California cities dominate Forbes.com's new list of America's most miserable cities. The housing bubble is the direct cause of the suffering.

Irvine Home Address … 50 ARBOLES Irvine, CA 92612

Resale Home Price …… $420,000

Looking out for number 1

California here we come

Right back where we started from

Hustlers grab your guns

Your shadow weighs a ton

Phantom Planet — California

California was the land of milk and honey, but with the collapse of the housing Ponzi scheme, Californians are not being given free money. It's making them miserable.

America's Most Miserable Cities

Kurt Badenhausen, 02.02.11, 12:00 PM EST

California has never looked less golden, with eight of its cities making the top 20 on our annual list.

Arnold Schwarzenegger was sworn in as the governor of California at the end of 2003 amid a wave of optimism that his independent thinking and fresh ideas would revive a state stumbling after the recall of Gov. Gray Davis.

The good vibes are a distant memory: The Governator exited office last month with the state facing a crippling checklist of problems including massive budget deficits, high unemployment, plunging home prices, rampant crime and sky-high taxes. Schwarzenegger's approval ratings hit 22% last year, a record low for any sitting California governor.

California's troubles helped it land eight of the 20 spots on our annual list of America's Most Miserable Cities, with Stockton ranking first for the second time in three years.

Congratulations, Stockton! I remember being contacted by a recruiter in 2005 about a position in Stockton. I remember thinking to myself that Stockton is not where I wanted to be trapped when the housing bubble burst. Construction related unemployment will be high there for a very long time.

In Pictures: America's Most Miserable Cities

Located in the state's Central Valley, Stockton has been ravaged by the housing bust. Median home prices in the city tripled between 1998 and 2005, when they peaked at $431,000. Now they are back to where they started, as the median price is forecast to be $142,000 this year, according to research firm Economy.com, a decline of 67% from 2005. Foreclosure filings affected 6.9% of homes last year in the Stockton area, the seventh-highest rate in the nation, according to online foreclosure marketplace RealtyTrac.

A 67% decline down to 1998 prices. Wow!

Stockton's violent crime and unemployment rates also rank among the 10 worst in the country, although violent crime was down 10% in the latest figures from the FBI. Jobless rates are expected to decline or stay flat in most U.S. metro areas in 2011, but in Stockton, unemployment is projected to rise to 18.1% in 2011 after averaging 17.2% in 2010, according to Economy.com.

“Stockton has issues that it needs to address, but an article like this is the equivalent of bayoneting the wounded,” says Bob Deis, Stockton city manager. “I find it unfair, and it does everybody a disservice. The people of Stockton are warm. The sense of community is fantastic. You have to come here and talk to leaders. The data is the data, but there is a richer story here.”

He is probably right. The misery in a town experiencing economic hardship is not bore equally. Those that are unemployed suffer greatly while those who continue working as during the boom suffer very little, other than perhaps the loss of their home equity. Those that are unemployed and did not take on a toxic mortgage to buy a house suffer most.

There are many ways to gauge misery. The most famous is the Misery Index developed by economist Arthur Okun, which adds unemployment and inflation rates together. Okun's index shows the U.S. is still is in the dumps despite the recent gains in the economy: It averaged 11.3 in 2010 (blame a 9.6% unemployment rate and not inflation), the highest annual rate since 1984.

Our list of America's Most Miserable Cities goes a step further: We consider a total of 10 factors, things that people gripe about around the water cooler every day. Most are serious issues, including unemployment, crime and taxes. A few we factor in are not as critical, but still elevate people's blood pressure, like the weather, commute times and how the local sports team is doing.

The Green Bay Packers do more to uplift Wisconsin than economic data. Go Packers!

One of the biggest issues causing Americans angst the past four years is the value of their homes. To account for that we tweaked the methodology for this year's list and considered foreclosure rates and the change in home prices over the past three years. Click here for a more detailed rundown of our methodology.

Florida and California have ample sunshine in common, but also massive housing problems that have millions of residents stuck with underwater mortgages. The two states are home to 16 of the top 20 metros in terms of home foreclosure rates in 2010. The metro area with the most foreclosure filings (171,704) and fifth-highest rate (7.1%) last year is Miami, which ranks No. 2 on our list of Most Miserable Cities.

The good weather and lack of a state income tax are the only things that kept Miami out of the top spot. In addition to housing problems (prices are down 50% over three years), corruption is off the charts, with 404 government officials convicted of crimes this decade in South Florida. Factor in violent crime rates among the worst in the country and long commutes, and it's easy to understand why Miami has steadily moved up our list, from No. 9 in 2009 to No. 6 last year to the runner-up spot this year.

California has its own miseries it heaps upon its cities. Do you think California will get a federal bailout?

California cities take the next three spots: Merced (No. 3), Modesto (No. 4) and Sacramento (No. 5). Each has struggled with declining home prices, high unemployment and high crime rates, in addition to the problems all Californians face, like high sales and income taxes and service cuts to help close massive budget shortfalls.

The Golden State has never looked less golden. “If I even mention California, they throw me out of the office,” says Ron Pollina, president of site selection firm Pollina Corporate Real Estate. “Every company hates California.”

There are many highly trained and talented people living in California, and this will always be a draw to employers to locate here, but the high taxes and highly regulated nature of the state makes it very unattractive to business.

Last year's most miserable city, Cleveland, fell back to No. 10 this year despite the stomach punch delivered by LeBron James when he announced his exit from Cleveland on national television last summer. Cleveland's unemployment rate rose slightly in 2010 to an average of 9.3%, but the city's unemployment rank improved relative to other cities, thanks to soaring job losses across the U.S. Cleveland benefited from a housing market that never overheated and therefore hasn't crashed as much as many other metros. Yet Cleveland was the only city to rank in the bottom half of each of the 10 categories we considered.

Two of the 10 largest metro areas make the list. Chicago ranks seventh on the strength of its long commutes (30.7 minutes on average–eighth-worst in the U.S.) and high sales tax (9.75%—tied for the highest). The Windy City also ranks in the bottom quartile on weather, crime, foreclosures and home price trends.

President Obama's (relatively) new home also makes the cut at No. 16. Washington, D.C., has one of the healthiest economies, but problems abound. Traffic is a nightmare, with commute times averaging 33.4 minutes–only New York is worse. Income tax rates are among the highest in the country and home prices are down 27% over three years.

I note that Las Vegas did not make the list. An oversight, perhaps?

I also note that Irvine didn't make the list. Like Disneyland, Irvine is the happiest place on earth.

Leaving the family holding the bag

Everything you will read about this property today is speculation based on a few facts. First, according to Redfin, the 2006 sale at the peak was not an arms-length transaction. That usually means the property was transfered to a family member.

However, when that sale occurred, the peak buyer borrowed $545,000 to complete the transaction. Arms length or not, the lender was happy to extend 100% financing to the borrower. Basically, the bank bought this property at the peak in exchange for the buyer's credit score.

If this was a family member non-arms-length transaction, how do these two parties feel about it? The original owner sold at the peak and obtained a huge windfall. He must feel good. The family member who paid peak price has trashed credit, but isn't out-of-pocket any money. Does the buyer feel ripped off? Does she ask grandpa to make her whole?

Irvine Home Address … 50 ARBOLES Irvine, CA 92612

Resale Home Price … $420,000

Home Purchase Price … $177,500

Home Purchase Date …. 2/17/1988

Net Gain (Loss) ………. $217,300

Percent Change ………. 122.4%

Annual Appreciation … 3.8%

Cost of Ownership

————————————————-

$420,000 ………. Asking Price

$14,700 ………. 3.5% Down FHA Financing

4.84% …………… Mortgage Interest Rate

$405,300 ………. 30-Year Mortgage

$85,388 ………. Income Requirement

$2,136 ………. Monthly Mortgage Payment

$364 ………. Property Tax

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

$70 ………. Homeowners Insurance

$384 ………. Homeowners Association Fees

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

$2,954 ………. Monthly Cash Outlays

-$350 ………. Tax Savings (% of Interest and Property Tax)

-$502 ………. Equity Hidden in Payment

$27 ………. Lost Income to Down Payment (net of taxes)

$53 ………. Maintenance and Replacement Reserves

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

$2,183 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$4,200 ………. Furnishing and Move In @1%

$4,200 ………. Closing Costs @1%

$4,053 ………… Interest Points @1% of Loan

$14,700 ………. Down Payment

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

$27,153 ………. Total Cash Costs

$33,400 ………… Emergency Cash Reserves

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

$60,553 ………. Total Savings Needed

Property Details for 50 ARBOLES Irvine, CA 92612

——————————————————————————

Beds:: 2

Baths:: 2

Sq. Ft.:: 1440

Property Type:: Residential, Condominium

Style:: One Level

View:: Mountain, Park/Green Belt, Faces South

Year Built:: 1975

Community:: Rancho San Joaquin

County:: Orange

MLS#:: 22147357

Source:: i-Tech MLS

Status:: ActiveThis listing is for sale and the sellers are accepting offers.

On Redfin:: 15 days

This sophisticated Town Home is situated on park-like grounds on a quiet cul-de-sac. A corner unit, this home features a spectacular view of the Newport Coast Mountain RangE & Mason Wildlife Regional Park. This single-level unit with warm neutral tones and an abundance of natural light accentuate the exotic cherry wood flooring throughout the main living area. The spacious entry boasts a handsome built-in Alderwood desk, while the open living room and dining area is graced by an outstanding stacked stone fireplace. The bright and airy kitchen offers beautiful white Hartmark cabinetry, Delerium granite countertops, double porcelain Kohler sink & bay garden window. The well appointed master suite offers an impressive 16 feet of custom built-ins in a mirrored closet complete with cedar ceiling, a master bath that includes a bright picture window with a spectacular view, and 13.5' vaulted ceiling. The guest bedroom features French doors & custom closet with cedar ceiling.

A California court ruled that irregularities in the Notice of Default do not harm the borrower and are not grounds to avoid foreclosure.

Irvine Home Address … 362 DEERFIELD Ave #111 Irvine, CA 92606

Resale Home Price …… $420,000

It was a long and dark December

From the rooftops I remember

There was snow, white snow

Clearly I remember

From the windows they were watching

While we froze down below

When the future's architectured

By a carnival of idiots on show

You'd better lie low

Coldplay — Violet Hill

Last week I wrote Notice of Default irregularities: new false hope for loan owners. Well, the false hope didn't last very long. A recent ruling has struck down the idea of suing based on irregularities in the Notice of Default.

Aceves ruling: Foreclosed homeowner has cause to sue bank for fraud

by KERRY CURRY

Tuesday, February 1st, 2011, 12:22 pm

A California appeals court ruled that a former homeowner's lawsuit against U.S. Bank (USB: 27.39 -0.98%) for fraud may continue after the bank allegedly reneged on a promise to negotiate a mortgage modification, opening the door for claims from potentially thousands of similarly situated troubled borrowers in the Golden State.

While the court ruled that a case for fraud–which includes claims for damages–could proceed, it also ruled that the homeowner, Claudia Jacqueline Aceves, lacked sufficient cause to get her home back after the foreclosure sale.

What could become a landmark foreclosure ruling appears to be both a win and a loss, for mortgage servicers and foreclosure defense attorneys alike. Mortgage servicers prevailed on issues of alleged defects in the foreclosure process, with the court ruling that none of the Aceves allegations of irregularities “would permit the trial court to void the deed of sale or otherwise invalidate the foreclosure.” Aceves had claimed, for example, that the notice of default was defective and therefore void, a claim the court rejected outright. “Absent prejudice, the error does not warrant relief,” according to the ruling.

The idea of getting a free house because someone made a clerical error on a Notice of Default is crazy. We live in a society that believes unjustified enrichment due to “technicalities” is fine, and if millions of deadbeats get free houses, justice must somehow be served.

The court spent most of its 15-page ruling, however, discussing how U.S. Bank had purportedly promised to negotiate a potential loan modification if the homeowner agreed to allow the bank to lift a bankruptcy stay, which had protected the home from seizure. Yet, when the homeowner agreed and attempted to begin negotiation on a loan modification, the bank allegedly opted to foreclose without negotiating.

Another feature of this ruling is going to be a renewed reliance on the defense that borrowers are immune from foreclosure while a loan modification is being negotiated. Banks will need paperwork from the loan modification department demonstrating the loan modification has been denied before a foreclosure can go forward.

Paul Jackson notes the passing of the Notice of Default irregularity defense in his editorial on the case:

Aceves: Far more than meets the eye

by PAUL JACKSON

As we roll the 2011 calendar over to February — already?— outcomes of hand-to-hand legal combat in courtrooms across the nation over the sprawling foreclosure mess are continuing to unfold. Early this year, a state supreme court case out of Massachusetts called Ibanez managed to forever alter the meaning associated with one of the world’s most famous electric guitar makers.

Innocent music instruments aside, a new ruling out of California in the past week has the potential to be every bit as important: Aceves v. U.S. Bank. HousingWire’s own Kerry Curry broke the story Tuesday afternoon, which really is a Jeckyll and Hyde sort of ruling that has the potential to be one of the nation’s most significant rulings in the foreclosure morass.

Depending on your view, in Aceves, you have something to cheer; and depending on your view, you also have something to fear. Regardless of your view, you have a ruling you can’t ignore, especially in California.

But, as we’ll see, the real bombshell in the Aceves ruling isn’t at all what you might expect.

The majority of the ruling’s text discusses the borrower’s right to pursue potential fraud and so-called promissory estoppel claims against the servicer, as HousingWire's original coverage provides strong detail on. And while the ruling should be instructive on that front to servicers working with borrowers in bankruptcy in California, there is far more buried in the pages of the ruling that is likely to be missed by the media hype.

Instead, the real importance of Aceves is buried on page 14 of a 15-page ruling, in a section called, innocuously enough, “Remaining Claims.”

And in particular, within a single paragraph:

Aceves also takes issue with the notice of default, pointing out that it mistakenly identified Option One as the beneficiary under the deed of trust when U.S. Bank was actually the beneficiary. Although this contention is factually correct, it is of no legal consequence. Aceves did not suffer any prejudice as a result of the error. Nor could she. The notice instructed Aceves to contact Quality Loan Service, the trustee, not Option One, if she wanted ― “[t]o find out the amount you must pay, or arrange for payment to stop the foreclosure, or if your property is in foreclosure for any other reason.” The notice also included the address and telephone number for Quality Loan Service, not Option One. Absent prejudice, the error does not warrant relief. (See Knapp v. Doherty (2004) 123 Cal.App.4th 76, 93–94 & fn. 9.)

This is a much larger finding than it might seem, according to at least two California attorneys I spoke with that practice in creditor’s rights. Explaining why, however, requires some unpacking.

Let’s get legal

For those of you that are intrepid researchers, you’ll note that the appellate court ruling in Aceves above cites Knapp v. Doherty as the controlling authority regarding its finding on the validity of the notice of default — that full case ruling is available here.

And if you read Knapp v. Doherty, you’ll note that the 2004 California state appellate ruling in that case applied only to the notice of sale in a nonjudicial foreclosure, not explicitly to notices of default.

But by granting the Aceves allegation of errors on the notice of default — and then still tossing out the claim anyway — the court in Aceves made it unmistakably clear that the so-called “prejudice rule” as applied to notices of sale in Knapp v. Doherty now applies to notices of default in the state of California, as well.

In plain English, the court basically said: We don’t care what the alleged defect in the notice of default is, unless you can also demonstrate that you were somehow harmed by that same defect.

This is common sense. The delinquent borrowers knew they were delinquent, and with notices taped to their door, they knew it was their property coming to auction. Notice of Default irregularities should not have become a defense against foreclosure. It no longer is.

It’s worth noting that state appellate court rulings are binding on lower-level trial courts, according to the legal sources I’ve spoken with — so this ruling has extremely wide implications on potentially thousands of existing cases in the state of California where borrowers are contesting a foreclosure on something akin to the validity of the notice of default. It's equally worth noting that California's so-called “prejudice rule” is not new, and is extremely well-established.

Going forward, attorneys I’ve spoken with tell me this is a sea change relative to how foreclosure-related litigation will be managed in the state. It also is likely to influence other states with similar “prejudice rules,” especially those that permit a nonjudicial foreclosure process, these attorneys have suggested. California attorneys have told me for months that nearly every contested foreclosure case in the state has involved a challenge in some way to the notice of default; it’s the single most common claim, I've been told.

I suppose when borrowers have nothing else, finding some minor technical error is weak but better than nothing.

It was only a few weeks back, after all, that colleague Kate Berry at American Banker made national headlines with a story that echoed the concerns (hopes?) of many lawyers contesting foreclosure actions, who were quick to suggest to the press that procedural errors in notices of default—including that evil of all judicial foreclosure evils, robo-signing — could render even nonjudicial foreclosures invalid, too.

Now? Probably not so much, at least in California.

I’d guess some of the same sources that led Berry to write her original story are moving fairly quickly at this point to marshal their resources around the fraud issue now green-lighted in Aceves (and detailed in HW’s news coverage of the case). After all, while the facts in the case are pretty unusual, pretty much every troubled borrower on Earth can allege: “I would have filed bankruptcy, too, if only I’d known the truth about loan modification.”

Paul Jackson is the founder and editor-in-chief of HousingWire. As with any HW columnist, his views are his own only and do not represent those of HousingWire. Follow him on Twitter: @pjackson

Attorneys will have to retool their cases by taking out the claims about deficient NODs and put in claims about being foreclosed while a loan modification was being considered. The latter circumstance being quite troubling for lenders. Everyone who went though a foreclosure who made a verifiable attempt at a loan modification will make a claim against the banks.

What a mess.

Zero down, $100K free money

Sometimes, I feel pretty stupid not buying a house in 2004-2006. I might have bought if I had known that I could purchase with nothing down and within a couple of years go back to the bank and get free money.

Of course, I know that is going Ponzi, so I couldn't get myself to do that; however, through ignorance, carelessness, and greed, many bubble-era buyers did buy these properties, and they did go Ponzi.

The owner of today's featured property paid $385,500 on 8/26/2003. He used a $308,080 first mortgage, an $77,020 second mortgage, and a $400 down payment. Perhaps the bank saw that as a security deposit?

On 10/31/2005 the obtained a $401,250 first mortgage and a $80,200 HELOC to raise the total property debt to $481,450 and the total mortgage equity withdrawal to $95,950.

Now that prices have gone south, this borrower is short selling and leaving the lender wondering how they are going to get their free money gift back.

Irvine Home Address … 362 DEERFIELD Ave #111 Irvine, CA 92606

Resale Home Price … $420,000

Home Purchase Price … $385,000

Home Purchase Date …. 8/26/2003

Net Gain (Loss) ………. $9,800

Percent Change ………. 2.5%

Annual Appreciation … 1.2%

Cost of Ownership

————————————————-

$420,000 ………. Asking Price

$14,700 ………. 3.5% Down FHA Financing

4.84% …………… Mortgage Interest Rate

$405,300 ………. 30-Year Mortgage

$85,388 ………. Income Requirement

$2,136 ………. Monthly Mortgage Payment

$364 ………. Property Tax

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

$70 ………. Homeowners Insurance

$289 ………. Homeowners Association Fees

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

$2,859 ………. Monthly Cash Outlays

-$350 ………. Tax Savings (% of Interest and Property Tax)

-$502 ………. Equity Hidden in Payment

$27 ………. Lost Income to Down Payment (net of taxes)

$53 ………. Maintenance and Replacement Reserves

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

$2,088 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$4,200 ………. Furnishing and Move In @1%

$4,200 ………. Closing Costs @1%

$4,053 ………… Interest Points @1% of Loan

$14,700 ………. Down Payment

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

$27,153 ………. Total Cash Costs

$32,000 ………… Emergency Cash Reserves

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

$59,153 ………. Total Savings Needed

Property Details for 362 DEERFIELD Ave #111 Irvine, CA 92606

——————————————————————————

Beds:: 2

Baths:: 2

Sq. Ft.:: 1367

$0,307

Lot Size:: –

Property Type:: Residential, Townhouse

Style:: Two Level

Year Built:: 1985

Community:: Walnut

County:: Orange

MLS#:: C11009806

Source:: MRMLS

——————————————————————————

Status:

On Redfin:

2 bedrooms, 2.5 bath.

Even as today's featured property emerges from the shadows, the future inventory of foreclosed homes and distressed real estate continues to grow.

Irvine Home Address … 42 POTOMAC Irvine, CA 92620

Resale Home Price …… $535,000

I shut and lock the front door.

No way in or out.

I turned and walked the hallway, and pulled the curtains down.

I stayed where my last step left me.

Ignored all my rounds

Soon I was seeing visions and cracks along the walls.

Oh. They were upside down. Oh. Oh.

Pearl Jam — In Hiding

I was caught completely by surprise by the squatting and the shadow inventory phenomenon. During the last housing crash, banks did not let delinquent borrowers stay in their homes for years without paying. In fact, lenders have never allowed borrowers to keep houses they are not paying for. This time they are.

Yesterday, we looked at the 25% strategic default rate in Las Vegas. The Las Vegas market was dominated by subprime, so it was crushed along with other subprime dominated markets from 2007 to 2009. Lenders learned from Las Vegas that if they foreclosed and processed properties according to standard loss mitigation procedures, they push prices back to mid-90s levels and hold them there while the entire housing stock turns over due to strategic default. Determined to avoid a repeat of the same in every housing market across the country, lenders chose not to foreclose when their prime customers began to default.

Shadow inventory is largely a banking problem. Private investors in mortgage-backed securities either privately or through the GSEs have already taken most of their write downs. They don't have the luxury of mark-to-fantasy accounting like our major banks do. The banks amend loans, extend terms, and pretend the loan will get paid in the end. In the process, they accummulate shadow inventory.

Banks grip on prime shadow inventory growing: Morgan Stanley

Whether they like it or not, the nation's banks control most of the country's shadow inventory, according to a report Friday from Morgan Stanley.

Even more, properties in imminent default are typically cheaper homes with prime mortgages. The analyst adds that their findings buck conventional wisdom that these homes are either concentrated in the slums of Detroit, or prevalent amongst cardboard cutter McMansion neighborhoods.

I wonder if blogs like this one or stories like Profiles in Squatting: Ladera Ranch, California, have created a “conventional wisdom” that says foreclosures are prevalent in McMansion neighborhoods. They are, but more on that later.

The shadow inventory, they say, is the biggest problem for average Americans living in the nation's major cities.

And, what's more, the homes are more and more being controlled by the banks, as opposed to Fannie Mae, Freddie Mac or private securitization trusts.

“While agencies certainly maintain control over a large portion of the shadow inventory at just over a third, we can see that the majority of the control over delinquencies is in the hands of the banks, and their share has increased over the past year,” reported Oliver Chang, James Egan and Vishwanath Tirupattur (see chart below):

“This may be because borrowers are becoming delinquent at a faster rate for bank-held loans, but checking transition rates for each controlling party, we do not see a significantly larger change in transitions into delinquency for bank-held loans,” they added.

Of the shadow inventory, 75% are valued below $250,000, showing that McMansions have a small share of delinquencies (see below chart):

Let's take a closer look at their data and see if it really supports their contention that McMansions are not a big part of the problem. First, in many markets you can find McMansions for under $250,000. Their dividing line is somewhat arbitrary. Since the national median is about $170K, it isn't surprising that 75% of houses fall below $250K whether their owners are delinqent or not. The data fails to establish a baseline of the total percentage of homes in those price categories for comparison.

If they wanted to establish that McMansions are not the problem, they need to define what a McMansion is, and then they would need to demonstrate that foreclosure statistics among McMansion owners is lower than or equal to the rates of other borrower classes. The data above establishes none of that.

Also, it's quite concievable that the total dollar value in loans is actually greater in the top 25% than in the bottom 75% combined. It takes ten $50,000 mortgages to equal one $500,000 mortgage. it is also unclear whether the amounts refer to current value or the value of the loan as shown on the bank's books. How many $400,000 loans are on properties in shadow inventory worth $170,000?

Despite this weakness in their analysis, there is clearly a lot of shadow inventory, and it is going to crush all price points.

Further, the shadow inventory is growing across all of the United States. The analyst expect that more than 8 million liquidations are in order over the next five years before housing stabilizes.

“While hard-hit cities represent a more than fair share of shadow inventory, its distribution broadly encompasses all corners of the country,” said the analysts.

The liquidation of subprime early on in the recession is now being replaced by later delinquencies in prime collateral.

First subprime, then prime. I think that has been discussed before:

The avalanche of foreclosures caused by the subprime ARM resets flattened the housing market. The avalance of prime foreclosures is being held in shadow inventory pending the banks deciding it's time to clear out the squatters.

The shift in collateral is making the supply imbalance worse for the best part of the credit spectrum.

CoreLogic said in September that based on the shear number of prime mortgages in the market, that foreclosure and delinquency rates would steadily tick upward. Compared to the less than 3.5 million subprime, there are about 40 million prime loans in the marketplace, 6.2% of which were 60 days delinquent in June 2010 and 3% of which were 90 days delinquent.

“We do see a slowdown in liquidation rates of bankheld loans, suggesting that the increasing share of shadow inventory is due to banks holding onto their delinquent loans longer than agencies or private securitization trusts,” they said.

Write to Jacob Gaffney.

Follow him on Twitter @JacobGaffney.

Shadow inventory is now in the hands of the banks, and how the banks dispose of their shadow inventory will determine what happens to house prices.

Irvine prime shadow inventory hits the market

We don't serve subprime in Irvine. Out of shadow inventory and into the light of the MLS. Today's featured property is an example of the shadow inventory the article is talking about.

Prime borrowers took on debt loads that were too large because they ddin't believe they would ever have to pay off the debt. They would continue to add to their mortgage every year as free spending money and pass that debt on to the future buyer of their house when they finally wanted to move. The owner of today's featured property had only owned it for about three years when they had already cleared a quarter million dollars in HELOC riches.

Since clearing a quarter million dollars, he stopped making payments in early 2008, and he is still listed as the owner on title.

Foreclosure Record

Recording Date: 06/08/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 09/24/2008

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 06/17/2008

Document Type: Notice of Default

This family doubled their mortgage in three years. Do you think their household income doubled? The families just like this one all over America are what make up the huge shadow inventory.

Irvine Home Address … 42 POTOMAC Irvine, CA 92620

Resale Home Price … $535,000

Home Purchase Price … $348,000

Home Purchase Date …. 1/31/2002

Net Gain (Loss) ………. $154,900

Percent Change ………. 44.5%

Annual Appreciation … 4.8%

Cost of Ownership

————————————————-

$535,000 ………. Asking Price

$107,000 ………. 20% Down Conventional

4.84% …………… Mortgage Interest Rate

$428,000 ………. 30-Year Mortgage

$108,768 ………. Income Requirement

$2,256 ………. Monthly Mortgage Payment

$464 ………. Property Tax

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

$89 ………. Homeowners Insurance

$90 ………. Homeowners Association Fees

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

$2,899 ………. Monthly Cash Outlays

-$383 ………. Tax Savings (% of Interest and Property Tax)

-$530 ………. Equity Hidden in Payment

$199 ………. Lost Income to Down Payment (net of taxes)

$67 ………. Maintenance and Replacement Reserves

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

$2,251 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$5,350 ………. Furnishing and Move In @1%

$5,350 ………. Closing Costs @1%

$4,280 ………… Interest Points @1% of Loan

$107,000 ………. Down Payment

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

$121,980 ………. Total Cash Costs

$34,500 ………… Emergency Cash Reserves

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

$156,480 ………. Total Savings Needed

Property Details for 42 POTOMAC Irvine, CA 92620

——————————————————————————

Beds:: 3

Baths:: 3

Sq. Ft.:: 1535

$0,349

Lot Size:: 3,500 Sq. Ft.

Property Type:: Residential, Single Family

Style:: Two Level, Traditional

Year Built:: 1985

Community:: Northwood

County:: Orange

MLS#:: S645158

Source:: SoCalMLS

Status:: ActiveThis listing is for sale and the sellers are accepting offers.

On Redfin:: 6 days

——————————————————————————

Great Irvine Home – Short Sale subject to lenders approval. Featuring 3 Bedroom, 2.5 Baths, 1535 square feet, 2 car Detached Garage. Family room with fireplace. Largest model in the tract. Short walk to Brywood elementary school and park. Great Northwood home with assoc. pool, spa, and tennis

Strategic default has become common and accepted in Las Vegas.

Irvine Home Address … 260 DEWDROP Irvine, CA 92603

Resale Home Price …… $249,000

It's not right, but it's okay

I'm gonna make it anyway

Close the door behind you

Leave your key

Whitney Houston — It's Not Right, But It's Okay

I am emotionally conflicted about strategic default. It's not right, but it's okay. Do you know what I mean?

I understand the argument that says borrowers should be responsible to keep their word and pay their debts. They should. However, I also believe that families should not be burdened for decades by one poor financial decision.

There are times when our values and beliefs are in conflict, and to avoid hypocrisy, each person must evaluate which of their conflicting values they hold in higher regard. I side with the family. I can't condemn a family for relieving themselves of a financial burden they cannot handle, particularly when lenders abdicated their responsibility of making sure the family could handle the debt.

Strategic default the norm in Las Vegas

Unless you have spent time talking with Las Vegas residents, you can't fully appreciate how common and accepted strategic default is in that town.

First, there is no class distinction when it comes to walking away. I know a business owner who walked away from his $1.1M mortgage. He said when he saw a few comps in his neighborhood go for less than $500,000, he said continuing to pay seemed pointless, so he walked.

I know a mortgage broker who walked away from three properties. She had a condo she bought in the mid 90s and two properties she bought when the market “corrected” in 2007. In early 2009, she saw a comp for her condo go for less than its 1996 purchase price. She calculated that she had almost $400,000 in mortgages on about $175,000 in real estate, and prices were still headed straight down.

Basically, anyone who bought in the 00s is underwater or nearly so, and there is little hope of price recover while the rest of the city strategically defaults because they too are underwater. The excess debt will be purged in Las Vegas, and the excessive debt service payments will not serve as a drag on the local economy as it will here. That being said, the purging process is not pretty.

Nearly one in four people in Nevada who lost their homes to foreclosure have admitting to walking away even though they could afford their monthly payments, according to a study released today by the Nevada Association of Realtors.

The study said 23 percent of those surveyed described their own situation as a strategic default, meaning they decided to stop making payments on their debt despite having the financial ability to pay. Many of those who walked away from their homes said trusted confidants advised them that a strategic default was their best option, the study said.

Keep in mind that many of these borrowers probably could not really afford the payment long term. Those borrowers are merely accelerating the inevitable rather than truly walking away from an obligation they could comfortably cover.

The authors of the study said strategic defaults are a much greater problem in Nevada than the rest of the nation. It has less of a stigma here that it’s a shameful decision, and it’s becoming more popular as part of a snowball effect, they said.

“I believe the current trend upward. It could get worse,” said Joel Searby, SGS’s director of marketing and business development. “The cultural stigma is dropping, and it’s becoming more acceptable.”

The survey was conducted by SGS, a national research firm that has done similar studies in Florida and Pennsylvania. It held two focus groups in Las Vegas and interviewed more than 1,000 Nevadans by phone.

“It was striking to see that nearly one in four Nevadans who lost their homes to foreclosure admitted they simply walked away from their mortgage,” said outgoing Nevada Association of Realtors President Linda Rheinberger.

Nevada has ranked No. 1 in the nation in terms of its rate of foreclosure filings since January 2007.

A report released today by California-based CoreLogic said foreclosure rates in Nevada increased in November to 9.49 percent of mortgage loans, up 1.71 percentage points from November 2009. The national rate was 3.48 percent in November.

In November, 19.65 percent of Las Vegas mortgages were 90 days or more delinquent, down from 19.70 percent in October. The statewide delinquency rate is 17.35 percent, CoreLogic reported.

It's difficult to imagine nearly 10% of mortgages in foreclosure and another 10% delinquent. It is difficult to keep a rate that high because after enough time goes by with a 20% delinquency rate, every mortgage in the area will turn over. The 20% in the pool from last year is a different 20% that is in the foreclosure queue now.

University studies in the past two years have suggested that between 17 and 25 percent of Las Vegas residents have considered or would consider walking away from their mortgage even though they could afford their payments.

Nevada had nearly 8,000 homes foreclosed upon in the fourth quarter of 2010, according to California-based RealtyTrac. If the survey is correct, that means more than 1,800 of those are people who did so strategically.

Searby said he was surprised with the findings of so many people walking away in Nevada. Anecdotal evidence in surveys in other states suggests the problem is “significantly worse” in Nevada, he said.

Nevada homes have taken one of the biggest price drops in the nation, and in Las Vegas prices have fallen about 60 percent from their peak in June 2006.

Cause and effect. Low prices are creating the circumstances leading to more strategic default. It is a classic downward spiral. The Las Vegas experience inspired the amend-extend-pretend dance to avoid a repeat in every housing market in the country.

Searby said a culture is developing in Las Vegas and the rest of Nevada that strategic defaults are OK, and there isn’t the stigma once associated with it. That’s creating a snowball effect that increases its popularity, he said.

Some websites are dedicated to encouraging people to walk away from their homes. The Las Vegas Sun and its sister publication, In Business Las Vegas, has written on the subject, and one prominent home builder, Richard Plaster, president of Signature Homes, has encouraged people to do a strategic default to spare their finances.

“It is about how they’re perceived by their peers,” Searby said. “One man in a focus group said growing up this would have been an act of shame. It’s not seen as something that brings shame on him now. There’s a subculture arising who don’t believe walking away from a mortgage is necessarily bad. This has become a financial decision for most of the families first and foremost.”

This is the argument I have been making for months. The needs and interests of the family outweigh paying the mortgage on an underwater property when it's cheaper to rent.

This dilemma is not new. If your family were starving to death, would you steal food? Most would. Anyone who valued survival more than personal property law would. In fact, many wars have been fought because one group lacked resources to survive, so they go to war to take those resources from another.

Searby said what surprised him in the survey is that those who are walking away tend to be older, mostly 40 and over, rather than younger generations that might be perceived to be less financially responsible.

“They are looking at the last 30 to 40 years of their life and feel it doesn’t make sense to have that kind of debt hanging over their heads,” Searby said. “It’s about their quality of life and that all they are going to pass on to their kids is debt.”

That scenario describes one Las Vegas resident who took part in the survey.

Lee, who didn’t want to use her last name, said she plans to walk away from her $1,700 a month mortgage even though she can afford the payment. Lee said the value of her home that she refinanced about six years ago for $235,000 plummeted from $270,000 to $80,000 today. Since then, she has retired from her federal job and had her husband leave her.

Interesting sob story, but at least she admitted to the HELOC abuse.

Lee said the Federal Deposit Insurance Corp. has taken over the bank that once held her loan and the lender now servicing the loan has been unwilling to work with her to reduce her payments. She said it’s prudent to keep the money for taking care of herself during her retirement.

“Why should I pay on something when it’s like losing $150,000 in the stock market,” Lee said. “The way I look at it is I’m 73 and never going to see this market come back. I don’t feel bad at all. They had a chance to work with me.”

Lee said she plans to rent a home from her girlfriend and isn’t worried that the lender will come after her for the first mortgage six months after foreclosing or for the second and third mortgages on the homes over the next six year as allowed under state law.

If that happens, she said, she will file bankruptcy.

In all likelihood, either the lender or a zombie debt collector will come after her, and she will have to declare bankruptcy to make the problem go away.

Most borrowers who walk away should declare bankruptcy. It's the only way to be sure the debt will never be a problem again. I can foresee many borrowers who walked away getting blind-sided by lenders several years from now when the borrowers have assets again.

Searby said those who walk away aren’t concerned that it would take them three to seven years to get another mortgage or that their credit might make it difficult to buy a car for a while.

That's because people don't have much reason to worry. The powers-that-be are determined to give everyone a pass.

The survey said most Nevada homeowners facing foreclosure weren’t aware of the federal and nonprofit programs designed to help them. Some 61 percent said they weren’t aware of foreclosure aid programs and only 3 percent said they used the state’s foreclosure mediation program or were helped by it in any way.

Many Nevadans experiencing foreclosure faced two or more life-altering events that increased their risk of defaulting on their mortgage, the study said. The report said the loss of a job and unexpected medical bills were the most common events triggering a foreclosure.

Homeowners statewide were far more likely to blame banks and lenders, at 46 percent, than the government, which polled 20 percent, for the foreclosure problem. Homebuyers got 13 percent of the blame, the study said.

Interesting. Lenders are getting their oversized share of the blame.

Short sales proved to be moderately helpful in avoiding foreclosures with the report saying 10 percent of those surveyed said it helped them.

NVAR President Mike Young said the study would be used as a basis with the state’s lawmakers to help address the problems with foreclosures. Besides advocacy and counseling, streamlining short sales could help stabilize the housing market, he said.

Short sales are those in which lenders allow the homes to be sold for less than is owed on the mortgage. Homeowners have faced hurdles in getting banks to approve that option.

Short sales are not the answer, and neither are loan modifications. More foreclosures are on the way.

What the foreclosed leave behind

I have found all manner of personal possessions left behind in properties. One of my competitors jokes about how he finds vacuum cleaners left in each property. I have only found 4 or 5 of them.

Some of the items left behind likely were beloved by their former owners. Mostly this is stuff like dolls or photographs, but on some occasions, it is much more.

Aren't these two cute?

They were a few days from starvation when we found them trapped in the back yard of a house the former owners. I understand owners abandoning their house. It's property. It's not alive. These owners abandoned their family pets. Disgraceful.

What goes through the mind of the former owners? Did they think someone like me would come along and save their dogs? What if we had waited another few days before taking possession?

We couldn't find any evidence of food left behind, although judging from these dogs appearances, they long since scavenged anything edible. After eating any remaining garbage and plant matter, they likely gnawed on that rubber tire.

Are these former owners such assholes that they left their dogs to die?

You'll be happy to know that we saved these two dogs from this fate and took them to a local shelter.

Should it really take two or more years to resolve a bad loan?

Today's featured property was originally posted April 26, 2007: More Jasmine Dew Drops in Quail Hill.

This was a flip gone bad. The owner put the property for sale about a year after paying $450,000 for a one bedroom apartment. He tried off and on selling the property for the next couple of years. He tired of the payments and quit paying sometime before mid 2008.

Foreclosure Record

Recording Date: 11/29/2010

Document Type: Notice of Default

Foreclosure Record

Recording Date: 02/18/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 10/08/2008

Document Type: Notice of Default

They may have convinced him to pretend with a loan modification, but one bedroom apartments are still not selling for more than $450,000 six years later, so the owner doesn't see much point in remaining current.

When he bought the property, he used a $356,000 first mortgage, a $66,700 second mortgage, and a $27,300 down payment, so he does have some skin in the game.

I speculate he has other assets too. I further speculate this sale is being held up while the owner and the second mortgage holder agree to a settlement. I know none of these people, but it does explain why one property can be for sale for years while an underwater delinquent borrower continues to be on title.

Today's featured property should have been foreclosed on years ago and washed through the system. Here we are in 2011, and we haven't resolved bad loans from 2008.

Irvine Home Address … 260 DEWDROP Irvine, CA 92603

Resale Home Price … $249,000

Home Purchase Price … $445,000

Home Purchase Date …. 11/21/05

Net Gain (Loss) ………. $(210,940)

Percent Change ………. -47.4%

Annual Appreciation … -10.9%

Cost of Ownership

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$249,000 ………. Asking Price

$8,715 ………. 3.5% Down FHA Financing

4.78% …………… Mortgage Interest Rate

$240,285 ………. 30-Year Mortgage

$50,274 ………. Income Requirement

$1,258 ………. Monthly Mortgage Payment

$216 ………. Property Tax

$153 ………. Special Taxes and Levies (Mello Roos)

$42 ………. Homeowners Insurance

$297 ………. Homeowners Association Fees

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

$1,965 ………. Monthly Cash Outlays

-$117 ………. Tax Savings (% of Interest and Property Tax)

-$301 ………. Equity Hidden in Payment

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

$31 ………. Maintenance and Replacement Reserves

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

$1,594 ………. Monthly Cost of Ownership

Cash Acquisition Demands

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$2,490 ………. Furnishing and Move In @1%

$2,490 ………. Closing Costs @1%

$2,403 ………… Interest Points @1% of Loan

$8,715 ………. Down Payment

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

$16,098 ………. Total Cash Costs

$24,400 ………… Emergency Cash Reserves

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

$40,498 ………. Total Savings Needed

Property Details for 260 DEWDROP Irvine, CA 92603

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Beds:: 1

Baths:: 1

Sq. Ft.:: 0830

$0,300

Lot Size:: –

Property Type:: Residential, Condominium

Style:: One Level, Contemporary

View:: Peek-A-Boo

Year Built:: 2003

Community:: Quail Hill

County:: Orange

MLS#:: L27347

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IMMACULATE LARGE SINGLE STORY 1 BEDROOM CONDO, BRIGHT KITCHEN WITH CORIAN COUNTERS AND BREAKFAST BAR OPEN TO A SPACIOUS LIVING ROOM WITH A FIREPLACE AND BUILT IN OFFICE/ MEDIA. SEPARATE DINING AREA, MASTER SUITE WITH HUGE CLOSETS. FLOORS ARE HARDWOOD THROUGHOUT LIVING AND DINING, CARPET IN THE BEDROOM AND CERAMIC TILE IN THE BATHROOM. PLANTATION SHUTTERS, A/C AND LAUNDRY INSIDE. THE COMPLEX HAS A POOL, SPA, GYM, BBQ AREA AND A CLUBHOUSE.

The realtor describes this place as LARGE and SPACIOUS. It's a one-bedroom one-bath condo of 830 square feet. The right word in realtorspeak is COZY.