Category Archives: Real Estate Analysis

Home Price Drop Sudden and Dramatic

Home prices are rolling over as expected. Look for the declines to pick up speed over the next four to five months.

Irvine Home Address … 10 FUCHSIA Irvine, CA 92604

Resale Home Price …… $429,900

You know I wouldn’t want to make you feel worse then you should

But if you were me you’d do the same (you know you would, you know you would)

It’s not that hard to say your wrong admit it oh go on, go on

It mean everything, just to hear you say to me

That I was right, and you were wrong

It’s not that hard go on, go on

New Years Day — I Was Right

Last week I profiled a neighborhood in Irvine that inexplicably dropped about 20% in value since the tax credit expired. As it turns out, widespread price declines are beginning to show up in the aggregate statistics. The leg down we have been expecting this fall and winter is happening now.

Clear Capital: Home price drop sudden and dramatic

by KERRY CURRY — Friday, October 22nd, 2010, 12:25 pm

Clear Capital said a 6%, two-month decline in home prices represents a magnitude and speed not seen since March 2009.

“Clear Capital’s latest data through Oct. 22 shows even more pronounced price declines than our most recent (Home Data Index) market report released two weeks ago,” said Alex Villacorta, senior statistician with data analytics firm. “At the national level, home prices are clearly experiencing a dramatic drop from the tax credit-induced highs, effectively wiping out all of the gains obtained during the flurry of activity just preceding the tax credit expiration.”

In other words, the billions the government spent trying to prop up the housing market was a complete waste of taxpayer dollars. We are right back were we started. Since I have consistently maintained that would be the result, I won't pretend to be surprised.

Prices are now at the same level as in mid-April, two weeks prior to the expiration of the federal homebuyer tax credit. The drop, in advance of typical winter housing market slowdowns, paints an ominous picture that will likely show up in other housing indices in the coming months.

If previous correlations between the Clear Capital and S&P/Case-Shiller indices continue as expected, the next two months will show a similar downward trend in S&P/Case-Shiller numbers.

I have also consistently stated we will see the Case-Shiller roll over this fall and winter. We will likely take out the false bottom formed in April of 2009. The bear rally is officially over.

Clear Capital uses rolling quarter intervals that compare the most recent four months to the previous three months. The rolling quarters have no fixed start date and can be used to generate indices as data flows in, the multi-month lag time experienced with other indices.

See chart below:

So where does this leave us? If home prices take another steep drop, the resulting strategic defaults will end the bank's denial and may lead to another TARP bailout, only this time, some believe the bailout will benefit loan owners instead.

Shilling Thinks Housing Will Fall Another 20%, But Many Homeowners Will Get Bailed Out

Matt Schifrin — Oct. 18 2010 – 2:55 pm

I just got off the telephone with economist, Forbes magazine columnist and newsletter editor Gary Shilling. As you probably know by now, Gary has been spot-on in his predictions on the economy, global markets and housing.

I asked him what was new and he told me that he had revised his forecast for housing. Here are some of his comments :

“If I am right and we see another 20% decline in housing prices, then we figure that the number of mortgages underwater will go from 23% to 40%. That is a huge amount and at some point the dam breaks,” says Shilling.

Why does the dam have to break? Nobody thought we would get this many underwater loan owners. Why didn't it break at 10% or 20%?

What would really cause problems is loan owner capitulation. If and when loan owners give up hope and accelerate their defaults, banks will have to deal with several million more delinquent squatters. So far they have been dealing with it through a combination of denial and government assistance. Why would a few million more delinquent squatters make any difference?

That’s bad news for the economy and bad news for homeowners and real estate brokers. It’s also bad news for banks and the stock market.

Shilling went on to say that if there is a bright spot in all this gloom it probably will benefit the profligate spending homeowners, who were lured by men like Angelo Mozilo into homes and mortgages they couldn’t afford.

Bailing out HELOC abusers is a bright spot? Perhaps for the HELOC abusers, but not for anyone else.

“Home ownership still has a lot of political clout in this country,” said Shilling. ” By hook or by crook, the politicians will come up with some kind of bailout for a lot of people underwater on their mortgages.”

In other words it doesn’t help anyone to have millions of homeowners foreclosed on and thrown into the street. Gary estimates that houses that are foreclosed on and vacant lose an average of $1,000 per month in value as long as they remain unsold. He adds that all the scrutiny that banks are under fire over concerning foreclosure procedures is creating the perfect environment for a massive bail-out of deadbeat homeowners.

If we bail out HELOC abusers, we will have made the final transition to "banana republic" status. You see the borrowers I profile here every day. Do you want your tax money to go toward paying off their debts? While you were being frugal and playing by the rules, they were out spending like kool aid intoxicated owners and having a good time. Now they are looking to you to pick up the tab.

Perhaps I am too cynical, but I also wonder if this story isn't a plant to convince underwater homeowners to stay on a bit longer and make a few more payments. If there is a false or feeble hope of principal forgiveness, many considering accelerated default may delay the inevitable to see what happens. This is exactly the kind of story the banks want to have circulating the web.

Gary thinks we need a Resolution Trust Corp (RTC) type solution for the housing market. You may remember that the RTC was set up by the Office of Thrift Supervision in the 1980s to deal with hundreds of insolvent thrifts who, like homeowners, got in way over their heads. Some of them invested in Mike Milken junk bonds, others invested in real estate and other highly leveraged loans.

The RTC entered into a number of equity partnerships to help liquidate real estate and other assets it had inherited from insolvent thrift institutions. Gary says the key to the RTC’s success was that it acted relatively quickly and that is what is needed for the housing market in order to lift the giant overhang caused by our zombie homeowner situation.

We don't need an RTC-type institution to clear out the housing inventory. What we need is for the banks to foreclose on the squatters and put the houses back on the market. The sooner we get this done, the sooner the housing market bottoms and the sooner we can get back to a healthy real estate market. Amend-extend-pretend creates an overhand of supply that will hinder economic growth for a decade.

I reminded Gary that many investors got rich from buying assets of troubled savings and loans, including billionaire Leon Black. We shall see who steps up this time. Any guesses?

Me for one. There are many people stepping up to buy these troubled assets. Cash is king in the aftermath of a debt-fueled asset bubble.

They thought it would be okay

Many of the Irvine equity strippers really believed everything would work out to their advantage. The value of their property was steadily climbing, and the magic of California real estate assured them prices would rise forever. Taking out all the equity to spend it seemed like no big deal. What's the worst that could happen?

Well, if they over-borrowed based on ever-increasing home prices, and if they can't afford the debt service payments, they may be forced to sell. If prices go down, they can't sell, and they end up in short sale or foreclosure. Welcome to the reality of many of those who spent their houses.

  • Today's featured property was purchased for $335,000 on 3/19/2002. The owners used a $268,000 first mortgage, a $50,250 second mortgage, and a $16,750 down payment.

  • On 4/8/2002 they obtained a $67,000 HELOC which allowed them to consolidate the second mortgage and withdraw all of their down payment. It took them less than three weeks to get their money back out of the property.

  • On 5/23/2003 they refinanced with a $304,000 first mortgage and a $38,000 HELOC.

  • On 8/23/2003 they obtained a $76,000 HELOC.

  • On 4/20/2004 they obtained a $98,000 HELOC.

  • On 10/26/2004 they refinanced with a $448,000 first mortgage.

  • On 11/29/2004 they got a $100,000 HELOC.

  • Total property debt is $548,000.

  • Total mortgage equity withdrawal is $229,750.

  • Total squatting time is about 18 months so far.

Foreclosure Record

Recording Date: 10/23/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 07/20/2009

Document Type: Notice of Default

Since they stopped going to the housing ATM in 2004 and prices went up thereafter, I think these borrowers knew they were getting overextended and chose not to go Ponzi. They were trying to be somewhat responsible. Unfortunately, it was too late.

Irvine Home Address … 10 FUCHSIA Irvine, CA 92604

Resale Home Price … $429,900

Home Purchase Price … $335,000

Home Purchase Date …. 3/19/2002

Net Gain (Loss) ………. $69,106

Percent Change ………. 20.6%

Annual Appreciation … 2.8%

Cost of Ownership

————————————————-

$429,900 ………. Asking Price

$15,047 ………. 3.5% Down FHA Financing

4.23% …………… Mortgage Interest Rate

$414,854 ………. 30-Year Mortgage

$81,379 ………. Income Requirement

$2,036 ………. Monthly Mortgage Payment

$373 ………. Property Tax

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

$36 ………. Homeowners Insurance

$280 ………. Homeowners Association Fees

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

$2,724 ………. Monthly Cash Outlays

-$321 ………. Tax Savings (% of Interest and Property Tax)

-$574 ………. Equity Hidden in Payment

$23 ………. Lost Income to Down Payment (net of taxes)

$54 ………. Maintenance and Replacement Reserves

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

$1,906 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$4,299 ………. Furnishing and Move In @1%

$4,299 ………. Closing Costs @1%

$4,149 ………… Interest Points @1% of Loan

$15,047 ………. Down Payment

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

$27,793 ………. Total Cash Costs

$29,200 ………… Emergency Cash Reserves

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

$56,993 ………. Total Savings Needed

Property Details for 10 FUCHSIA Irvine, CA 92604

——————————————————————————

Beds: 3

Baths: 2 full 1 part baths

Home size: 1,495 sq ft

($288 / sq ft)

Lot Size: 1,495 sq ft

Year Built: 1974

Days on Market: 408

Listing Updated: 40403

MLS Number: S589143

Property Type: Condominium, Townhouse, Residential

Community: El Camino Real

Tract: Db

——————————————————————————

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

This is a beautiful home with 3 bedrooms 2.5 baths, formal living room with fire place, dining room, kitchen with granite counters, extra room off kitchen that is great for eating area or many have used this area as a family room with sofas and TV area, upstairs family room and office area, this home has a nice patio that leads to a 2 car garage. Close to great schools and shopping!

Are you ready to pay to bail out the HELOC abusers?

What Really Prompts Borrowers to Accelerate Their Default?

A series of new studies on borrower behavior shed some light on the motivations behind those who quit paying their mortgages.

Irvine Home Address … 23 FOXHOLLOW Irvine, CA 92614

Resale Home Price …… $319,900

On and on we're charging to the place so many seek

In perfect synchronicity of which so many speak

We feel so close to heaven in this roaring heavy load

And then in sheer abandonment, we shatter and explode.

Judas Priest — Turbo Lover

Strategic default: the abandonment of mortgage and property. A financial explosion.

Most buyers of property were seeking riches from appreciation. They all enjoyed the synchronized movements of the market when everyone was clamoring for more property. Trees don't grow to the sky, and no matter how close prices get to heaven, nirvana is always out of reach.

Strategic Defaults Threaten All Major U.S. Housing Markets

Posted by Keith Jurow 09/30/10 8:00 AM EST

In my last article, we examined the shadow inventory to determine how many distressed properties (not on MLS) were almost certain to be forced onto the market in the not-to-distant future.

For a sensible follow up, let's take an in-depth look at so-called "strategic defaults" to see how many homeowners are likely to "walk away" from their mortgage debt although they might be financially able to continue paying it.

Strategic Default Defined

According to Wikipedia, a strategic default is "the decision by a borrower to stop making payments (i.e., default) on a debt despite having the financial ability to make the payments." This has become the commonly accepted view.

From Accelerated Default: What Strategic Default Really Is: "There is no accepted definition of strategic default. Lenders have tried to define the issue as any borrower who is capable of making a payment and chooses not to. On the surface that sounds reasonable, but that misses a very important distinction. Some people chose to default because they know they can't afford the home and they are merely choosing the timing of the inevitable.

When I think about strategic default, I think about people who chose the timing of their default when there is little reasonable hope of having equity and they are facing escalating payments. The only thing strategic about the default is the timing, not whether or not they will lose the home."

In a recent, thorough study of strategic defaults, an effort was made to narrow its definition even more specifically. The report examining 6.6 million first lien mortgages was published this past April by Morgan Stanley analysts. They considered a default to be strategic only if a borrower went from being current on the debt to 90 days delinquent in consecutive months "without any curing in between or thereafter."

The authors went further and included two other prerequisites. First, the borrower had to be "underwater" on the first lien mortgage. Second, the homeowner had to have an outstanding non-mortgage debt balance of more than $10,000. The purpose of this last requirement was explained to me in a phone conversation with the lead analyst. He clarified that unless the borrower had at least $10,000 in non-mortgage debts which continued to be kept current; it was very likely that the mortgage default was induced by the inability to continue making the payments.

While this definition by the Morgan Stanley analysts is plausible, I consider it to be too narrow. It excludes too many borrowers who choose to stop paying the mortgage even though they may miss payments on some of their other debt obligations. I define a strategic defaulter to be any borrower who goes from never having missed a mortgage payment directly into a 90 day default. We'll examine a graph a little later which clearly illustrates this definition.

This definition is not a bad way to identify people who default by choice, but it doesn't necessarily tell us why they made the choice. Many people who financially implode keep it all together until the reach a breaking point where they capitulate. The only thing we can be sure of about the people Mr. Jarow has singled out is that they were decisive. Once they stopped making payments, they didn't bother to play around with loan modifications or otherwise game the system.

I believe it is important to note that most people chose to default because they know continuing to pay is futile. Just because someone is capable of continuing a futile act doesn't mean that stopping is an irrational decision. In fact, those that acclerate their defaults are far more rational than those who continue to pay when it makes no financial sense for them to do so.

Why Do Homeowners Walk Away from Their Mortgage?

In the midst of the housing bubble, it was inconceivable that a homeowner would voluntarily stop making payments on the mortgage and lapse into default while having the financial means to remain current on the loan.

Then something happened which changed everything. Prices leveled off in 2006 before starting to decline. With certain exceptions, they have been falling ever since around the country. In recent memory, this was something totally new and it has radically altered how homeowners view their house.

In those metros where prices soared the most during the housing bubble and collapsed most severely, many homeowners who have strategically defaulted shared three essential assumptions:

1. The value of their home would not recover to their original purchase price for quite a few years.

2. They could rent a house similar to theirs for considerably less than what they were paying on the mortgage.

3. They could sock away tens of thousands of dollars by stopping mortgage payments before the lender finally got around to foreclosing.

Notice the considerable value lenders obtained by their failure to foreclose. Locally, where house prices are still elevated above reason, people believe house prices will return to peak valuations in a few years and the HELOC party will be back on. Denial keeps people making payments who would ordinarily accelerate their default. Many families in Orange County cannot afford their houses. Many have already defaulted. Few have been foreclosed on so prices remain elevated, and the hopeless maintain denial of a brighter tomorrow.

Put yourself into the mind and the shoes of an underwater homeowner who held these three assumptions. The temptation to default became very difficult to resist. What would you have done?

The author presumes everyone believes accelerated default is wrong. He portrays it as something evil that people are tempted with. It isn't the default that is a tempting evil, it was taking out the loan in the first place. If someone goes out on an all night bender, are they tempted by evil aspirin in the morning? People who accelerate their defaults are merely curing the problem that was created by their earlier mistakes.

Now you may ask: What has kept most underwater homeowners from defaulting?

Why Do Struggling Homeowners Keep Paying Their Mortgages?

This is not an easy question to answer. I suggest that you take a look at a very thorough discussion of this issue in a paper written by Brent White, a professor of law at the University of Arizona and published in February 2010. Its title is "Underwater and Not Walking Away: Shame, Fear and the Social Management of the Social Crisis." He asserts that there are strong societal norms and pressures that lead to feelings of shame, fear and guilt which prevent many underwater homeowners from choosing to default.

He also cites the strong moral condemnation heaped on strategic defaulters by the press as well as by significant political figures. Take the speech given in March 2008 by then Secretary of the Treasury Henry Paulson. Paulson declared on national television: "Let me emphasize, any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator – and one who is not honoring his obligations." Coming from the former Chairman of a Wall Street firm that earns billions every year by speculating, these words had a certain hollow ring to them.

Strategic Default Is Merely Collecting On Home Price Protection Insurance Sold By Lenders

Walking Away from a Mortgage to Secure Their Children’s Future

Two Key Studies Show that Strategic Defaults Continue to Grow

Within the past six months, two important studies were published which have tried to get a handle on strategic defaults. First came the April report by three Morgan Stanley analysts entitled "Understanding Strategic Defaults." Remember their narrow definition of a strategic defaulter which I described earlier:

1. an underwater homeowner who goes straight from being current on the mortgage to a 90+ day delinquency "without any curing in between or thereafter"

2. has an outstanding non-mortgage debt balance of at least $10,000 which does not become delinquent

The study analyzed 6.5 million anonymous credit reports from TransUnion's enormous database while focusing on first lien mortgages taken out between 2004 and 2007.

One conclusion which the authors reach is that the percentage of defaults which they label strategic has risen steadily since early 2007. By the end of 2009, 12% of all defaults were strategic. Even more significant is that loans originating in 2007 have a significantly higher proportion of defaults which are strategic than those originated in 2004.

Interesting. It appears that people who have not been in the home as long are more prone to walk away. Are they less attached? Since their values went nowhere but down, did they fail to get a taste of kool aid to keep them hooked?

The following chart clearly shows this difference.

kj-09292010-chart-1.jpg

It is also important to note that with higher Vantage credit scores, the strategic default rate rises very sharply. [Vantage scoring was developed jointly by the three credit reporting agencies and now competes with FICO scoring].

Is anyone else surprised that strategice default is more common among people with good credit scores? I guess we really are all subprime now.

Another Morgan Stanley chart shows us that for loans originated in 2007, the strategic default percentage also climbs with higher credit scores.

kj-09292010-chart-2.jpg

Notice that although the percentage of loans which default at each Vantage score level declines, the percentage of defaults which are strategic rises. A fairly safe conclusion to draw from these two charts is that homeowners with high credit scores have less to lose by walking away from their mortgage. The provider of these credit scores, VantageScore Solutions, has reported that the credit score of a homeowner who defaults and ends up in foreclosure falls by an average of 21%. This is probably acceptable for a borrower who can pocket perhaps $40,000 to $60,000 or more by stopping the mortgage payment.

Very interesting data. If you had an 800 FICO score, a strategic default will lower it 160 points to a value of 640. It probably doesn't take long to bring that up enough to qualify for most forms of credit, albeit at a higher rate.

There is one more key chart from the study that is worth looking at. This one looks at strategic default rates for different original loan balances.

kj-09292010-chart-3.jpg

Note that the size of the original loan balance has little impact on the strategic default rate.

Rich people and poor people accelerate their defaults at the same rate. I would have guessed that wealthier people would hold out longer by drawing on other sources of credit. Apparently not.

The Key Factor Behind Strategic Defaults

Then what is the decisive factor that causes a strategic default? To answer this, we need to turn to the other recent study.

This past May, a very significant study on strategic defaults was published by the Federal Reserve Board. Entitled "The Depth of Negative Equity and Mortgage Default Decisions," the study was extremely focused in scope. It examined 133,000 non-prime first lien purchase mortgages originated in 2006 in the four bubble states where prices collapsed the most — California, Florida, Nevada and Arizona. All of the loans had 100% financing with no down payment. These loans came to be known as 80/20s – an 80% first lien and a 20% piggy back second lien. It's hard to remember that those deals once flourished.

The first conclusion to note is that an astounding 80% of all these homeowners had defaulted by September 2009.

Anecdotally, I am not surprised by that number. Do you remember back in 2007 and 2008 many of the properties I profiled were 100% financing walkaways. By the end of 2008 and into 2009, we stopped seeing those and we began seeing people who had put 5% to 10% down. It is still rare to see a default where the owner put 20% or more down and there was no HELOC abuse.

Half the defaults occurred in less than 18 months from origination date. During that time, prices had dropped by roughly 20%. By September 2009 when the study's observation period ended, median prices had fallen another 20%.

The study really zeroes in on the impact which negative equity has on the decision to walk away from the mortgage. Take a look at this first chart which shows strategic default percentages at different degrees of being underwater.

kj-09292010-chart-4.jpg

Notice that the percentage of defaults which are strategic rises steadily as negative equity increases. For example, with FICO scores between 660 and 720, roughly 45% of defaults are strategic when the mortgage amount is 50% more than the value of the home. When the loan is 70% more than the house's value, 60% of the defaults were strategic.

Now take a look at this last chart. It focuses on the impact which negative equity has on strategic defaults based upon whether or not the homeowner missed any mortgage payments prior to defaulting.

kj-09292010-chart-5.jpg

This chart shows what I consider to be the best measure of strategic defaulters. It separates defaulting homeowners by whether or not they missed any mortgage payments prior to defaulting. As I see it, a homeowner who suddenly goes from never missing a mortgage payment to defaulting has made a conscious decision to default. The chart reveals that when the mortgage exceeds the home value by 60%, roughly 55% of the defaults are considered to be strategic. For those strategic defaulters who are this far underwater, the benefits of stopping the mortgage payment outweigh the drawbacks (or "costs" as the authors portray it) enough to overcome whatever reservations they might have about walking away.

Intuitively, this makes sense: the further you are underwater, the more hopeless your situation, so you are far more likely to accelerate your default. With deeply underwater homeowners — like anyone who has not defaulted already in Las Vegas — true strategic default becomes much more common. I am sure I would default on my mortgage if I were 50% underwater. Anyone that far underwater is stupid not to default.

Where Do We Go From Here?

The implications of this FRB report are scary. Keep in mind that 80% of the 133,000 no down payment loans examined had gone into default within three years. Clearly, homeowners with no skin in the game have little incentive to continue paying the loan when the property goes further and further underwater.

While many of these 80/20 zero down payment loans have already gone into default, there are still a large number of them originated in 2004-2005 which have not. We know from LoanPerformance that roughly 33% of all the Alt A loans that were securitized in 2004-2006 were 80/20 no down payment deals. Over 20% of all the subprime loans in these mortgage-backed security pools had no down payments. These figures are confirmed by the Liar Loan study which I referred to in a previous article. It found that 28% of the more than 700,000 loans examined in that report which had been originated between 2004 and 2007 were 80/20 no down payment deals.

The problem of strategic defaults goes far beyond those homeowners who put nothing down when they bought their home. Although the Morgan Stanley study found that only 12% of all the defaults observed were homeowners walking away from the mortgage, I think their definition of a strategic defaulter is much too narrow.

The chart from that study which we looked at earlier shows strategic default rates when the loan exceeded the home value by 20-60%. Total default rates were over 40% for mortgages of all sizes. This tells me that a substantial proportion of all these defaults by underwater homeowners were walk-aways.

It is not only the four worst bubble states examined in the FRB study to which these two reports are applicable. Remember, prices have declined by 30% or more in just about all of the 25 large metros that had the highest number of distressed properties which I examined in my previous article on the shadow inventory.

Another chart from the Morgan Stanley study showed that for all the 6.6 million loans analyzed, the percentage of them defaulting rose steadily from 45% for loans with a LTV of 100 to 63% for loans with a LTV of 155. It seems clear from these two reports that as home values continue to decline and LTV ratios rise, the number of homeowners choosing to strategically default and walk away from their mortgage obligation will relentlessly grow. That means real trouble for all major housing markets around the country.

Where we go from here is simple: we foreclose on the squatters and let whatever happens happen. There is no real dilemma here. We just don't want to do what is necessary and endure the pain that goes along with it.

The HELOC Lifestyle

California is the only place in the world where people come to believe they can live on home price appreciation as a reliable source of income. It isn't surprising that real estate takes on a special level of desirability when each house comes with a built-in ATM machine. It becomes obvious that people come to expect and rely on this source of income when you witness them steadily and methodically increasing their mortgage balance.

Of course, since banks allow people to borrow this money and become dependant upon this source of income, houses become desirable beyond all reason. The competition for free money becomes intense, house prices rise, and when the market rally fizzles, prices crash back to earth, and the banks lose billions of dollars.

  • The owners of today's featured property paid $175,000 on 3/18/1999. They used a $169,750 first mortgage and a $5,250 down payment.

  • On 11/15/2001 they refinanced with a $229,500 first mortgage.

  • On 12/4/2002 they refinanced with a $240,000 first mortgage.

  • On 2/11/2003 they refinanced with a $278,000 first mortgage.

  • On 11/1/2004 they refinanced with a $300,000 first mortgage.

  • On 2/11/2008 they refinanced with a $323,000 first mortgage.

  • Total mortgage equity withdrawal was $153,250.

  • Total squatting time is about 15 months so far.

Foreclosure Record

Recording Date: 09/14/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 03/24/2010

Document Type: Notice of Rescission

Foreclosure Record

Recording Date: 03/09/2010

Document Type: Notice of Default

Foreclosure Record

Recording Date: 10/30/2009

Document Type: Notice of Default

This is what passes for good mortgage management in California. They tried to live within their means so to speak; they only spent what they perceived to be within the bounds of normal appreciation for their property. Of course, they were wrong, but that is the mindset by which they approached their mortgage management.

Am I the only one who thinks this is crazy?

Irvine Home Address … 23 FOXHOLLOW Irvine, CA 92614

Resale Home Price … $319,900

Home Purchase Price … $175,000

Home Purchase Date …. 3/18/1999

Net Gain (Loss) ………. $125,706

Percent Change ………. 71.8%

Annual Appreciation … 5.2%

Cost of Ownership

————————————————-

$319,900 ………. Asking Price

$11,197 ………. 3.5% Down FHA Financing

4.74% …………… Mortgage Interest Rate

$308,704 ………. 30-Year Mortgage

$64,292 ………. Income Requirement

$1,608 ………. Monthly Mortgage Payment

$277 ………. Property Tax

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

$27 ………. Homeowners Insurance

$340 ………. Homeowners Association Fees

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

$2,252 ………. Monthly Cash Outlays

-$150 ………. Tax Savings (% of Interest and Property Tax)

-$389 ………. Equity Hidden in Payment

$20 ………. Lost Income to Down Payment (net of taxes)

$40 ………. Maintenance and Replacement Reserves

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

$1,774 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$3,199 ………. Furnishing and Move In @1%

$3,199 ………. Closing Costs @1%

$3,087 ………… Interest Points @1% of Loan

$11,197 ………. Down Payment

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

$20,682 ………. Total Cash Costs

$27,100 ………… Emergency Cash Reserves

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

$47,782 ………. Total Savings Needed

Property Details for 23 FOXHOLLOW Irvine, CA 92614

——————————————————————————

Beds: 3

Baths: 1 full 1 part baths

Home size: 1,300 sq ft

($246 / sq ft)

Lot Size: n/a

Year Built: 1985

Days on Market: 17

Listing Updated: 40443

MLS Number: S632715

Property Type: Condominium, Residential

Community: Woodbridge

Tract: St

——————————————————————————

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

Desirable 3 bedroom two story condominium in the Somerset Tract near an amazing and tranquil rest and park area, Green Belt and Pool. This perfect starter home includes super upgraded laminate and travertine floors. Kitchen has gas stove and stainless steel sink. Crown moulding and 3 inch baseboards grace each of the rooms, along with custom paint, smooth ceilings, and textured walls. For your comfort, home also features an oversized five year old air conditioner. Bathrooms feature new light fixtures. Living Room is showcased with a slate Fireplace and beautiful French Doors that open on to the Patio with an 8 year old fruit bearing guava tree. Enjoy all the Woodbridge area amenities, including the Lakes, Pools, Parks, Schools and Shopping. This home is lovingly maintained by this family and not a short sale fixer upper.

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

20% of Mortgages Will Default: 11 Million to Lose Their Homes

A new report from Amherst Securities projects that 20% of all mortgages will default and 11 million people will lose their homes.

Irvine Home Address … 5151 DOANOKE Ave Irvine, CA 92604

Resale Home Price …… $549,000

I was thinking of a series of dreams

Where nothing comes up to the top.

Everything stays down where it's wounded

And comes to a permanent stop.

Wasn't thinking of anything specific,

Like in a dream, when someone wakes up and screams.

Bob Dylan — Series of Dreams

Is it possible for the housing market to stay wounded permanently? Will prices in Las Vegas fall forever? Will prices reach zero? Will Orange County prices stay high forever? Perhaps if lenders give away homes to the squatters the inventory will never hit the market and prices will not crash.

What does a delinquent squatter do if they want to sell? Oh, wait… since they don't have any equity, there really isn't anything to sell. They really don't own anything other than a big loan and dreams of future equity during the next housing bubble.

A Mammoth One in Five Borrowers Will Default

October 3, 2010 by Michael David White

A leading mortgage analyst predicts over 11 million homeowners will default and lose their home if the government fails to take more radical intervention.

Amherst Securities Group LP, one of the most respected names in mortgage research, has trumpeted an ambitious call-to-government arms in its October mortgage report.

“The death spiral of lower home prices, more borrowers underwater, higher transition rates (to default), more distressed sales and lower home prices must be arrested.”

Must the decline be arrested? I suppose it depends on the market. If the decline is stopped to early, you end up with inflated markets like Orange County. If the decline is not stopped and the market is cleared through capitulation, prices get pounded back to the early 90s like they are in Las Vegas. I proposed a method to stop the decline in Should Government Mortgage Subsidies Be Offered to Cashflow Investors?, and anyone who reads the comments can see how well that idea went over.

The authors dismiss recent talk of mortgage performance improvement as statistical sleight-of-hand magically conjured by modifications.

“This ‘improvement’ (in mortgage performance) simply reflects large scale modification activity having served to artificially lower the delinquency rate” (Please see the chart above of mortgage balances delinquent and re-performing. All charts in this post are from “Amherst Mortgage Insight” dated October 1, 2010.).

It's refreshing to see an analysis that goes beyond the headlines and takes a hard look at the effectiveness of these programs and the redefault rate. It's obvious that the loan modification programs have been a complete failure, and the statistical blips these programs create merely foster false hope that the problems in housing will somehow cure themselves.

The report offers an astounding forecast of the fate of severe negative-equity properties. Nineteen percent of properties with a loan-to-value (LTV) of 120% or greater are defaulting every year. A death-defying 75% of mortgages on 120% LTV properties will eventually go bad (19% + 19% + 19%, …).

The current crop of mortgages is already “impaired” at the one-of-five level. Nine of 100 are seriously delinquent. Six of 100 are “dirty current” (made current by modification). Five of 100 are seriously underwater (LTV greater than 120%) (Please see the chart above categorizing the forecast of 11 million defaults.).

The authors, who describe current conditions as leading to “an impossible number” of defaults and one that is “politically unfeasible”, unveil a major arms race of measures to counteract the default tide.

Brace yourself: if you didn't like my idea to stabilize prices, wait until you read through this list….

The solutions include

  1. mandatory principal reductions,

  2. looser underwriting of new mortgage loans,

  3. leveraged capital pools for investors, and

  4. penalties for defaulting homeowners.

Amherst reports that a family who defaults can live rent-free for 20 months on average. They propose that missed mortgage payments, including property taxes and insurance, be counted as W2 income.

I love that idea! Tax the squatters!

They make note of recent new signs of distress including two record-low readings of existing home sales in the last two reports. Another block is that underwriting standards have grown much stricter at Fannie and Freddie. Only 2% of Freddie purchases are now bad-credit borrowers where they represented about 20% of borrowers in 2006. FHA purchase mortgages, however, which have by definition much more lenient lending guidelines, have exploded upwards from roughly 10% of their lending in 2006 to more than 50% today.

The buyer pool is also compromised by the fact that 17% of borrowers now have a seriously compromised credit history. After mortgage default a typical wait-time to qualify again is anywhere from 3 to 7 years. One of the more desperate measures suggested by the authors seeks a new mortgage for those who are now behind or in danger of failing. “This (default) can be fixed by re-qualifying borrowers who are in a home they can’t afford into one they can afford.”

The dilemma of a deflating bubble is that supply grows while demand shrinks largely due to tigher credit standards and increasing borrower delinquency. There is no easy solution. The process must move forward to completion. There is no magic wand the government can wave and make everything better.

Risk is so high in today’s real estate market that private money has largely left the mortgage category. The retreat is most easily seen in the jumbo mortgage market. Total jumbo mortgage origination has fallen from a high of $650 billion in 2003 to $92 billion in 2009 (see the chart above). Government loans account for 90% of current originations.

“If government policy does not change, over 11.5 million borrowers are in danger of losing their homes (1 borrower out of every 5),”‘ the report said, which estimates the total of homes with a first mortgage at 55 million. “Politically, this cannot happen.”

I have heard this bogeyman thrown out before. What does it mean to say this politically cannot happen? What if it does? I doubt we will see rioting in the streets or the collapse of government. What you would see is a lot of renters who used to be owners saving a lot of money on their housing costs.

Don't loan HELOC abusers money

Every once in a while, I see a private party loan get recorded in the property records. These usually come at the end of a long series of refinances and represent a personal loan from a friend or family member. These are almost always a bad idea. Whatever relationship these two people had is now ruined because the loan will likely never be repaid.

  • This property was purchased for $265,000 on 6/23/1999. The owner used a $212,000 first mortgage and a $53,000 down payment.

  • On 5/22/2002 he obtained a stand-alone second for $50,000.

  • On 5/27/2003 he refinanced with a $304,500 first mortgage.

  • On 11/13/2003 he obtained a stand-alone second for $120,000.

  • On 2/7/2005 he refinanced with a $455,000 first mortgage.

  • On 5/3/2006 he got a stand-alone second for $150,000.

  • On 4/22/2008 he borrowed $20,000 from a private individual.

  • Total property debt is $625,000.

  • Total mortgage equity withdrawal is $413,000.

He hasn't been served a default notice yet, but I image this owner is part of the non-paying shadow inventory. People who put their houses up for short-sale rarely make payments during the process. Why would they?

Irvine Home Address … 5151 DOANOKE Ave Irvine, CA 92604

Resale Home Price … $549,000

Home Purchase Price … $265,000

Home Purchase Date …. 6/23/1999

Net Gain (Loss) ………. $251,060

Percent Change ………. 94.7%

Annual Appreciation … 6.3%

Cost of Ownership

————————————————-

$549,000 ………. Asking Price

$109,800 ………. 20% Down Conventional

4.74% …………… Mortgage Interest Rate

$439,200 ………. 30-Year Mortgage

$110,335 ………. Income Requirement

$2,288 ………. Monthly Mortgage Payment

$476 ………. Property Tax

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

$46 ………. Homeowners Insurance

$0 ………. Homeowners Association Fees

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

$2,810 ………. Monthly Cash Outlays

-$387 ………. Tax Savings (% of Interest and Property Tax)

-$554 ………. Equity Hidden in Payment

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

$69 ………. Maintenance and Replacement Reserves

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

$2,136 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$5,490 ………. Furnishing and Move In @1%

$5,490 ………. Closing Costs @1%

$4,392 ………… Interest Points @1% of Loan

$109,800 ………. Down Payment

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

$125,172 ………. Total Cash Costs

$32,700 ………… Emergency Cash Reserves

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

$157,872 ………. Total Savings Needed

Property Details for 5151 DOANOKE Ave Irvine, CA 92604

——————————————————————————

Beds: 4

Baths: 2 full 1 part baths

Home size: 1,976 sq ft

($278 / sq ft)

Lot Size: 5,543 sq ft

Year Built: 1970

Days on Market: 18

Listing Updated: 40437

MLS Number: P752184

Property Type: Single Family, Residential

Community: El Camino Real

Tract: Ch

——————————————————————————

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

TWO STORIES, 4 BEDROOM, 3 BATHS, EL CAMINO TRACT. NEW KITCHEN CABINET, NEW GRANITE COUNTER TOP. PROPERTY SOLD 'AS IS' CONDITION. SELLERS ARE VERY MOTIVATED, CO-LISTING AGENT PHU NGUYEN 714-210-0204.

I can tell you why the co-listing agent is involved with this transaction, but that might give away too much….

Should Government Mortgage Subsidies Be Offered to Cashflow Investors?

Among the dumb ideas being floated to resolved the housing crisis, one good one has appeared: Help investors buy up distressed homes and rent them out.

Irvine Home Address … 6 HERITAGE Irvine, CA 92604

Resale Home Price …… $319,000

Situation could be much better

much better than today

you know that you could do much better

much better than you do today

but how come you never try to change situation

how come you always escape

out of a serious conversation

dont't you know it can't never be too late

for us to succeed

out of every misery

you can be released

as long as you beleive

Ayo — Help Is Coming

In housing markets where a significant number of properties are being converted from owner-occupied to rental status, there is no government program or help for this transition to occur. Without government help, prices fall far below fundamental valuations as the imbalance of supply and demand becomes extreme. The only solution is to reduce supply and increase demand. To accomplish this, I propose that the GSEs promote investor programs that reduce the cost of ownership to small investors and encourage them to keep the supply off the resale market.

I am about to argue for something that would benefit me personally, so take everything which follows with a dose of skepticism. I would like to think I can set my personal biases aside and propose a solution better than those coming out of Washington. Feel free to disagree.

Should Treasury Help Investors Become Landlords?

Emily Peck — September 27, 2010

The government’s tried a lot of tactics in propping up the housing market: Tax credits for home buyers. Mortgage modifications for distressed homeowners. A program to buy up mortgage-backed securities.

Now, some analysts from Bank of America are proposing another plan: Help investors buy up distressed homes and rent them out.

In a recent research paper, the BofA analysts frame this as the second phase of the Public Private Investment Plan. Funded by TARP, which expires Oct. 3, PPIP offered investors funds and credit to buy up residential and commercial mortgage backed securities. The paper calls that program an unqualified success for driving up the value of mortgage backed securities.

Through their proposed PPIP 2, Treasury would use the same model to help investors to directly buy up foreclosed homes.

The analysts propose funding the purchase of up to $400 billion worth of homes by a select group of property management companies given the task of home oversight. Treasury could provide, they suggest, up to $100 billion in equity, matching the property management companies, as well as up to $200 billion in debt capital.

I like the basic idea of helping investors to purchase homes and convert them to rentals. I really hate the idea of it being done as another form of crony capitalism where the select few chosen by the Treasury department would get to make all the money. There is a much better way to make this happen.

The analysts propose that PPIP 2 investors be required to hold on to these homes for a certain amount of time, to avoid weighing the market down with low-priced foreclosed properties.

The U.S. homeownership rate, at about 67%, is “adjusting to a more natural level of 62-64%,” the analysts write. That means we’re in the process of converting owners to renters–sometimes painfully via foreclosure. The authors write that some of these folks probably never should have owned homes anyway and, since modification won’t (and doesn’t) always help them, the ability to rent distressed properties might do the trick, while also avoiding a flood of foreclosures onto the market.

This is exactly the problem. The home ownership rate must fall. Far too many people who were not prepared for home ownership were given title to property. These people must go back to being renters, but there is no mechanism in place to cost effectively make this transition. in fact, since investors loans carry a higher interest rate and are difficult to qualify for, there are roadblocks to this transition that must be removed.

The authors say that they haven’t seen any proposal along these lines. One possible reason? TARP fatigue. From the paper:

To put it mildly, in spite of its successes, TARP has not been particularly popular. We believe reauthorizing this type of spending on even a limited basis would be next to impossible, at least until after the upcoming election.

I agree; doling out another crony payoff is not going to be very popular either before or after the election. This is a transparent corporate giveaway that people are growing tired of.

The real reason you haven't seen proposals like this is because everyone in the administration is still focused on owner occupants. There have been no policies implemented or discussed that might hurt the home ownership rate — even is such a policy will help reduce taxpayer losses. A high home ownership rate has become a sacred cow in Washington, and until we admit maximizing the home ownership rate may not be a good thing, our policies will continue to be counter productive.

The GSEs should insure investor loans

Let's start by acknowledging that the GSEs no longer have any semblance of what they used to be. They were founded to support a secondary mortgage market and make capital available for low and middle income Americans to buy homes. Since they went into conservatorship in 2008, they have been largely used to prop up the housing market. Let's acknowledge that their primary function is currently to prop up the housing market by providing mortgage insurance at below-market costs to stabilize the housing market.

Once we accept the new role of GSEs, we can then discuss how this can best be accomplished. Our current policies are geared toward keeping owner-occupants in properties and Prop Up the Flagging Owner-Occupancy Rate. This policy will largely fail because many homes have to be converted to cashflow rental properties. If the government and the banks really want to limit their losses on mortgage loans (and GSE mortgage insurance), then they need to focus on how they can raise the property bids of cashflow investors.

If the GSEs offered the same loan insurance to cashflow investors as they do to owner-occupants so that interest rates were similar, and if the rental cashflow from the property could be counted toward the qualifying income, bids from cashflow investors would be much higher. Think about it: if you lower the cost of ownership for investors and make it easier for investors to qualify, you will get higher bids and more investor competition for properties. This in turn will raise prices and reduce the losses both banks and the GSEs will endure on those properties that must be converted from owner-occupied to rental status.

The truth of this fact is plainly obvious when you look at Las Vegas's housing market. The home ownership rate in Las Vegas is going to drop 25% or more from the 2006 peak. Nearly every household there is underwater, and they have little or no hope of price recovery. Accelerated default is the norm, and a huge number of homes are currently being converted from owner-occupied to rental status. Each time this happens, some lender is losing a fortune, and the only way to stop the bleeding is to raise the bids for cashflow rentals. The only way that is going to happen is to lower the cost of ownership for investors and increase the size of the borrower pool by qualifying more investors.

This is a problem I am very familiar with. I know the math as I face it myself with each property I consider buying personally. I know that investors pay a higher interest rate, face higher equity requirements, and have fewer loan programs that consider the rental income in qualification (it still must be cashflow positive). Each of those barriers lowers my bid for any particular property, and since everyone is facing the same issues, it lowers everyone else's bids as well. Lower market bids for these properties make for larger lender losses.

If the government and the GSEs were serious about combating this problem, the GSEs could offer relief in these areas (interest rates, equity requirements, and income qualification) to investors who agree to keep the properties off the market as rentals for three to five years. That would keep these properties out of the for sale market (or the loan would have a stiff financial penalty), and the reduced supply would also help stabilize prices.

This doesn't have to be some crony capitalist handout. It could be a grass roots program for small investors and prudent savers with good credit — you know, the people who have been being screwed at every turn in favor of banking interests and corporations with all the bailouts. I openly admit my personal bias, but I still believe this is a good idea that would be far more effective than any of the programs that have actually been implemented to date.

What do you think? Has the time come for the GSEs to help the small investor clean up this mess?

The California Housing Foreclosure Cycle

People often talk about the real estate cycle in California without having any idea of what causes it. In short, irrational exuberance among buyers enabled by foolish lenders causes prices to go up, and when buyers who over-borrowed stop repaying their loans, lenders tighten credit, and prices crash. This most recent housing bubble was actually the third such housing bubble here in California. It probably won't be the last.

  • Today's featured property was purchased by the Federal National Mortgage Association for $138,000 on 8/23/1996. It was an REO. They later sold the property Glendale Federal Bank who sold it to the current owner on 5/17/1997 for $100,000. The current owner used a $97,500 first mortgage and a $2,500 down payment.

  • On 8/24/1998, the owners obtained a stand-alone second for $37,300.

  • On 9/21/199 they refinanced the first mortgage for $163,946.

  • On 10/1/2004 they refinanced again for $220,000.

  • On 6/5/2006 they refinanced one last time for $237,000.

  • Mortgage equity withdrawal is $139,500.

If you believe the property description, this is a standard sale, but they don't have much cushion before this becomes a short sale.

How many other REOs from the last cycle will end up as REOs this time around? How many of today's REOs will end up as tomorrow's foreclosures?

Irvine Home Address … 6 HERITAGE Irvine, CA 92604

Resale Home Price … $319,000

Home Purchase Price … $100,000

Home Purchase Date …. 5/17/1997

Net Gain (Loss) ………. $199,860

Percent Change ………. 199.9%

Annual Appreciation … 8.6%

Cost of Ownership

————————————————-

$319,000 ………. Asking Price

$11,165 ………. 3.5% Down FHA Financing

4.74% …………… Mortgage Interest Rate

$307,835 ………. 30-Year Mortgage

$64,111 ………. Income Requirement

$1,604 ………. Monthly Mortgage Payment

$276 ………. Property Tax

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

$27 ………. Homeowners Insurance

$273 ………. Homeowners Association Fees

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

$2,180 ………. Monthly Cash Outlays

-$149 ………. Tax Savings (% of Interest and Property Tax)

-$388 ………. Equity Hidden in Payment

$20 ………. Lost Income to Down Payment (net of taxes)

$40 ………. Maintenance and Replacement Reserves

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

$1,703 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$3,190 ………. Furnishing and Move In @1%

$3,190 ………. Closing Costs @1%

$3,078 ………… Interest Points @1% of Loan

$11,165 ………. Down Payment

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

$20,623 ………. Total Cash Costs

$26,100 ………… Emergency Cash Reserves

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

$46,723 ………. Total Savings Needed

Property Details for 6 HERITAGE Irvine, CA 92604

——————————————————————————

Beds: 2

Baths: 1 full 1 part baths

Home size: 1,022 sq ft

($312 / sq ft)

Lot Size: n/a

Year Built: 1977

Days on Market: 23

Listing Updated: 40451

MLS Number: S631821

Property Type: Condominium, Townhouse, Residential

Community: El Camino Real

Tract: Hv

——————————————————————————

Regular sale: stop wasting your time on short sales. No need to wait for the bank on this one. A wonderful, upgraded townhouse in the Heritage Park community of Irvine featuring dual master bedrooms with lots of closet space, and a spacious, upgraded kitchen featuring custom cabinets, tile floors, and beautiful Corian counters. Both bathrooms have been recently tastefully upgraded. Newly-installed laminate flooring. The enclosed patio is perfect for enjoying the great Southern California weather and there is an inside laundry area. Walk to the huge Heritage Park, association pool, large county library, basketball, tennis and other sports courts, and the area tot lot. The area is close to many restaurants, shops and entertainment venues. Walk to local, highly-rated schools. No Mello-Roos and low HOA! Easy access to major freeways, this is an excellent opportunity to live in one of the safest cities in America. Motivated seller – and this is a regular sale!

The Right to Rent Would Flatten the California Housing Market

A new bill circulating in Congress would encourage accelerated default on a grand scale and crush California's housing market.

Irvine Home Address … 247 ORANGE BLOSSOM Irvine, CA 92618

Resale Home Price …… $217,900

I haven't ever really found a place that I call home

I never stick around quite long enough to make it

It's just a thought, only a thought

But if my life is for rent and I don't learn to buy

Well I deserve nothing more than I get

Cos nothing I have is truly mine

Dido — Life For Rent

Dean Baker of the Center for Economic and Policy Research was one of the early public voices who called the housing bubble. He accurately noted the disparity between rent and payments and concluded housing prices were not sustainable. Like me, he was a renter looking to buy as prices were ramping up, and like me, he noted that since it didn't make sense for him personally to buy, it didn't make sense for anyone else either. Being an economist at an influential think tank, he was in a position to research and write about the issue and be heard.

I really like Mr. Baker's proposal, but I have been afraid to write about it because I don't think lawmakers fully understand what passing his legislation would do to the housing market. I would very much like to see it become law, but if it does, every inflated housing market in the country would crash very hard as loan owners accelerate their defaults. If lawmakers are educated to this fact by me or the banking lobby, they will not pass this good legislation. But I am only a blogger, so perhaps they will ignore me. Let's hope so.

Right to Rent could change the nation's foreclosure crisis: CEPR

by CHRISTINE RICCIARDI — Wednesday, September 22nd, 2010

In the wake of reform enacted to promote homeownership, analysts at the Center for Economic and Policy Research are saying that ownership may not be the smartest option. In a report released today, The Gains from Right to Rent in 2010, the CEPR suggests that giving homeowners the right to rent their house at a fair market price could be a game changer in the nation's foreclosure crisis.

The report dissects the benefits of a drafted bill, H.R. 5028, also known as The Right to Rent. Under the legislation, homeowners entering the foreclosure process would be able to occupy their homes for up to five years, while paying rent to a lender. Rent would be based on fair market price as determined by an independent appraiser and adjusted annually.

Think about the effect of this law from the perspective of an underwater homeowner making a payment that exceeds a comparable rental. Why would anyone in that position keep paying their mortgage if they knew they could default and stay in their home for five years? Further, wouldn't these owners also believe that they would be given a chance to repurchase the house after 5 years when their credit is improved? If this law is passed, every market inflated above rental parity would crash to that price level because of a rush of accelerated default.

"This would give homeowners an important degree of security, since they could not simply be thrown out on the streets," wrote Dean Baker and Hye Jin Rho, co-director of and research assistant at CEPR. "This policy should also benefit neighborhoods in the most hard-hit areas, since they would not have large numbers of vacant homes following foreclosures."

This policy probably would benefit the hardest hit areas because there would be less turnover of the housing stock. Riverside County would benefit greatly while Orange County would be crushed.

The CEPR report, which compares the costs of owning a home and renting in 16 major metropolitan statistical areas around the U.S., found that homeowners would see substantial reductions in costs by becoming renters if they rented in a bubble-inflated market. Savings are much less, however, if the market was not affected by the housing bubble.

For example, in the Los Angeles MSA, homeowners would save $1,586 per month by becoming a tenant. The median home price in 2006 and 2007 was $608,600. Based on that number, CEPR found the monthly cost of ownership as $3,128 versus $1,420 to rent.

New York/New Jersey, Sacramento, San Diego and San Francisco savings are all over $1,000.

The tremendous savings being touted here are real, and they represent a loan owner's incentive to accelerate their default. Most loan owners believe house prices will go back up and they will get appreciation and HELOC riches: they are making a strategic repayment. Once the incentives change, fewer will make the oversized payments. Instead of continuing to make a strategic repayment, most will opt to strategically default. It's only the false belief that their investment will yield results that keeps most of these people paying now.

In Detroit, however, the marginal saving is only $89 between owning and renting home. MSAs including Baltimore, Chicago, Cleveland, Minneapolis, Philadelphia, Phoenix, and Tucson had a difference of less than $500.

“With roughly one-in four mortgages underwater, the loan modification plans put forth so far have done little to help homeowners facing foreclosure,” said Baker. “Right to Rent, on the other hand, would benefit millions, provide families with real housing security, and could go into effect immediately.”

And it would lower house prices to rental parity.

And it could fill adequate demand. According to a survey done recently by Apartments.com, 60% of respondents said they prefer renting to buying a home. Almost 30% said they had never rented before but are currently looking for an apartment.

The CEPR report includes an appendix with cost analysis for 100 MSAs around the country. Amounts for houses are based on costs for a house that sells at 75% of the median house price. The basis for rental costs is the Department of Housing and Urban Development's Fair Market Rent for a two-bedroom apartment. The calculations used assume the homeowner faces a marginal tax rate of 15%. View the full report here.

Permanent Rental Parity

Despite the problems created with implementation of a right-to-rent law, the impact would be long lasting and very positive because most first mortgages would be limited to rental parity. Right now, the excess mortgage payment going to the bank represents money not being spent in the local economy. When a loan owner in California is paying a 50% DTI, very little is left over to stimulate the economy — and have a life. Without appreciation and HELOC abuse, high DTIs are detrimental to California, and a HELOC based economy is an unsustainable Ponzi Scheme.

Since the incentive to default exists for mortgage payments above rental parity, lenders will stop underwriting those loans. If you were a lender, and if you knew the borrower could default at any time and stay in the property for 5 years and only have to pay you rent, wouldn't you keep the payment at or below rental parity? A right to rent law would stabilize the housing market in a way no other government program has succeeded in doing. Unfortunately for lenders, the implementation of this law will take the remaining air out of the housing bubble.

I strongly support the idea of keeping house prices at rental parity because it discourages Ponzi living and puts the economy on a sustainable footing. I proposed a similar idea in The Great Housing Bubble:

There is one potential market-based solution that would require no government regulation or intervention that would prevent future bubbles from being created with borrowed capital: change the method of appraisal for residential real estate from valuations based exclusively on the comparative-sales approach to a valuation derived from the lesser of the income approach and the comparative-sales approach. Both approaches are already part of a standard appraisal, so little additional work is necessary–other than appraisers will have to focus on doing the income approach properly. In the current lending system, the income approach is widely ignored. … When the fallout from the Great Housing Bubble is evaluated, it is clear that the comparative-sales approach simply enables irrational exuberance because the past foolish behavior of buyers becomes the basis for future valuations allowing other buyers to continue bidding up prices with lender and investor money. Prices collapsed in the Great Housing Bubble because prices became greatly detached from their fundamental valuation of income and rent. This occurred because the comparative-sales approach enables prices to rise based on the irrational exuberance of buyers. If lenders would have limited their lending based on the income approach, and if they would not have loaned money beyond what the rental cashflow from the property could have produced, any price bubble would have to have been built with buyer equity, and lender and investor funds would not have been put at risk. There is no way to prevent future bubbles, and the commensurate imperilment of our financial system, as long as the comparative-sales approach is the exclusive basis of appraisals for residential real estate.

My approach was to change the appraisal system to limit loans to rental parity, but Dean Baker's idea of right to rent would have the same effect. If loans are limited to rental parity, so will house prices — unless we suddenly become a nation of savers and manage to inflate a bubble with equity…. not going to happen.

Sold to Countrywide at the peak

This wasn't really sold to Countrywide, but borrowing the full value had the same effect. The owners extracted every penny of equity, and Countrywide (B of A) will end up with another REO. In effect, they bought the property in mid 2007 but didn't know it.

  • This property was purchased on 10/23/1998 for $88,000. The owners used a $66,000 first mortgage, and a $22,000 down payment.

  • On 3/5/2003 they refinanced with a $150,000 first mortgage.

  • On 7/30/2007 they refinanced with a $296,000 first mortgage. These owners were not regular HELOC abusers, but they did manage to double their mortgage on two occasions.

  • Total mortgage equity withdrawal is $230,000. That is great for a 1 bedroom condo.

Foreclosure Record

Recording Date: 07/19/2010

Document Type: Notice of Default

Some might disagree with my giving them a "D" for mortgage management. With only two refinances, I think these people really believed they were living within their means and only spending part of their appreciation. It doesn't appear thoughtless or reckless — stupid, but not reckless.

Irvine Home Address … 247 ORANGE BLOSSOM Irvine, CA 92618

Resale Home Price … $217,900

Home Purchase Price … $88,000

Home Purchase Date …. 10/23/1998

Net Gain (Loss) ………. $116,826

Percent Change ………. 132.8%

Annual Appreciation … 7.8%

Cost of Ownership

————————————————-

$217,900 ………. Asking Price

$7,627 ………. 3.5% Down FHA Financing

4.31% …………… Mortgage Interest Rate

$210,274 ………. 30-Year Mortgage

$41,642 ………. Income Requirement

$1,042 ………. Monthly Mortgage Payment

$189 ………. Property Tax

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

$18 ………. Homeowners Insurance

$230 ………. Homeowners Association Fees

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

$1,479 ………. Monthly Cash Outlays

-$94 ………. Tax Savings (% of Interest and Property Tax)

-$287 ………. Equity Hidden in Payment

$12 ………. Lost Income to Down Payment (net of taxes)

$27 ………. Maintenance and Replacement Reserves

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

$1,137 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$2,179 ………. Furnishing and Move In @1%

$2,179 ………. Closing Costs @1%

$2,103 ………… Interest Points @1% of Loan

$7,627 ………. Down Payment

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

$14,087 ………. Total Cash Costs

$17,400 ………… Emergency Cash Reserves

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

$31,487 ………. Total Savings Needed

Property Details for 247 ORANGE BLOSSOM Irvine, CA 92618

——————————————————————————

Beds: 1

Baths: 1 bath

Home size: 814 sq ft

($268 / sq ft)

Lot Size: n/a

Year Built: 1976

Days on Market: 62

Listing Updated: 40419

MLS Number: I10079989

Property Type: Condominium, Residential

Community: Orangetree

Tract: Cpwas

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

Located in a desirable community. Just down the road from Irvine Spectrum, to UC Irvine and walking distance to Irvine Valley College. It is a one bedroom/one bath downstairs and a big loft upstairs. Kitchen have new granite countertop and tile floors. Bathroom have new tile floors as well. And have wood floors in other rooms. Amenities such as tennis courts, basketball court, swimming pool, childrens playground.

The realtor needs to work on subject-verb agreement and basic grammar.

Where the local renters are