Category Archives: News

Low Interest Rates Will Not Create Demand

Low interest rates are not created the demand for housing that low prices does.

Irvine Home Address … 19 GEORGETOWN 25 Irvine, CA 92612

Resale Home Price …… $439,000

Man I ain't getting nowhere

I'm just living in a dump like this

There's something happening somewhere

baby I just know that there is

You can't start a fire

you can't start a fire without a spark

This gun's for hire

even if we're just dancing in the dark

Bruce Springsteen — Dancing in the Dark

Not long ago I noted, Low Interest Rates Are Not Clearing the Market Inventory. Well, I am not the only one who has noticed. Richard Fisher, President of the Federal Reserve Bank of Dallas, has also noted that low interest rates will not fix the ailing economy, but super low rates will have many deleterious effects not anticipated by others at the Fed.

Dallas Fed president: Low interest rates won't spark demand

by JACOB GAFFNEY — Monday, November 8th, 2010, 3:28 pm

The environment of exceedingly low interest rates is great for banks, according to Richard Fisher, President of the Federal Reserve Bank of Dallas, but is doing little to help the overall economy get back on track.

"Despite their theoretical promise, reductions in interest rates to Lilliputian levels have not done much thus far to spark loan demand," he told the Association for Financial Professionals in San Antonio Monday.

Home loan demand is well off historic highs as Existing-Home Sales Sink to Lowest Level Ever Recorded and refinance demand has dropped because everyone either already has refinanced or they are unable to because they are under water on their mortgage. Plus, who is anxious to use low interest rates to buy assets at inflated prices? There is only one sure-fire way to stimulate demand: lower the price. Fix the Housing Market: Let Home Prices Fall.

On the weekend open thread, the clearest example of lower prices stimulating demand can be readily seen in Las Vegas:

Notice the crash in prices has resulted in a large boost in sales. Buyers in Las Vegas are currently more active than they were at the peak of the bubble.

So how is Southern California doing?

While home prices have bounced off the false bottom, the rate of sales has declined significantly from the peak and remains at very low levels? Why is that? Why are sales rates higher in Las Vegas than in Southern California relative to the peak?

It's the price.

Every once in a while I see threads in the comments where the sales strength of the market is touted. Look carefully at the charts above: sales rates are down in Southern California — way down. Anything else is spin. Yes, people are buying homes, but they are buying far fewer of them because the prices are too high. In Las Vegas more people are buying homes because the prices are lower. In fact, they are so much lower that outside people like me are buying homes because the prices are so low.

Lower prices stimulate demand, not lower interest rates.

Back to the article….

Liquidity seems to exist in other markets, notable commodities, he said. But it worries him that the money markets aren't coming back strong enough and short-term lending to small business remains restricted to a point of macroeconomic pain.

"It concerns me that liquidity is omnipresent on bank and corporate balance sheets, and yet it is not being used to hire American workers," he said.

Who are the banks going to loan that money to? The over-indebted American consumer? Few creditworthy borrowers exist in the current economic environment. Too much bank money is tied up in non-productive loans, non-productive assets, and low yield government treasuries.

Fisher claims that banks already hold over $1 trillion in excess reserves. Holdings of government securities as a percentage of total assets on bank balance sheets are growing, he said, and loans as a percentage of assets are declining.

The recent Fed cash pump, referred to as QE2, will also keep rates low and weaken the dollar, Fisher said. And the inflow may not stop at the current allotment to purchase $600 billion in Treasuries between now and the end of the second quarter of next year, which is on top of the amount projected to replace the paydown in mortgage backed-securities.

"I could not state with conviction that purchasing another several hundred billion dollars of Treasuries — on top of the amount we were already committed to buy in order to compensate for the run-off in our $1.25 trillion portfolio of mortgage-backed securities — would lead to job creation and final-demand-spurring behavior," he said. "But I could envision such action would lead to a declining dollar, encourage further speculation, provoke commodity hoarding, accelerate the transfer of wealth from the deliberate saver and the unfortunate, and possibly place at risk the stature and independence of the Fed."

Wow! A guy at the Fed who really gets it. Bernanke has openly stated he wants a weaker dollar too help stimulate inflation. The excess liquidity is bound to find its way into momentum plays as money chases the few asset classes with any real prospects and other money follows. This speculation leads to mis-allocations of resources and continued economic weakness. The theft from savers is obvious. Have you seen the interest rate on your savings account lately?

This activity should put the stature and independence of the Fed at risk. It is clear the Fed exists to promote moral hazard and prevent the normal cleansing function of recessions from occurring.

Despite the Feds best efforts, house prices in Las Vegas have crashed back to mid 90s levels, and because of it, the debt is being purged, citizens have affordable housing, sales rates are up, and the groundwork is being laid for a healthy recovery.

Because of the Feds best efforts, house prices in Orange County remain elevated at 2003-2005 prices, and because of it debt is being preserved, citizens have expensive housing, sales rates are down, and a sustained economic recovery is being delayed and weakened.

Las Vegas will prosper because once the crash has erased the excess debt, home owners will have more spending money as a percentage of their income than Orange County residents will have. This extra spending money will make its way to auto dealerships, local restaurants, and other businesses.

Borrowers in Orange County will be spending a much higher percentage of their incomes on interest and debt service, and only the hope of future mortgage equity withdrawal based on herd-induced appreciation keeps the whole system together. The local economy will suffer as local incomes are diverted to far-away interest recipients who are not stimulating the California economy. We can have high house prices or a vibrant economy, but we can't have both without Ponzi borrowing.

Federal Reserve chairman Ben Bernanke recently defended QE2 in an editorial in The Washington Post:

“This approach eased financial conditions in the past and, so far, looks to be effective again. … Easier financial conditions will promote economic growth … lower mortgage rates will make housing more affordable and allow homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending.”

Whenever I read one of Bernanke's statements, I assume he says stupid things like that because he has to. It frightens me that he might actually believe it. I think Greenspan believed his own bullshit.

First, easier financial conditions — whatever that means — will not necessarily promote economic growth. Bernanke's zero interest rate policy hasn't fixed things so far. It has prevented asset prices from crashing to market-clearing levels, but I consider that a failure of policy; Benanke considers that a success.

Second, lower mortgage interest rates will not allow underwater loan owners to refinance, and even if they did, they still have too much debt relative to their incomes. Financing enormous sums at 4% isn't doing borrowers any favors as long as they have too much debt.

Third, lower bond rates may not encourage businesses to invest. What will they invest in? What is there a demand for that is not already over-supplied? Real estate? LOL!

Forth, higher stock prices — when inflated by air from the Federal Reserve — are Ponzi profits likely to evaporate once the Fed stops its inflationary policies. Is this a sustained element of demand upon which we should build our economy?

Fisher said he is already seeing foreign money go to other lands, funds that would normally be diverted into the American economy and that if more careful steps aren't taken, the nations can experience "super ordinary" levels of inflation.

The sad part of our policy is that we will export the inflation we tried to create at home. Japan's decades-long low interest rate policy helped inject excess liquidity into other Asian economies over the last 20 years, yet inflation in Japan remains elusive. It's hard to say where our excess liquidity will end up. China perhaps? Like water seeking its natural level, the liquidity will flow somewhere, and that isn't likely to be into the inflated real estate values in Southern California. With such low cap rates and only the prospect of Ponzi profits, why would rational money flow there? To pick up "investments" like today's featured property?

Orange County's version of a cashflow property

Most investors in Orange County who claim they are cashflow investing are still buying because they plan on obtaining and spending the price appreciation as income. it isn't true cashflow investing. Today's featured property is the type of property a cashflow investor should look for. It is near the university, so it is easy to rent, and it is relatively small, so there is not as much maintenance. The HOAs are ridiculously high, and so is the price relative to rents, but if you can extract equity to boost your returns, properties like this can be profitable. The problem is that appreciation is not stable and consistent, and it may or may not materialize. Contrary to popular belief, it will not materialize here to any degree over the next several years. As a true cashflow investment, this one is a loser.

  • This property was purchased on 8/3/1999 for $235,000. The owner used a $223,250 first mortgage and a $11,750 down payment. Even at that price, this isn't a particularly good cashflow investment. With the huge HOA, this property doesn't start to be attractive until it gets below $150,000.

  • On 11/30/1999 he opened a $24,750 HELOC. Think how that boosted his return.

  • On 11/6/2000 he obtained another HELOC for $47,000. If you can extract an additional $20,000 a year from the property, suddenly the cashflow looks much better. Of course, since that is an unsustainable Ponzi scheme, I don't consider that much of an investment.

  • On 11/15/2001 he refinanced the first mortgage for $236,000 and obtained a $29,500 stand-alone second.

  • On 9/23/2002 he refinanced with a $260,000 first mortgage and obtained a $32,000 HELOC. Notice the steady mortgage equity withdrawals are mimicking income. In reality, he is steadily increasing his debt.

  • On 3/3/2004 he refinanced with a $260,000 first mortgage and obtained a $223,000 HELOC.

  • On 1/4/2006 he obtained a $60,000 HELOC.

  • On 3/1/2006 he refinanced with a $480,000 first mortgage.

  • On 3/17/2006 he obtained a private party loan for $150,000. Given the short timeframe between the two loans, I wonder if the private party knew he was subordinate to that huge new first mortgage?

  • Total property debt is $630,000.

  • Total mortgage equity withdrawal is $406,750 over a seven year stretch. If you believe that is sustainable, this property was a tremendous bargain when he purchased it in 1999. Since this has proven not to be sustainable, it was a costly mistake. He made good money during the bubble, but now he doesn't have any income from this property, and his credit is ruined. In this instance, I would rather be the tortoise than the hare.

Foreclosure Record

Recording Date: 06/16/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 01/04/2010

Document Type: Notice of Default

Irvine Home Address … 19 GEORGETOWN 25 Irvine, CA 92612

Resale Home Price … $439,000

Home Purchase Price … $439,000

Home Purchase Date …. 4/4/1999

Net Gain (Loss) ………. $(26,340)

Percent Change ………. -6.0%

Annual Appreciation … 0.0%

Cost of Ownership

————————————————-

$439,000 ………. Asking Price

$15,365 ………. 3.5% Down FHA Financing

4.29% …………… Mortgage Interest Rate

$423,635 ………. 30-Year Mortgage

$83,696 ………. Income Requirement

$2,094 ………. Monthly Mortgage Payment

$380 ………. Property Tax

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

$37 ………. Homeowners Insurance

$282 ………. Homeowners Association Fees

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

$2,793 ………. Monthly Cash Outlays

-$332 ………. Tax Savings (% of Interest and Property Tax)

-$579 ………. Equity Hidden in Payment

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

$55 ………. Maintenance and Replacement Reserves

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

$1,961 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$4,390 ………. Furnishing and Move In @1%

$4,390 ………. Closing Costs @1%

$4,236 ………… Interest Points @1% of Loan

$15,365 ………. Down Payment

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

$28,381 ………. Total Cash Costs

$30,000 ………… Emergency Cash Reserves

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

$58,381 ………. Total Savings Needed

Property Details for 19 GEORGETOWN 25 Irvine, CA 92612

——————————————————————————

Beds: 2

Baths: 2 full 1 part baths

Home size: 1,457 sq ft

($309 / sq ft)

Lot Size: n/a

Year Built: 1983

Days on Market: 87

Listing Updated: 40480

MLS Number: L33738

Property Type: Condominium, Residential

Community: University Town Center

Tract: Cc

——————————————————————————

According to the listing agent, this listing may be a pre-foreclosure or short sale.

APPROVED SHORT SALE at $450,000.00 !! 2 Bedroom , 3 bath attached condo. With upgraded kitchen, granite counters and custom cabinets. Great location, near Univeristy High School and UCI.

IHB Special Event

Tomorrow night, Wednesday, November 10, 2010, at 6:30, there will be an IHB special event at Dave and Busters in the Irvine Spectrum. We will be gathering in the patio room to the left as you enter.

We have a long history of these events. Back in 2007, the first meetings were held when we still kept our identities secret. The biggest meeting was two years ago in November 2008, when I revealed my identity on the cover of the OC Register and held the big book-signing event for The Great Housing Bubble.

We have continued our meetings on and off over the last two years. During the summer, we held a number of meetings to raise money for the fund. I want to invite all the fund investors to come out on Wednesday evening. I can give you an update on my progress in person. Also, anyone else considering investing can come out and talk to me about getting in before the November 18 closing date.

One thing that was interesting about the investor meetings was how many long-term readers attended these events — readers I had never met. I would like to invite all the lurkers out there to attend as well.

Everyone is invited to a night of real estate talk, free appetizers and drinks, and a chance to meet with some reporters who find these IHB gatherings interesting. Please come out and show your support for the IHB.

Thank you.

A Plan to Transfer Losses on Jumbo Toxic Mortgages to Taxpayers (repost)

Due technical difficulties with our threaded comments, we closed the comments on the original post. The entire post is now here, and comments are open.

Do you want to pay the losses from jumbo loans — big loans to rich people — with your taxes?

Irvine Home Address … 7 PEPPERCORN Irvine, CA 92603

Resale Home Price …… $767,000

We be fallin up (up)

Never fallin down (down)

We keep it at a higher level elevating now,

(put it in your) in your area,

(city or your) town,

Black Eyed Peas — Fallin' Up

In our modern mortgage era, nearly all loans are backed by the US government. At one time we had something resembling a free market, but the quasi-governmental entities Freddie Mac and Fannie Mae crowded out much of the mortgage market, and when they were taken over by the Treasury department, they basically took over the mortgage market together with the FHA.

The GSEs and the FHA were originally intended to provide mortgages to lower and middle income Americans who where not being served by the free market. Rich people can get loans because they have assets and often high incomes.

There hasn't been much need to subsidize rich people, and there isn't much support among the electorate for such subsidies. That is why we have a conforming limit to GSE and FHA loans. Raising this conforming limit would offer a government subsidy to wealthy or high-income borrowers. It would also give opportunity for lenders to refinance many of their toxic jumbo loans into government-backed toxic loans and shift losses to the US taxpayer.

Total Mortgage founder: Increase jumbo loan limit nationwide to spur the market

by CHRISTINE RICCIARDI — Thursday, October 28th, 2010

John Walsh is founder and president of Total Mortgage Services, a direct mortgage lender and broker based in Milford, Conn. For this edition of In This Corner, Walsh gives his take on the jumbo loan market and the limit restrictions imposed across the country.

HousingWire recently spoke with an analyst who said jumbo loans are now performing similarly to the subprime market during the housing bubble. The delinquency rate for this type of mortgage is becoming abnormally high. How does this compare to your experience in the marketplace?

There's been a large loss in value in the jumbo market that has to do with a number of factors: the loss of liquidity on the jumbo side and the fact that there are fewer jumbo outlets has put further pressure on the jumbo housing market. I think that's the reason why there are troubles in that sector.

Let's put the horse back in front of the cart. The reason there is less liquidity and fewer jumbo outlets is because 10% of the borrowers are delinquent, and there is no government agency stepping up to take these losses. The lack of liquidity is the symptom of the market's real trouble: delinquent borrowers.

As far as a percentage decline in value, the jumbo market seems to have been hit extremely hard which has contributed to the performance on those loans — a lot of those jumbo loans are underwater.

That being said, prices have gotten to somewhere near a low.

What tea leaves did he read to come to that conclusion?

With the mortgages that we're giving out today, the loan-to-value requirements are a lot steeper, the credit score requirements are a lot steeper, the debt-to-income requirements are a lot more stringent. So I think the jumbo loans being written today as opposed to the ones written even as little as six months ago or a year ago, are going to perform significantly better. That's why you're beginning to see an ease on the jumbo side of loans.

The tightening of requirements he is talking about has also reduced the number of borrowers in the jumbo loan pool considerably. Think about how many homes are priced over $1,000,000 in Orange County, and pair that with the number of borrowers who can actually qualify for and make the payments on a jumbo loan — not factoring in mortgage equity withdrawal to make Ponzi payments. The supply of these homes greatly exceeds the potential demand.

There's also a lot of legacy jumbo problems which I think is just a function of the value of homes.

The legacy problems are a function fo the value of homes? I thought the problems were because lenders were insanely stupid and gave out huge loans to anyone with a pulse. And in fact, it was giving out those stupid loans with inflated the housing bubble and a created the problem with home values we have today.

There was a lot of no income (documentation) loans that were done on jumbo borrowers — that seemed to be the way a lot of the jumbo loans were done. A lot of places did no income option ARMs. So a lot of those problems, that's what you're seeing now from a legacy side of things.

Legacy loans: a feel-good euphemism for everything stupid in the housing bubble. The word legacy almost makes it sound regal, just, and important, like something meant for the aristocracy. I say we let the aristocracy eat the legacy loan cake they baked.

Going forward, the loans that are being written today are significantly better credit risks. That's why you're beginning to see some liquidity in the jumbo market.

As far as the demand for jumbo loans, where do you see most of the demand coming from? What kind of loans are these?

We don't really do commercial lending, so it's all residential lending on the jumbo side. The jumbo side is not really regional, there's just more people calling about them these days. I would say demand is up at least 25% over the past couple of months. We're beginning to refinance some of our customers from two, three, four years ago that got really good jumbo mortgage rates, but because the rates have come down so much, they're beginning to come into that area where a refinance makes sense. We have seen a fairly significant uptick in the jumbo refinances recently.

Phone calls asking about jumbo loans is not demand. I can imagine the calls he must be getting…

Qualified borrowers is real demand, and that kind of jumbo loan demand is not increasing with near 10% unemployment.

You mentioned in a statement that you believe conforming loan limits should be raised across the country, not just in "high-cost areas." What do you mean high-cost areas? How would this change affect the market?

There's a conforming jumbo now, so in certain areas of the country you can go and get virtually the same prices as a conforming loan and get the loan to go to either Fannie Mae or Freddie Mac. Normally the conforming loan limit is $417,000, but in certain areas you can go up to $729,750 as a mortgage amount. That's only in 20 metropolitan areas. So even though you're in one town, where you may only be able to go up to $650,000, in another town the limit is $729,000. So it varies from ZIP code to ZIP code. My thought is you should expand that increased conforming loan limit countrywide because a lot of people fall between $417,000 and $729,750.

Do the taxpayers want to subsidize loans between $417,000 and $729,750 everywhere? I think it is a ripoff for the taxpayer that those loans are insured here, but to do that everywhere would simply expose the taxpayer to more risk.

It would put a lot more people in the purchase market that wouldn't necessarily qualify under the jumbo program, but may qualify under this particular program. You also bring FHA into the possibility, which is 3.5% down up to $729,750. I think it would expand a ton of potential, not only buyers and a lot more purchases in the range $417,00 to $729,750, but also allow a lot of people to refinance and take advantage of these unbelievably, historically low rates.

We may be able to re-inflate the housing bubble nationally if we allowed 3.5% down loans up to $729,750. I don't think that would be a good thing, particularly since the taxpayer would be absorbing all the losses when the echo bubble burst.

A lot of people just don't qualify based on their loan-to-value; a lot of people have lost so much equity they can't capitalize on these low rates. And if all these people have the ability to refinance, you're looking at a lot of people saving money, a lot more money being pumped into the economy from a refinancing perspective. From a purchasing perspective, obviously when people buy a home they hire more contractors and go to Home Depot more. The good things that happen when people buy houses will happen and spur the purchase market even more all across the country; not in just these defined areas.

I am always amazed that people think you can borrow your way out of debt. Excessive debt is the problem. Adding to that debt is not a viable solution, and neither is refinancing excessive debt at a lower interest rate.

I think that could be a great thing on top of all the things the government is trying to do.

I think it is a terrible thing to do just as the other failed things the government is trying to do.

It's not like the short sale refinance program where they're actually going to subsidize the write down or the mortgages. This is just you're taking on a larger loan size.

Great idea: take on more debt because you can't afford the debt you already have. Brilliant!

I think it's a great time because the underwriting standards have gotten so much more stringent these days you're getting a lot more qualified borrowers.

Why hasn't the government already put in place some policy to deal with jumbo loans?

I'm sure there's a rationale as to why they only did it in pocket areas. I think they did it upon median income in particular areas. I sort of understand why they did it, but my philosophy in that area is this: just because you live in Fairfield, Conn., you have the ability to take advantage of this program. But if you live in Omaha, Neb., and you have a loan amount that meets the value of the home and you still have to meet the same underwriting guidelines, why can't you, in Nebraska, take advantage of that particular program? Again to spur more purchase activity and also to take advantage of lower rates for the ability to refinance and put more money back into the economy.

This idea is dumb for many reasons, but as the jumbo loans losses continue to mount, expect to see this dumb idea resurface. Personally, I don't want to become liable for the extravagant borrowing of fools with huge losses on their jumbo loans. As you read about today's featured borrower, ask yourself if you want to pay his bill.

Buy, refi, and bye-bye

Most of the foreclosure properties I see today have this familiar pattern: fools overpays during the bubble, and as prices go up, they add to their bloated mortgages until finally they implode and lose their property. Many of these people borrow enough to recoup their down payment and get some extra money out of the bank, and some do not. The owner of today's featured property had access to his entire down payment, but unless he used the HELOC, he may have left the down payment in the bank.

  • This property was purchased for $720,000 on 7/16/2004. The owner used a $575,200 first mortgage, and a $144,800 down payment.

  • On 8/8/2005 he refinanced for $584,600 and recovered some of his down payment.

  • On 10/14/2005 he opened a $180,000 HELOC.

  • He quit paying in late 2008, and he squatted for about 21 months before the auction.

Foreclosure Record

Recording Date: 07/08/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 05/11/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 02/05/2009

Document Type: Notice of Default

The flipper that purchased the property at auction is playing games with the listing price. This is the slow grinding loss of imaginary equity.

Date Event Price
Nov 04, 2010 Price Changed $767,000
Oct 23, 2010 Price Changed $772,000
Oct 15, 2010 Price Changed $775,000
Oct 01, 2010 Price Changed $779,000
Sep 23, 2010 Price Changed $785,000
Sep 17, 2010 Price Changed $789,000
Sep 01, 2010 Listed $795,000

Irvine Home Address … 7 PEPPERCORN Irvine, CA 92603

Resale Home Price … $767,000

Home Purchase Price … $661,500

Home Purchase Date …. 8/23/2010

Net Gain (Loss) ………. $59,480

Percent Change ………. 9.0%

Annual Appreciation … 60.7%

Cost of Ownership

————————————————-

$767,000 ………. Asking Price

$153,400 ………. 20% Down Conventional

4.21% …………… Mortgage Interest Rate

$613,600 ………. 30-Year Mortgage

$144,845 ………. Income Requirement

$3,004 ………. Monthly Mortgage Payment

$665 ………. Property Tax

$225 ………. Special Taxes and Levies (Mello Roos)

$128 ………. Homeowners Insurance

$222 ………. Homeowners Association Fees

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

$4,244 ………. Monthly Cash Outlays

-$704 ………. Tax Savings (% of Interest and Property Tax)

-$851 ………. Equity Hidden in Payment

$231 ………. Lost Income to Down Payment (net of taxes)

$96 ………. Maintenance and Replacement Reserves

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

$3,015 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$7,670 ………. Furnishing and Move In @1%

$7,670 ………. Closing Costs @1%

$6,136 ………… Interest Points @1% of Loan

$153,400 ………. Down Payment

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

$174,876 ………. Total Cash Costs

$46,200 ………… Emergency Cash Reserves

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

$221,076 ………. Total Savings Needed

Property Details for 7 PEPPERCORN Irvine, CA 92603

——————————————————————————

Beds: 3

Baths: 2 full 1 part baths

Home size: 2,046 sq ft

($375 / sq ft)

Lot Size: n/a

Year Built: 2004

Days on Market: 66

Listing Updated: 40486

MLS Number: P750630

Property Type: Condominium, Residential

Community: Quail Hill

Tract: Laur

——————————————————————————

A True Turnkey Property with An Incredibly Open And Spacious Floor Plan Boasting High Ceilings, Plantation Shutters, Hardwood Flooring, New Paint, and Stainless Steel Appliances!!! Along with the Bedrooms there is any Extra DEN downstairs & LIVING AREA upstairs!!! Customized Tiles and Kitchen with Granite Countertops and Stainless Steel Appliances with a Brand New Wine Cooler! Boasts a TRUE Master Bedroom Features Walk-In Closet, Private Balcony, Dual Sinks, Roman Tub & Separate Shower. Inside Separate Laundry Rooom And Plenty Of Storage. This Fantastic End Unit Share Only 1 Wall. Situated In A Quiet Location Of A Very Desireable Complex Located In The Heart Of Irvine. Close to Restaurants, Theater And Shopping. Close To The Toll Road And It Is One Of Irvine's Newest complexes.

Why is this in Title Case?

Do you feel the excitement with the exclamation points!!!

A Plan to Transfer Losses on Jumbo Toxic Mortgages to Taxpayers

Do you want to pay the losses from jumbo loans — big loans to rich people — with your taxes?

Irvine Home Address … 7 PEPPERCORN Irvine, CA 92603

Resale Home Price …… $767,000

We be fallin up (up)

Never fallin down (down)

We keep it at a higher level elevating now,

(put it in your) in your area,

(city or your) town,

Black Eyed Peas — Fallin' Up

In our modern mortgage era, nearly all loans are backed by the US government. At one time we had something resembling a free market, but the quasi-governmental entities Freddie Mac and Fannie Mae crowded out much of the mortgage market, and when they were taken over by the Treasury department, they basically took over the mortgage market together with the FHA.

The GSEs and the FHA were originally intended to provide mortgages to lower and middle income Americans who where not being served by the free market. Rich people can get loans because they have assets and often high incomes.

There hasn't been much need to subsidize rich people, and there isn't much support among the electorate for such subsidies. That is why we have a conforming limit to GSE and FHA loans. Raising this conforming limit would offer a government subsidy to wealthy or high-income borrowers. It would also give opportunity for lenders to refinance many of their toxic jumbo loans into government-backed toxic loans and shift losses to the US taxpayer.

Total Mortgage founder: Increase jumbo loan limit nationwide to spur the market

by CHRISTINE RICCIARDI — Thursday, October 28th, 2010

John Walsh is founder and president of Total Mortgage Services, a direct mortgage lender and broker based in Milford, Conn. For this edition of In This Corner, Walsh gives his take on the jumbo loan market and the limit restrictions imposed across the country.

HousingWire recently spoke with an analyst who said jumbo loans are now performing similarly to the subprime market during the housing bubble. The delinquency rate for this type of mortgage is becoming abnormally high. How does this compare to your experience in the marketplace?

There's been a large loss in value in the jumbo market that has to do with a number of factors: the loss of liquidity on the jumbo side and the fact that there are fewer jumbo outlets has put further pressure on the jumbo housing market. I think that's the reason why there are troubles in that sector.

Let's put the horse back in front of the cart. The reason there is less liquidity and fewer jumbo outlets is because 10% of the borrowers are delinquent, and there is no government agency stepping up to take these losses. The lack of liquidity is the symptom of the market's real trouble: delinquent borrowers.

As far as a percentage decline in value, the jumbo market seems to have been hit extremely hard which has contributed to the performance on those loans — a lot of those jumbo loans are underwater.

That being said, prices have gotten to somewhere near a low.

What tea leaves did he read to come to that conclusion?

With the mortgages that we're giving out today, the loan-to-value requirements are a lot steeper, the credit score requirements are a lot steeper, the debt-to-income requirements are a lot more stringent. So I think the jumbo loans being written today as opposed to the ones written even as little as six months ago or a year ago, are going to perform significantly better. That's why you're beginning to see an ease on the jumbo side of loans.

The tightening of requirements he is talking about has also reduced the number of borrowers in the jumbo loan pool considerably. Think about how many homes are priced over $1,000,000 in Orange County, and pair that with the number of borrowers who can actually qualify for and make the payments on a jumbo loan — not factoring in mortgage equity withdrawal to make Ponzi payments. The supply of these homes greatly exceeds the potential demand.

There's also a lot of legacy jumbo problems which I think is just a function of the value of homes.

The legacy problems are a function fo the value of homes? I thought the problems were because lenders were insanely stupid and gave out huge loans to anyone with a pulse. And in fact, it was giving out those stupid loans with inflated the housing bubble and a created the problem with home values we have today.

There was a lot of no income (documentation) loans that were done on jumbo borrowers — that seemed to be the way a lot of the jumbo loans were done. A lot of places did no income option ARMs. So a lot of those problems, that's what you're seeing now from a legacy side of things.

Legacy loans: a feel-good euphemism for everything stupid in the housing bubble. The word legacy almost makes it sound regal, just, and important, like something meant for the aristocracy. I say we let the aristocracy eat the legacy loan cake they baked.

Going forward, the loans that are being written today are significantly better credit risks. That's why you're beginning to see some liquidity in the jumbo market.

As far as the demand for jumbo loans, where do you see most of the demand coming from? What kind of loans are these?

We don't really do commercial lending, so it's all residential lending on the jumbo side. The jumbo side is not really regional, there's just more people calling about them these days. I would say demand is up at least 25% over the past couple of months. We're beginning to refinance some of our customers from two, three, four years ago that got really good jumbo mortgage rates, but because the rates have come down so much, they're beginning to come into that area where a refinance makes sense. We have seen a fairly significant uptick in the jumbo refinances recently.

Phone calls asking about jumbo loans is not demand. I can imagine the calls he must be getting…

Qualified borrowers is real demand, and that kind of jumbo loan demand is not increasing with near 10% unemployment.

You mentioned in a statement that you believe conforming loan limits should be raised across the country, not just in "high-cost areas." What do you mean high-cost areas? How would this change affect the market?

There's a conforming jumbo now, so in certain areas of the country you can go and get virtually the same prices as a conforming loan and get the loan to go to either Fannie Mae or Freddie Mac. Normally the conforming loan limit is $417,000, but in certain areas you can go up to $729,750 as a mortgage amount. That's only in 20 metropolitan areas. So even though you're in one town, where you may only be able to go up to $650,000, in another town the limit is $729,000. So it varies from ZIP code to ZIP code. My thought is you should expand that increased conforming loan limit countrywide because a lot of people fall between $417,000 and $729,750.

Do the taxpayers want to subsidize loans between $417,000 and $729,750 everywhere? I think it is a ripoff for the taxpayer that those loans are insured here, but to do that everywhere would simply expose the taxpayer to more risk.

It would put a lot more people in the purchase market that wouldn't necessarily qualify under the jumbo program, but may qualify under this particular program. You also bring FHA into the possibility, which is 3.5% down up to $729,750. I think it would expand a ton of potential, not only buyers and a lot more purchases in the range $417,00 to $729,750, but also allow a lot of people to refinance and take advantage of these unbelievably, historically low rates.

We may be able to re-inflate the housing bubble nationally if we allowed 3.5% down loans up to $729,750. I don't think that would be a good thing, particularly since the taxpayer would be absorbing all the losses when the echo bubble burst.

A lot of people just don't qualify based on their loan-to-value; a lot of people have lost so much equity they can't capitalize on these low rates. And if all these people have the ability to refinance, you're looking at a lot of people saving money, a lot more money being pumped into the economy from a refinancing perspective. From a purchasing perspective, obviously when people buy a home they hire more contractors and go to Home Depot more. The good things that happen when people buy houses will happen and spur the purchase market even more all across the country; not in just these defined areas.

I am always amazed that people think you can borrow your way out of debt. Excessive debt is the problem. Adding to that debt is not a viable solution, and neither is refinancing excessive debt at a lower interest rate.

I think that could be a great thing on top of all the things the government is trying to do.

I think it is a terrible thing to do just as the other failed things the government is trying to do.

It's not like the short sale refinance program where they're actually going to subsidize the write down or the mortgages. This is just you're taking on a larger loan size.

Great idea: take on more debt because you can't afford the debt you already have. Brilliant!

I think it's a great time because the underwriting standards have gotten so much more stringent these days you're getting a lot more qualified borrowers.

Why hasn't the government already put in place some policy to deal with jumbo loans?

I'm sure there's a rationale as to why they only did it in pocket areas. I think they did it upon median income in particular areas. I sort of understand why they did it, but my philosophy in that area is this: just because you live in Fairfield, Conn., you have the ability to take advantage of this program. But if you live in Omaha, Neb., and you have a loan amount that meets the value of the home and you still have to meet the same underwriting guidelines, why can't you, in Nebraska, take advantage of that particular program? Again to spur more purchase activity and also to take advantage of lower rates for the ability to refinance and put more money back into the economy.

This idea is dumb for many reasons, but as the jumbo loans losses continue to mount, expect to see this dumb idea resurface. Personally, I don't want to become liable for the extravagant borrowing of fools with huge losses on their jumbo loans. As you read about today's featured borrower, ask yourself if you want to pay his bill.

Buy, refi, and bye-bye

Most of the foreclosure properties I see today have this familiar pattern: fools overpays during the bubble, and as prices go up, they add to their bloated mortgages until finally they implode and lose their property. Many of these people borrow enough to recoup their down payment and get some extra money out of the bank, and some do not. The owner of today's featured property had access to his entire down payment, but unless he used the HELOC, he may have left the down payment in the bank.

  • This property was purchased for $720,000 on 7/16/2004. The owner used a $575,200 first mortgage, and a $144,800 down payment.

  • On 8/8/2005 he refinanced for $584,600 and recovered some of his down payment.

  • On 10/14/2005 he opened a $180,000 HELOC.

  • He quit paying in late 2008, and he squatted for about 21 months before the auction.

Foreclosure Record

Recording Date: 07/08/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 05/11/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 02/05/2009

Document Type: Notice of Default

The flipper that purchased the property at auction is playing games with the listing price. This is the slow grinding loss of imaginary equity.

Date Event Price
Nov 04, 2010 Price Changed $767,000
Oct 23, 2010 Price Changed $772,000
Oct 15, 2010 Price Changed $775,000
Oct 01, 2010 Price Changed $779,000
Sep 23, 2010 Price Changed $785,000
Sep 17, 2010 Price Changed $789,000
Sep 01, 2010 Listed $795,000

Irvine Home Address … 7 PEPPERCORN Irvine, CA 92603

Resale Home Price … $767,000

Home Purchase Price … $661,500

Home Purchase Date …. 8/23/2010

Net Gain (Loss) ………. $59,480

Percent Change ………. 9.0%

Annual Appreciation … 60.7%

Cost of Ownership

————————————————-

$767,000 ………. Asking Price

$153,400 ………. 20% Down Conventional

4.21% …………… Mortgage Interest Rate

$613,600 ………. 30-Year Mortgage

$144,845 ………. Income Requirement

$3,004 ………. Monthly Mortgage Payment

$665 ………. Property Tax

$225 ………. Special Taxes and Levies (Mello Roos)

$128 ………. Homeowners Insurance

$222 ………. Homeowners Association Fees

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

$4,244 ………. Monthly Cash Outlays

-$704 ………. Tax Savings (% of Interest and Property Tax)

-$851 ………. Equity Hidden in Payment

$231 ………. Lost Income to Down Payment (net of taxes)

$96 ………. Maintenance and Replacement Reserves

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

$3,015 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$7,670 ………. Furnishing and Move In @1%

$7,670 ………. Closing Costs @1%

$6,136 ………… Interest Points @1% of Loan

$153,400 ………. Down Payment

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

$174,876 ………. Total Cash Costs

$46,200 ………… Emergency Cash Reserves

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

$221,076 ………. Total Savings Needed

Property Details for 7 PEPPERCORN Irvine, CA 92603

——————————————————————————

Beds: 3

Baths: 2 full 1 part baths

Home size: 2,046 sq ft

($375 / sq ft)

Lot Size: n/a

Year Built: 2004

Days on Market: 66

Listing Updated: 40486

MLS Number: P750630

Property Type: Condominium, Residential

Community: Quail Hill

Tract: Laur

——————————————————————————

A True Turnkey Property with An Incredibly Open And Spacious Floor Plan Boasting High Ceilings, Plantation Shutters, Hardwood Flooring, New Paint, and Stainless Steel Appliances!!! Along with the Bedrooms there is any Extra DEN downstairs & LIVING AREA upstairs!!! Customized Tiles and Kitchen with Granite Countertops and Stainless Steel Appliances with a Brand New Wine Cooler! Boasts a TRUE Master Bedroom Features Walk-In Closet, Private Balcony, Dual Sinks, Roman Tub & Separate Shower. Inside Separate Laundry Rooom And Plenty Of Storage. This Fantastic End Unit Share Only 1 Wall. Situated In A Quiet Location Of A Very Desireable Complex Located In The Heart Of Irvine. Close to Restaurants, Theater And Shopping. Close To The Toll Road And It Is One Of Irvine's Newest complexes.

Why is this in Title Case?

Do you feel the excitement with the exclamation points!!!

Federal Reserve Policy Fails to Meet Its Goals to Save Real Estate Values

Do policy makers at the Federal Reserve really believe their policies will work, or are they just doing whatever they can to save the banks at the expense of everyone else?

Irvine Home Address … 5242 ROYALE Ave Irvine, CA 92604

Resale Home Price …… $640,000

You take it on the run baby

If that's the way you want it baby

Then I don't want you around

I don't believe it

Not for a minute

You're under the gun so you take it on the run

You're thinking up your white lies

You're putting on your bedroom eyes

You say you're coming home but you won't say when

But I can feel it coming

If you leave tonight keep running

And you need never look back again

REO Speedwaagon — Take It On the Run

Most of the policy decisions coming out of the Federal Reserve appear as if they are making it up as they go. During 2008 and 2009, some of the emergency lending windows opened at the Fed likely saved the economy from total collapse; however, many of the policy decisions have not been as successful, and the attempt to re-inflate the housing bubble to save bank balance sheets is failing as house prices roll over despite historically low interest rates.

Are the Fed's Honchos Simpletons, Or Are They Just Taking Orders?

(November 1, 2010) — Charles Hugh Smith

Without exception the Fed's policies are pernicious failures; either they are exceptionally thickheaded, or they are just taking orders.

At the risk of boring you with material you already know well, let's quickly cover the Fed's policies and stated goals since the Global Financial Meltdown of late 2008.

The Fed's supposed goal is "get the economy on its feet again" by stabilizing employment and prices. At the risk of sounding naive, we can paraphrase all the Fed's statements thusly: "We're trying to help everyone in the U.S. by fighting this recession."

Sounds noble enough, so let's look at what the Fed has actually done in the real world.

1. The Fed has injected "liquidity" into the banking sector, enabling banks to borrow essentially unlimited sums at essentially zero interest–the infamous ZIRP (zero-interest rate policy).

2. The Fed has pushed down mortgage rates by buying over 10% of all outstanding mortgages in the U.S.–all the toxic garbage loans which the banks were desperate to get off their crippled balance sheets.

3. The Fed has pushed down yields on U.S. Treasury bonds ("monetizing" this newly issued debt) by buying hundreds of billions of dollars of bonds itself.

Much has been made of the latest round of quantitative easing (a fancy term for printing money). That particular policy has caused concerns that inflation is right around the corner. i do believe inflation is going to occur at some point, but not until the Federal Reserve has printed enough money to compensate for the debt destruction that is occurring in residential and commercial loans. The debt creation during the bubble was extremely inflationary as all this new debt inflated massive real estate bubbles in both sectors; however, since the official government compilation of inflation does not include those asset prices, it went unnoticed by the Federal Reserve.

Now that the residential and commercial real estate bubbles are deflating, debt destruction is causing widespread deflation far in excess of the official government measures. This deflation is what is ravaging our economy. Quantitative easing is one method of combating deflation. Basically, you print money to make up for that which was destroyed. To the degree the two cancel each other out, neither deflation or inflation results. Unfortunately, in the real world, the Federal Reserve generally errors to the side of printing which will cause significant inflation once the deflation ceases and the economy improves.

Here is what each program was intended to do:

1. ZIRP and unlimited liquidity was intended to enable the banks to "earn their way back to solvency" by giving them free money which they could then loan out at much higher rates. The difference between zero (their cost) and the interest rate they charged borrowers (such as those wonderful 19% credit cards) was pure profit, courtesy of the Federal Reserve.

This is also theft from savers. The free market would place a value on stored financial reserves, but the Federal Reserve usurps the free market and diverts the return on savings away from savers to the member banks. The inflation that comes at the end of the cycle is a second form of theft from savers we will see when interest rates go back up.

2. The purchase of $1.2 trillion in mortgage-backed securities was intended to stabilize housing and real estate prices at far above their "natural" level set by "organic" supply and demand; in essence, the goal was to stop market prices from "reverting to the mean," i.e. returning to historical trendlines which are roughly equivialent to pre-bubble valuations circa 1997-98.

This was intended to stop the implosion of banks' balance sheets as their assets–all those mortgage-backed securities and derivatives they own–kept falling in value.

It was also intended to stabilize real estate prices so banks could slowly sell off the millions of foreclosed (REO) and defaulted homes they hold in the "shadow inventory" at prices far above where organic supply and demand would let them settle.

We have certainly seen the result of this policy here in Irvine. Our real estate prices have remained elevated far above their natural market levels. Banks are still hoping to unload their shadow inventory when demand increases as the economy improves. I believe we will see the collapse of the real estate cartel and lower prices in Orange County over the next several years.

On the other hand, markets like Las Vegas have over-corrected. Prices there are back at mid 90s levels, and they are likely to stay there for the foreseeable future. The Federal Reserves policy goals have been a failure in Las Vegas.

In the bigger picture, Las Vegas is actually a success of the free market whereas Orange County is a failure. When prices bottom in Las Vegas, the entire housing stock will be affordable, and as normal appreciation resumes, people will again build equity while enjoying the economic stimulus of low housing costs. Contrast that to Orange County where we will likely see slowly grinding downward pricing, no equity, and a moribund economy because so much of the local incomes are going toward debt service. Which market is a success and which is a failure?

As a side benefit, keeping home prices inflated far above their real value would also allow the Fed to dump its own portfolio of $1.2 trillion mortgage-backed securities without suffering catastrophic losses.

Lastly, the goal was to lower the cost of mortgages to such ridiculously low levels that otherwise prudent citizens might be seduced into buying a house "because rates are so low." (Never mind what happens if the house falls another 40% in value over the next few years.)

I freely admit that the low interest rates are certainly enticing me to buy cashflow properties. Of course, I don't believe those properties will fall 40% more in value, and frankly, even if they did, I wouldn't care because i bought them for their current cashflow not their resale value.

The idea was to encourage rampant home buying (for speculation or long-term ownership, it didn't matter) to prop up the market with "demand," even if that "demand" was driven by the low cost of borrowing rather than organic demand based on the need for shelter. (Please recall that there are 19 million vacant dwellings in the U.S. now.)

3. The outright purchase of U.S. Treasury bonds was intended to drop the yield on newly issued bonds to keep the cost of borrowing trillions of dollars for "fiscal stimulus" down so the potential future cost of all the trillions of dollars in new Federal debt would be masked from a credulous citizenry who care more about their entitlements than what happens to their kids and grandkids.

The lack of consideration for future generations is one of the features of the housing bubble I find most distasteful. The generation of owners who still have artificial equity do so at the expense of the next generation who must grossly overpay for housing. It is a transfer of wealth from the young to the old that rivals social security.

4. All the policies led to super-low yields on low-risk investments so that "cash is trash;" that created a powerful incentive to put capital into risk assets such as stocks, commodities and real estate. By explicitly pushing free money and zero-interest rates, the Fed made it impossible to earn any yield on low-risk assets; thus they have been explicitly pushing capital and borrowed money into the "risk trade": emerging markets, commodities, and stocks.

The goal here is to create a new "wealth effect": if another bubble is inflated in stocks and commodities, then owners of capital will feel wealthier and as a result, they will start spending more.

Right now, nobody is penalized for tucking away cash in their mattress.

Are the Fed's honchos really such knuckleheads that they don't know most Americans have no financial assets to boost in a new bubble?

Source: Wealth, Income, and Power.

The top-earning 20 percent of Americans — those making more than $100,000 each year — received 49.4 percent of all income generated in the U.S., compared with the 3.4 percent earned by those below the poverty line.

U.S. median household income fell 3 percent in 2009 to $50,221, the second straight annual drop, the Census Bureau said.

One Year Later, No Sign of Improvement in America's Income Inequality Problem:

Income inequality has grown massively since 2000. According to Harvard Magazine, 66% of 2001-2007's income growth went to the top 1% of Americans, while the other 99% of the population got a measly 6% increase.

The Top 5 percent in income earners — those households earning $210,000 or more — account for about one-third of consumer outlays, including spending on goods and services, interest payments on consumer debt and cash gifts, according to an analysis of Federal Reserve data by Moody’s Analytics.

The Fed's central idea was to create a "trickle down" of wealth as a new stock and commodity bubble increased the financial wealth of the top 10%. That idea has demonstrably failed; could the Fed's economic geniuses really be so stupid as to trust in the long-discredited "trickle down" theory that enriching the top tranch will actually benefit the bottom 90%?

What the author fails to recognize is that financial assets are not required to inflate a housing bubble. Copious amounts of debt are all that's required. The middle class proved they could inflate a massive housing bubble and consume any wealth it created by mortgage equity withdrawal.

5. All the policies were designed to flood the economy with new "free" money, thereby sparking inflation and a new round of consumption that would inject "growth" into the economy.

In other words, the "problem" is perceived as sagging asset prices (real estate and the worthless mortgages written on homes that have lost 50% of their value) which have impoverished homeowners and impaired banks' assets.

The Fed's "solution" is to reinflate the housing bubble (or stabilize its collapse) and push investors and speculators alike into risk assets, in the hopes that a new asset bubble somewhere will boost assets enough to create a "feel good" wealth effect which will trigger massive new consumer spending and repair banks' balance sheets with higher asset valuations.

The concept that asset prices are depressed is part of the problem with banks and the Federal Reserve. Most real estate markets — Las Vegas excluded — are not depressed and undervalued even with the dramatic price declines we have seen so far. Prices were previously elevated beyond their fundamental value, and the crash is a return to stable valuation metrics. This conceptual confusion is why the policies of the Federal Reserve have failed.

Put another way, here are the Fed's goals stripped of niceties:

1. Revoke the business cycle–no recessions allowed. In the normal business cycle of classical Capitalism (as opposed to the crony Capitalism we have today), then expansion of credit/debt and rising assets leads to mal-investment and rampant speculation: overbuilding, overcapacity, over-indebtedness and leveraged bets that misprice risk.

Which is precisely what occurred in the 1995-2000 stock market bubble and the 2002-2007 housing/real estate bubble: mal-investment, over-indebtedness, overbuilding and mispricing of risk on a grand, unprecedented scale.

In the normal scheme of things, all this bad debt would be written off and the assets would be sold/liquidated. Holders of those assets and the debt based on those assets would both suffer losses or even be wiped out. All the overbuilt properties and overcapacity would be sold for pennies on the dollar, and the liabilities (debt) wiped off the balance sheet along with all the inflated assets.

That is a great description of how free markets are supposed to work. Recessions are how free markets purge their excesses. Foolish business plans and excessively leveraged speculative bets are wiped out and capital is redistributed to where it can be used more efficiently. Keeping capital tied up in unproductive assets hinders economic growth and creates the malaise we experience today.

There is no other way to clear the market for future growth. Yet the Fed has pursued a "solution" that violates all the principles of Capitalism: to reinflate asset bubbles or keep them artificially high by injecting more credit/debt into the system.

In other words, if you can't service your current debt and you're insolvent because your assets have declined, then the Fed's "solution" is to give you free money to roll over into a bigger debt load and boost the risk-asset trade so the assets on your books will rise again, "solving" your insolvency.

Do you see the foolishness of this approach? You can't borrow your way out of debt.

Does anyone at the Fed really believe this will work , or are they just thick? Or even worse, are they just lackeys taking orders from Wall Street and the Financial Power Elites?

You cannot eliminate the consequences of speculative bad bets and over-indebtedness with more debt and more speculation, yet that is precisely the intent of all the Fed's policies.

The Fed's unprecedented purchase of mortgages and Treasury debt have indeed reinflated the stock and housing bubbles to a limited degree, but most of that free money has flowed into emerging markets and commodities, which are now in their own massive bubbles.

In yet another pernicious consequence, the Fed's bumbling attempts to create inflation in the U.S. have failed–the inflation is raging in China. And as inflation rages there, then the cost of Chinese goods in the U.S. will rise.

Is there any possible way to fail more spectacularly that the Fed? Instead of sparking "good inflation" in the U.S. which they presumed (thickheadedly) would boost wages along with prices, thus enabling debt-serfs to pay down their debts with "cheaper" money, they have sparked runaway asset bubbles in commodities and "bad" inflation in China, which means the cost of goods the debt-serfs need to survive is skyrocketing while their wages and income stagnate.

In other words, the policies of the Fed have completely backfired in terms of "helping" 90% of the citizenry. The "wealth effect" of rising stock prices failed to boost the spirits and balance sheets of the bottom 90% who have essentially no financial capital, average incomes have declined in the recession and yet prices for commodities are climbing.

The Fed's policies have created the worst-case scenario for the average American household: stagnant income and rising prices of essentials. The problem is demand is falling along with net incomes, not the supply of new debt. By raising the costs of commodities, the Fed is actually reducing the net disposable income of households: the reverse of the "wealth effect."

Rather than allow the economy to clear out bad debt and re-set asset prices that would enable organic growth, the Fed has tried to inflate new asset bubbles to save the Financial Power Elites from suffering the losses resulting from the last two bubbles popping.

I have stated on many occasions that I believe the end game is price inflation without wage inflation that will cause a decline in our standard of living. Everyone who is bullish on real estate believes inflation is coming and it will push real estate prices higher. The Federal Reserve's printing money will eventually ignite inflation. I agree with the bulls on that point; however, the inflation in prices will not be accompanied by inflation in wages, something required for house prices to go up. How does the Federal Reserve create wage inflation with chronic high unemployment? They can't. That is why house prices will not be going up any time soon.

It's as if the fever the patient needs to wipe out a deadly infection has been suppressed by the Fed, creating the illusion of "health" even as the infection destroys the patient from within.

2. "Save" Wall Street, the banks, the nation's Financial Power Elites and the nation's homeowners by blowing new asset bubbles with massive injections of free money and the bogus "demand" created by the Fed's own purchases. The dynamic has already been explained above: cover the losses of the last bubble imploding by blowing an even bigger bubble now that boosts the asset side of balance sheets.

Do the Fed's honchos really think there is another end-game here other than the collapse of their latest ZIRP-QE2-driven asset bubbles? Could they really be so blind, so stupid, so misinformed, so ignorant of reality and history, as to believe their policies will actually work?

Are they so detached from reality that they fail to see their policies are backfiring, further impoverishing most of the citizenry as they set up the inevitable collapse of the banks they have tried so hard to save?

Are they really simpletons, or are they just taking orders from the Financial Elites who have the most to lose when the whole sagging sandcastle finally collapses into the waves?

I think they really believe their policies will work. I also think they are mistaken.

Personally, I plan to load up on 4% debt to buy cashflow properties. If I am paying 4% in an inflationary environment where inflation exceeds 4%, I am paying back the debt with dollars declining in value at a rate higher than my interest rate. in other words, they will be paying me to keep the debt alive. This works great for cashflow properties, but not so well for speculative bets on price appreciation because higher inflation — absent wage inflation — and higher interest rates makes borrowing more expensive and reduces loan balances which hinders appreciation.

Cashflow will be the only way to make money in real estate for the next decade or more just like it was in the 90s.

Thinking up their white lies

I've often wondered what long term loan owners tell their families when they finally implode. How do people explain to their friends and relatives that they borrowed more than double what they paid for their house years ago, blew the money, and then lost their family home? It must be an interesting yarn.

  • The owners of today's featured property paid $438,000 on 12/18/2000. They used a $365,000 first mortgage, a $36,500 second mortgage, and a $36,500 down payment.

  • On 2/20/2003 they refinanced the first mortgage for $322,700. For the first two years, they were going the right direction, but then they tasted a bit of kool aid, and everything went poorly from this point forward.

  • On 5/28/2003 they obtained a HELOC for $30,000.

  • On 12/30/2003 they refinanced with a $359,400 first mortgage.

  • On 3/17/2004 they got a HELOC for $115,000.

  • On 7/28/2004 they refinanced with a $376,800 first mortgage and went Ponzi.

  • On 1/25/2005 they refinanced the first mortgage for $524,000.

  • On 5/31/2006 they refinanced with a $640,000 Option ARM with a 1% teaser rate.

  • On 6/11/2007 they refinanced with a $656,000 first mortgage and a $40,000 stand-alone second.

  • Total property debt is $696,000.

  • Total mortgage equity withdrawal is $294,500 including their down payment.

  • Total squatting time is 18 months.

Foreclosure Record

Recording Date: 07/01/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 07/15/2009

Document Type: Notice of Default

Seriously, how do people explain this behavior? Is it possible to dodge the question at family gatherings?

Irvine Home Address … 5242 ROYALE Ave Irvine, CA 92604

Resale Home Price … $640,000

Home Purchase Price … $438,000

Home Purchase Date …. 12/18/2000

Net Gain (Loss) ………. $163,600

Percent Change ………. 37.4%

Annual Appreciation … 3.8%

Cost of Ownership

————————————————-

$640,000 ………. Asking Price

$128,000 ………. 20% Down Conventional

4.29% …………… Mortgage Interest Rate

$512,000 ………. 30-Year Mortgage

$122,018 ………. Income Requirement

$2,531 ………. Monthly Mortgage Payment

$555 ………. Property Tax

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

$53 ………. Homeowners Insurance

$0 ………. Homeowners Association Fees

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

$3,139 ………. Monthly Cash Outlays

-$417 ………. Tax Savings (% of Interest and Property Tax)

-$700 ………. Equity Hidden in Payment

$198 ………. Lost Income to Down Payment (net of taxes)

$80 ………. Maintenance and Replacement Reserves

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

$2,299 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$6,400 ………. Furnishing and Move In @1%

$6,400 ………. Closing Costs @1%

$5,120 ………… Interest Points @1% of Loan

$128,000 ………. Down Payment

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

$145,920 ………. Total Cash Costs

$35,200 ………… Emergency Cash Reserves

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

$181,120 ………. Total Savings Needed

Property Details for 5242 ROYALE Ave Irvine, CA 92604

——————————————————————————

Beds: : 4

Baths: : 3

Sq. Ft.: : 2011

$0,318

Lot Size: : 6,000 Sq. Ft.

Property Type:: Residential, Single Family

Style:: One Level, Ranch

View:: Faces Northeast

Year Built: : 1969

Community: : El Camino Real

MLS#: : P758091

Source: : CARETS

——————————————————————————

Charming 4 bedroom 3 bath home in the Ranch. Tastefully updated and well maintained. Granite counters in kitchen and bathrooms. Laminate flooring, crown molding, plantation shutters in kitchen, living room and family room. Dual pane windows. Mahogany front door. 2 car garage. Backyard has a pool, patio with awning, and gazebo. No HOA dues.

I hope you have enjoyed this week, and thank you for reading the Irvine Housing Blog: astutely observing the Irvine home market and combating California Kool-Aid since 2006.

Have a great weekend,

Irvine Renter

After Eight Years of Squatting, Who Absorbs the Losses?

The losses from the housing bubble will exceed $1.1 trillion. Who is going to pay for it?

Irvine Home Address … 29 SMOKESTONE 30 Irvine, CA 92614

Resale Home Price …… $285,000

Yeah runnin' down a dream

That never would come to me

Workin' on a mystery, goin' wherever it leads

Runnin' down a dream

I rolled on as the sky grew dark

I put the pedal down to make some time

There's something good waitin' down this road

I'm pickin' up whatever's mine

Tom Petty and the Heartbreakers — Running Down a Dream

Mortgage Mess: Shredding the Dream

The foreclosure crisis isn't just about lost documents. It's about trust—and a clash over who gets stuck with $1.1 trillion in losses

October 21, 2010 — Peter Coy, Paul M. Barrett and Chad Terhune

In 2002, a Boca Raton (Fla.) accountant named Joseph Lents was accused of securities law violations by the Securities and Exchange Commission. Lents, who was chief executive officer of a now-defunct voice-recognition software company, had sold shares in the publicly traded company without filing the proper forms. Facing a little over $100,000 in fines and fees, and with his assets frozen by the SEC, Lents stopped making payments on his $1.5 million mortgage.

The loan servicer, Washington Mutual, tried to foreclose on his home in 2003 but was never able to produce Lents' promissory note, so the state circuit court for Palm Beach County dismissed the case. Next, the buyer of the loan, DLJ Mortgage Capital, stepped in with another foreclosure proceeding. DLJ claimed to have lost the promissory note in interoffice mail. Lents was dubious: "When you say you lose a $1.5 million negotiable instrument—that doesn't happen." DLJ claimed that its word was as good as paper. But at least in Palm Beach County, paper still rules. If his mortgage holder couldn't prove it held his mortgage, it couldn't foreclose.

Eight years after defaulting, Lents still hasn't made a payment or been forced out of his house. DLJ, whose parent, Credit Suisse, declined to comment for this story, still hasn't proved its ownership to the satisfaction of the court. Lents' debt has grown to about $2.5 million, including unpaid taxes, interest, and penalties. As the stalemate grinds on, Lents has the comfort of knowing he's no longer alone. When he began demanding to see the I.O.U., he says, "I was looked upon like I had leprosy. Now, I have probably 20 to 30 people a month come to me" asking for advice. Lents is irked when people accuse him of exploiting a loophole. "It's not a loophole," he says. "It's the law."

The Lents Defense, as it might be called, doesn't work everywhere.

This guy is obviously a crook. Wether the bank can produce the paperwork or not doesn't change the basic facts:

  1. There was a note at one time that encapsulated the agreement between this borrower and the lender.

  2. He did borrow the money.

  3. He did agree to repay the money or surrender the house in a foreclosure action.

Since these basic facts are not in dispute, and since Mr. Lent's is not disputing that he failed to meet his contractual obligations, why can't this foreclosure go forward? He says this is not a loophole, but this clearly is a loophole or technical evasion. This squatter needs to get out the bank's house, then he can fight with them over "damages" caused by their failure to produce the note. Since he obviously is not being damaged in any way, his frivilous counter-suit would be dismissed.

So who ends up paying for the losses caused by this squatter. On the surface, this looks like a bank loss, but we all know that the taxpayer will ultimately be on the hook. Are you happy about this guy squatting in luxury while you pay for it?

Thousands of Floridians have lost their homes in lightning-fast "rocket dockets." In 27 other states, judges don't even review foreclosures, making it harder for homeowners to fight back….

Even if the documentation problems turn out to be manageable—as Bank of America (BAC) and others insist they will be—the economy will still suffer long-term consequences from the loose underwriting that caused the subprime housing bubble.

Bullshit alert! This was NOT a subprime housing bubble. The damage has largely been felt by subprime borrowers only because the alt-a and prime borrowers who defaulted have been allowed to squat. When the media begins falsely portraying this as a subprime housing bubble, it implies this was a problem caused by and limited to subprime. That is not accurate, and if widely believed may cause policy errors directed toward the "subprime" problem.

According to an Oct. 15 report by J.P. Morgan (JPM) Securities, some $2 trillion of the $6 trillion in U.S. mortgages and home-equity loans that were securitized during the height of the bubble, from 2005 through 2007, are likely to go into default. The report says the housing bust will ultimately cause losses of $1.1 trillion on those bonds.

Who is going to absorb the $1,100,000,000,000 in losses? The banks can't absorb that much as it would completely wipe out the capital in our banking system. In the end, it will be a combination of investor losses, bank losses, and US taxpayer bailouts that mop up this mess. As you might imagine, investors and bankers are working feverishly to pass that loss on to you.

While banks and investors take their hits, millions of homeowners continue to be punished by unaffordable mortgage payments and underwater home values.

Punished? Well, it they stupidly took on a mortgage payment they cannot afford, they deserve it. If they bought an overvalued house, that is their problem. The authors are setting up loan owners as victims when many of them were buying based on greed.

Laurie Goodman, a mortgage analyst at Amherst Securities Group, said in an Oct. 1 report that if government doesn't step up its intervention, over 11 million borrowers are in danger of losing their homes. That's one in five people with a mortgage. "Politically," she wrote, "this cannot happen. The government will attempt successive modification plans until something works."

We are revisiting this nonsense again. Why can't this happen? What if it does? People will move out of their homes, and new people will move in. So what?

I think she is right that the government will do everything it can to prevent the market from doing what it must to clear the bad debt, and in the process, the government's actions will delay the recovery and cause more people to suffer. When it's all over, the government will release some bullshit report claiming everything they did was right and helpful.

Meanwhile, a high-stakes fight is breaking out between the banks that made loans and the investors who bought them. A shot was fired on Oct. 18 when a group of major investors claimed that Bank of America's Countrywide Home Loan Servicing had failed to live up to its contracts on some of more than $47 billion worth of Countrywide-issued mortgage bonds. The group said Countrywide Servicing has 60 days to correct the alleged violations, such as failure to sell back ineligible loans to the lenders. According to people familiar with the matter, the group includes Pimco, BlackRock (BLK), and the Federal Reserve Bank of New York.

For banks that have just started making money again after near-death experiences in 2008, mortgage losses could delay the return to good health. Chris Gamaitoni, an analyst for Compass Point Research & Trading, a Washington financial advisory firm, estimates losses for the big banks of $134 billion from having to buy back bad loans from private investors and another $27 billion in losses from buying back loans from Fannie Mae and Freddie Mac. Other estimates are lower—from $20 billion to $84 billion—in part because those analysts are less certain than Gamaitoni that investors will succeed in court.

This battle between investors and bankers is more important than most realize. If the investors win, and if banks are liable to repay these losses, banks will suffer longer, and the economy will continue to sputter.

Bank of America, the nation's largest lender, has resorted to tough tactics in resisting repurchases of bad loans. Facing pressure from Freddie Mac, one of the two government-controlled mortgage financing companies, to buy back money-losing home loans with problems like inflated appraisals, overstated borrower income, or inadequate documentation, Bank of America issued a blunt threat, according to two people with direct knowledge of the incident. If Freddie Mac did not back off its demands for the buybacks, Bank of America officials said, the bank would take more of the new, more profitable mortgages it is originating these days to rival Fannie Mae, these people said. Freddie and Fannie, known as GSEs (government-sponsored entities), need a steady supply of healthy new loans to climb out of their financial hole.

Now that is playing hardball. Good for Bank of America.

The claimed threat from Bank of America, which was not put into writing, according to one of these people, was taken seriously enough that it has been discussed at several Freddie Mac board meetings, including one in mid-October. Some officials have urged the Federal Housing Finance Agency—the government conservator that has controlled Fannie and Freddie since they were bailed out in 2008—to confront Bank of America and prevent it from trying to play one against the other, which may be infuriating but is not illegal. "If the tactic worked, I'd be shocked and appalled," said Thomas Lawler, a former portfolio manager at Fannie Mae and now an economic consultant. "The GSEs are supposed to be run now to minimize losses to the taxpayers. Freddie ought to ignore the threat." FHFA Acting Director Edward J. DeMarco declined to comment, as did officials of Freddie Mac. Bank of America also declined to comment.

Why shouldn't Bank of America play one off against the other? The whole reason there are two GSEs instead of one was to foster competition and prevent either from having monopoly powers.

For policymakers, the dilemma is this: Enormous losses will cause problems wherever they end up. They could further harm Fannie and Freddie, which insure the vast majority of the nation's mortgages and have already received nearly $150 billion in taxpayer support. Or, if Fannie and Freddie succeed in pushing the burden back to the banks, the losses could cripple some of the major institutions that have just emerged from a government bailout. Bank of America faces $12.9 billion in buyback requests, and mortgage insurers have asked for the documents on an additional $9.8 billion on which they may consider seeking repurchases, according to regulatory filings. (Bank of America has put aside $4.4 billion for buybacks, and CEO Brian T. Moynihan says the costs will be manageable.) "The Treasury is very aware that they can't push too hard on this because if you do push too hard it might put the companies in negative capital again," says Paul J. Miller, an analyst at FRB Capital Markets. "There's a lot of regulatory forbearance going on."

Aside from ignoring banks' bad debts, Washington hasn't done much to fix the crisis. Both houses of Congress easily passed a bill this year that would have undermined centuries of law by requiring every state to recognize MERS-type electronic records from other states. Only a pocket veto by President Barack Obama kept it from becoming law.

One option, opposed by the Obama Administration and most Republicans in Congress but favored by Senate Majority Leader Harry Reid and others, is a national moratorium on foreclosures. It would last until regulators assure themselves that lenders have straightened out their foreclosure procedures.

So how is that supposed to work? The banks have all resumed their foreclosure proceedings, and they all claim they have worked out any procedural problems. Who can claim otherwise? Do we want to give a bunch of bureaucrats the ability to hold up foreclosures because in their opinion the banks procedures are inadequate? If the banks were not complying with existing laws, then they should be held accountable, but so far, there have been very few cases where any procedural flaws have been identified, and many reporters, loan owners, and attorneys have been looking.

Opponents say it would delay the recovery of the housing market by preventing qualified buyers from getting their hands on foreclosed homes.

Opponents of a moratorium say those things because it does delay the recovery, and it does prevent a qualified buyer from getting their new home.

Look at the language the authors used, "getting their hands on foreclosed homes." They portray the new buyer — a buyer qualifying under new stricter lending standards who will likely make their payments — as some kind of illegitimate claimant, a greedy buyer trying to get their filthy hands on someone else's property. The author's agenda is showing.

Supporters of the idea, such as Dean Baker, co-director of the Center for Economic and Policy Research, say there are plenty of already foreclosed homes available for sale and thus no urgent need to add to the supply.

Goodman, the Amherst Securities analyst, says banks need to reduce the principal that people owe on their homes so they have an incentive not to walk away. "Ignoring the fact that the borrower can and will default when it is his/her most economical solution is an expensive case of denial," Goodman writes. If the home whose mortgage was reduced happens to regain value, 50 percent of the appreciation would be taxed, she says. Meanwhile, to discourage people from sitting tight in homes while foreclosure proceedings drag on, she would have the government tax the benefit of living in the home rent-free.

Those ideas are bad on many levels. First, Foreclosure Is a Superior Form of Principal Reduction. Giving borrowers money only encourages the worst kind of moral hazard. Banks are far better off losing more money now and eliminating moral hazard than encouraging borrowers to steal from them over and over again in the future. Second, the 50% tax on appreciation sounds great, but as soon as some seller somewhere has to actually pay that tax, there will be a tax revolt, and congress will roll over and repeal the tax.

The one idea I do like is taxing the squatters. These people are receiving the beneficial use of the property as surely as if it were a gift of cash. It should be taxed to help pay for the bailouts.

CitiMortgage is testing an innovative alternative based on the legal procedure known as "deed in lieu of foreclosure." The owner turns the deed over to the bank without a fight if the bank promises not to foreclose, lets the family stay in the house after the agreement for six months, and gives relocation assistance.

In other words, CitiMortgage is giving cash for keys, a practice I am learning much about in Las Vegas.

Other ideas: In a New York Times blog post on Oct. 19, Harvard University economist Edward Glaeser suggested federal assistance to overwhelmed state and local courts, as well as $2,000 vouchers for legal assistance to low-income families that can't afford to fight foreclosures.

Just what we need, a handout for attorneys.

Bloomberg News columnist Kevin Hassett, who is director of economic policy studies at the American Enterprise Institute, says in his Oct. 18 column that the newly created Financial Stability Oversight Council should make the foreclosure mess its first big project, "take authority for solving it, and do so as swiftly as possible."

Speed is essential. The longer it drags on, the more the foreclosure crisis corrodes Americans' faith in their financial and legal systems. A pervasive sense of injustice is bad for the economy and democracy as well. Take Joe Lents. The Boca Raton homeowner hasn't made a mortgage payment since 2002, but he perceives himself as a victim. "I want to expose these guys for what they're doing," Lents says. "It's personal now."

Yes, let's take Joe Lents as an example. He is a perfect example of how a pervasive sense of injustice and victimhood can be cultivated among those perpetrating the injustice. Squatters need to get out of the houses they are not paying for. The pervasive injustice is that good families with the buying power to purchase a home are being denied that opportunity by delays in the foreclosure process and political grandstanding.

Evict the squatters now!

He nearly quadrupled his mortgage debt

Some borrowers were obviously gaming the system. No amount of careless spending can explain a borrower that methodically increases his mortgage to its maximum at every opportunity. This borrower had to know he was stripping the equity out of this place, and he was going to do so until he couldn't borrow any more. There was no thought given to actually paying down the mortgage.

  • Today's feature property is one of the hardest working condos I have seen to date. The property was purchased on 8/24/1998 for $130,000. The owner used a $104,000 first mortgage, a $13,000 second mortgage, and a $13,000 down payment.

  • On 3/9/2000 he got a stand alone second for $35,000. After about 18 months of ownership, he got back his down payment plus $18,000 (about $1,000 per month). It almost makes this property cashflow positive if you look at it that way.

  • On 6/7/2002 he refinanced the first mortgage for $176,000.

  • On 6/5/2003 he refinanced the first mortgage for $262,675.

  • On 4/14/2003 he refinanced with a $274,400 first mortgage.

  • On 7/8/2004 he refinanced with a $364,500 first mortgage and obtained a HELOC for $20,250.

  • On 11/1/2006 he refinanced with a $353,000 first mortgage and a $43,950 stand-alone second.

  • Total property debt is $396,950.

  • Total mortgage equity withdrawal is $279,950.

  • Total squatting time is over two years.

Foreclosure Record

Recording Date: 07/08/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 04/16/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 01/12/2009

Document Type: Notice of Default

So what do you think about this borrowers behavior? Perhaps we should reward him with principal reduction. He would be happy to borrow that money all over again, particularly if you are going to pay it off for him through your tax dollars.

Irvine Home Address … 29 SMOKESTONE 30 Irvine, CA 92614

Resale Home Price … $285,000

Home Purchase Price … $130,000

Home Purchase Date …. 8/24/1998

Net Gain (Loss) ………. $137,900

Percent Change ………. 106.1%

Annual Appreciation … 6.5%

Cost of Ownership

————————————————-

$285,000 ………. Asking Price

$9,975 ………. 3.5% Down FHA Financing

4.29% …………… Mortgage Interest Rate

$275,025 ………. 30-Year Mortgage

$54,336 ………. Income Requirement

$1,359 ………. Monthly Mortgage Payment

$247 ………. Property Tax

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

$48 ………. Homeowners Insurance

$290 ………. Homeowners Association Fees

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

$1,944 ………. Monthly Cash Outlays

-$123 ………. Tax Savings (% of Interest and Property Tax)

-$376 ………. Equity Hidden in Payment

$15 ………. Lost Income to Down Payment (net of taxes)

$36 ………. Maintenance and Replacement Reserves

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

$1,496 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$2,850 ………. Furnishing and Move In @1%

$2,850 ………. Closing Costs @1%

$2,750 ………… Interest Points @1% of Loan

$9,975 ………. Down Payment

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

$18,425 ………. Total Cash Costs

$22,900 ………… Emergency Cash Reserves

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

$41,325 ………. Total Savings Needed

Property Details for 29 SMOKESTONE 30 Irvine, CA 92614

——————————————————————————

Beds: 2

Baths: 2 baths

Home size: 917 sq ft

($311 / sq ft)

Lot Size: n/a

Year Built: 1980

Days on Market: 174

Listing Updated: 40480

MLS Number: R1003214

Property Type: Condominium, Residential

Community: West Irvine

Tract: Othr

——————————————————————————

According to the listing agent, this listing may be a pre-foreclosure or short sale.

A CLEAN 2 BR 2 BATH DOWN STAIRS CONDO. HARDWOOD FLOORS, PLANTATION SHUTTERS. COZY. GREAT FOR A STARTER OR DOWN-SIZING FAMILY. ENJOY THE CLEAN COMMUNITY OF WOODBRIDGE.