Patrick Killelea asked me not to post the links from Patrick.net, so if you were looking for that content, please go to his site.
Today, I am going to take a look at rental parity in Irvine, at least a snapshot of rental parity based on 2009 data. I was going to run this post during the week, but since the data has not been updated for more than a year, I moved it to Saturday. It is still interesting data. I wish it were updated more frequently.
I believe this data was compiled in 2009 from available data sources some of which may have only had data available from earlier years. In short, the data is probably not far off as not much has changed in incomes, rents, or prices since early 2009.
North Irvine
Some neighborhoods in Irvine have higher median home prices because they are inhabited by high income borrowers. The chart below shows the median income data for the northern half of Irvine. It doesn't show Woodbury, and the data on west Irvine is sketchy. That being said, the neighborhoods with the highest incomes are the most desirable on the map.
Based on the income numbers above and housing cost data, the map below shows the percentage of income people in each area are putting toward housing.
The debt-to-income ratios shown above all make the same assumption about equity and mortgage balances. In the real world, some of these neighborhoods will sustain a higher DTI, not because borrowers are borrowing more, but because the owners used a larger than standard down payment.
The map above shows the cost of ownership for renters in the same area. Comparing the two maps above reveals which Villages and neighborhoods in north Irvine are at or near rental parity and which ones are well above.
One of the first things I noticed was that El Camino Real was very close to rental parity. Since this is one of the least desirable neighborhoods in Irvine, it is not surprising that the aggregate lowest premiums would be found there.
The other item that stands out is the huge premium people are paying to own in Northwood. Don't simply dismiss this as Northwood is desirable. The desirability premium would be reflected in both rents and resale prices. There is a premium for rental in this area, but there is an enormous premium for ownership that defies explanation — other than kool aid intoxication and the belief that these prices are going even higher.
South Irvine
Some have speculated that when you factor out the college students and renters that the actual incomes in Irvine are much higher. The statistics below do not support that contention. The Irvine median income is around $90K, and if you look at the income distribution below, you see some above and some below just as you should. If you get down adjacent to the university, incomes fall off a cliff where the college students impact the results. Whatever impact college students have on the median income is isolated to this area.
Outside the loop in Woodbridge and University Park are both areas where the bulk of the housing stock is trading near rental parity. Inside Woodbridge Loop and in the south-central premium area of University Park as well as Turtle Rock is still inflated.
The owner of today's featured property paid $1,410,500. He used a $1,000,000 first mortgage, a $269,404 HELOC and a $141,096 down payment. For this he obtained his unique tract home that surely was going to hold its value in the bad times and appreciate like crazy when times are good. We all know how that is turning out. This is another 25%+ loss on a high-end property.
Gorgeous home in Portola Springs. This lovely home features 4 Bedrooms, one on the main floor with a separate entrance. All bedrooms have private baths. A nice size bonus room upstairs. Gracious Master suite w/ Office. Beautiful hardwood floors downstairs. Formal living room and dining room. Chefs kitchen w/ granite counter tops, vegetable sink in center island, glass front cabinets, breakfast bar and nook. Adjacent to the kitchen is a spacious family room w/ fireplace. Good size rear yard w/ upgraded hardscape and young softscape, great place to entertain family and friends. Additional features include a 3 car garage, mud room, upstairs laundry room, plantation shutters, recessed lighting, and crown molding throughout.
Distressed borrowers scan news reports for false hopes of a cure for their financial illness. For this news cycle, the savior is an irregularity on the Notice of Default.
American Banker — Friday, January 21, 2011 — By Kate Berry
Last year's robo-signing scandals delayed tens of thousands of foreclosures in the 23 states where the process is handled in court. A new controversy could complicate foreclosures in the other 27 states.
At issue is the notice of default, the first letter that a mortgage lender or servicer sends to a homeowner who has fallen behind on payments. The notice typically starts the formal foreclosure process in nonjudicial states such as California, Arizona and Nevada.
Every notice of default has a signature on it. But just like the infamously rubber-stamped affidavits in the robo-signing cases, default notices, in at least some instances, have been signed by employees who did not verify the information in them, court papers show. In several lawsuits filed in nonjudicial states, borrower attorneys are arguing that this is grounds to stop a foreclosure.
In the case I documented last month, the former owners got an attorney to threaten a lawsuit because the Notice of Default in the county records did not have the address printed on it. Part of the process is that the house must be physically served papers, usually they are taped conspicuously to the door. The person serving the house certainly knew the address. And so did the person who served the Notice of Trustee Sale.
If the copy entered into the public record didn't have the address written on it, should we give the former owner a free house?
Anyone who claims they didn't know the house was in foreclosure is not being truthful — and many holdover occupants, both renters and former owners, feign ignorance if it's to their advantage.
“Whoever signs the NOD needs to have knowledge that there is in fact a default,” said Christopher Peterson, an associate dean and law professor at the University of Utah.
The suits also argue that the default notices are invalid because the employees who signed them worked for companies that did not have standing to foreclose.
In a lawsuit against Wells Fargo & Co. in Nevada, an employee for a title company who signed default notices admitted in a deposition this month that he did not review any documents or know who had the right to foreclose.
“They are starting foreclosures on behalf of companies with no authority to foreclose,” said Robert Hager, an attorney with the Reno, Nev., law firm Hager & Hearne, representing the borrower in the case. “The policy of these companies is to just have a signer execute a notice of default starting foreclosure without any documentation to determine whether they are starting an illegal foreclosure.”
Although not a part of a recent Recon Trust and Bank of America lawsuit (Nevada court blocks Bank of America trust foreclosure), these suits occasionally find a legal wrinkle where a few plaintiffs gain some benefit, and a few law firms make a fortune.
The Recon Trust lawsuit in Nevada did cause a huge number of last-minute auction postponements yesterday. The list in Las Vegas was nearly 1,000 properties. Even with over 900 of those being postponed or cancelled each day, it usually takes four or five hours to call the whole list. Yesterday it was finished in about an hour. Or course, the other trustees are expected to pick up Recon Trust's slack just as they did during the brief moratorium last fall during robo-signer.
The Nevada nonjudicial foreclosure statute requires that the company signing a notice of default have the authority to foreclose, Hager said.
In a deposition on Jan. 4, Stanley Silva, a title officer at Ticor Title of Nevada Inc., said he “technically signed” default notices for clients, which were often acting as agents of other parties, which in turn worked for others.
“The person at the bottom of the chain, by executing the document, has taken an action on behalf of all of them through their various agency agreements,” Silva said. In one case, for example, he said he had signed “on behalf of Ticor Title of Nevada, who is agent for LPS Title, who is agent for National Default Servicing.”
“Who is agent for Fidelity National?” Hager asked. “Apparently, yes,” Silva replied.
“Which is a servicer for Wilshire?”
“Apparently.”
The attorney has exposed the inner workings of MERS, and it's ugly, but does it violate some standard of law? How much knowledge of events does a signer need to have? What is the signer attesting to? Could a trained monkey sign the papers? Could a barely legally responsible adult with minimal education and experience be given the responsibility of signing foreclosure documents? Why not?
Silva said under oath that he never reviewed any documents or knew what company was the holder of the original note at the time he signed the notice of default. He said he signed about 200 default notices over a four-year period.
When asked by Hager if he signed notices of default “without verifying the accuracy of the information,” Silva replied: “Correct.”
What level of verification is required of the signer? How are they to verify? What are the penalties for failure to verify properly? Does the response imply that the signers were doing things knowingly inaccurate? Wouldn't whoever was signing look to others to properly prepare the paperwork? Shouldn't they be able to rely on the bank's internal system of checks and balances to know the paperwork they are signing is correct?
For as much as I malign banks, they do know how to accurately keep track of who they loaned money to and how much they are owed. If a loan holder is not paying them, they know it, and they know where that borrower lives. The idea that somewhere in that system banks get lost and start randomly foreclosing on people for no reason is silly.
Representatives for Wells Fargo did not return calls seeking comment. The intermediaries that Silva mentioned in his testimony either did not return calls or declined to comment.
Walter Hackett, a lawyer with Inland Counties Legal Services, in San Bernardino, Calif., and a former banker with Bank of America Corp. and Union Bank, has filed several cases contesting notices of default, on the grounds that the employees signing such notices were working for companies that are not the noteholders — or even their appointed agents.
“A huge percentage of notices of default and notices of trustee sales are legally questionable and probably void,” Hackett said. “Nobody with the authority to trigger the nonjudicial foreclosure process is triggering it — only third parties who claim they have the right to do so are triggering it.”
This is the MERS defense. The third party claim to ownership of the note is being called into question. Its wrong.
After a notice of default is sent to the borrower and filed at the county recorder's office, a notice of sale is typically published in the local newspaper and the sale of the property often takes place without the borrower even knowing the home has been sold to another party.
That is ridiculous. Most of the homes I have purchased at action still had the notices taped to the front door. The colorful masking tape and bright white paper stand out at street level. Someone living in a neighborhood where one of these is posted will notice the next time they drive buy. These notices are that conspicuous.
O. Max Gardner 3rd, a consumer bankruptcy attorney at Gardner & Gardner PLLC in Shelby, N.C., said the default notice is “the key legal document that is sent to the borrower” before a notice of sale.
Thousands of judicial-state foreclosures were halted last year after several banks including Ally Financial Inc.'s GMAC Mortgage and Bank of America Corp. admitted that employees had signed affidavits without reviewing the documents. In several judicial states, including New York and Florida, sloppy paperwork by servicers has led courts to require that companies verify they have all the proper documents, including proof they own the mortgage before foreclosing.
This month, in a closely watched case, the Supreme Judicial Court of Massachusetts (a nonjudicial state) rejected claims made by U.S. Bancorp and Wells Fargo that the banks, as securitization trustees, did not have to prove their authority to foreclose on two separate homes.
Peterson, the law professor, said one difference between the notice of default cases and the widely publicized robo-signing incidents is that in the latter, affidavits are given to judges whereas the notice of default is not strictly a legal document.
But consumer lawyers said homeowners face a bigger legal burden in nonjudicial sates because they have to file a lawsuit against the holder of the note to bring any action in court.
“Because there's no court reviewing anything in nonjudicial states,” abuses are “probably even more rampant,” Gardner said. “This is just another example of robo-signing in a different context.”
Those poor abused loan owners. They were victims of rampant mortgage process abuse in nonjudicial states like California. Not.
Two and a half years in the foreclosure process
Amend-extend-pretend is used by banks to buy time. They are hoping if they drag out the process long enough prices will rebound and they will get out without taking a loss on their oversized loans. Today's featured property was served a Notice of Default on 4/21/2008 which means they missed payments in April, March, February, and probably January of that year.
Prior to the housing bubble, lenders would customarily wait until customers were 90 days late with a payment before issuing a NOD. It's also likely that this borrower was delinqent long before then and the bank let them slide 180 days or more before issuing the NOD. Shadow inventory is stuck in the limbo between delinqency on the mortgage and the Notice of Default.
The previous owner of today's featured property was a peak buyer. He paid $509,000 on 9/16/2005. He used a $356,300 first mortgage, a $152,700 second mortgage, and a $0 down payment. By late 2007 he had already given up.
The bank bought the property at auction last July for $431,484. Apparently, with more than three years seasoning, this foreclosure is fully baked and ready for consumption on the Irvine MLS.
Like new! Immaculate two bedroom + loft townhouse built in 2005 located in the desirable Collage complex. Unit features include brand new paint and carpet throughout, fireplace, one car garage, patio with pool views, walk-in closet and storage room. Complex is equipped with beautifully manicured landscaping, pool, spa and secure gate access. Property will be sold with washer, dryer, stove/range and dishwasher.
January 26th, 2011, 8:30 am — posted by Jon Lansner
Orange County’s high end takes the heaviest discounting, according to a slightly different view of the Orange County real estate market from HousingTracker.net.
This website tracks trends in asking prices from brokers’ MLS system of homes for sale. In addition, HousingTracker breaks down its data into a pair of neat markers — the 25th and 75th percentiles that let us see how the market’s upper crust and more modest abodes are faring.
From the January report we see …
At the 25th percentile — the median of the lower half of the price spectrum of local homes for sale — the selling price was $294,950; that is down 1% vs. the previous month and down 1.7% vs. a year ago. Over two years, there’s been an 1.8% dip in prices set by sellers of more affordable local homes. This is the 5th consecutive month-to-month cut in asking prices for these more “affordable” homes.
At the 75th percentile — the median of the upper half of the price spectrum of local homes for sale — the selling price was $640,873; that is down 1.1% vs. the previous month and off 11.5% vs. a year ago. Over two years, there’s been an 11.9% tumble in prices asked for higher-end housing. This is the 7th consecutive month-to-month cut in asking prices for these less “affordable” homes.
The gap between these two price points was 117% this month vs. 118% the previous months and 142% a year earlier. The gap peaked at 167% in June and July 2009.
The overall Orange County median listing price, by this math, was $418,975 for January — that is off 1.1% vs. the previous month and off 6.6% vs. a year ago. Over two years, there’s been an 3% decline.
Realtor Aaron Zapata of Prudential California Realty commented: “I call this the sandwiching effect. The upper end is being pressed down by lack of demand, while the lower end is climbing because of great demand. The difference between the high and low end gets smaller.”
As I demonstrated in yesterday's post, the pressure has been building at the high end due to low sales rates and excessive inventory.
It was inevitable that high end prices would continue to go down. If inventory continues to rise, prices will likely fall.
We are seeing the same buildup of inventory here in Irvine where much of OC's high end resides.
What will happen to pricing and volume here?
I believe new home sales will continue to do well, although the price increases and sales volumes will not meet the Irvine Company's expectations. The dreamers still clinging to bubble values will continue to see erosion of their perceived value. Asking prices will keep falling and the bubble clearance sale will finally get started.
Losing more than 25% after owning in Irvine for more than 5 years
Buying a high-end property in a prestigious neighborhood does not ensure prices cannot go down. The laws of supply and demand in the housing market do not bend to the will of high-end home owners.
This property is not suffering from any malady. It is a huge home in one of Irvine's most exclusive neighborhoods. The back yard is a fantasy resort pool, and the interior is immaculate. The only problem with this home is the price tag attached. This high-end home sale will lose someone half a million dollars. Apparently, even the high end properties are subject to the laws of supply and demand.
Banks know from experience in Irvine that if they force an expensive property to go to auction, the auction price is about half of peak asking price (How to Lose $2,650,000 in Irvine Real Estate). Since the auction is all cash, it gives some indication of what these properties are worth without the lender air that inflated high end properties.
To get an idea what I mean, remember back to a bygone era when loans over $1,000,000 simply didn't exist. Okay, perhaps a few were around, but for the most part, if you saw a neighborhood where transactions were occurring over $1,000,000, you knew that significant savings or ported equity made up the difference. People didn't gain access to those neighborhoods through borrowing alone. People had to save money to be one of the chosen ones.
Fast forward to the housing bubble when stupid loans of every kind where given out to anyone who wanted one. The neighborhood of $1,000,000 homes is accessible to anyone with a high income or a convincing liar loan application. The influx of new buyers sends prices skyward, and by 2006, those formerly $1,000,000 neighborhoods are all listed for more than $2,000,000.
With the credit crunch in August of 2007, credit for jumbo loans dried up. Very few loans have been underwritten in the last three and a half years because no government program insures them. With proper risk pricing and its associated higher interest rate, buyers can't afford a big mortgage. With big mortgages gone, the support for high end prices was removed with them.
Bottom line is that the air has been abruptly removed from the high end of the market, but it has been allowed to slowly gliding downward in a controlled descent.
The owners of today's featured property paid $2,100,000. They used a $1,680,000 first mortgage, a $420,000 HELOC, and a $0 down payment (it is possible they were merely approved for the HELOC and actually put money down.)
On 4/3/2007 they refinanced with a $1,720,000 first mortgage and a $212,000 HELOC. The smaller HELOC and lower combined balance suggests these owners had put money down. However, the larger first mortgage suggests they took out some money in the refinance. No matter the case, having $1,932,000 in debt gets hard to maintain. The stopped paying the mortgage back in May of 2010.
Foreclosure Record
Recording Date: 12/16/2010
Document Type: Notice of Sale
Foreclosure Record
Recording Date: 09/15/2010
Document Type: Notice of Default
The bank is assessing its options. If it forces a foreclosure, they will take a big loss. If they try to negotiate a short sale, they will dance with the sellers for months as the sellers hide assets and claim poverty. The threat of foreclosure will loom over the negotiation, but if the borrowers are already resigned to their fate, the bank has limited leverage.
-$1516 ………. Tax Savings (% of Interest and Property Tax)
-$1652 ………. Equity Hidden in Payment
$601 ………. Lost Income to Down Payment (net of taxes)
$206 ………. Maintenance and Replacement Reserves
============================================
$6,728 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$16,500 ………. Furnishing and Move In @1%
$16,500 ………. Closing Costs @1%
$13,200 ………… Interest Points @1% of Loan
$330,000 ………. Down Payment
============================================
$376,200 ………. Total Cash Costs
$103,100 ………… Emergency Cash Reserves
============================================
$479,300 ………. Total Savings Needed
Property Details for 12 MONTIA Irvine, CA 92620
——————————————————————————
Beds:: 5
Baths:: 5
Sq. Ft.:: 4350
$0,379
Lot Size:: 10,000 Sq. Ft.
Property Type:: Residential, Single Family
Style:: Two Level, Other
Year Built:: 2000
Community:: Northwood
County:: Orange
MLS#:: S630641
Source:: CARETS
——————————————————————————
Magnificent And Dramatic Arbor Crest Estate, Resort Like Living, Ideal For Executive Buyers. Fabulous Backyard w/ Boulderscape Design Pool, Spa, Waterfall & Slide, Oversized Bar, Palapa, Built-in BBQ And Refrigerator. The House Features 5 Bedrooms-4.5 Baths, Fully Loaded With Top Of The Line Kitchen Appliances(Sub-Zero. .. ), Center Island & Large Eating Area, Travertine Floors Throughout Downstairs, Surround Sound, Soaring Ceilings & Plenty Of Windows and much much more. Custom Builtins Library/Office And One Bedroom W/ Full Bath Downstairs. Four Bedrooms Upstairs Plus A Bonus Room W/ Quality Carpeting, Extensive Wrought Iron Staircase, Water Filter System etc. .. Professional Interior Designer Touch And Ideal for Entertaining. No Need To Preview.
Last August I noted that Existing-Home Sales Sink to Lowest Level Ever Recorded. I'm not talking about some minor slowdown in sales or softening in prices. The current sales rates are very low no matter how it is spun.
Before the Irvine Company cheerleaders claim I am crazy, let me point out they did stop building homes for two years followed by a very slow market testing year before building a modest production run this year. I'm glad they sold them. I hope they build more. I'm delighted to see people in the building industry go back to work. As an Irvine resident, I appreciate the product the Irvine Company builds and the communities they leave behind.
Some contend I am anti-Irvine or some such rubbish because I point out the house prices are too high by historic measures. The results can be seen daily here with the cost of ownership of the individual properties that I profile. Some are at or near rental parity, but the nicer properties are still prices far above. That is the state of the market.
I report current market conditions and analyze how these may impact prices moving forward. I don't set out to be bearish, but the facts are what they are, and beyond faith in the California real estate market gods, there isn't much reason to be bullish on appreciation, and with prices still high in coastal markets, there isn't much reason to be bullish about rental income either.
WASHINGTON – The number of people who bought previously owned homes last year fell to the lowest level in 13 years, and economists say it will be years before the housing market fully recovers.
High unemployment and a record number of foreclosures are deterring potential buyers who fear home prices haven't reached the bottom. Job growth is expected to pick up this year, but not enough to raise home sales to healthier levels.
“We built too many houses during the boom, and now after the crash, it will take us a long time to get back to normal,” said David Wyss, chief economist at Standard & Poor's in New York.
The National Association of Realtors reported Thursday that sales dropped 4.8 percent to 4.91 million units in 2010. That was slightly fewer than in 2008, which had been the weakest year since 1997.
Those are national statistics, but what about California?
California is a big state. Is Southern California having better sales? No, looks about the same.
Irvine is different, right?
The poor year for sales did end on a stronger note. Buyers snapped up homes at a seasonally adjusted annual rate of 5.28 million units in December, the best sales pace since May and the 12.8 percent rise from November was the biggest one-month surge in 11 years.
Gains in mortgage rates may have spurred some fence-sitters to buy homes in December before rates moved higher, analysts noted.
What analysts noted that? Some urgency analyst working for the National Association of realtors? That statement reads like NAr copy.
The increase was an encouraging sign after a dismal year for home sales, said Mark Zandi, chief economist at Moody's Analytics. But he cautioned against raising expectations for a rapid recovery in housing.
“The job market is still very weak, and unemployment is very high. Until we get more jobs, people will be reticent about buying homes,” he said.
The housing market cannot recover until the economy does. People without jobs don't buy houses… anymore. With NINJA loans dead, the housing market will not see a new influx of buyers until people get stable incomes. Realistically, even then, it is two years before a new hire qualifies for a loan.
Zandi said home prices would fall another 5 percent this year. Sales of previously occupied homes would likely exceed 5 million. That's a slight improvement from last year, he said, but it will probably take until 2013 or 2014 for sales to reach a healthy level of 6 million units a year.
Home sales will benefit from an improved hiring market. Many economists predict employers will double the number of jobs added this year compared with 2010. A reason for more optimism is a decline in the number of people applying for unemployment benefits over the past four months.
A reason for more optimism? I thought I was reading a news story, but I was really visiting my therapist. I guess internet news is the therapy of the unemployed.
Last week, applications fell to a seasonally adjusted 404,000, the Labor Department said. That followed a spike in applications in the previous week, which is typical after the holidays end and employers let temporary workers go. Even with the holiday bump and this past week's decline, the latest figures were only slightly higher than the 391,000 level reached last month – the lowest in more than two years.
Fewer than 425,000 people applying for benefits is considered a signal of modest job growth. Economists say applications must fall consistently to 375,000 or fewer to substantially reduce the unemployment rate.
Still, the unemployment rate is not expected to fall much below 9 percent this year. And the housing market cannot fully recover until the glut of foreclosed homes is cleared.
Those are the two issues overhanging the housing market. There is (1) a great deal of pent up supply in the form of foreclosures and shadow inventory, and (2) a lack of buyers available to absorb the known supply. The supply and demand imbalance will be problematic until the demand picks up and the supply is absorbed. That will take years, perhaps decades in some markets. If you look at the sales rates and inventories at the high end, the disaster in the making is clear.
Last year, a record 1 million homes were lost to foreclosures, and foreclosure tracker RealtyTrac Inc. predicts 1.2 million more will be lost this year.
Foreclosures or distressed sales such as short sales – when lenders let homeowners sell for less than they owe on their mortgages – are forcing home prices down in many markets. That has made it difficult for some potential buyers looking to upgrade, because they would have to accept less money to sell their current home.
Even historically low mortgage rates have done little to boost the sales.
The average rate on a 30-year fixed mortgage rose to 4.74 percent this week, Freddie Mac said Thursday. That's up from a 40-year low of 4.17 percent in November. The average rate on the 15-year loan, a popular refinance option, slipped to 4.05 percent last week. That's nearly half a point higher than the 3.57 percent rate in November – a 20-year low.
For December, sales rose in all parts of the country, with the strongest gain a 16.7 percent increase in the West. Sales rose 13 percent in the Northeast, 10.1 percent in the South and 11 percent in the Midwest.
The median price for a home sold in December was $168,800, down 1 percent from a year ago.
Double dip.
The banking cartel members are all in agreement that pushing REO through the system right now would be a bad idea because there is not enough volume to make a difference, and the effect on pricing is devastating. However, each of them will have a different opinion as to when the market has turned and it is safe to process their REO. We will not see that phase of the cartel collapse until volume picks up enough that buyers are available for the lenders to fight for.
Peak buyer gives up after five years
How low do you wait for the market to come back? For many the real question is “how long can they sacrifice and continue making payments while they are underwater?” Perhaps it was an adjusting ARM, or perhaps he simply lost faith in appreciation of Irvine real estate, but for whatever reason, this loan owner is selling short after owning a little over five years.
He paid $643,500 back on 10/20/2005. He used a $514,550 first mortgage, a $64,300 HELOC, and a $64,550 down payment. His asking price wipes out his down payment, the HELOC and part of the first mortgage.
If this property could transact at this price, it would be at or below rental parity. In all likelihood, this property will get bid up higher as the short sale process limps along.
This gem of an end unit has a bright open floor plan with beautiful Cherrywood floors and cabinets and Tile flooring in the kitchen. The bedrooms have upgraded wall to wall carpet. Crown molding and window Shutters add their own elegance. Woodbury is one of the nations finest communities with seven pools, sport fields, tennis and basketball courts, many parks and award winning schools. Walk to the mall with both nationl chain stores and boutique shopping.
Banks created their own nightmare. They turned good borrowers into HELOC dependent Ponzis, inflated a massive housing bubble, and now that prices are crashing, lenders are surprised at the behavior of borrowers. Each side feels they are being victimized by the other. Lenders are being left to hold the bag and absorb the losses, so they have suffered consequences for their actions. Borrowers lost their homes, so they have suffered too. Beyond enduring the consequences, each party bears some responsibility for what happened. But who deserves blame, and how much?
Back in January of 2010 I advanced the proposition that Lenders Are More Culpable than Borrowers. It's a great old read and a good refresher for today's featured article.
The writing today is challenging for me to deal with because I agree with the central point of this author's argument that banks are more responsible than loan owners. However, the reasoning she uses is faulty and based on emotional appeals. The real points in favor of her position are missed entirely (see link above).
As the foreclosure crisis has escalated over the past several months, one overarching debate has been about who bears the most blame: homeowners or banks?
After everything I've learned and written about the foreclosure mess, my verdict is: The banks are responsible for 90% of the problem, troubled homeowners 10%.
After writing about this phenomenon for four years, my verdict is: 66% lenders, 33% borrowers, and 1% for the rest of us that have to pay for it because we allowed it to happen.
Yes, every foreclosure involves a homeowner not paying his mortgage.
This is the classic lead-in where you acknowledge very damning evidence against your position as briefly as possible so the impact falls flat. The fact that loan owners are not paying their mortgage is exactly why they bear responsibility in this mess. Nobody forced people to take out loans. Borrowers were responsible for their actions. I would say they are 50% responsible, but lenders bear more than half because they should have known better.
But every foreclosure also involves a bank that made the loan. And usually another bank, or several more, that profited from securitizing the loan. And still another bank, or several, that profited from servicing the loan.
Banks and investors made money. So what? Making money does not make one evil. The system was set up for banks to originate loans. They did this for a profit.
Together, those banks have done three things that created the massive glut of foreclosures choking America's legal systems and laying waste to its real estate markets:
They knowingly made millions of loans doomed for foreclosure as soon as the check was written.
They deliberately and/or incompetently failed to modify many salvageable mortgages.
They were so careless with their paperwork and processes that they've undermined the rule of law, clouded the title to untold numbers of properties and complicated the processing of the massive backlog of foreclosures that hurts the economically crucial real estate market.
Let's take a closer look at each factor.
Her first point is true. Lenders did knowingly make millions of loans that were doomed. Lenders did this because they were working on an origination model where they were compensated based on filling an order for a loan made by an investor. It was the investors who were demanding stupid loans that were doomed from the start. Investors demanded bad loans because the loans were often packaged into securities given AAA ratings by ratings agencies being paid by the syndicators to give them AAA ratings. The conflict of interest caused risk to be improperly priced and large amounts of money to flow into poorly underwritten mortgages.
Her second point about failing to modify salvageable mortgages is emotional pandering and nonsense. Many former loan owners find vindication in stories about how the evil banks failed to unilaterally change the terms of a contract to suit the borrower. It's easier for the renting-former-owners to rage against the system rather than feel responsible for a delinquent mortgage requiring modification.
Plus, the whole idea of a salvageable mortgage seems wrong to me. These borrowers are drowning in a cesspool and throwing them a life preserver in the form of a loan modification merely allows them to wallow in their own debt. Is it better to let them drown? I think so. After a foreclosure and bankruptcy, it is over, and they can rebuild their lives. Financial rebirth is a wonderful opportunity.
The emotional pandering is part of the left-wing political meme on this issue. The other political pandering to loan owners concerns robo-signer.
Her third point about procedural delays is off on many levels. First, she implies the procedural delays have hurt the housing market, but she isn't clear on what that means. Lenders have been creating and taking advantage of delays throughout the process in order to slow the flow of foreclosures. Lenders gain by having less inventory pressuring prices. Delinquent borrowers gain by more squatting time. Current borrowers gain by having prices remain higher than levels needed to clear the market. Those interested parties all benefit from delays. Renters and would-be buyers are the ones hurt by these delays, and their voices are seldom heard.
The facts aren't important to her point. She was merely making an emotional appeal to anyone who has gone through foreclosure. Renting-former-owners (RFOs?) think maybe their foreclosure was improper too? And maybe someone will give them a free house because of it?
What Happened to Underwriting?
Getting a mortgage isn't supposed to be as easy as getting cash from an ATM. Banks are supposed to make applicants prove they can repay loans before giving them. The process is called underwriting, and it's one of the most basic in banking.
Yet during the housing bubble, banks largely stopped underwriting in any reasonable way. Indeed, if the banks had been underwriting throughout, the bubble could never have inflated so much.
If you want to get a vivid and entertaining overview of the dynamics that eliminated underwriting, listen to Planet Money's interviews of people at every stage of the process, from making the home loan through its ultimate securitization.
The mortgages made without underwriting have lots of names: Low-doc loans (the borrower stated her income without proof, but proved the assets she claimed to own, or vice versa), no-doc loans (borrower stated both income and assets without proving either), NINJA loans (no proof of income, job or assets). They're all known as liar's loans. According to a recent Forbes article, in 2006 and 2007 liar's loans accounted for 40% of new mortgages, and more than 50% of new subprime mortgages.
The housing bubble would not have gotten legs in 2004 if it were not for Option ARMs and reduced lending standards. Prices were too high in 2004 (as evidenced by the fact that most markets trade below those prices even today). With a diminished buyer pool and higher prices, the market was nearing a top. Wall Street demanded mortgage-backed securities. To meet this demand loan balances would need to get larger and qualification standards would need to drop. The Option ARM allowed much larger loan balances, and the qualification standards were dropped sufficiently to meet demand. Demand was nearly infinite, and qualifications were nearly eliminated.
The Banks Knew Mortgage Applications Were Fraudulent
Now here's the thing: No one forced the banks to make those loans, even if the applicants were lying about their ability to repay.
People shouldn't be sympathetic to banks that effectively say: “Hey, we knew the applicants were lying and wouldn't be able to repay the loans. We didn't care because we didn't hold onto the loans. We offloaded the risk to investors through the securitization process. But so what? Blame the deadbeat borrowers for the volume of foreclosures today.“
That is a compelling argument. Deadbeat borrowers do deserve much of the blame. I peg it at 33%.
Why is it fair to say the banks knew they were being lied to? Well, beyond the obvious — everybody in the business used the term liar's loan — the FBI warned about mortgage fraud back in 2004. And take a look at this 2006 fact sheet from the Mortgage Brokers Association for Responsible Lending that analyzed data from 2004 and 2005. By doing a quick check, the group found that 90 out of 100 stated-income loans exaggerated the applicant's income, and 54 of those loans inflated it by more than 50%.
By 2007, the FBI reported that industry insiders — loan officers, mortgage brokers, real estate agents, appraisers and lawyers — not wannabe homeowners — were involved in some 80% of mortgage fraud. The FBI calls that “fraud for profit” as opposed to “fraud for housing,” which is when a homeowner lies to get a house he can't afford. As Calculated Risk's Tanta showed in 2007, that distinction started breaking down as the absence of underwriting by the banks enabled both types of fraudsters to join forces.
Tanta also explained that in addition to being directly complicit in mortgage fraud, lenders engaged in massive cost-cutting efforts that gutted their ability to underwrite loans:
So many of the business practices that help fraud succeed — thinning backoffice staff, hiring untrained temps to replace retiring (and pricey) veterans, speeding up review processes, cutting back on due diligence sampling, accepting more and more copies, faxes, and phone calls instead of original ink-signed documents — threw off so much money that no one wanted to believe that the eventual cost of the fraud would eat it all up, and possibly more.
Lenders certainly earned their 66% of the blame. That doesn't take away from the 33% that borrowers still are accountable for. The rest of her argument is pressing the point that borrowers are nearly blameless. She is wrong.
Beyond the idea that the banks knew, in real time, that they were making loans that couldn't be repaid, evidence shows that banks went a step further and tried to conceal that information from others.
Banks Hid Fraud by Shopping for AAA Ratings
Banks weren't the only entities to stop evaluating risk. Their key allies were the big three ratings agencies, Moody's, Standard & Poor's and Fitch. The ratings agencies put AAA ratings on securities that didn't come close to deserving that golden grade, in part by using outdated risk models that their own analysts complained inflated ratings. But why weren't the agencies worried about their professional reputations?
In 2009, professor and former financial regulator William K. Black used a paper from S&P to discuss how the banks and the raters chose not to look at the documents used to make the loans they were securitizing. Then Black cited a 2007 paper from Fitch to show why it mattered that no one was looking at the loan files, why it was at minimum willful blindness. (Willful blindness is trying hard to not know that the law holds you accountable for knowing.)
What was going on? According to 2010 testimony from former ratings agency executives and their emails, the agencies capitulated to demands from banks for AAA ratings on mortgage-backed securities even though they knew those ratings weren't deserved.
The banks had the leverage to get the AAA ratings they wanted because rating “structured finance products” — mortgage backed securities and the like — had become really profitable for the ratings agencies, and compared to other types of rated securities, very few clients issued them. So if those clients — the big banks — weren't pleased, they could simply “ratings shop” — that is, go from one agency to another until they got the desired rating.
In short, a large proportion of the foreclosures drowning the courts and the real estate market are a direct consequence of the banks' failure to effectively underwrite loans during the bubble. Those borrowers should have had — and today would have had — their loan applications rejected.
That is a good description of the shady dealings at the ratings agencies.
Servicers Get Paid to Foreclose, Not Modify
But wait, you might point out, it's not just the dodgy liar's loans going bust. Foreclosures have spread widely throughout the “prime” mortgage market as well. Surely, the Great Recession, not the banks, is to blame for many of those foreclosures.
You'd be only partly right.
What's generating many recession-induced foreclosures is the relatively new model of mortgage servicing. Prior to the mass securitization of mortgages, the bank that made a mortgage was the same bank that serviced it. As a result, the servicing bank made its money from the mortgage interest, and the long-term repayment of the mortgage was key to its profit. So, a bank was typically willing to work out a mortgage modification with the homeowner to keep that income stream intact.
Of course, sometimes the homeowner was in such trouble that foreclosure made more sense. Foreclosures do happen even in real estate markets filled only with solidly underwritten loans serviced by the bank that made the loan. That's because bad things do happen to prevent a once-creditworthy borrower from repaying.
Unemployment is a big problem. But there are other problems like a borrower's adjustable-rate mortgage recasting to fully amortizing and their payment going up 50%.
How many forecloses result from financial incentive and how many from incompetence isn't clear, but it's also irrelevant. The point is that a good chunk of foreclosures shouldn't happen because modifications make more money for the people the mortgage is owed to (usually, the investors in the mortgage-backed securities).
Simply put, if the banks had kept up normal underwriting and had modified mortgages (or approved more short sales) every time it made sense to do so, we wouldn't have the foreclosure volume, and thus delays, that we currently face.
Her contention that investors would make more from a modified mortgage is not proven. It is likely not true simply because so many modified mortgages fail costing the investors even more money. Since she is mistaken about what is best for the investors of the mortgage-backed securities (as if she cared) she is also mistaken in her contention that less foreclosure volume was in everyone's best interest.
The “Paperwork” Problems Aren't Meaningless
Now you might ask, in addition to volume-related delays, with so many foreclosures in the system, aren't defaulted homeowners to blame for gumming up the process? Aren't they just citing meaningless problems with the banks' paperwork so that they can stay in their homes for free, hurting everyone else in the process?
No.
Actually, yes. Attorneys enable squatters to game the system. The delays caused by this foolish procedural posturing stops a new family from moving into the property — a family likely to be paying a mortgage — which in turn hurts the lender.
While it's true that foreclosure defense attorneys want to slow the process to give their clients more time to relocate,
Bullshit! People are not looking for more time to relocate. How long does it take to move out? Two weeks? Three weeks, tops? This premise doesn't pass the sniff test. Attorneys enable squatters to game the system because squatters want them too. Squatters want to stay in a house with no rent and no payment. It is financial greed, pure and simple.
that doesn't mean the “paperwork” problems they're raising are meaningless. [actually, it does.]
Even homeowners who are capable of curing their default sometimes can't because banks' inaccurate record-keeping about how much the homeowners owe precludes the possibility. More outlandish problems have surfaced too: from multiple banks trying to foreclose on the same property, to banks foreclosing on homes bought with cash, to banks breaking into homes they haven't foreclosed on, to a bank ignoring its court-approved agreement to foreclose and demanding the money instead.
She has recounted every feeble story trying to give the robo-signer scandal legs. Each of them is pretty weak. None of this makes borrowers any less blameworthy for the housing bubble.
What Revelations Are Still to Come?
These cases are probably just the leading edge of a paperwork-problem tsunami. Even though these issues have been in the news for months, the official investigations and litigation are still in relatively early stages. Millions of foreclosures in nonjudicial states haven't gotten the scrutiny they deserve (except presumably as part of the 50-state attorneys general investigation), so who knows what will yet surface?
As major judiciaries force a closer look at bank documents, what will they find? The fact that all the major law firms advising on “typical” securitization deals didn't know that “assignments in blank” violated Massachusetts law is chilling. How many other states' laws were broken by the “typical” deal?
Moreover, everything we're seeing suggests the banks' papers for securitized loans are in total disarray. The note is in one place (theoretically), the record of payments on the loan (inaccurate as it may be) is in another, and the ownership of both the note and the mortgage may or may not be the same. When asked to produce securitization documents, banks frequently submit drafts and contracts without attachments. The attorneys doing the foreclosures are buried in volume, cutting corners themselves, and are unable to meaningfully communicate with their bank clients. Indeed, it may not even be attorneys doing the foreclosures.
And What's the Fate of Mortgage-Backed Securities?
The banks also have a different type of mortgage “paperwork problem” relating to mortgage-backed securities. Will the banks discover that millions of mortgages they thought they had securitized instead stayed with them because they screwed up the paperwork to transfer the mortgages?
Massachusetts will be a leading indicator on that question because the “assignment in blank” problem may have prevented most of those Massachusetts mortgages from being securitized. Or if the securitizations technically succeeded, will investors still win suits against the banks or force them to buy back large volumes of securities because the papers the banks used to sell the securities were fraudulent?
The foreclosure paperwork problem damage the banks somewhat and the broader economy even more so, but the paperwork problem with mortgage-backed securities has the potential to trigger Bank Bailout II.
Whatever happens to mortgage-backed securities is irrelevant. Investors will demand a properly priced mortgage-backed security, and the market will find a way to supply that demand. After years of fighting the legal issues pertaining to buybacks will be resolved and the market will function again. None of this makes borrowers blameless.
No One Is Above the Law
But imagine for a second a world that doesn't exist — one in which the banks' foreclosure documents were all accurate, and their problems were simply a failure to abide by the rules that apply to everybody else? Shouldn't we blame the deadbeats for gumming up the system then? Many readers make comments to that effect on some of my reporting.
Yes, we should. Just like we should blame them now.
Let's flip the question: Why is it OK for the banks to ignore the rules? The rich and powerful and the ordinary Joe are all supposed to play by the same rules. No one is supposed to be above the law.
That is a straw-man argument. First, borrowers are not ignoring the rules. Deadbeat borrowers are exercising a contractual right to quit paying and surrender the property — at least the ones who are not squatting with the aid of an attorney. Flipping the question makes no sense, particularly when the original question was based on faulty observation.
The following points are false.
No matter whether it's America's real estate market getting crushed by millions of foreclosures that didn't need to be, or our real property records getting shredded through clouded titles, or
The following points are true.
citizens' tax dollars being used to bail out banks again, we're all paying for the banks “paperwork” problems.
And remember: We don't know yet just how big that bill is ultimately going to be.
We don't know how big the bills are going to be or who will ultimately pay them. As a taxpayer, you can be sure your name is on the bill.
She owned it for years, then she went Ponzi
Today's featured owner is another loss for a stupid lender, and another long-term home owner that went Ponzi and spent their home in just a few years.
My records don't go back far enough to find when they purchased the property. That often happens on properties owned since the mid 90s or longer. My first record is a HELOC she opened on 6/8/1999 for $67,000.
By 2002 she was fighting the urge to go Ponzi. On 3/5/2002 she refinanced her first mortgage for $287,000. This was likely a cash out transaction but still for much less than appraised value. In other words, she got a little kool aid buzz, but she didn't get enough to go crazy. On 11/4/2002 she refinanced the first mortgage again for $283,100. Since this is for a smaller amount, I surmise that she was at least trying to be responsible. She gave that up in 2005 and went Ponzi.
On 3/15/2005 she refinanced the first mortgage for $481,000 with an Option ARM with a 1% teaser rate. One can speculate on why she needed $200,000 in one lump sum, but she must have had bills to pay. Big bills.
Actually, she probably took the money simply because it was offered. With the Option ARM, she was likely told that their payment would go down and she would be given a check for $200,000. Not a bad sales pitch if you want to underwrite lots of mortgages. Once she went Ponzi with the Option ARM, the rest was merely whirling down the drain.
On 12/12/2005, blissfully unaware that she had gone Ponzi, she opened a HELOC for $100,000. The free money was flowing.
On 4/26/2006, with one last suck on the mortgage teat, the owner obtained a $647,000 first mortgage and a $80,000 HELOC to bring the total property debt to $727,000. The total mortgage extraction likely exceeded $500,000.
Oh, and she got to squat for a while too:
Foreclosure Record
Recording Date: 10/16/2009
Document Type: Notice of Sale
Foreclosure Record
Recording Date: 07/08/2009
Document Type: Notice of Default
At the most recent, the last payment she made would have been on March 1, 2009. In all likelihood she was delinquent far longer than that but the bank didn't bother filing the NOD.
Most desirable floor plan with quiet end of cul-de-sac location. Adjacent to community greenbelt/park. Upgraded appliances with near new painted interior. Neutral colored carpet throughout.
This video has nothing to do with real estate, but I thought the artistry was fantastic, so I am sharing it here.
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