Nevada has a great many empty homes, and after my experiences flipping occupied properties, I will be happily focused on the empty ones.

Home Address … 7625 VELVET MIST ST, LAS VEGAS, 89131

Resale Home Price …… $95,900

Don’t ask me how, but guess who hit the big time.

Don’t look now, but guess who’s back in town.

It’s so easy, don’t even have to try.

You’re the winner you can take the prize.

Loverboy — Lucky Ones

In the cleanup phase of the Great Housing Bubble, the lucky ones are those profiting from recycling the dead carcasses from yesteryear. I have been sifting through the debris in Las Vegas for about six months now. For a variety of reasons, I have been mum on my activities, but today I am going to share some anecdotes and lessons learned from my new adventure.

The most important of these lessons relates to the topic of today's featured article. According to the US Census Bureau, there are 167,564 houses in Nevada. That's a lot of empty homes — which is good if you want to survive as a flipper. Occupied homes are troubles magnified. Buying them is harmful to your financial health.

The pros and cons of occupied properties

Buying occupied properties at auction is always riskier because you never know what will happen with the previous occupants. I purchased two occupied houses for investors who were able to enjoy positive cashflow from the first month of ownership, so there are potential advantages. Since occupied properties have more risk, they have appealingly large margins — at least they look like they have large margins. When you factor in the lost time and the potential for litigation or damage by the occupants, houses with people in them are something to be avoided.

Squatters on my dime

I have one property I purchased in November, and the former owners are still squatting there. The former owners pulled an interesting legal move. They had the wife file for bankruptcy in her maiden name a few days after the foreclosure auction, and they put the property into the estate. Well, our search didn't pick up the bankruptcy because it wasn't in the owner's name, so we began foreclosure proceedings. Late in the process, the bankruptcy attorney accuses us of harassment, and we had no idea what he was talking about.

Once we discovered the suit, we had to initiate our own suit to have the property removed from the bankruptcy proceedings. They didn't own the property when they filed, so they can't obtain protection from the bankruptcy court to stay there. If they had filed before the foreclosure, they would have had other rights, but if they had filed before the foreclosure, it would have shown up in a title search, and I wouldn't have bid on the property.

The cost of all this legal maneuvering is expensive. The time to properly evict these people has been costly in two ways. First, the declining market means my resale price is declining while i wait. in addition, I have opportunity cost on money tied up in a non-performing asset. I am not a bank. I can't amend, extend, and pretend I am making money. I either sell quickly for a profit or I don't profit.

Ye ol' crack house

By far the most bizarre story I have is a property I purchased in October.

Back in 2005, a recent Salvadoran immigrant obtains his citizenship. With his workman's salary and a penchant for liar loans, he puts together an empire of 8 properties in Las Vegas from 2005 to 2007. The last of these properties was his crown jewel — the property I bought.

The property is in a older Las Vegas neighborhood called Spring Valley. The neighborhood is dominated by ranch style houses ranging from 1,400 SF to 1,800 SF. It has seen better days, but this is not a bad neighborhood. It is mostly median income middle-class families trying to get by.

My property is the large 5 bedroom home at the end of a cul-de-sac. It is the only one in the area with a large pie shaped lot with an outbuilding and RV parking. Back in 2007 when Vicente the Fox, our recent immigrant, bought this property with his liar loan, it was the finest property on the street.

Vicente the Fox began using his large property as a salvage yard. He put individual locks on all the bedroom doors and leased out the rooms to boarders and skimmed their rent. He tried to convince them to keep paying him even after I bought the house.

The boarders were united by their love for crystal meth. There is no evidence this place was used as a meth lab — thankfully — but when the constables came by to evict the last boarders, they confiscated a cigar box full of used pipes and other paraphernalia. In the two weeks after we took possession, the house was broken into three times.

The amount of junk on this lot is staggering. There are eight automobiles on this property, and none of those are in the garage because the garage was full of stuff. All eight cars are in the back and side yards. There were 4 working refrigerators on the property, a dirt bike, an air conditioner, anything and everything you can imagine, and lots of it.

I call our former owner Vicente the Fox because he carefully avoided us whenever we tried to serve him formal eviction papers. He didn't live at this house, and his former address is an apartment where he skipped out on the rent. However, since I was unable to serve him, I could not fully divest him from the property and the junk sitting on it.

He teams with a local attorney bandito to shake me down for wrongful foreclosure, stealing his property, and so on. Since I couldn't get him served, his weak case was strong enough to tie me up in court for a while. I settled.

Surprisingly enough, it turned out in my favor because when I let him back on the property to get his stuff, he cleared out much of the garbage along with the stuff of value. My worst fear was him picking over the good stuff and leaving me with a $5,000 mess to clean. He took a number of paint cans and other items that would have required me to bring in special disposal teams.

There is no good resolution for this property. I will lose money on the deal, and Vicente the Fox will have a roving pile of garbage scattered at friends and acquaintances houses all over town.

Eventually, this property will get sold. Hopefully, it will be to a good family that restores it as the jewel of the neighborhood. That's the outcome I want.

Flippers are maligned for bringing down the quality of life in neighborhoods. The reality is that the delinquent former owners are the ones who brought down the neighborhood. Flippers like me are the ones taking back the crack houses from rent-skimming former owners and putting families back into them.

After those two experiences, it's easy to see why dealing with vacant properties is much preferred. I'll focus on the empty ones. There are plenty to choose from.

Nevada's boom ends in record number of empty homes

(AP) – 6 days ago

LAS VEGAS (AP) — The promise of palm tree groves and low-priced real estate lured Alan and Katherine Ackerly across the Rocky Mountains from Denver to Nevada in 2004, where thousands of new houses beckoned brightly as any neon sign.

They came to buy their retirement home. But the real estate bust took its toll, with a flood of short sales and foreclosures in the market, and last month the Ackerly's dream home was foreclosed on, too.

“I pretty much gave it back to them,” said Alan Ackerly, a 57-year-old electrician who stopped paying his mortgage because he owed more than the house was worth.

The Ackerly's home is now among a swelling number of abandoned houses in Nevada. There were 167,564 empty houses in the state last year, according to newly released U.S. Census data, more than double the number in 2000. The number of vacant homes represents about one out of every seven houses across Nevada.

I haven't looked into the Census Bureau's methodology, but that number sounds a bit too big, doesn't it? There are unquestionably a large number of vacant homes, but that many?

The figures are another striking example of how the housing crisis has pummeled Nevada, casting a new light on the severely weakened market after years of boom.

One result is an increase in code violations. In Clark County, home to Las Vegas, such complaints nearly doubled from 2008 to 2009 and the median price of resale homes dropped to $115,000 in January.

That put's their median somewhere in the late 90s. The Las Vegas market is the apocalypse bubble bloggers predicted would occur in every market. As a reaction to Las Vegas, lenders decided it was wiser to build a huge shadow inventory. The likely have saved themselves a great deal of strategic default.

Neighbors call to complain of abandoned houses, stagnant pools, wild yards and unsecured doors, said Joe Boteilho, the county's code enforcement chief. But the neighborhoods of newly constructed homes are not facing the same blatant signs of disrepair seen in other foreclosure-ravaged states such as Florida, Michigan and California.

It has been a deep plunge for Nevada. Once a leader in job creation and construction, the state had the highest foreclosure rate in the country in January. Delinquent mortgages, meanwhile, are on the rise, with Las Vegas, Reno and Carson City all in the top eight cities per capita in a national real estate study published last month.

Strategic default will dominate the Las Vegas housing market for the foreseeable future. With prices stuck 60% below the peak, late buyers have little or no hope of getting back to breakeven in their lifetimes. How many of you are willing to work 20 years to pay off a mistake like that?

More than 16 percent of Nevadans relocated to new residences within the state in 2008 alone, the highest mobility rate in the nation, the Census data shows.

“We were the hottest market in the nation in terms of the shape of the bubble, how fast it went up,” said Nasser Daneshvary, director of the Lied Institute for Real Estate Studies at the University of Nevada, Las Vegas. “And, of course, when something goes up, it comes down hard, too.”

The growth fueled by tourism and the gaming industry has yielded few winners. Short sales and foreclosures have slashed homes prices, ravaged neighborhoods and fueled unemployment in the construction sector, one of Nevada's primary industries. The jobless rate is 14.2 percent, and the state's estimated budget gap starts at $1.5 billion.

In Fernley, the fastest growing city in Nevada from 2000 to 2010, the only sign of construction in recent months was a new Walgreens and a Catholic church. One in 49 homes is in foreclosure.

“It was just very explosive,” said Mayor LeRoy Goodman. “We hit bottom.”

The economy had become overly dependent upon construction. This cruel purging has wiped out everyone in real estate and construction. When activity returns, it will feel like a huge resurgence compared to the severe contraction of 2008. The industry will regrow into a smaller economic engine utilizing less of the workforce. Perhaps they will only build one mega-resort at a time for a while.

This in what was once the land of plenty. The expansion of glass towers and sprawling casinos on the Las Vegas Strip saw a 3.8 percent unemployment rate statewide in the beginning of 2000. Over the next decade, Nevada would grow by 35 percent, the fastest rate in the nation.

Men and women in hard hats carved homes into mountainsides, raised superstores from the dust and wedged plush golf courses into the desert. The state's residential properties grew by more than 40 percent to 1.17 million homes during those years, affording Nevada the youngest housing stock in the country in 2009, according to the Census data. In Clark County, the school district saw an average of 10 new schools a year at its peak growth.

The people who are down on Las Vegas forget its phenomenal growth prior to this recession. Las Vegas is not Detroit. Detroit watched the auto industry leave with no replacement to fill the void. The economic engine of Las Vegas is gaming and sin.

My wager is that vice will be popular in the future and people will continue to flock to Las Vegas for its vices. Therefore, Las Vegas will recover, and so will its real estate market. I could be wrong. I could lose my bet on Las Vegas's future.

As houses and condominium towers rose from the ground, so did prices. The median home price went from $150,000 to $300,000 between 2000 and 2007, according to a University of Nevada, Las Vegas study.

“It was a new town,” said Dennis Smith, president of Home Builders Research, a Las Vegas real estate firm. “There was money everywhere. Everyone wanted to invest in Vegas.”

The state's growing wealth and relaxed lending practices allowed workers with limited incomes to gain home ownership. In many cases, these were the same people who later faced foreclosure. Most Nevadans who lost their homes earned between $24,000 and $72,000, according to a homeowners survey published by the Nevada Association of Realtors in January. Roughly 60 percent said they lost their jobs first, then their homes.

I would like to see that NAr study. I know several who strategically defaulted there because their mortgage was too big relative to the value. Perhaps they are the other 40%? The strategic defaulter's there aren't hiding their faces in shame.

The crash came in 2008, when unemployment passed 7 percent for the first time during the decade.

Even so, nearly 74,000 new homes were built in 2010, according to Census data. Realty companies said there are still buyers who prefer newly-built houses.

A general recovery seems far away. The state's Foreclosure Mediation Program helped more than 4,200 homeowners since its creation in 2009. Nearly 2,000 of those owners were able to keep their properties.

More short sales and foreclosures are projected to further depreciate homes values across Nevada in 2011. Census data to be released starting in June was expected to highlight the state's robust renters' market.

The rental market is strong because many people were booted out in a foreclosure, but they still had jobs, so they stayed in the area and rented. If there were a major exodus from the area — as is happening in Detroit — then rents would decline along with prices.

“This year will be the worst,” said Rep. Shelley Berkley, D-Las Vegas, who co-chairs the Democratic Caucus Housing Stabilization Task Force in Washington. “The unemployment rate is not going down. The values of the homes keep going down and the ability to pay your mortgage is just not there.”

The Ackerly family moved into a rental house after they defaulted on their mortgage. The value of their $240,000 North Las Vegas home was worth $80,000 by the time they left. Unlike some of their neighbors, they didn't take the new kitchen cabinets, or the palm trees they had planted in the yard, or any of the other improvements they lovingly made to the house after they moved in.

“We were done with it,” said Alan Ackerly.

The things people take and leave behind

One of the properties I bought in March had the kitchen stripped out by the former owners. It's an empty room with a pipe-hole in the wall.

For some reason, people like to leave vacuum cleaners behind. Perhaps they don't want the dust from a foreclosure in their new house? I don't know. But I find one left behind in nearly every property.

I had one property where the former owner removed every doorknob in the house, but then they left them in a pile on the floor and didn't take them. In that same house, they took the garbage disposal. What's the resale value of a used garbage disposal?

A few weeks ago I wrote about the losers who left their family pets to die. We saved them, but not before they endured countless days without food or water trapped in the back yard.

The owners of today's featured property left it broom clean. They even left a note on the water softener telling the next owner it needed service. Who does that? Who leaves a maintenance note on a property they are losing in foreclosure? Good people. That's who.

The virtue of quick processing

In early March, with B of A coming off its Nevada moratorium, I had a few properties in escrow, so I decided to deploy the last $200K I had available. The number of properties pushed through the Las Vegas auction site in March to third parties has been remarkable. I picked up five this month. Any rumors of an end to the foreclosure problems in Las Vegas will be dashed when the March foreclosure numbers are announced. Remember you heard that here first.

On March 2nd, I bought two properties, and with a new sense of urgency rivaling a FedEx operation, we got one of the two properties on the market two days later in time for weekend showing.

214 Mariposa, Henderson, NV 89015

We still had work to do on this property. Basically, I decided to list the property while we were working on it to see what happened. Worst case is that I turn off some potential buyers who see it before it is ready. I wouldn't do that here in Irvine, but Las Vegas is a different market, so I thought I would try it.

Early the next week, even before Jacki gets crews out to start work, an interested buyer makes an as-is offer within $5,000 of my asking price. Since I was just about to embark on a $5,000 renovation, this offer was a no-brainer, and I took the deal. I was in escrow within eight days of the auction.

That was eye opening.

I realized I had been operating as if I were flipping in Irvine or Orange County. In Las Vegas time-to-market is more important than quality of presentation. The properties in my existing inventory — the stuff that is losing value as it ages — all show very well. We focused a great deal of attention on small details, and likely overspent what we should have to make these properties show well. It hasn't made a difference. Price is what sells in Las Vegas. Get to the market quickly and less expensively than your competition, or you lose money.

As good as good can get

This week as I was patting myself on the back for the quick flip, I took the money from some recent closings and bought three more properties. The featured property below was purchased on Friday, March 18, 2011. That's last Friday.

On Saturday, Jacki has the locks changed, took a few photos, and installed the Supra key. Sunday morning some prospective buyers looked at the property. Monday morning (yesterday) we got a full asking price offer which I have accepted.

Four days from auction purchase to full-price offer. We may open escrow today. It doesn't get better than that.

Home Address … 7625 VELVET MIST ST, LAS VEGAS, 89131

Resale Home Price … $95,900

Home Purchase Price … $67,100

Home Purchase Date …. 3/18/2011

Percent Change ………. 34.3%

Annual Appreciation … 515.1%

Cost of Ownership

————————————————-

$95,900 ………. Asking Price

$3,357 ………. 3.5% Down FHA Financing

4.23% …………… Mortgage Interest Rate

$92,544 ………. 30-Year Mortgage

$18,154 ………. Income Requirement

$454 ………. Monthly Mortgage Payment

$83 ………. Property Tax

$8 ………. Homeowners Insurance

$280 ………. Homeowners Association Fees

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

$825 ………. Monthly Cash Outlays

-$41 ………. Tax Savings (% of Interest and Property Tax)

-$128 ………. Equity Hidden in Payment

$5 ………. Lost Income to Down Payment (net of taxes)

$12 ………. Maintenance and Replacement Reserves

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

$673 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$959 ………. Furnishing and Move In @1%

$959 ………. Closing Costs @1%

$925 ………… Interest Points @1% of Loan

$3,357 ………. Down Payment

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

$6,200 ………. Total Cash Costs

$10,300 ………… Emergency Cash Reserves

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

$16,500 ………. Total Savings Needed

Property Details for 7625 VELVET MIST ST, LAS VEGAS, 89131

Beds: 3

Baths: 2

Sq. Ft.: 1,241

$/Sq. Ft.: $77

Lot Size: 4,356 Sq. Ft.

Property Type: Single Family Residential, Detached

Year Built: 2003

Community: Lynbrook

County: Clark

MLS#: 1129717

Source: GLVAR

Status: Exclusive Right

On Redfin: 1 day

Cumulative: 2 days

New Listing (24 hours)

————————————————-

MOVE IN READY! Not a Short Sale or REO. Quick Response from Seller. 1-Story Home, 3 Bedroom, 2 Bath in a gated community. Neighborhood near Schools, Shopping, Dining, Parks and Recreation. Charming Open Floor Plan with lots of Natural Light.

Flipping Out

I hope you enjoyed my Las Vegas anecdotes. As you can see, most of my time and energy have been devoted to that end. I don't think I have revealed any trade secrets or given my competitors any valuable information. Perhaps a few may be dissuaded from trying when they know how hard it really is.

It's a hard business, and if you don't know what you're doing, you can quickly lose a lot of money. It requires a lot of time, money, patience, the ability to accurately value property, and a working understanding of real estate law. It can be a lucrative business if you can figure out before the opportunity disappears.

Surviving the turnover of the first group of properties, I feel like I have the team and the systems in place to do well. I am looking forward to the rest of 2011. For those of you interested in my fund, I'm sorry, but it is closed to new investors. Maybe next year….

The battle lines in the fight to create a stable housing market is being waged over minimum down payment requirements on qualified residential mortgages.

Irvine Home Address … 2306 SCHOLARSHIP Irvine, CA 92612

Resale Home Price …… $254,900

Oh but ain't that America for you and me

Ain't that America somethin' to see baby

Ain't that America home of the free

Little pink houses for you and me

John Mellencamp — Pink Houses

America was a frontier country. People flocked to America from Europe for the opportunity to own their land, something denied to most living in post-feudal Europe. The idea of having a piece of property with your own pink house is deeply woven into the American culture. it's part of our history, and to this day, many identify home ownership with being American.

I wrote about our modern perversion of ownership in Money Rentership: Housing and the New American Dream. Questions of our concepts of financing and ownership are coming to surface in Washington as we take up debate on down payment requirements for the new qualified residential mortgage.

Homeownership should not be part of the American Dream

Posted by Nin-Hai Tseng, writer-reporter

March 15, 2011 8:30 am

Most banks want to securitize loans made to borrowers buying homes with little money down. Did we learn nothing from the financial crisis?

Lenders did learn from the financial crisis. They learned they can underwrite unconscionable loans to make a quick buck at origination, and when the loans go bad, the government will cover their losses. Why would lenders want to change that system? Keep that in mind as you watch the lending lobby posture in Washington to game the rules in their favor.

In an attempt to fix some of the problems that caused the housing bubble and financial crisis, banking regulators are coming up with new mortgage lending rules that will address what lower-risk quality mortgages should look like. The goal is to let lenders sell so-called “qualified residential mortgages” to investors without having to retain the risks.

The question the Treasury Department must now answer is what makes a qualified mortgage? Regulators including the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency are pushing for a 20% down payment on such loans. While the big banks like Bank of America (BAC) and JP Morgan Chase (JPM) have not formally weighed in, their lobbyists at American Bankers Association and the Mortgage Bankers Association say that requirement is far too high and would price many buyers out of the housing market.

The most pernicious lie in real estate lending is that restricting access to loans prices buyers out of the market. The hidden assumption is that bids must always be raised because prices never go down. If the government chose to enact the most Draconian standards possible, it may reduce sales volumes at current pricing, but it does not price buyers out of the market — it prices sellers out of the market. As credit tightens, asking prices need to go down for transactions to occur.

Lenders want to make the largest loan possible at the highest interest rate they can. That is their business model. Of course, they would also like the borrower to repay that money, so pushing loan balances up too high leads to Ponzi borrowing, widespread insolvency, and a catastrophic market crash as we have witnessed. However, lenders don't care about the risks as long as Uncle Sam backstops them. They will push for the ability to make the largest loans they can and pass the risk off to whoever they can.

The debate will have broad implications for how homebuyers finance their mortgages. During the housing boom, many Americans took out home loans with little to no money down. When prices fell steeply following their mid-2006 peak, many borrowers didn't have enough equity to cushion the blow, leading to record foreclosures nationwide. Meanwhile, the big banks and investors holding these risky loans suffered huge losses.

We have witnessed many tempest-in-a-teapot issues like robo-signer that flare up and go away without long-term impact on the housing market. This issue is different. The minimum qualifying standard on this loan is going to become the bedrock of mortgage finance. If we get this wrong, we will rebuild the mortgage market on a weak foundation.

Joseph Pigg, vice president and senior council of the ABA, says the 20% proposal is much too narrow and he worries it could further hamper demand for homes, especially when the fragile real estate market is still recovering. And while a heftier down payment generally reduces the risks of a loan, he says, other factors such as income, credit score, and the property's location determine the quality of a loan.

Yes, there are other factors besides the down payment that impact loan quality. There are undoubtedly many buyers who put less than 20% down that will not default on their loan. So what? We are talking about establishing a minimum threshold for all loans. It should be a conservative measure with little or no real risk exposure. Lowing down payment requirements for this loan shifts risk from lenders to the US taxpayer who will end up paying the bills if we create another unstable Ponzi scheme.

But perhaps it's time to question whether homeownership should even be part of the American Dream.

Tighter mortgage lending rules could return the housing market to the way it was in the 1970s, when homeownership was much lower and virtually all homebuyers put down at least 20% of the value of the house. Standards began changing around the 1980s as home prices appreciated significantly and mortgage financing became more sophisticated.

Sophisticated?

Financing has become more sophisticated… sophisticated at creating new Ponzi schemes.

Finance professionals view lower lending standards as progress and tightening lending standards as regression. For an industry of parasites trying to siphon the cashflow from all the world's assets, that paradigm makes sense. In reality, their progress generally amounts to some new Ponzi scheme. I wrote in The Fallacy of Financial Innovation,

“Many in the lending industry think their work is like science that continually advances. It is not. It is far more akin to assembly line work where the same widgets are pumped out year after year. When lenders start to innovate, trouble is brewing. The last significant advancement in lending was the widespread use of 30-year amortizing loans that came into favor after World War II. Prior to that time, home loans were interest-only, short-term loans with very high equity requirements (50% was most common.) This proved problematic in the Great Depression as many out-of-work owners defaulted on their loans. A mechanism had to be found to get new buyers into the markets and allow them to pay off the loan. The answer was the 30-year, fixed-rate amortizing loan. To say this was an innovation is a stretch as this loan has been around as long as banking has existed, but it did not become widely used until equity requirements were lowered. The lenders were willing to lower the equity requirements as long as the loan was amortizing because their risk would decline as time went by and the loan balance was paid off.”

Lenders used to originate loans with an assumption of flat pricing. The reasoning was that they didn't know if that borrower may not be compelled to sell within months of purchase. They wanted to be sure they could discount the sales price, pay a sales commission, and still recover their capital. That meant at least a 10% cushion from day one. Twenty percent was better.

During the housing bubble, the originators of the Option ARM made the assumption that house prices would go up 3% per year every year because past history confirms that house prices rise with inflation. As a lender, if you believed the value of your collateral was rising 3% per year, you could originate with low down payments, increasing mortgage balances, and the whole host of problems the Option ARM created because even when the loans go bad, the loss severities would be low due to the increasing value of the collateral. Hah. That didn't go as planned.

Borrowing against the increasing value of an asset destabilizes the price of that asset. Once aggregate debt levels get too high, a financial disruption can cause prices to crash which in turn spawns wave after wave of strategic default which drives house prices well below fundamental values. The upward frenzy of rally buying is closely mirrored by the downward spiral of default, foreclosure, excess supply and lower prices which causes more default.

It's easy to see why bankers would gripe about the 20% minimum. Smaller loans translate into smaller profits, and a smaller market for securitized mortgages. And lenders can fully securitize only qualified mortgages — any loans made without the designated down payment can still be sold, but the lenders would have to retain 5% of their value on their books.

Wells Fargo (WFC) is the one exception among the banks on this rule — it's arguing for a 30% down payment for qualified mortgages. Wells executives call it skin in the game, but smaller lenders are calling it an unfair competitive advantage — as one of the largest lenders, Wells would be able to tolerate more risk on its balance sheet from the many borrowers who won't be able to afford such a down payment.

That is fantastic. With internal division on policy, it will be much harder for the lending lobby to push a 10% down mortgage.

Certainly a 20% down payment — much less a 30% one — isn't easy for many homebuyers, especially as unemployment stays unnervingly high. The average loan-to-value ratio for January 2011 was 73%, which means borrowers on average put 27% down, according to the Mortgage Bankers Association.

The Irvine bulls always tout the high down payments of Irvine buyers as a sign of special interest by FCBs. Apparently, averaging more than 20% down is normal for real estate markets. Considering almost of third of homeowners own outright, it isn't surprising some amount of ported equity moves from property to property keeping down payments up. Perhaps Irvine is not that special after all?

But while home sales have started to tick up slightly, demand is mostly coming from cash-rich investors who are scooping up foreclosed properties at bargain prices, not from first-time buyers. Economist Paul Dales of Capital Economics recently pointed out that more than two-thirds of existing home sales since last summer were made to cash buyers or investors, while a mere 6% were sold to first-time homebuyers.

Maybe the answer isn't to give borrowers more leeway, but less. Given all we've learned in the years following the housing crash, perhaps a little time travel back to the 1970s might not be so bad. During the boom years, many lenders passed on their mortgages, including all of the risk, to speculative investors. That proved disastrous, leading to a banking crisis and a housing bubble that all too quickly went bust.

It will be painful to endure a longer, deeper housing crisis that could come from tighter standards. But do we want to relive the nightmare that got us here?

I wholeheartedly agree with the author's contentions. Returning to sane lending standards is not regression, it is progress from where we are today. Lending lost its way. The billions in losses prove that. We need to retreat to what works. Some may chose to view that as going back to the stone ages. I prefer to view it as a return to fiscal sanity and a stable housing market.

Nearly $500,000 for a one bedroom apartment condo?

The Jamboree Corridor condos were 20 years before their time, just like the prices of 2006 in general. These condos don't make sense. They never did. Even after a 50% decline in prices and below 5% interest rates, these properties still don't make sense. The prices on these properties are only now reaching rental parity — and these properties should trade at a discount to rental partiy because it is not a place people want to live long term. This is a great 20-something apartment, but it makes for a less desirable family home.

My data service doesn't pick up this particular address, but the details of who lost what isn't important. The lender didn't likely require a big downpayment, so the first mortgage is taking a big hit.

The assymetric nature of drawdown

People who study financial markets and portfolio returns note an interesting phenomenon regarding returns on financial investments: losses are more devastating to returns than slow gains. This property has declined nearly 50% in value since it was purchased in 2006. So when the property goes back up 50% in value, will it be back up to the peak?

Nope. A 50% decline requires a 100% increase to offset it. By the time peak buyers see values reach their entry points, buyers from today will have accumulated $250,000 in equity. Timing does matter.

The frenzied rally of the Great Housing Bubble saw double-digit appreciation for several consecutive years. Depending on the market, most of all of that gain was wiped out in two-years of double-digit declines in 2007 and 2008.

The savvy buyer who picked up this great investment undoubtedly expected double-digit appreciation from his starting point. This should be reselling for a $1,000,000 by now. instead it's REO hoping for a quarter of that.

Irvine Home Address … 2306 SCHOLARSHIP Irvine, CA 92612

Resale Home Price … $254,900

Home Purchase Price … $478,500

Home Purchase Date …. 6/12/06

Net Gain (Loss) ………. $(238,894)

Percent Change ………. -49.9%

Annual Appreciation … -13.0%

Cost of Ownership

————————————————-

$254,900 ………. Asking Price

$8,922 ………. 3.5% Down FHA Financing

4.82% …………… Mortgage Interest Rate

$245,979 ………. 30-Year Mortgage

$51,703 ………. Income Requirement

$1,294 ………. Monthly Mortgage Payment

$221 ………. Property Tax

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

$42 ………. Homeowners Insurance

$310 ………. Homeowners Association Fees

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

$1,867 ………. Monthly Cash Outlays

-$121 ………. Tax Savings (% of Interest and Property Tax)

-$306 ………. Equity Hidden in Payment

$16 ………. Lost Income to Down Payment (net of taxes)

$42 ………. Maintenance and Replacement Reserves

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

$1,499 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$2,549 ………. Furnishing and Move In @1%

$2,549 ………. Closing Costs @1%

$2,460 ………… Interest Points @1% of Loan

$8,922 ………. Down Payment

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

$16,479 ………. Total Cash Costs

$22,900 ………… Emergency Cash Reserves

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

$39,379 ………. Total Savings Needed

Property Details for 2306 SCHOLARSHIP Irvine, CA 92612

——————————————————————————

Beds: 1

Baths: 1

Sq. Ft.: 0738

$345/SF

Lot Size: –

Property Type: Residential, Single Family

Style: One Level, Modern

Year Built: 2006

Community: Airport Area

County: Orange

MLS#: P774302

Source: SoCalMLS

Status: Active

On Redfin: 2 days

——————————————————————————

REO Bank Owned – New complex near John Wayne Air Port between Irvine and Newport Beach. Excellent amenities include tennis courts, pool, spa, BBQ area, basketball court A rare opportunity Make you best offer.

Today's featured article looks at how Americans are changing their views on the rent-versus-buy decision.

Irvine Home Address … 4162 SALACIA Irvine, CA 92620

Resale Home Price …… $699,990

Back when real estate always went up — or at least when that was a commonly accepted as fact — the rent-versus-buy decision wasn't primarily financially or investment oriented. Most often people would chose to rent instead of own because they valued mobility, didn't want the liability and responsibility of home ownership and maintenance, or a variety of other reasons. Until the market crashed, renters did not consider losing their down payment and more if they need to sell unexpectedly. Much to the chagrin of realtors, potential buyers now know crashes are possible.

Buy? Nah, Rent. Nah, Buy.

Deciding used to be simple—buying a home always made sense. Then the bubble burst.

By Alina Tugend — Wednesday, March 16, 2011

Jean Sica-Lieber owned homes all of her life—when she was married and divorced, when her children were young and when they were grown. But recently, after selling her Rochester, N.Y., town house at a loss, she decided to rent. Sica-Lieber assumed it would be for a year and then she would buy a small place with a garden. But now, she’s rethinking that plan.

“Part of me, and I think this exists in most Americans, wants to be a property owner, despite the fact that unless we buy outright, the bank really owns most of it,” the 58-year-old publishing specialist said.

There are some people who get it. Equity is ownership. Negative equity is an oxymoron invented by the lending industry who preferred a nonsense term that made money-renters feel like home owners.

“But when it came right down to it, I’m single and don’t have children to do chores. How do I want to spend my time? Would I rather do more travel or pay property taxes?”

She recognizes the opportunity cost of loan ownership. Without HELOC money to supplement income, high debt-to-income ratio living is a real drag.

So Sica-Lieber decided to hold off on buying that little house, and she renewed her lease on her town house for at least another year.

For Kelly Stettner, 41, who had rented all her adult life, buying a house brought unexpected joy. When their landlord put the duplex she and her husband were renting up for sale, they ended up purchasing a 1929 bungalow on an acre in Springfield, Vt. They, their two children, and their dog couldn’t be happier.

“Budgeting is different, but we’re exploring many options that we never had considered while renting—a solar panel, a vegetable garden, [do-it-yourself] landscaping, and much more,” said Stettner, an administrative assistant. “But the emotional end is what I couldn’t imagine. There’s a self-esteem from the responsibility of owning it. We’re responsible for keeping it energy-efficient, keeping it clean. We get to do what we want, when we want, on our own terms, and we directly benefit from it. That was something I hadn’t really anticipated.”

Those are the emotional payoffs of home ownership — or at least the perception of home ownership minus the inconvenient reality of debt. When people feel ownership of something, they tend to take better care of it.

For example, I recently moved to a different rental (I am still Irvine Renter), and this property has beautiful wood floors. I so enjoy the beauty of these floors that I take care of them as if i were an owner. I am caring for the floors because I appreciate their beauty. I get the benefit of use, so I feel and act like an owner even though I merely rent. I take better care of the floors in my rental because I feel that emotional sense of ownership.

I haven't owned my primary residence for over 10 years now. I never thought that would happen, and I do miss many aspects of home ownership. Unfortunately, the reality of local price declines and the still staggering cost makes me stay on the sidelines. I can see the stars and moon aligning sometime in the next two or three years. I feel no urgency.

To buy or to rent? That was never much of a question for most Americans. Buy as soon as possible, of course, to show that you’ve grown up and made good. Paying rent, the thinking went, is just throwing money away; owning a house is an investment in the future.

It amazing how much those myths are embedded in our culture.

Until the past few years, that is, when too many Americans who bought homes with too little down and at too high a price discovered that they couldn’t pay the mortgage and couldn’t sell either. That unaffordable house became an albatross. So now, potential homeowners are more likely to seriously consider renting. But which makes more economic sense in the short- and long-term?

It depends.

In nearly three-fourths of the nation’s top 50 cities, it is better to buy than to rent, according to the real-estate website Trulia.com. The site, one of the most popular for real-estate research, offers a “Rent versus Buy” calculator that compares the costs of two-bedroom apartments, condominiums, and town houses. The data for January show that cities where the housing bubble burst with a vengeance—Miami; Las Vegas; Arlington, Texas; Mesa and Phoenix, Ariz.; and Jacksonville, Fla., in that order—were the best places to buy instead of rent.

Renting was a far better deal in New York City; Seattle; Kansas City, Mo.; San Francisco; Memphis, Tenn.; and Los Angeles—less because of cheap rent than the continued high cost of buying in those cities despite the recession, according to Tara-Nicholle Nelson, Trulia’s consumer educator.

The website considers a home to be fairly valued, Nelson explained, if buying it costs about 15 times a year’s rent. So if you pay $10,000 a year to rent, you should be wary of paying more than $150,000 to purchase an equivalent piece of property.

The comparative advantages of buying versus renting aren’t easy to figure, though. Numerous websites offer calculators that have the user enter the requisite data and supposedly learn which course to pursue. But Russell James, who teaches personal finance at Texas Tech University, has researched these online tools and found them unreliable. When he plugged the same information into the top 10 online calculators, eight advised him to buy and two told him to rent. “At one extreme, I was told buying would save me around $61,500,” he reported, “and at the other end, I was told renting would save me $15,000.”

We developed the IHB calculator because most of the online calculators are intentionally misleading. Most rent-versus-buy calculators were not designed to give people accurate information. Most of these calculators were designed by realtors with the intention to present buying in a favorable light no matter the truth. It part of the ongoing campaign by realtors to dupe buyers into action — even if buying is harmful to the buyer — to generate sales commissions.

We are planning an upgrade to the IHB calculator this year. We may go high tech. I believe it can be a very useful tool if it can be streamlined for easier use and to present accurate information as clearly as possible.

James also warned that online calculators may be particularly misleading for lower-income buyers, who are more likely to purchase older homes that need repairs and are less energy-efficient. These buyers are also less likely to itemize their tax deductions, losing the advantage of the federal tax break for mortgages.

Whether you rent or buy, some costs may not be obvious. Home­owners must pay property taxes, private mortgage insurance (if they plunked down less than 20 percent when they bought), home insurance, and all utilities—some of which landlords may have paid before. They’re also responsible for buying any needed big-ticket items such as lawn mowers, snowblowers, and washer/dryers. Renters, Nelson said, face the “opportunity cost” of lost equity and the prospect of never owning a home free and clear; they also could pay substantially higher taxes if their income is large enough to deduct property taxes and mortgage interest. And any improvements a tenant makes to a rental property belong to the landlord, of course. Tenants might also face unexpected rent hikes and evictions.

The sad reality is most new homeowners underestimate their monthly costs by 20% to 30%. The most difficult period for most first-time buyers is the first year or two when they adjust to what their house really costs.

Real-estate experts warn that it’s important for potential homebuyers to plan ahead. The common wisdom is that a buyer should anticipate staying in a house for seven to 10 years to recover all the costs. Yet these days, most people expect to be more mobile, in pursuit of new jobs and careers. “The two things are working in opposition,” Nelson said, “the mobility of the job market versus how tough it is to recoup housing costs.”

An astute observer noted I have stated several times — perhaps too many times — people should expect to hold for seven to ten years to break even. Fair enough, but it is a message worth repeating, because most in Orange County real estate are still telling people rapid appreciation awaits those who buy today.

For buyers, times are very different than they were before the housing crash triggered the Great Recession. Then, the saying went, you just needed a pulse to get a mortgage. Now, you need a pristine credit score (in the high 600s, at least) and history without any outstanding debt or defaults, according to broker Allyson Bernard, the owner of Real Estate Professionals of Connecticut. And expect to put down at least 10 percent.

Many people who want prices to go back up quickly have complained about the tightening credit. I believe credit will tighten further and become more expensive going forward. The comment above reflects the current “bar” people must reach to buy a home. A FICO in the high 600s and 10% down is not onerous by historic standards.

Many in the lending industry have equated lower lending standards with progress. We are somehow going back to the stone ages of the 1970s by raising lending standards. Progress should not measured by how stupid banks can be with giving out free money to people who won't pay it back. Relaxed lending standards do not reflect progress, they reflect regression and stupidity.

Lenders, she noted, also demand a strong employment history: “[They’re] not just looking at your stability, but at the stability of the market you work in.” The restrictions are toughest, Bernard said, on the increasing numbers of self-employed, who find it harder and harder to obtain a “non-verified” mortgage. Bernard noted that she owns her home, but that if she didn’t, as a self-employed real-estate agent, “I couldn’t even get a mortgage.”

When stated-income became the easiest conduit for Wall Street money, those programs were doomed. In many instances, we have probably thrown out the baby with the bath water when it comes to stated-income loans.

Some version of stated-income can be underwritten successfully. There are many ways the self-employed can demonstrate income, and programs using these sources as documentation will eventually return. However, right now, if you don't get a W-2, it is very difficult to provide lenders with income documentation they will accept. We should never return to the days of signature mortgages, but programs that accommodate alternate sources of income can and will return to the market in time.

Still, now that housing prices are down and interest rates are low, many economists and most real-estate agents say that if you can find the credit, this is the time to buy. But Elizabeth Weintraub, a Sacramento agent who writes on the subject for the website About.com, isn’t so sure. “People think owning a home is their destiny, but maybe you’re not cut out to be a homeowner,” she said. “You’re making a commitment to buy more than four walls and a roof. You need to think, ‘Do I have a maintenance account set up? Will the tax consequences be significant? Can I afford to make improvements?’

“It’s OK to give yourself permission not to own a home,” Weintraub concluded.

That is the most important statement in the article. Prior to the collapse of the housing bubble, renting was universally derided as a sub-standard way of life. A tremendous amount of emotional baggage is attached to our desires to be home owners. Sometimes people just need to be given permission, the comfort of the herd, to make a change. The whole point of this article was to prepare people to emotionally accept the statement above.

By some accounts, the traditional stigma against renting is easing. There is even a small movement, Nelson of Trulia.com pointed out, of people who call themselves renters by choice.

Perhaps Irvine Renter is the start of a small national movement?

Texas Tech’s James, however, said he doesn’t expect any significant shift, partly because of Americans’ long-standing love for homeownership and partly because of the law. In Europe, where longtime renting is far more common, he noted, “there’s a totally different attitude.” Renters have strong legal protection—too strong, some argue—against eviction and dramatic rent increases. But in the United States, except in places (such as Manhattan) with a semblance of rent control, the cost of renting is unstable, he said, and therefore less appealing over the long haul.

That truism is only factual when borrowers use fixed-rate mortgages. ARM borrowers do not gain the certainty of costs lower than renting that fixed-rate mortgage borrowers gain.

Still, in deciding whether to rent or buy, the numbers matter only so much. Kelly Stettner regards owning a home in her Vermont town as good not only for her family but for the community, too. “It really does make us better citizens,” she said. “We’re responsible for keeping up good relations with our neighbors and making sure that our house looks good from the street.”

What does it say about her that she is a lesser citizen when she rents?

Upstate New York renter Jean Sica-Lieber thinks that the decision depends on where you are in life and what you want out of your future. “There’s a freedom that goes with owning,” she said. “And there’s a freedom that goes with not owning.”

The author writes the ShortCuts column for The New York Times. Her book, Better by Mistake, is being published this month. She’s at twitter.com/@atugend.

Freedom is renting. Given my new line of work, I strongly considered moving to Las Vegas. Since I rent, that is an option for me. A quarter to a third of home owners in America do not have the same freedom, and many of those people will not regain their freedom for a very long time.

Irvine Home Address … 4162 SALACIA Irvine, CA 92620

Resale Home Price … $699,990

Home Purchase Price … $260,000

Home Purchase Date …. 8/23/96

Net Gain (Loss) ………. $397,991

Percent Change ………. 153.1%

Annual Appreciation … 6.8%

Cost of Ownership

————————————————-

$699,990 ………. Asking Price

$139,998 ………. 20% Down Conventional

4.82% …………… Mortgage Interest Rate

$559,992 ………. 30-Year Mortgage

$141,984 ………. Income Requirement

$2,945 ………. Monthly Mortgage Payment

$607 ………. Property Tax

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

$117 ………. Homeowners Insurance

$0 ………. Homeowners Association Fees

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

$3,818 ………. Monthly Cash Outlays

-$714 ………. Tax Savings (% of Interest and Property Tax)

-$696 ………. Equity Hidden in Payment

$258 ………. Lost Income to Down Payment (net of taxes)

$117 ………. Maintenance and Replacement Reserves

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

$2,784 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$7,000 ………. Furnishing and Move In @1%

$7,000 ………. Closing Costs @1%

$5,600 ………… Interest Points @1% of Loan

$139,998 ………. Down Payment

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

$159,598 ………. Total Cash Costs

$42,600 ………… Emergency Cash Reserves

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

$202,198 ………. Total Savings Needed

Property Details for 4162 SALACIA Irvine, CA 92620

——————————————————————————

Beds: 4

Baths: 3

Sq. Ft.: 2550

$275/SF

Lot Size: 6,200 Sq. Ft.

Property Type: Residential, Single Family

Style: Two Level, Ranch

Year Built: 1970

Community: Northwood

County: Orange

MLS#: S651772

Source: SoCalMLS

Status: Active

On Redfin: 2 days

——————————————————————————

Premiere Location on Cul de Sac Street-3 Bedrooms, 2.5 Baths w/ Approx. 1915 S. F. , Wood Floors, Vaulted Ceilings, Sunny Kitchen w/ Newer Appliances, Tile Counters, Wood Floor, Garden Window, Breakfast Nook w/ Pantry, Spacious Family Room w/ Double French Doors & Sidelights Opens to Private Backyard, Built-In Entertainment Unit, Brick Fireplace & Recessed Lights, Formal Living Room & Dining Room, Master w/ Walk-In Closet & Window Shutters, Master Bath w/ Dual Vanity, Tile Floor & Tiled Shower, Private Backyard has Hardscape w/ Brick Accents & Grassy Area, Walk to Tot Lot & Large Grassy Area Behind Home, Walk to Award Winning Schools including Prestigious Northwood High, Enjoy Resort-like Association Amenities w/ Pools, Huge Spa, Tennis Courts, Volleyball Courts, BBQ's & Remodeled Clubhouse, No Mello Roos, Low Tax Rate, Assoc. Dues $83/Month

I play too much Wii Golf

I really enjoy playing Wii Golf. I have the Tiger Woods golf game, and it is more realistic, but Wii Golf captures the essence of golf. The thrill of golf. Sometimes you are forced to cope with unfair bounces and bad breaks. Wii Golf is more like real life. Golf has always been a metaphor for life, for dealing with capricious fate. Wii Golf is an instructional spiritual practice.

Wii Golf was designed by gamers who were interested in good gameplay. Some of the architectural devices they use (trees in fairways, ridiculous green slopes, and others) are a turn-off to many seeking the golf course experience. I love these features because they force you to overcome them.

Wii golf is broken down into groups of three holes, a par 3, a par 4, and a par 5. Once you become proficient at the game, you expect to birdie nearly every hole. The par 5s offer an opportunity for an eagle 3 if the wind is favorable. Practically speaking, the best you can achieve on each three-hole group is -4 (four under par). I will usually be either -2 or -3 for each three-hole group. Most often I will shoot between 6 and 9 under par for a nine-hole round, but sometimes, when everything comes together, I can get to -10 or better. The round above was perfection.

I will spare you the shot-by-shot description of my brilliant play. No need to go into detail about the masterful judgment of ball physics and creative shotmaking only a golfing genius could ever attain. No, I won't recount the amazing three wood I sliced onto the third green to within 10 feet. but i have to share the final hole.

The par 5 ninth has always been a nemesis. It's set up to be reachable in two only if the wind is behind. No backwind, no chance for eagle. The green is severe with mounds and plateaus on the left side and a steep gradient on the right. There are many difficult pin placements and few easy ones.

I got my favorable backwind, and I judged my tee shot perfectly between a large central pine tree and the nearby left rough. it provides a hilltop driver “from the deck” that lands in a small patch of fairway between two greenside bunkers. Too short, and the ball is in the water, and too long, and it hits the green and bounds over the back. If you don't hit this tiny square, your ball does not end up on the green.

After managing to get on in two, I pinpointed the cup on the other side of the green — the side you can't access with your second shot. I faced this 50+ foot putt with a swinging left-to-right break of great severity.

I stopped to laugh to myself about the degree of difficulty for a perfect score. The game was not making it easy for me. I used all my experience to try to pick a line and speed I believed would rattle the cup from three-putt land. As I watched it arc into the hole with perfect speed and break (I think the Wii helps you out sometimes), I felt a sense of satisfaction as deep as any experience I have enjoyed on a golf course. In some ways, more so.

Today I have a guest author who came to share his insights into what happens after mortgage delinqency.

Irvine Home Address … 3 East ALBA Irvine, CA 92620

Resale Home Price …… $610,000

I've never been so poor.

I bought something I can't afford

Most people can relate with a new car

but this is more value by far

Bankruptcy — Antifreeze

Joe Weber is a local bankruptcy attorney, a daily reader of the IHB, and a frequent astute observer. (I won't tell you who he is.) I have gotten to know Joe over the last year, and I asked him to share his perspective with the broader IHB readership.

From Joe's website, www.bkrights.com, “Attorney Joseph A. Weber has represented thousands of people and businesses in bankruptcy. He is a graduate of St. Leo University, the American College of Law, and has been a member of the Orange County Bar Association, The National Association of Chapter 13 Trustees, The National Association of Consumer Bankruptcy Attorneys, and the Orange County Bankruptcy Forum. He is the author of Credit Limits, a book about the proliferation of bankcards.”

Joe sees what happens at the end of the line. When Ponzis implode, most of them end up in Joe's office. He is privy to the gory details of Ponzi debt as he sees it every day in his practice. He has seen the credit bubble inflating and taking over consumers lives for decades now.

Joe Weber's observations on debt, foreclosure, and bankruptcy

When I first saw a person with six figure credit card debt I was shocked. That was in the middle 80s. Now I see it every day. Since the 1960s, non-rich people having large lines of unsecured credit became commonplace. Since the 80s, my law partner and I have filed thousands of Bankruptcy cases. Almost all of them have significant credit card debt, in addition to the traditional medical and store debt. I wrote the book “Credit Limits” in the early 90s about this phenomenon. In the nearly 20 years since then, more people have universal (e.g. Visa, Master Card, Discover) cards than ever before. Kids still in or just out of high school have them, many with credit lines of 5K or more.

After the housing bubble burst and many banks failed, credit tightened up. Of the folks we saw coming in for Bankruptcy consults, many had had their credit limits cut, and the interest rates on their cards sharply raised. Like the housing bubble, this created a “musical-chair” effect: monthly payments increased, but those who regularly took advances to meet installment payments on other accounts couldn’t do that anymore. And those who regularly took 30-40K out of their home “equity” to pay down the credit cards, couldn’t do that anymore as this particular ATM was shut down too. Then, many of those who would work longer hours or take a second job to service their debt found it impossible, as overtime and employment opportunities also dried up.

As 2011 starts I’m seeing more people in debt who are unemployed or grossly underemployed than any time in my career, even compared with the early 90s. I just don’t believe that government statistics accurately give the true picture- almost every day I talk with someone who is not only unemployed or underemployed, but who has just given up looking for work altogether, living back with parents or crashing on a friend’s couch.

As IHB has clearly laid out, people with low income can’t qualify for large mortgages when liar loans and other “alternative financing” aren’t available. I believe that many more people have to become employed or better employed before things go back to normal.

All Bankruptcies concern debt and assets and how they are treated. Natural persons (unlike “paper” entities like corporations and LLCs) get their debts discharged or wiped out in Chapter 7. Natural persons get their debts reorganized in Chapter 13. The two big housing-related issues I’m seeing now are: 1) Junior lien deficiencies during or after foreclosure; and 2) Homeowners behind on their mortgage payments reorganizing mortgage back payments in Chapter 13.

During the Great Housing Bubble, many people bought houses with 80/20 loans. In California, if the house later goes down in foreclosure and the junior lien (2^nd mortgage) was never refinanced, then the lender cannot collect money from the former homeowner. If that loan was acquired AFTER the original purchase, (non-purchase money), then whoever signed the note could be liable for any money not realized from the foreclosure sale. These days, what usually happens is the holder of the 1^st Deed of Trust forecloses and becomes the owner of the property, the lien of the 2^nd TD is extinguished; the holder of the 2^nd never gets a dime, then they look to the former homeowner for whatever the balance was. This can be devastating, as the balance could easily be in six figures and most people can’t just write a check for it.

If the person files a Chapter 7 Bankruptcy and receives a Discharge, this obligation is then wiped out. Another strategy Bankruptcy clients employ is to file a case under Chapter 7 and delay foreclosure- once a case is filed a “stay” goes into effect, preventing collection actions including foreclosure. If back mortgage payments aren’t brought up to date and the bank wants to continue with the foreclosure, they have to apply to the Bankruptcy judge for permission to continue, or what is called “Relief from the Automatic Stay.” If the creditor moves at top speed they can get relief in as little as 5-6 weeks. Some mortgage holders/servicers elect to do nothing, and wait for the Chapter 7 case to end, typically 4-5 months after it was first filed. This affords the debtor/homeowner even more time to stay in the property without making payments.

In Chapter 13 Bankruptcy a person can propose a Plan to the court to make up back mortgage payments over time, usually 60 months. And in Chapter 13, junior liens (2nds, 3rds, etc.), if there is no value to secure them, can be stripped off the house, leaving only the 1^st mortgage.

(Joe Weber is a Bankruptcy attorney in Costa Mesa. His site is www.bkrights.com)

[end of commentary]

As a follow up question, I asked Joe:

I have believed from the start that foreclosure followed by bankruptcy was going to be the ultimate resolution for those who succumb to mortgage distress. Right now that is shaping up to be millions and millions of bankruptcies. What do you see as the ultimate resolution for those who stop paying their mortgages?

His response was:

Foreclosure. I've seen too many people pay too much for a house they never could afford in the first place. And many of them STILL can't afford that house, even after saving it through Chapter 13 restructuring or non-Bankruptcy loan modification. A large percentage of homes nationwide have negative equity. We've yet to understand, then see the long-range effect of this.

Unfortunately, I see more foreclosures “cleansing” the market and bringing prices back in line to true value.

Thank you, Joe.

The impact we don't see

Many flamboyant spenders during the bubble are quietly contemplating their options. Joe only sees borrowers who have decided to do something about their problem. But many more are in denial, ignoring creditor queries, and hoping the problem will simply go away. Perhaps the lender will forget they were owed money, right?

Usually it isn't until the collection calls get overwhelming that people realize they have to act. With so many bad loans and bigger issues to deal with, following up with collections on old bad debts has not gotten the attention it will over the next several years. Also, since lenders are pretending many non-performing loans will still be paid, they are ignoring the problem too, probably hoping for another government bailout.

In the end, these debtors will be coaxed out of hiding, and they will be forced to work out something with their creditors. For an increasingly large number, the only workout is a bankruptcy.

The trend of increasing bankruptcies will likely continue. Bankruptcy reform in 2005 was supposed to reduce the number of bankruptcies permantenly. As the number of bankruptcies continues to rise, the failure of this legisltation will be apparent.

Gold in shadow inventory

There is a group of delinquent borrowers in shadow inventory that don't concern the bank: squatters with equity. The owner of today's featured property hasn't made a payment in a couple of years.

Foreclosure Record

Recording Date: 10/30/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 07/21/2009

Document Type: Notice of Default

However, the bank is in no hurry to foreclose? Why is that? Well, as long as they property has equity, the bank is merely adding to the principal balance the lost interest, penalties, and every fee they can dream up.

From a banks perspective, shadow inventory can be divided up into two broad categories: 1. those delinquent borrowers with equity where they can recover their capital in foreclosure, and 2. those delinquent borrowers with no equity that will cause a huge loss. The bank has no urgency to foreclose on the first group, the ones with equity, because its actually better than if the loan were performing. Not just are they booking the interest as income, they are also getting fees and penalties.

Banks will not move aggressively to foreclose on squatters with equity because they are a hidden cash cow. The probably watch reports to see if the remaining equity is getting low enough that they may not recover their capital in a foreclosure. When a borrower's equity runs dry is when their foreclosure will be bumped to the front of the queue.

Banks are in no hurry to foreclose on the group with no equity because of the losses it will cause. Basically, the only people the bank feels any urgency to act on are those with marginal equity. These are the delinquent borrowers who consumed their equity with non-payment. As soon as equity is gone, they are a prime target because the bank has extracted all they can, and any further delay costs them money.

Today's featured owners were minor Ponzis. They did consistently add to their mortgage, but it was very small amounts that shouldn't have been a source of financial distress. Unemployment is a likely culprit here.

Irvine Home Address … 3 East ALBA Irvine, CA 92620

Resale Home Price … $610,000

Home Purchase Price … $236,000

Home Purchase Date …. 7/21/97

Net Gain (Loss) ………. $337,400

Percent Change ………. 143.0%

Annual Appreciation … 7.0%

Cost of Ownership

————————————————-

$610,000 ………. Asking Price

$122,000 ………. 20% Down Conventional

4.82% …………… Mortgage Interest Rate

$488,000 ………. 30-Year Mortgage

$123,731 ………. Income Requirement

$2,566 ………. Monthly Mortgage Payment

$529 ………. Property Tax

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

$102 ………. Homeowners Insurance

$139 ………. Homeowners Association Fees

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

$3,486 ………. Monthly Cash Outlays

-$436 ………. Tax Savings (% of Interest and Property Tax)

-$606 ………. Equity Hidden in Payment

$225 ………. Lost Income to Down Payment (net of taxes)

$102 ………. Maintenance and Replacement Reserves

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

$2,771 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$6,100 ………. Furnishing and Move In @1%

$6,100 ………. Closing Costs @1%

$4,880 ………… Interest Points @1% of Loan

$122,000 ………. Down Payment

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

$139,080 ………. Total Cash Costs

$42,400 ………… Emergency Cash Reserves

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

$181,480 ………. Total Savings Needed

Property Details for 3 East ALBA Irvine, CA 92620

——————————————————————————

Beds: 3

Baths: 3

Sq. Ft.: 1915

$319/SF

Lot Size: 3,825 Sq. Ft.

Property Type: Residential, Single Family

Style: Two Level, Contemporary

View: Park/Green Belt

Year Built: 1980

Community: Northwood

County: Orange

MLS#: S651655

Source: SoCalMLS

Status: Active

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Premiere Location on Cul de Sac Street-3 Bedrooms, 2.5 Baths w/ Approx. 1915 S. F. , Wood Floors, Vaulted Ceilings, Sunny Kitchen w/ Newer Appliances, Tile Counters, Wood Floor, Garden Window, Breakfast Nook w/ Pantry, Spacious Family Room w/ Double French Doors & Sidelights Opens to Private Backyard, Built-In Entertainment Unit, Brick Fireplace & Recessed Lights, Formal Living Room & Dining Room, Master w/ Walk-In Closet & Window Shutters, Master Bath w/ Dual Vanity, Tile Floor & Tiled Shower, Private Backyard has Hardscape w/ Brick Accents & Grassy Area, Walk to Tot Lot & Large Grassy Area Behind Home, Walk to Award Winning Schools including Prestigious Northwood High, Enjoy Resort-like Association Amenities w/ Pools, Huge Spa, Tennis Courts, Volleyball Courts, BBQ's & Remodeled Clubhouse, No Mello Roos, Low Tax Rate, Assoc. Dues $83/Month

Thank you for reading the Irvine Housing Blog.

Astutely observing the housing market and combating California Kool-Aid since 2006.

Have a great weekend,

Irvine Renter

Ireland experienced a housng bubble even larger than ours, and they are facing many of the same problems.

Irvine Home Address … 24 Wayfarer Irvine, CA 92614

Resale Home Price …… $695,000

Life's backwards

People turn around

The house is burned

The house is burned

Sinead O'Connor — Fire on Babylon

The day investors stopped using toxic loans as a conduit to inflate prices, credit crunched, and the fate of the housing market was sealed. It was only a matter of how long and painful the journey back to reasonable valuations was going to be.

Many with a vested interest in real estate refuse to face that the value of the house is burned. Owners don't want to face it, banks don't want to face it, and the government isn't forcing them to face it. Lenders have life backwards: they have a value on their books that determines what they need to get for their bad loans or its underlying collateral. Markets don't work that way.

Irish Banks Seek to Delay `Evil Day' as Home-Loan Losses Rise

By Joe Brennan – Mar 10, 2011 4:01 PM PT

Perched on a chair overlooking a wood panel-lined room in Dublin’s High Court, a bespectacled Judge Elizabeth Dunne has become all-too-used to hearing from the victims of Ireland’s economic meltdown.

Each Monday, Dunne presides over repossession hearings, with one in 10 Irish mortgages now in trouble. At the end of last year, more than 79,000 borrowers were behind on payments or had loan terms altered due to “financial distress,” the country’s central bank said on Feb. 28.

“Things are getting worse and worse,” said Dunne, as she weighed the case of a couple about 114,000 euros ($158,000) in arrears on a 558,938-euro home loan, one of 74 cases on her list on March 7. “Putting off the evil day is not going to help.”

I don't think the banks share her view on the evils of putting off the day of reckoning.

Our mortgage default rate runs at about 10% just like Ireland's, and their banks are delaying repossession just like ours are.

Irish mortgages account for more than a third of about 270 billion euros of loans that remain with the nation’s so-called viable lenders — Allied Irish Banks Plc (ALBK), Bank of Ireland Plc, Irish Life & Permanent Plc and EBS Building Society. The country’s new coalition parties are not convinced “that there has been proper transparency or full disclosure by the banks” on home-loan impairments, Alan Shatter told RTE Radio on March 7, two days before his appointment as Minister for Justice.

Wow! Someone in Ireland's government actually seems to care about what happens on banks balance sheets. No politician in the United States is questioning the accounting gimmicks currently being used by our major banks.

Historically, banks have always controlled the Republicans, but now with Democrats showing little or no spine when it comes to reigning in the banks, lenders are being allowed to post bogus accounting numbers on the idea that the market will come back and they will be made whole. That isn't gong to happen. There are far too many banks on the wrong side of the trade. They all have copious amounts of property, and they all need to dispose of it at top dollar.

“There has been a continual under-estimation of loan impairments in Irish banks over the past few years,” Ray Kinsella, banking professor at the Smurfit Business School at University College Dublin, said by telephone. “I am seriously concerned about mounting loan losses in their mortgage books.”

New Stress Test

The bad loans may be reassessed as early as this month when Ireland’s central bank concludes a third round of stress tests on the country’s lenders. The results will determine how much of a 35 billion-euro international bailout fund Ireland will need to draw down.

A year ago, Irish regulators stress-tested for a 5 percent loss rate on Irish mortgages. This year’s review “will take account of the deteriorating economic conditions and hence” loan-loss assumptions “may be higher,” said Nicola Faulkner, a spokeswoman for the central bank, by e-mail.

What a joke. Their real estate prices are going to halve over a five year period, and they will take forever to get back to the peak. Their 5% loss rate likely didn't factor in the market conditions created by their own inventory.

Ireland is suffering after a decade-long real estate boom collapsed in 2007. Already, the state has bought 72.3 billion euros of risky commercial property loans from the banks, at an average discount of 58 percent. Irish house prices, which quadrupled in the decade to 2007, have since plunged more than a third. Unemployment has tripled to 13.5 percent over the same period.

Who is lining up to buy their overpriced homes?

House Price Declines

This year’s tests may stress loan books against the unemployment rate rising to 16 percent, house prices falling 60 percent from their peak and “negligible” economic growth, said analysts including Jim Ryan and Michael Cummins of Glas Securities, the Dublin-based fixed-income firm, in a note to clients March 9. The central bank declined to comment.

That is classic. These private analysts portray the reality of what is going to happen to the economy and the housing market. Obviously, the central bank doesn't want to run that stress test (a realistic one) because it would show how totally screwed they really are.

More than 300,000 households, or about 40 percent of mortgages, may find their mortgages are worth more than their homes, so-called negative equity, before the property market bottoms out, said David Duffy, an economist at the Economic & Social Research Institute in Dublin, who estimates that house prices will fall by as much as half from peak to trough.

We currently have 25% of our mortgages underwater, but if prices drop another 10%, we could easily reach 40% of mortgages underwater at the bottom.

His estimate of a 50% drop in Ireland looks reasonable when you consider prices more than doubled in 7 years.

Prices in Ireland are probably near where they would have been if no housing bubble occurred. However, a housing bubble did occur, and after the collapse, the downward price momentum and problems with supply will continue to push prices lower and cause an overshoot to the downside.

Morgan Kelly, a University College Dublin economics professor dubbed “Doctor Doom” for his bleak assessments of Ireland’s housing market, wrote in the Irish Times on Nov. 8 that banks face “mass mortgage defaults” and a “wave of foreclosures.” Kelly declined to be interviewed.

Strategic default will ravage what's left of the market there just as it has in Las Vegas.

EU Bailout

Iceland, where almost 40 percent of residential mortgages were in negative equity by December, decided that month to write off mortgages and other household debt by as much as $858 million. Unlike Ireland and other western nations, the Nordic nation placed its biggest lenders in receivership in 2008 rather than offer taxpayer-funded capital injections.

Ireland has bolstered its banks with 46.3 billion euros of additional capital over the past two years. The nation was forced to agree to an 85 billion-euro bailout on Nov. 28, led by the European Union and the International Monetary Fund. That package includes 10 billion euros to recapitalize the banks up- front and a further 25 billion euros of “contingency” capital to be used if required.

“When the teams from the EU, ECB and IMF arrived in November, they probably thought they would find huge holes remaining in the banks’ loan books, but they did not,” said Alan Ahearne, who was economics adviser to Brian Lenihan, the former finance minister. “It’s not that there’s some black hole in the Irish banks that hasn’t previously been discovered.”

Actually, I think there is…

10 Billion Euros

Still, a previous regulatory target for banks to hold 8 percent core tier 1 capital, a gage of financial stability, “wasn’t enough to support confidence in the banks” given the economy’s problems, Ahearne said. Ireland agreed as part of the bailout to increase lenders’ capital levels to no less than 10.5 percent by the end of this month.

The 10 billion euros of initial capital destined for banks under the rescue package “pretty much covers our base case scenario” for remaining losses in Irish banks, said Ross Abercromby, a London-based analyst at Moody’s Investors Service, by telephone. “The additional 25 billion euros contingency fund would cover our stress scenario, which is pretty severe.”

Moody’s estimates that losses on Irish mortgages may be as high as 14 percent where the loan-to-value ratio is over 90 percent. That rises to 16 percent “in our worst case,” the ratings company said.

Household debt soared from 48 percent of disposable income in 1995 to 176 percent in 2009, catapulting Irish consumers into fourth place in 2008 in an international league table of personal indebtedness from 17th place in 1995, according to Ireland’s Law Reform Commission.

Are the analysts correct, or will Ireland's banks be looking for more bailouts?

Savings Rise

On the other hand, Irish households’ net savings as a percentage of disposable income rose from zero in 2007 to 12 percent in 2009, according to the Central Statistics Office. The savings rate should remain around the same level for this year and next, the ESRI said on Jan. 20.

That is impressive. Savings will provide the internal capital for Ireland to prosper again. Americans are not quite so thrifty.

Irish Life & Permanent Plc Finance Director David McCarthy said he doesn’t believe there are undiscovered losses in banks’ mortgage books. The group, which has 26.3 billion euros of Irish home loans, saw arrears of less than 90 days peak in mid-2010, McCarthy said on March 2, and they’ve “been falling, albeit quite slowly, since then,” he said.

Bank of Ireland spokeswoman Anne Mathews referred to CEO Richie Boucher’s Nov. 12 statement to analysts that there was “clear evidence” that arrears were “beginning to stabilize.” Allied Irish and EBS spokesmen declined to comment.

‘Different Phenomenon’

The Irish home-loan market is “a totally different phenomenon” to the commercial real-estate market, said John Reynolds, chief executive officer of Belgian-owned KBC Ireland.

“Irish banks have been hamstrung by a narrative that has been allowed to develop that all their lending was as mad as their real-estate lending,” said Reynolds. “The reality is that the Irish banks, when they didn’t do the real-estate stuff, which was a seductive drug, did bog-standard, criteria-driven lending.”

If that statement is accurate, Irish banks may be better off than we give them credit (pun intended). Our banks are hamstrung by real estate losses, but they are severely hampered by derivative losses and commercial losses. It wasn't housing that brought down Citi.

“Banks are exercising huge forbearance on borrowers in arrears,” partly because of pressure from the authorities “but also because they don’t want to repossess houses as there’s no second-hand market to sell them,” said Kinsella, the banking professor. Lenders only held 585 repossessed residential properties at end-2010, according to the central bank.

The new government said on March 6 it may bring in a two- year moratorium on repossessions “of modest family homes where a family makes an honest effort to pay their mortgages.” Currently, mortgage holders can enjoy 12-month protection from legal action if they are co-operating with lenders.

The coalition also pledged to fast-track changes in laws requiring bankrupted individuals to wait 12 years before they are discharged from their debts.

Wow! That really is different than what we are doing. Here in the United States, the GSEs have been moving to relax the waiting period so they can manufacture enough buyers to recycle their bad loans.

If Ireland does make it more restrictive to get a new loan, their housing market is really going to crumble. I believe this policy to be an empty threat to deter strategic default. Nice idea, but the defaults are going to occur anyway, and the policy will end up quietly being changed to get buyers back into the queue.

Rising Interest Rates

The issue of full recourse for mortgage loans is positive for banks, if not for borrowers in negative equity, said Abercromby. “If that level of recourse is watered down, by introducing less stringent bankruptcy laws, you could be looking at higher losses,” he said.

And if they don't relax those laws, they are sentencing an entire generation to debt servitude.

That's really the issue faced both here and abroad: increase bank losses and reduce the debt burden on the population, or limit the bank losses and force families to spend their entire working lives to pay for the mistakes of bankers. Each government through its own process will determine who the winners and losers are in the battle of the banks versus the people.

From what I am seeing here in the US, the banks will probably win. Prices will stay inflated, debt-to-income ratios will remain elevated, and everyone will be forced to put the maximum amount of income possible toward a house payment if they want to own something comparable to a rental. People will drink the appreciation kool aid, but with everyone already stretched to the max, prices won't go up any faster than inflation. What happens then?

There is also concern that rising interest rates will hit borrowers who have managed to remain out of trouble so far. ECB President Jean-Claude Trichet signaled on March 3 the bank may raise its benchmark rate from a record low of 1 percent as soon as next month.

Banks have already increased variable home loan rates from an average of 3.16 percent in mid-2009 to 3.87 percent by November, according to the ESRI. Lenders, including Irish Life and EBS, have hiked borrowing costs again since then.

Meanwhile, at least half of all Irish mortgages are so- called tracker products, with pricing linked to ECB’s key rate, according to the Irish Banking Federation.

More than fifty percent of Irish mortgage are ARMs underwritten at the bottom of the interest rate cycle. Hmmm… do you think they may have some payment shock to deal with over the coming years as interest rates rise?

Adjustable rate mortgages will separate the successful owners from the unsuccessful ones over the next decade. Those trying to save a few dollars today will pay a higher price when they refinance. If they roll over a series of 3-year ARMs, in nine years, they may be paying the same mortgage balance at 9% instead of the 5% or less borrowers are locking in today.

ARM holders are signing up to give ever-increasing payments to their lenders for the foreseeable future.

Tracker Rates

While banks may be able to contain bad-loan losses on their mortgage books, “a big and ongoing problem is that a large part of their mortgage books are based on ECB tracker rates, which banks are funding at a loss,” said Karl Deeter, operations manager with Dublin-based Irish Mortgage Brokers.

Back in the High Court, Dunne is listening to how a house builder from Co. Cavan, close to the border with Northern Ireland, is 67,000 euros in arrears on a 360,000 euro home loan taken out three years ago.

Times are hard out there, says the man, who has a plant hire and quarrying business, but is making partial remortgage payments. “I understand that well,” says Dunne. “I see that every Monday.”

To contact the reporter on this story: Joe Brennan in Dublin at jbrennan29@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

ireland had a real estate bubble very similar to ours, and they are grappling with the same issues we are in its deflation.

I wonder if you can pick up any good cashflow properties there now that prices have crashed?

That pesky comparable

It must be nice to believe a precious cottage still commands peak pricing. Well, good luck to these sellers with the appraisal because a model-match just sold last week for $488,000.

$488,000 9 SPRING BUCK Sold on Mar 09, 2011

0.05 miles 3 bd / 2.5 ba 1,571 Sq. Ft.

It's pretty hard for an appraiser to ignore a week-old model-match a few blocks away that just sold for $207,000 less. Perhaps he can bump up the value with the upgrades. Pehaps a price as high as $525,000 might be justifiable, if the appraiser were so inclined.

If these owners want to get $695,000, it better be an FCB with a lot of cash. The're going to need it.

For the record, these people were responsible borrowers. They only increased their mortgage once, and it certainly appears that money was put into the property.

Irvine Home Address … 24 Wayfarer Irvine, CA 92614

Resale Home Price … $695,000

Home Purchase Price … $236,000

Home Purchase Date …. 7/21/97

Net Gain (Loss) ………. $417,300

Percent Change ………. 176.8%

Annual Appreciation … 7.9%

Cost of Ownership

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$695,000 ………. Asking Price

$139,000 ………. 20% Down Conventional

4.82% …………… Mortgage Interest Rate

$556,000 ………. 30-Year Mortgage

$140,972 ………. Income Requirement

$2,924 ………. Monthly Mortgage Payment

$602 ………. Property Tax

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

$116 ………. Homeowners Insurance

$139 ………. Homeowners Association Fees

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$3,931 ………. Monthly Cash Outlays

-$709 ………. Tax Savings (% of Interest and Property Tax)

-$691 ………. Equity Hidden in Payment

$256 ………. Lost Income to Down Payment (net of taxes)

$116 ………. Maintenance and Replacement Reserves

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$2,904 ………. Monthly Cost of Ownership

Cash Acquisition Demands

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$6,950 ………. Furnishing and Move In @1%

$6,950 ………. Closing Costs @1%

$5,560 ………… Interest Points @1% of Loan

$139,000 ………. Down Payment

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$158,460 ………. Total Cash Costs

$44,500 ………… Emergency Cash Reserves

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$202,960 ………. Total Savings Needed

Property Details for 24 Wayfarer Irvine, CA 92614

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Beds: 3

Baths: 3

Sq. Ft.: 1571

$442/SF

Lot Size: 3,024 Sq. Ft.

Stories: 0002

Year Built: 1980

Community: Irvine

County: Orange

MLS#: 11003979

Source: VCRDS

Status: Active

On Redfin: 1 day

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A Beautiful 3 bedroom 2 1/2 a bath remodeled cottage home inside the loop in desirable Woodbridge. The kitchen features granite counter tops, new appliances, hardwood floors and new cabinets. Crown molding throughout the house. Remodeled bathrooms with granite counter tops and tile flooring. New paint throughout the home. Custom wood shutters, mirrored wardrobe doors. Painted garage floor. Dining room and family room opens to a beautiful landscaped private patio. New front landscape. Woodbridge offers community lakes as well as the community pools.

I would like to wish my visiting Irish mother-in-law a

Happy St. Patrick's Day!