and demand caused by the housing bubble have worked through the system, prices will spring back up to their long-term trendline.

Affordability is like water in a pool, and lender supply is like pushing a basketball below the waterline. Once the pressure abates, the ball pops back up to the surface. In neighborhoods where prices are still inflated above the waterline, prices don't pop back up.

The report looked particularly at single-family home rentals; about 14% of single-family homes in the country are maintained as rental properties, according to the news release. Renting a single-family home can be especially attractive to families who have lost their homes to foreclosure, Hicks said. Once parents have had a backyard for their children to play in, they often don’t want to live in an apartment home, he said.

That is another reason I like single-family detached homes over condos.

Traditionally, HomeVestors franchisees buy only about 12% of houses with the intention of fixing them for rental. A greater percentage of homes are bought to renovate and sell right away, Hicks said.

But that’s changing, and more are looking for income properties, he said.

“We see a lot of investors stung by the stock market over the past few years,” and now they’re turning to real estate, Hicks said. “Even counting the past few years, if you take long-term investing in properties and land, the return on that is some of the best investments people have ever had.”

The calculations in the report assumed markets’ three-year home-price forecasts and gross rents to assign them a risk-return premium. Las Vegas had a 4.7% risk-return premium, relative to the national average; San Francisco, which ranks 100 on the list, had a -2.4% risk-return premium, according to the report. …

Orange County would probably perform similarly to San Francisco as prices remain elevated in both markets. Orange County has poor cashflow and poor long-term potential for appreciation based on its current valuation. One can argue Orange County will experience superior income growth and thereby it will have superior appreciation. That is possible. California kool aid certainly is tasty. I am in no hurry to deploy my money here.

Rental property fund

In the next few months, I will be forming a fund to buy-and-hold cashflow properties in Las Vegas. Now that I know the market and have the team in place to handle the workload, I am prepared to deliver properties. For those willing to take a gamble on Las Vegas, stay tuned.

Put to the bank at the peak

The owners of today's featured property owned it for longer than my records go back. Based on their property taxes, I have inferred they paid about $200,000 about 25 years ago. You would think the house would be paid off by now, but this is Irvine not Indianapolis.

In a perfectly timed refinance, this couple took out a $600,000 loan on 9/16/2006, and followed it with a $227,000 HELOC on 3/27/2007. If they maxed out the HELOC, they obtained full resale value without having to sell or leave their house.

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

This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707

949.769.1599

sales@idealhomebrokers.com

Irvine House Address … 1 West FORTUNA Irvine, CA 92620

Resale House Price …… $669,000

Beds: 5

Baths: 4

Sq. Ft.: 2750

$243/SF

Property Type: Residential, Single Family

Style: Two Level, Other

Year Built: 1977

Community: Northwood

County: Orange

MLS#: S664891

Source: SoCalMLS

Status: Active

On Redfin: 21 days

——————————————————————————

End of Cul De Sac, 5 bedrooms, boasting 2 master suites w/ Own Full Bath. This is a Great area for a large Family. Side to a Large Green Belt, has Extra Long Driveway, Custom Built-ins, Custom Oak Balusters & Handrails, Custom Molding, Ceiling Fans, Tile Floors, Spacious Kitchen w/ Newer Appliances & Pantry, Large Family Room w/ Entertainment Unit, Remodeled Fireplace & Custom Windows, Indoor Laundry, Private Backyard, Newer Title Roof, Walk to Award Winning Schools Including Northwood High, Walk to Great Association Amenities-Pools, Spa, Tennis courts, Clubhouse, Tot Lots, BBQ's. Close to Hicks Canyon Trail, Parks & shopping. Low Tax Rate, NO MELLO ROOS, LOW Association.

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Proprietary IHB commentary and analysis

Since this property is in a neighborhood with no Mello Roos and a low association fee, the current price makes this property at or below rental parity. I challenge anyone to find a comparable rental for less than $2,700.

Resale Home Price …… $669,000

House Purchase Price … $200,000

House Purchase Date …. 1/1/1986

Net Gain (Loss) ………. $428,860

Percent Change ………. 214.4%

Annual Appreciation … 4.8%

Cost of Home Ownership

————————————————-

$669,000 ………. Asking Price

$133,800 ………. 20% Down Conventional

4.48% …………… Mortgage Interest Rate

$535,200 ………. 30-Year Mortgage

$115,947 ………. Income Requirement

$2,705 ………. Monthly Mortgage Payment

$580 ………. Property Tax (@1.04%)

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

$139 ………. Homeowners Insurance (@ 0.25%)

$0 ………. Private Mortgage Insurance

$83 ………. Homeowners Association Fees

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

$3,508 ………. Monthly Cash Outlays

-$451 ………. Tax Savings (% of Interest and Property Tax)

-$707 ………. Equity Hidden in Payment (Amortization)

$222 ………. Lost Income to Down Payment (net of taxes)

$104 ………. Maintenance and Replacement Reserves

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

$2,674 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$6,690 ………. Furnishing and Move In @1%

$6,690 ………. Closing Costs @1%

$5,352 ………… Interest Points @1% of Loan

$133,800 ………. Down Payment

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

$152,532 ………. Total Cash Costs

$40,900 ………… Emergency Cash Reserves

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

$193,432 ………. Total Savings Needed

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

In an effort to ease the saturation on the MLS, lenders have slowed the rate at which they are filing default notices and moving on foreclosures. The result is more shadow inventory, more delinquent mortgage squatting, and another delay for the hoped-for housing market recovery.

Irvine Home Address … 14951 GROVEVIEW Ln Irvine, CA 92604

Resale Home Price …… $419,900

I fought it for a long time now

While drowning in a river of denial

I washed up, fixed up, picked up all my broken things

'Cause you left me, police tape, chalk line

Tequila shots in the dark scene of the crime

Suburban living with a feeling that I'm giving up

everything for you

Oh, oh, oh, how was I supposed to know

That you were oh, oh, over me

I think that I should go (GO!)

Something's telling me to leave but I won't

'Cause I'm damned if I do ya, damned if I don't

All Time Low — Damned If I Do Ya (Damned If I Don't)

Since mid 2008, foreclosure statistics have been largely meaningless. Prior to 2008, defaults were tethered to delinquencies, and foreclosures promptly followed defaults. Since the amend-extend-pretend dance got started, delinquencies rose for another two years while default notices and foreclosure auctions happened at whatever rate the banks felt was appropriate at any given time. Right now, with prices falling in nearly every market, lenders are turning off the flow of properties in an effort to manage MLS inventories and stop prices from falling any further.

In the short term, it is probably the right policy for the lending cartel to operate under. If the price drops continue unabated, more borrowers will strategically default. Of course, as banks stop issuing notices of default and stop foreclosing on delinquent borrowers, they add to their shadow inventory and encourage strategic default because borrowers know they can get years of free housing. Lenders really are between a rock and a hard place.

Since this is a cartel, and since the GSEs are not playing along, each lender that delays foreclosure will ultimately recover less from the property than if they foreclose now. Lenders still seem to be suffering from the delusion that prices will come back and they will get more if they wait. It isn't going to happen that way. The overhang of inventory will be with us for years, and each disposition will prevent any meaningful appreciation. For each cartel member the choice is to sell now or sell later and get less. Under those circumstances, the incentive to cheat is strong, and the reward for withholding inventory is only more denial.

The number of Californians entering foreclosure is at lowest level since 2007

Notices of default against California homes dropped 17% in the second quarter from the first quarter and 19.2% from the second quarter of 2010. Banks repossessed 10.9% fewer homes than a year ago and 1.4% fewer than in the first quarter.

July 20, 2011 — By Alejandro Lazo, Los Angeles Times

The number of Californians entering foreclosure dropped steeply in the second quarter to the lowest level since 2007, a sign the foreclosure crisis in the Golden State could be easing as the housing market stabilizes and regulators increase scrutiny of lenders.

No, it is not a sign the foreclosure crisis is easing. First, there is no foreclosure crisis. There is the foreclosure cure which ailing lenders are avoiding. Second, a decline in foreclosures is not a sign lenders are running out of people to foreclose on. It isn't until the shadow inventory is gone that we can talk reasonably about the foreclosure cure having taken its effect.

Notices of default filed against California homes dropped 17% from the previous quarter and 19.2% from the same period last year, according to San Diego research firm DataQuick. A total of 56,633 homes received a notice of default, which is the first formal step in the foreclosure process.

DataQuick President John Walsh attributed the second-quarter declines to a steadier housing market.

The more I read John Walsh's statements, the less credibility he has. He is a data provider not a data analyst. In short, he is a clueless shill who really shouldn't be quoted for stories like this.

“Homeowner distress spreads fastest when home price declines are steepest,” Walsh said in a statement. “And it now appears likely that, barring some new economic shock, the worst of the price declines are behind us.”

Walsh is calling the bottom? Again? One of these times he will be right, depending on how many times he makes this prediction in the next two or three years before we finally reach a durable bottom.

The number of homes taken back by banks also fell in the second quarter. A total of 42,465 homes were repossessed during those three months, a 10.9% decline from a year earlier and a 1.4% drop from the first quarter. On average, California homes took 10 months to wind their way through foreclosure, up from 9.1 months in the previous quarter and the year-earlier period.

Foreclosures have slowed nationally partly because homeowners are challenging them in court and the nation's biggest banks are negotiating a settlement with regulators over faulty repossession practices.

Some experts believe that if a settlement is reached, foreclosures could surge again once banks overhaul their practices and compensate borrowers. But unlike states where the foreclosure system is overseen by the court system, California has seen a steady decline in default notice filings for more than two years with the housing market recovering faster than other hard-hit regions.

Since we do have non-judicial foreclosures, our system has the potential to process foreclosures quicker; however, that has nothing whatsoever to do with the decline in default filings. Banks are managing inventory, pure and simple.

Still, a steady flow of distressed properties could continue for years, said Robert Hooker, executive director of the Inland Empire Economic Recovery Corp., a San Bernardino nonprofit that buys, rehabilitates and sells foreclosed homes.

“This current decline is probably short-lived because the banks are readjusting themselves,” Hooker said. “They still have a tremendous amount of shadow inventory, and they don't want to saturate the market.“

Finally, half way through the article we hear from someone who knows what they are talking about.

And Bruce Mirken, a spokesman for the Greenlining Institute in Berkeley, said many troubled homeowners still remain in serious need of government assistance.

“It's way too early to pop the champagne corks,” he said. “Dropping back to 2007 levels is a positive trend, but foreclosures in 2007 were quite high by historical standards — more than double the rate in preceding years. There are many reasons to doubt whether the housing market has really turned the corner, and the need for serious foreclosure relief and principal reduction has absolutely not gone away.“

No, there is no need for “serious foreclosure relief and principal reduction.”

I have an idea. For everyone who thinks loan owners need principal reduction, why don't they go knock on doors on their own street until they find an underwater loan owner not making their payments. It shouldn't take more than ten attempts to find one. Once a delinquent mortgage squatter in need of principal reduction is found, they should write them a personal check and tell them to send it to the bank. It's grass-roots political activism at its best. I can support that initiative because I don't have to see any of my tax money going to support someone else's entitlements.

The second quarter marked the lowest level of default notices received by California homeowners since the second quarter of 2007. That was when the subprime mortgage crisis was pushing the nation into the throes of a credit crunch that would end in financial crisis and the most severe recession since the Great Depression.

Last quarter's numbers were also well below the record 133,431 default notices filed in the first quarter of 2009, when home prices were still dropping sharply.

Homeowners in more affluent, coastal counties were less likely to enter foreclosure than those in other parts of the state. Mortgages on properties in San Francisco, Marin and San Mateo counties were the least likely to go into default, while those in Kings, Sutter and Yuba counties were the most likely, DataQuick reported.

Loan owners in coastal California are much more likely to be admitted to shadow inventory than borrowers in other parts of the state. Lenders don't want to take the losses that are still forthcoming. From the article, one could surmise that coastal California is more prosperous and less subject to mortgage delinquency. Nothing could be further from the truth.

In one sign that the most beaten-down areas of the state might be getting some relief, the default-notice decline was greatest in the state's least expensive communities, where foreclosures had been the most prevalent, DataQuick said.

Most loans receiving default notices last quarter were made in 2005 through 2007, the tail end of the bubble, indicating that the most distressed homeowners in the state bought their properties during the run-up in home prices and during the height of the shoddy lending practices that pervaded the mortgage industry.

The most active lending institutions foreclosing on Californians were JPMorgan Chase & Co., Wells Fargo & Co. and Bank of America Corp. Although 56,633 default notices were filed in the second quarter, they involved 55,153 homes because some borrowers were in default on multiple loans.

alejandro.lazo@latimes.com

Lender filings are down everywhere. Someday, not today, lender filings will be down because borrowers are not delinquent on their loans. Then, and only then, will the housing market's supply problems be solved. Unfortunately, we won't reach the point of zero shadow inventory and low delinquency rates for several more years.

$419,900 for 800 square feet

Being a flipper of auction properties, I was intrigued by today's featured property. A forty year old 800SF property in Las Vegas would probably sell for $31,000 at auction. Here in Irvine, it fetches $311,000.

The flippers did a very tasteful job on the renovation, and they likely spent a large sum of money on their 800SF gem. It isn't 40 years old inside anymore.

What do you think? Was this flip a good idea? Will they get $419,900 for this?

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

This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707

949.769.1599

sales@idealhomebrokers.com

Irvine House Address … 14951 GROVEVIEW Ln Irvine, CA 92604

Resale House Price …… $419,900

Beds: 2

Baths: 1

Sq. Ft.: 800

$525/SF

Property Type: Residential, Single Family

Style: One Level, Traditional

Year Built: 1971

Community: El Camino Real

County: Orange

MLS#: S666630

Source: SoCalMLS

Status: Active

On Redfin: 7 days

——————————————————————————

IF SPECIAL IS IMPORTANT, YOU SHOULD TAKE THE TIME TO VIEW THIS TOTALLY REFRESHED LOVELY SINGLE STORY FAMILY HOME. No Mello Roos, No Association Dues, just a short walk to a distinguished elementary school, a blue ribbon middle school, a high school and a community park with basketball court. This fantastic remodeled home is complete with new kitchen cabinets including a large island and buffet counter with beautiful granite counter tops, all new stainless steel appliances, nice distressed look flooring thruout with new carpet in the bedrooms. Also included is a serene outdoor living area that flows right into the house thru french doors. Last but not least a beautiful relaxing bathroom that you wont want to every come out of. All of the beautiful decorator touches will be well beyond your expectations. Dont forget to take a alook at the clubhouse for the kids in the backyard.

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Proprietary IHB commentary and analysis

thruout? alook? IF SPECIAL IS IMPORTANT? WTF? No, I want a house that isn't special. Special is not important to me.

a beautiful relaxing bathroom that you wont want to every come out of… Sorry, but I will always want to get out of the bathroom.

Did they count the clubhouse in order to ge to 800SF? This house puts a new meaning to cozy.

Resale Home Price …… $419,900

House Purchase Price … $311,000

House Purchase Date …. 5/20/2011

Net Gain (Loss) ………. $83,706

Percent Change ………. 26.9%

Annual Appreciation … 126.3%

Cost of Home Ownership

————————————————-

$419,900 ………. Asking Price

$14,697 ………. 3.5% Down FHA Financing

4.48% …………… Mortgage Interest Rate

$405,204 ………. 30-Year Mortgage

$87,784 ………. Income Requirement

$2,048 ………. Monthly Mortgage Payment

$364 ………. Property Tax (@1.04%)

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

$87 ………. Homeowners Insurance (@ 0.25%)

$466 ………. Private Mortgage Insurance

$0 ………. Homeowners Association Fees

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

$2,966 ………. Monthly Cash Outlays

-$328 ………. Tax Savings (% of Interest and Property Tax)

-$536 ………. Equity Hidden in Payment (Amortization)

$24 ………. Lost Income to Down Payment (net of taxes)

$125 ………. Maintenance and Replacement Reserves

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

$2,251 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$4,199 ………. Furnishing and Move In @1%

$4,199 ………. Closing Costs @1%

$4,052 ………… Interest Points @1% of Loan

$14,697 ………. Down Payment

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

$27,147 ………. Total Cash Costs

$34,500 ………… Emergency Cash Reserves

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

$61,647 ………. Total Savings Needed

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

With down payment requirements going up, many Americans do not have the required savings to make a down payment on a house. Where will this money come from?

Irvine Home Address … 35 WONDERLAND Irvine, CA 92620

Resale Home Price …… $559,800

I'm comin' up for air so I can

Check myself again and I stand

Proven to the man but sheltered

Confidence we tend to (shove in)

Unexpected hunger traps me

Tantric — Down and Out

When the housing market finally bottoms, many will look at the pieces of their shattered lives and wonder how they will ever own a home again. Gone are the days of easy financing and zero money down mortgages.

Lenders are now requiring 20% down. First mortgages with lower down payments are still available, but between the higher interest rate and the private mortgage insurance, the costs of these nonconforming products is prohibitively high. To make matters worse, lenders who lost billions on second mortgages are unwilling to extend bridge financing for those who need it to buy a home.

Many people still hunger for home ownership, particularly those who still mistakenly see it as a path to riches or unlimited HELOC spending money. However, desire is not demand, and despite the longing for home ownership, those who do not have the necessary savings or a sufficient credit score do not contribute to demand. Many will abandon their dreams of home ownership, but many more will carry on.

Down Payment on Home Out of Reach for Half of U.S., Poll Finds

Jun. 3 2010 – 1:13 pm — Posted by Gail Cunningham

Buying a home usually represents the largest investment most people will ever make. According to the National Foundation for Credit Counseling’s (NFCC) May online survey, that investment could now be out of reach for many.

The NFCC recently asked consumers about their ability to meet the down-payment requirements associated with buying a home in today’s market. Of the more than 2,000 respondents, almost half (49 percent) admitted that they’d never be able to save enough money for a down-payment on a home. This is discouraging news for the housing market in general, lenders, potential buyers, as well as existing homeowners.

How many of you would be able to save the $120,000 down payment on a $600,000 Irvine home? Most American's don't save much, and with the pressures to look prosperous here in Orange County, the ability to save such prodigious sums is largely out of reach. Anyone living paycheck-to-paycheck has the odds stacked against them.

Owning a home has traditionally been considered a significant part of a person’s wealth-building strategy. With almost half of the poll respondents indicating that they would never be able to save enough money for a down-payment on a home, the implication is that they feel that buying a house is, and may always be, out of reach for them.

Historically, finding the money for a down-payment was only a problem for first-time home-buyers. After buying the first home, between the equity growing due to making monthly house payments and the value of the house appreciating, buyers could satisfy the down-payment requirement on the new home from the proceeds of the sale of the former house. This is often no longer the case.

Realistically, unless our system changes, FHA loans are the only way first-time homebuyers and former homeowners with insufficient equity will be buying homes. First-time homebuyers have traditionally used the FHA or subprime, but now with so many former owners who lost everything in the aftermath of the housing bubble, many more people will find themselves in need of down payment assistance.

Due to today’s turbulent housing market, the problem has now spread to those who currently own a home. Many mortgages are underwater. Thus, even if the homeowner is able to sell their current house, there may be no profit available to satisfy the down-payment on the next home. Exacerbating the problem is that as home prices have decreased, many lenders have increased the down-payment amount required to obtain a mortgage loan.

Equity has evaporated at a time when equity is most needed to buy a home. Some of it due to falling prices, and some of it do to irresponsible HELOC borrowing and dependancy. As is always the case at the bottom of a recession, cash is king.

With the average home price in America just below $200,000, a 20 percent down-payment is near $40,000, a nice chunk of change by any standard. Some may still be able to obtain an FHA loan with a low down-payment requirement, but those with poor credit will likely have to put a larger amount down. Even with the economy improving, considering the staggering number of people who are out of work and those whose retirement plans have been decimated, buying a home may no longer be a part of the American dream, at least not in the near future.

Many people who didn't lose their net worth in the housing bust may have had to spend their savings to survive the recession making the buyer pool with 20% down that much more depleted.

Others responding to the survey indicated that their mortgage loan would either have to require a much lower down-payment (20 percent), or they would have to borrow the down-payment regardless of how much it was (18 percent). Further bad news for anyone associated with housing is that the lowest number of respondents indicated that they’d have no trouble coming up with a 20 percent down-payment (12 percent).

Very few people have the 20% down. Only 12% of those polled said they could comfortably come up with the money. This is a serious problem for housing demand going forward.

Where will the down payment money come from?

Realistically, there are only two sources: savings and borrowing. Some may receive gifts, but those who don't have wealthy family members to give them money, they will either need to save it or borrow it.

Even in a booming economy, it takes years to save the necessary 20% down payment on a house. Most people are either unable or unwilling to endure the austerity such a sacrifice requires. Many will save their money and follow this path to home ownership. Kudos to those who succeed.

Most people will only save the minimum necessary and instead borrow the money. Those that follow this path will get less home than those who save because the borrowers will face much higher costs than the savers. For instance, the current FHA insurance premium is over 1% of the sales price. Its like paying double taxes. This extra expense comes out of qualifying income and thereby reduces the loan balance available to borrow.

In the future, demand for second mortgages will prompt some adventurous lenders to try this market again. Currently, lenders hold billions of worthless second mortgages on their books, so originating new ones is not in their business plan. To make these loans today would be to light more money on fire as falling house prices will quickly put these second mortgages underwater. It won't be until well after the market bottoms that second mortgages will be made available to the masses again.

For the foreseeable future, mortgage demand will remain weak. At first it will be due to continuing unemployment and weak earnings, but as the economy recovers, the reasons will not be income qualification, it will be the lack of a suitable down payment.

More than 25% off it's new 2004 price

i remember watching with amazement as people paid outrageous prices for these Northwood II homes back in 2004 and 2005. Most of these buyers put 20% down as there was so much demand that builders on the Ranch could be choosy. Nearly all of those buyers have lost their down payments, and any who refinanced are underwater.

Many of these properties were bought as investments, after all, prices only go up in Irvine — except when they don't.

At the current price, the low interest rates are making this place payment affordable even with the sky-high HOA and Mello Roos.

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

This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707

949.769.1599

sales@idealhomebrokers.com

Irvine House Address … 35 WONDERLAND Irvine, CA 92620

Resale House Price …… $559,800

Beds: 3

Baths: 3

Sq. Ft.: 2146

$261/SF

Property Type: Residential, Condominium

Style: Two Level, Mediterranean

View: Faces Northwest

Year Built: 2004

Community: Northwood

County: Orange

MLS#: S643218

Source: SoCalMLS

On Redfin: 198 days

——————————————————————————

DOUBLE MASTER BEDROOMS: ONE DOWN STAIRS, ONE UPSTAIRS! The third bedroom is downstairs, too, large and with a private bath. Very spacious, clean and well maintained home. Upgraded cabinetry, computer niches (more than one), corian counters in two full baths, double sink vanities. UPSTAIRS MASTER HAS LARGE COUNTER WITH SIT DOWN LADY'S VANITY! Lots of living space and room for a family. Desirable interior facing location, super quiet and private. Lots of windows, direct garage access. Kitchen has stainless steel appliances, including refrigerator, granite counter tops, five burner stovetop, built in oven and microwave. Kitchen counter sits four people, room for a large dining table. Enclosed patio, accessed by french doors. Upstairs, in front of master, large loft, a second living room or multi-use area. Very open and bright. Behind the gates, beautiful common pool and recreation area.

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Proprietary IHB commentary and analysis

Resale Home Price …… $559,800

House Purchase Price … $712,000

House Purchase Date …. 9/30/2004

Net Gain (Loss) ………. ($185,788)

Percent Change ………. -26.1%

Annual Appreciation … -3.4%

Cost of Home Ownership

————————————————-

$559,800 ………. Asking Price

$111,960 ………. 20% Down Conventional

4.48% …………… Mortgage Interest Rate

$447,840 ………. 30-Year Mortgage

$97,021 ………. Income Requirement

$2,264 ………. Monthly Mortgage Payment

$485 ………. Property Tax (@1.04%)

$200 ………. Special Taxes and Levies (Mello Roos)

$117 ………. Homeowners Insurance (@ 0.25%)

$0 ………. Private Mortgage Insurance

$292 ………. Homeowners Association Fees

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

$3,358 ………. Monthly Cash Outlays

-$377 ………. Tax Savings (% of Interest and Property Tax)

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

$185 ………. Lost Income to Down Payment (net of taxes)

$90 ………. Maintenance and Replacement Reserves

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

$2,664 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$5,598 ………. Furnishing and Move In @1%

$5,598 ………. Closing Costs @1%

$4,478 ………… Interest Points @1% of Loan

$111,960 ………. Down Payment

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

$127,634 ………. Total Cash Costs

$40,800 ………… Emergency Cash Reserves

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

$168,434 ………. Total Savings Needed

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

Lenders have been concentrating shadow inventory in communities like Irvine with larger loan balances and numerous second mortgages. They foreclose only on rare occassions, and they do so in a capricious manner to combat strategic default and avoid large losses.

Irvine Home Address … 57 SNOWDROP TREE Irvine, CA 92606

Resale Home Price …… $845,000

Keeping my eyes open

I cannot afford to sleep

Giving away promises

I know that I can't keep

I would stand inside my hell

And hold the hand of death

You don't know how far I'd go

To ease this precious ache

You don't know how much I'd give

Or how much I can take

Melissa Etheridge — Come To My Window

As a renter it's hard not to feel a twinge of jealousy for delinquent mortgage squatters. While many of us pay outrageously high rents to live in Irvine, squatters get to occupy their houses for nothing. With a typical single family home renting for $2,500 here, delinquent mortgage squatters are saving $30,000 per year compared to their renting counterparts. Plus, the government is doing everything possible to give them more free money so they can continue to occupy houses they have no business being in.

It must be difficult for many of them to sleep at night. They have made promises they can't keep, and unless their lender forgives their debts, most are going to be forcibly removed from what they consider to be their family homes. How much would they give to relieve that ache? How much more can they take?

To make matters worse for stressed out borrowers, lenders use terrorist tactics to keep more struggling borrowers from defaulting. Each month lenders randomly single out a few squatters to push through the foreclosure process. If they didn't do this, borrowers would know they had several years of free lodging waiting for them if they default. If borrowers knew they could save $50,000 to $100,000 in housing costs through several years of squatting, most struggling borrowers would default. Lenders know this, so they must randomly execute a few to keep the herd fearful and guessing.

This practice is not as random as it would seem. The selection process is first divided up into buckets. One bucket contains small loans with no second mortgages. This bucket is the one getting the most activity as lenders and the GSEs are competing to empty this bucket as quickly as possible.

The second bucket contains large loans on the balance sheets of large lenders and in private securitizations. Lenders randomly select a moderate number from this bucket each month. Since the big lenders (which are also the big servicers) do not have second mortgages on these homes, they are somewhat more eager to process them, although since the loan losses are still quite large, they aren't in any particular hurry.

The third bucket contains large loans with second mortgages on them. These are the most irresponsible borrowers, and the most likely to be distressed. Lenders only select a very small number of these each month to process because they will lose much more money. If the lender is losing on the first mortgage, the second mortgage is a complete loss.

In fact, bucket number three can be subcategorized by whether or not the lender-servicer holds both the first and the second or if the second is with another lender. If the lender-servicer holds the first and the second, this is the group least likely to be foreclosed on. If the lender-servicer only has the first mortgage, they will ruthlessly blow out the second mortgage of their competitors. This partitioning of the third bucket is so brazen that many servicers are risking lawsuits from the asset-backed securities pools waiting for the foreclosure to take place.

In short, lenders are giving the most irresponsible borrowers the greatest squatting benefits because these are the borrowers on which lenders stand to lose the most.

Foreclosure Roulette Revisited

By Sean O'Toole | Jul 7, 2011

Nearly a year ago I opined that banks were engaged in a game of Foreclosure Roulette — a game by which they randomly foreclosed on a few homeowners, while delaying most foreclosures for longer and longer periods of time. The primary aim of the bank’s random foreclosures being that they can’t let word get out that you can stop making mortgage payments and live in your home for free for years on end, as is increasingly the case. Otherwise, millions of underwater, but paying, homeowners might also stop making payments, spelling disaster for the banks.

At first glance current foreclosure sales do seem completely random. Vacant homes sit for months or even years waiting to be foreclosed on, while a family working hard to short sale their home has the rug pulled out from under them. But looking for patterns by focusing on the borrower or even the property assumes lenders care about people, and neighborhoods. That’s not the role of financial institutions. These are corporations, and their focus is on profit and loss. By focusing on where the losses really are, clearer patterns begin to emerge and we now see that this game of chance isn’t completely random. Like in Vegas, the odds are stacked in favor of the house — not your house, the banks.

This behavior may be completely logical, but it is still reprehensible. They are resorting to terrorist tactics, and they are rewarding the most irresponsible. No matter how they go about resolving these bad loans, moral hazard will inevitably result.

First lets look at time to foreclose based on the size of the potential loss. We did this by analyzing 153,956 foreclosure sales on first mortgages from January 2008 through July 2011 for which we had all the necessary data. This includes properties that were sold back to the bank and became REO, as well as properties purchased by investors on the courthouse steps at foreclosure auction. We divided all the loans into two groups: those with balances over $417,000 (the conforming loan limit) and those below. Specifically we were wondering if banks took longer to foreclose on larger loans, where there tend to be larger losses, than on smaller loans. The answer is clear: yes, the size of the potential loss absolutely matters. Not only that, but time to foreclose doesn’t diverge until the government intervened in the foreclosure market in early 2009, with, for example, changes to the Federal Accounting Standards Board rules on mark-to-market.

Amend-extend-pretend began in earnest in mid 2008, and the results became apparent in early 2009 as Mr. O'Toole's data shows. This also corresponds to the buildup of shadow inventory.

In July 2011, the average loan balance on foreclosures with a loan balance greater than $417,000 (the red line) was $616,000, and the average current market value was $404,000, resulting in an average loss of more than $250,000 per loan after sales costs.

Compare that to loans with a balance less than or equal to $417,000 (the blue line). On those loans the average loss was closer to $115,000 on an average loan balance of $274,000 and with an average current market value of $176,000.

The truth is that the larger the loan balance you have, the more upside down you are in the home, and the bigger the loss for the lender, the better your chances are of not being foreclosed on for a very long time.

This nuance is important for anyone considering strategic default. If someone is considering defaulting on a $100,000 loan, I wouldn't count on much squatting time. Perhaps they will get a year or two, but the GSEs are processing their bad loans at a relatively rapid pace. However, if someone is considering defaulting on a $1,000,000 loan — and we have a lot of those in Orange County — chances are those borrowers will get to squat in their McMansions for the foreseeable future.

In other words, for all of you renting and waiting for prices to drop, lenders are allowing the deadbeat borrowers to stay in the house you want to buy without making any payments. You are stuck renting while they are getting to live in what should be your house for nothing.

Next lets look at the time to foreclose based on the number of outstanding loans. Some have suggested that many servicers have a conflict of interest in that they service first mortgages on properties on which they directly hold the second mortgage in their own portfolio. In fact, Representative Bradley Miller D-NC, introduced a bill, H.R. 4953, to specifically eliminate this conflict of interest; saying at the time “Their stance does seem largely driven by accounting concerns — they are trying to maintain the fiction that the mortgages are worth the value they are carrying them at on their books.” It turns out that there is a dramatic difference in the amount of time it takes servicers to foreclose on first mortgages when there is also a second mortgage on the property, as shown below.

The blue line indicates the average time to foreclose for properties that only had one loan; and the red line indicates the average time to foreclose for properties that had two loans. While there is a notification requirement when foreclosing on a property with a junior lien (a second mortgage for example), this is easily accomplished within the standard foreclosure timeframe, and first mortgage holders have no other duties to protect second mortgage holders, so there is really no other reasonable explanation that we can think of for this significant difference in timing outside of the conflict of interest issue that some have suggested. Note that like time to foreclose by loan balance above, the lines don’t start to diverge until early 2009, when mark-to-market rules were loosened.

The evidence is clear. Lender-servicers are not foreclosing on loans where they would be wiping out their second mortgage. This is also an important nuance for those considering strategic default. If someone has a first mortgage and a second from the same lender, they are much more likely to be allowed to squat indefinitely than if their second is through a different lender.

The basic idea behind mark-to-market accounting rules is that if an asset that you have on your books drops in value, you should recognize that loss on your books and write down the value of the asset on your books. When Treasury Secretary Paulson announced TARP in September 2008, he made it clear that he didn’t think banks should have to write down these assets to or be forced to sell them at what he believed were distressed prices.

This merely underscores the complete lack of understanding of the problem in our government. Prices were not distressed in 2008, and they are only distressed now in a few markets. Prices were in fact quite elevated and needed to come down. Allowing banks to pretend merely delayed the inevitable. It did not fend off a write down that did not need to occur.

After that announcement, considerable pressure was put on the supposedly independent Federal Accounting Standards Board (which writes the accounting rules these companies must follow) to ease the rules that require companies to mark assets to current market values. It occurred to me at the time that it was a ridiculous notion as properties weren’t selling at distressed prices, they had instead returned to normal prices after being artificially inflated in a major credit bubble. Regardless, I think there is little doubt that the changes to these rules were necessary in order for the banks to pass the stress tests that were undertaken shortly after this accounting change was pushed through.

So while we still think foreclosure roulette is the bank’s game of choice, we now also believe that the number of chambers in their gun, and your likelihood of being quickly foreclosed on, is directly tied to the size of the potential loss that the bank might face. Perversely, this means those who took the biggest loans, on the nicest houses, with the largest lines of credit to buy lots of shiny new toys will also get the most free rent when they strategically default.

And we will also probably allow many of those people to get loans again without much waiting because lenders need warm bodies to buy their REO.

It's a great system we have, isn't it?

A squatter's paradise

The bank currently owns this empty property, but the former owners tried to sell it for almost four years prior to their foreclosure. Do you think they were making any payment during that time?

Date	Event		Price	Source
Jul 05, 2011	Listed (Active)		$845,000	SoCalMLS #S665221
Jun 29, 2011	Sold (Public Records) REO		$668,126	Public Records
Jan 02, 2009	– Delisted		—	Inactive SoCalMLS #3
Sep 26, 2008	– Relisted		—	Inactive SoCalMLS #3
Sep 25, 2008	– Delisted		—	Inactive SoCalMLS #3
Aug 27, 2008	– Relisted		—	Inactive SoCalMLS #3
Aug 26, 2008	– Delisted		—	Inactive SoCalMLS #3
Jun 13, 2008	– Price Changed		*	Inactive SoCalMLS #3
May 14, 2008	– Listed		*	Inactive SoCalMLS #3
May 05, 2008	– Delisted		—	Inactive SoCalMLS #2
Jan 05, 2008	– Listed		*	Inactive SoCalMLS #2
Nov 16, 2007	– Delisted		—	Inactive SoCalMLS #1
Oct 10, 2007	– Price Changed		*	Inactive SoCalMLS #1
Aug 30, 2007	– Price Changed		*	Inactive SoCalMLS #1
Aug 12, 2007	– Listed		*	Inactive SoCalMLS #1
Sep 20, 2006	Sold (Public Records)		$1,024,500	Public Records

My records show the first notice of sale in April of 2009. If a lender is prompt in their filing — and in the deflation of the housing bubble, they haven't been — the borrower stopped making payments at least 6 months earlier. That puts his last payment back in November of 2008 at the latest.

Foreclosure Record

Recording Date: 08/25/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 04/21/2009

Document Type: Notice of Default

The foreclosure auction took place on June 29, 2011, nearly three years after he quit paying. When this property was purchased for $1,024,500, the borrower used a $716,850 first mortgage and put $307,650 down. In this instance the lender gave the borrower ample time to sell the house to recover some of his down payment. It didn't happen, so now the lender has the property and is trying to sell it for an amount that will make them a profit. They need to make it when they can.

If the lender gets this price, the former owner would feel like a fool leaving any equity in the property. Of course with a $4,000+ per month cost of ownership, this owner recovered $120,000 in savings during his 30 months of squatting. I guess that makes it a win-win.

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

This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707

949.769.1599

sales@idealhomebrokers.com

Irvine House Address … 57 SNOWDROP TREE Irvine, CA 92606

Resale House Price …… $845,000

Beds: 4

Baths: 2

Sq. Ft.: 2803

$301/SF

Property Type: Residential, Single Family

Style: Two Level, Traditional

View: Reservoir

Year Built: 2006

Community: Columbus Grove

County: Orange

MLS#: S665221

Source: SoCalMLS

On Redfin: 17 days

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Welcome to Lantana at Columbus Grove in Irvine!!! Enjoy the several amenities including association barbeque, club house, recreational facility, parks, association pool, greenbelts and more. Walk, drive or bike over to the District at Tustin Legacy which is Orange County's newest shopping, dining and entertainment destination. After a long day, return to your own sanctuary; park inside your 3 car attached tandem garage, relax in your spacious 4 bedroom, 3 bath home. Start up the fireplace, enjoy a cup of coffee or soak in your master bedroom tub. The gourmet kitchen includes stainless steel appliances, granite counters, breakfast bar and a walk-in-pantry; this kitchen will keep all chefs wanting to try new recipes! Valuted ceilings, recessed lights, mirrored closets, upstairs laundry, and plenty of linen space. Carpet, hardwood floors and a big back yard makes this house truly a BEAUTIFUL HOME, ALL THAT IS MISSING IS YOU!!!

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Proprietary IHB commentary and analysis

Valuted? I have concluded that three exclamation points are the surest sign of a realtor's writing. Nobody else feels the need to express that much excitement in their sales spiel.

Resale Home Price …… $845,000

House Purchase Price … $668,126

House Purchase Date …. 6/29/2011

Net Gain (Loss) ………. $126,174

Percent Change ………. 18.9%

Annual Appreciation … 317.7%

Cost of Home Ownership

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$845,000 ………. Asking Price

$169,000 ………. 20% Down Conventional

4.48% …………… Mortgage Interest Rate

$676,000 ………. 30-Year Mortgage

$146,450 ………. Income Requirement

$3,417 ………. Monthly Mortgage Payment

$732 ………. Property Tax (@1.04%)

$517 ………. Special Taxes and Levies (Mello Roos)

$176 ………. Homeowners Insurance (@ 0.25%)

$0 ………. Private Mortgage Insurance

$175 ………. Homeowners Association Fees

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$5,017 ………. Monthly Cash Outlays

-$814 ………. Tax Savings (% of Interest and Property Tax)

-$893 ………. Equity Hidden in Payment (Amortization)

$280 ………. Lost Income to Down Payment (net of taxes)

$126 ………. Maintenance and Replacement Reserves

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$3,715 ………. Monthly Cost of Ownership

Cash Acquisition Demands

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$8,450 ………. Furnishing and Move In @1%

$8,450 ………. Closing Costs @1%

$6,760 ………… Interest Points @1% of Loan

$169,000 ………. Down Payment

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$192,660 ………. Total Cash Costs

$56,900 ………… Emergency Cash Reserves

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$249,560 ………. Total Savings Needed

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