Category Archives: Real Estate Analysis

There are 3,600+ Distressed Properties in Irvine

Many are celebrating the end of the real estate bust. But what about all those delinquent borrowers? Isn't that still a problem?

Irvine Home Address … 19 BENNINGTON Irvine, CA 92620

Resale Home Price …… $632,400

{book1}

I will creep

Into your thoughts

Like a bad debt

That you can't pay

Take the easy way

And give in

Morrissey — The More You Ignore Me, The Closer I Get

Many buyers today believe that the variety of government props to the market have saved the day and house prices have resumed their steady, upward climb. The changing mix of sales has certainly propped up the median price. The cost per square foot — which is a better indication of what people are getting for their money — has not changed much. Since early 2009 when the Federal Reserve started buying mortgages to lower interest rates, prices have stabilized. They bounced last spring and pulled back during the winter, and it looks to be repeating the cycle this year.

In 2009, pricing was held up at very low transaction volumes. In 2010, the volume is picking up a little, but inventory is creeping up as well. Can this spring rally can hold as we push through 800 properties for sale?

The bottom line is that prices will hold up as long as inventory is not released too quickly. It can be absorbed by the depleted buyer pool, at least that is the advice economists are giving banks.

Foreclosure Glut: Is 'Shadow Inventory' Really a Threat?

Millions of New Foreclosures Will Stifle, Not Crush Housing Market, Say Economists

By DALIA FAHMY

June 7, 2010

Every once in a while, the term "shadow inventory" makes it into the business headlines. Invariably, stories warn of a looming flood of foreclosures that will drag the housing market down as soon as homeowners begin to feel optimistic again.

But what is shadow inventory — and is it really such a big threat?

Different experts have different definitions. Some only include homes that have already been repossessed by banks and are awaiting distressed sales. Others include those whose owners are long-overdue on mortgage payments, while others still count homes whose owners would like to sell but are waiting for conditions to improve.

8 Million More Foreclosures May Be Waiting

"The definition of shadow inventory has gotten out of control," says Rick Sharga, senior vice president at RealtyTrac, an online market for distressed homes.

As a result, estimates of homes in the shadows vary widely between 2 million and 8 million. By comparison, approximately 5.5 million homes are expected to change hands this year, of which about a third are in some kind of distress.

High estimates usually include include repossessed homes that have not yet been listed for sale, homes that have been moved from the delinquent bucket and into foreclosure, and homes that are more than 60 days delinquent.

The latest report is that 8.4% of Orange County mortgage holders are delinquent on their payments. There are about 75,000 homes in Irvine and about 45,000 mortgages. If only 6% of those are delinquent, that amounts to 2,700 homes. If Irvine matches the 8.4% rate of Orange County, then 3,780 homeowners are delinquent. This is not a theoretical problem. It is a massive inventory of homes that must get pushed through the resale market.

"Theoretically you could say up to 7 million homes are in the pipeline, but not all of them will go into the market and if even if they do, not all of them will hit at once," says Sharga. Given the current pace of sales, Sharga believes shadow inventory could be cleared by the end of 2013, at which point the housing market can begin a real recovery.

RealtyTrac's president is saying no recovery until 2013. If by recovery he means we break out of this bottoming formation, his estimation is as good as any. It will vary market to market.

Shadow Inventory Can Be Lethal

The problem with shadow inventory is that it does not simply represent additional supply. It's supply of the worst kind: distressed homes that are often in hard-hit regions, often in a state of disrepair. Homes in foreclosure have more power to drag down real estate prices and keep them depressed for years to come.

"If you can buy a cheap foreclosed home next door to a normal home, many people will choose to buy the discounted home," says Celia Chen, housing analyst at Moody's Economy.com. She estimates that 4.6 million homes are currently waiting in the shadows, almost a whole year's worth of housing supply.

Months of supply on its own doesn't sound so bad. Unfortunately, this inventory is still growing and it is being sold at a rate that will not clear it for many years, at the rate of current sales, it will take 60 months just to clear Irvine, and it is one of the better markets.

Shadow Inventory Stuck In Limbo

Like many other analysts, Chen believes we still have a long way to go before real estate prices begin recovering. Some expect a recovery to begin in the middle of next year, others don't see it coming for several more years.

There are many reasons that shadow inventory is so difficult to gauge.

For one thing, financial institutions that own distressed mortgages are not saying exactly how many homes they hold. Firms have generally been releasing their supply of distressed homes slowly into the market for fear of crushing prices.

Another problem is that nobody knows exactly how many homes will make it out of the government's "Home Affordable Modification Program." Chen estimates that only 45 percent of the 1.2 million loans that are aiming for a modification will actually succeed, while the rest will likely end up in foreclosure.

While these numbers certainly are cause for concern, the good news is that this shadow inventory is unlikely to cause a shock to the system similar to the initial crash.

That last sentence was pure emotional comfort with little basis in fact or history. For prices to remain firm, and unstable cartel of banking interests must keep them that way.

No Nuclear Event in Housing

"Much as during the arms building between the U.S. and the Soviet Union, neither one ever launched a nuclear attack for fear of causing complete destruction," says RealtyTrac's Sharga. "You're not going to see a nuclear event happen in the housing market either."

There will not be a nuclear event if the banks continue withholding inventory and allowing people to squat. That is the price paid by the banks and ultimately the taxpayer. The collapse of the cartel may not be nuclear, but it could certainly drive prices down.

Esmael Adibi, economics professor at Chapman University says shadow inventory is actually a good thing because it means that financial institutions – primarily lenders and investors who own the delinquent mortgages – are holding on to the inventory instead of dumping it into the market.

A good thing? I have heard Dr. Adibi speak before, and I could picture him saying that. First, this is good for whom exactly? Banks? They must love having a bazillion delinquent loans? Buyers who have to pay higher prices? Dr. Adibi sits on the board of at least one bank, and they do listen to his advice. Look for the banks he advises to sit on their REO and be the last to liquidate. This is his endorsement of widespread squatting.

Adibi says financial institutions are not only holding on to their inventory in order to avoid crushing the market, but also because they believe they might get a better deal once prices have recovered slightly.

"Can you imagine if all those homes ended up in the market now?" he says. "Things would be much worse."

Yes, I can imagine that pretty well, and "much worse" is a matter of perspective. A conspiracy to keep prices elevated and keeping families priced out of them is not my idea of "much better." Notice also that he said they are holding out for better deals. This is cartel behavior, but what happens when some of the members of the cartel want to get out quicker? What about those banks whose business plan is not to hold this inventory until prices come back?

Prices are about as good as they are going to get for banks for quite some time. Low interest rates make reasonable payments on huge loans. Look at today's property. A $632,400 property only costs the owner a little over $2,500 a month to own. The payment is no longer the problem; the amount financed is staggering. As long as payment affordability is reasonable, people will buy homes. If the banks can prevent too many of them from entering the market, prices will not fall.

What about the 3,600 distressed properties in Irvine?

I recently wrote that Nearly 500 Properties Are Currently Scheduled for Foreclosure Auction In Irvine. There are about 900 properties in the foreclosure pipeline about about 2,700 in shadow inventory. Last month we sold 228 properties, and this is the prime selling season. In any market where distressed inventory has exceeded 50%, prices have cratered, so if we chipped away at the 3,600 number with about 120 sales a month, it will take 30 months to clear out the garbage — assuming we don't add any more to it.

How common are the Ponzis? Is the number of truly distressed debtors only 3,600 in Irvine. Based on the sample we encounter here daily on the blog, I estimate the number to be higher. Of all the people you know, what percentage are Ponzis? Is it less than 10% or more like half? The more common the Ponzis, the greater the likelihood of a protracted real estate bust. Too many people took on too much debt so they could pretend and look rich. There is far less wealth here than commonly believed. People here are very good at faking it.

Used, abused, and left for garbage

  • The owners of today's featured property drained it like their neighbors. The property was purchased on 7/31/1991 for $309,000. The owners financing is unknown but they probably put 20% down and financed $247,200.

  • My records pick up with a $100,000 HELOC on 7/16/2002.

  • On 4/26/2004 they refinanced the first mortgage for $275,000, so the owners were conservative up to then.

  • On 5/11/2004 they opened a $100,000 HELOC.

  • On 4/15/2005 they refinanced with a $589,600 first mortgage.

  • On 12/12/2005 they opened a $139,000 HELOC.

  • On 8/20/2007 they refinanced with a $630,000 first mortgage and a $125,000 HELOC.

  • Total property debt is $755,000.

  • Total mortgage equity withdrawal is $507,800 if they maxed out the HELOC.

  • Total squatting time is at least 18 months.

Foreclosure Record

Recording Date: 07/20/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 04/14/2009

Document Type: Notice of Default

Foreclosure Record

Recording Date: 04/13/2010

Document Type: Notice of Sale (aka Notice of Trustee's Sale)

I want to call your attention to the last two notices. Note that the NOT was refiled one day before the 1 year period was up. This is evidence of the bank doing nothing to stop the squatting.

Irvine Home Address … 19 BENNINGTON Irvine, CA 92620

Resale Home Price … $632,400

Home Purchase Price … $309,000

Home Purchase Date …. 7/31/1990

Net Gain (Loss) ………. $285,456

Percent Change ………. 104.7%

Annual Appreciation … 3.6%

Cost of Ownership

————————————————-

$632,400 ………. Asking Price

$126,480 ………. 20% Down Conventional

4.91% …………… Mortgage Interest Rate

$505,920 ………. 30-Year Mortgage

$129,606 ………. Income Requirement

$2,688 ………. Monthly Mortgage Payment

$548 ………. Property Tax

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

$53 ………. Homeowners Insurance

$0 ………. Homeowners Association Fees

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

$3,289 ………. Monthly Cash Outlays

-$458 ………. Tax Savings (% of Interest and Property Tax)

-$618 ………. Equity Hidden in Payment

$240 ………. Lost Income to Down Payment (net of taxes)

$79 ………. Maintenance and Replacement Reserves

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

$2,531 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$6,324 ………. Furnishing and Move In @1%

$6,324 ………. Closing Costs @1%

$5,059 ………… Interest Points @1% of Loan

$126,480 ………. Down Payment

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

$144,187 ………. Total Cash Costs

$38,800 ………… Emergency Cash Reserves

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

$182,987 ………. Total Savings Needed

Property Details for 19 BENNINGTON Irvine, CA 92620

——————————————————————————

Beds: 4

Baths: 2 full 1 part baths

Home size: 2,503 sq ft

($253 / sq ft)

Lot Size: 6,215 sq ft

Year Built: 1979

Days on Market: 3

Listing Updated: 40331

MLS Number: S619509

Property Type: Single Family, Residential

Community: Northwood

Tract: Md

——————————————————————————

Great opportunity to buy in Northwood. Good floorplan, living room, family, dining room, 2 fireplaces, inside laundry and large backyard. No HOA or Mello Roos. Desirable school district.

Safe Haven Buying: Kool Aid Intoxication of the Housing Bust

High-end squatters are starting to be pushed from their houses. Will the added inventory bring down high-end prices, or will the high end be a safe haven?

Irvine Home Address … 65 GRANDVIEW Irvine, CA 92603

Resale Home Price …… $2,799,000

{book1}

You wanna stay out with your fancy friends.

I'm tellin' you it's got to be the end,

Don't bring me down,no no no no no,

I'll tell you once more before I get off the floor

Don't bring me down.

Electric Light Orchestra — Don't Bring Me Down

You want to buy with your fancy friends? I'm tellin' you the rally's got to end. Don't bring them down. I'll tell you once more as prices bounce off the floor, they will go down.

Prices have crashed nationwide because buying only made sense as long as prices were going up. Once the rally stopped, prices were doomed to crash because the only alternate reason to buy is to save money versus renting. In many areas of the country, prices are low enough that buying makes sense because it is cheaper to own than to rent. Locally, that is not the case.

During the rally kool aid intoxication caused people to buy to capture appreciation, but this is not the only manifestation of kool aid intoxication. Now, some people are buying merely because prices have not gone down. This reason is just as crazy because it isn't grounded in anything tangible. The herd is seeking protection from the crash, and people are buying in areas simply because other people are buying and holding up prices. This isn't careful analysis, it is herd-following foolishness.

Back in 2007, many real estate boards had heated arguments between bulls and bears. The bulls would pull up charts showing the huge preceding rally as evidence that prices would go up forever. It is hard to argue with a chart, but past performance is no guarantee of future outcomes, and just as the bears predicted, prices fell off a cliff.

Those who argue for safe-haven speculation make the same argument: prices haven't fallen therefore they will not fall. The bulls ignore the huge inventory of distressed properties as if it isn't there. "I'll believe it when I see it," they say. How much more obvious does it need to be? We can see years worth of inventory in the foreclosure pipeline, and although we don't have addresses of the shadow inventory, First American CoreLogic does, and they say 8.4% of Orange County mortgage holders are delinquent on their payments. That doesn't seem particularly safe to me.

New Trulia Real Estate Index: Rent vs. Buy

Today Trulia announced America’s Top 10 Cities to Buy vs. Rent and the Top 10 Cities to Rent vs Buy. Trulia calculated the price-to-rent ratio using the average list price compared with average rent on 2 bedroom apartments, condos and townhomes listed on Trulia.com. To create the list, Trulia analyzed the largest 50 cities in America, by population.

Top 10 Cities to Buy vs. Rent

City Price-to-Rent Ratio
1. Minneapolis, Minnesota 8
2. Arlington, Texas 8
3. Miami, Florida 8
4. Fresno, California 8
5. San Antonio, Texas 8
6. Mesa, Arizona 9
7. Jacksonville, Florida 9
8. Phoenix, Arizona 10
9. El Paso, Texas 10
10. Las Vegas, Nevada 11

“At the peak of the real estate bubble, cities like Miami, Phoenix and Las Vegas were not affordable for many. Now the opposite is true,” said Pete Flint, co-founder and CEO of Trulia. “Home sellers in these hard hit areas are forced to lower their prices to compete with all the foreclosures on the market. As a result , these unattainable markets are so affordable it makes better financial sense to buy than rent.”

Yes, it is better to own than to rent in all of the places listed above. I would also include most of Riverside County. Prices in these areas are well below rental parity. Renters in these areas pay a premium for the freedom of movement and lack of liability — as they should. Renting is supposed to cost a premium. Ownership is a burden; taxes, maintenance, debt service, transaction costs, and illiquidity.

Top 10 Cities to Rent vs. Buy

City Price-to-Rent Ratio
1. New York, New York 33
2. Omaha, Nebraska 26
3. Seattle, Washington 25
4. Portland, Oregon 22
5. San Francisco, California 22
6. Oklahoma City, Oklahoma 21
7. Kansas City, Missouri 20
8. San Diego, California 20
9. Cleveland, Ohio 20
10. Dallas, Texas 19

“It is not a surprise to see cities like New York and San Francisco on the ‘Rent’ cities but I was surprised to see areas like Omaha, Oklahoma City and Kansas City on our rental list, “said Flint “We’re not suggesting that it’s unwise to buy in these areas, though – just that it’s significantly more expensive than renting. In many of these cities, even though home buying is much more costly than renting, prices are still much lower than they have been in a long, long time.”

To see the Top 50 City Rent v Buy Index, please click here to download.

Trulia.com’s Rent vs. Buy Index – Interpretation Key

Price-to-Rent Ratio of 1-15: It is much less expensive to own than to rent a home in this city Price-to-Rent Ratio of 16-20: It is more expensive to own a home in this city are The total costs of ownership of a home in this city are greater than the costs of renting, but it might still make financial sense depending on the situation. Price-to-Rent Ratio of 21+: The total costs of owning a home in this city are much greater than the costs of renting.

Definitions: Total costs of home ownership include mortgage principal and interest, property taxes, hazard insurance, closing costs at time of purchase and ongoing HOA dues and private mortgage insurance, where applicable. Total costs of homeownership include an offset for the tax advantages of homeownership, including mortgage interest, property tax and closing cost deductions.

Total costs of renting include rent and renter’s insurance.

I was surprised to see San Diego is still unaffordable. Prices have crashed pretty hard there as they led Orange County on the way up and on the way down. If ownership is still more expensive than rent, that market may experience more pain.

One of the weaknesses of the Trulia method is that it does not take into account changes in affordability based on interest rates. With our current 5% interest rates, price to rent ratios near 20 are close to rental parity.

A Fresh Look at Rent vs. Buy

"Why on Earth would you buy down here when you can rent?" asked a friend of mine in Miami Beach not long ago. "Buying is so over."

He promptly moved to Manhattan for work reasons–and bought a $1 million loft on the Upper West Side.

Note the typical behavior. People want to buy when prices are up, and turn more wary when they've collapsed. Logically it makes no sense.

Mathematically, it makes no sense either. The various strata of the market are spread out based on incomes and amounts borrowed. During the housing bubble, the low end increased in price because first-time homebuyers whose income could only afford a $200,000 were instead given a $500,000 mortgage. The added $300,000 pushed up all prices in the marketplace. The natural spread between the low end and the high end was maintained.

However, during the bust, the low end of the market has collapsed, and the high end has held up because lenders decided to let high-end borrowers squat. The result is a wide dispersion of market prices, far wider than what is normal. Market dynamics indicate that the substitution effect will restore the natural balance of prices by lowing prices at the high end. Since many high-end borrowers are delinquent on their loan payments, the only reason the high end has not collapsed so far is that the supply has been withheld by banks not approving short sales and not foreclosing on squatters.

Research out Thursday adds some hard numbers.

Real estate website Trulia.com has looked at major real estate markets across the country and asked: Is it cheaper to buy, or to rent?

By Trulia's math my friend was moving in exactly the wrong direction.

Rent in Manhattan: Home prices there are way too high, says Trulia. (Ditto San Francisco.)

Buy in Miami. And Phoenix. And Las Vegas. And most of the other places that have been flattened by the crash. Homes there are cheap compared to rents.

The cross-over point is about 15 times annual rent, the company believes. In other words, as a rough rule of thumb, homes are probably fairly valued in a city when they cost about 15 times a year's rent. So, for example, if you're paying $10,000 a year to rent a place, think twice about buying a home that costs more than $150,000. Dean Baker, economist at the Washington, D.C. think-tank The Center for Economic and Policy Research, came to a similar conclusion in research on the subject in recent years. Fifteen times is the historic average, he said.

With 5% interest rates, the crossover is closer to 20 than 15. I used to write often about a gross rent multiplier of 160 (I used monthly rent rather than yearly). As interest rates dropped to 5%, the 160 GRM increased to about 220, a number well above historic norms.

So what's the multiple in New York right now?

About 32 times, says Trulia. The average two-bedroom condo or townhouse in New York city costs about 32 times as much to buy as it does to rent. Other major markets over 20 times include Seattle (24 times), San Francisco (22 times) and Portland, Ore. (22 times).

On the other hand Miami list prices are now about eight times annual rents, says Trulia. Phoenix is about 10 times and Las Vegas about 11.

The most beaten down markets are where the best deals are to be had.

Trulia's data need to be taken with some caveats.

Trulia looked at list prices rather than actual transaction prices, so its figures for prices may be too high.

Furthermore drawing the cut-off point at 15 times rents may be on the low side.

Mr. Baker, in conversation yesterday, said that figure assumes that you're only going to stay in your home for the typical seven years. If you stay a lot longer, he says, the transaction costs of buying and selling become less and less important. That makes owning more attractive.

Nonetheless the Trulia analysis seems directionally correct. Work done by the C.E.P.R. last year came to similar conclusions: Namely that markets like New York and the California coast remained expensive compared to rents, while the hardest hit markets now look cheap.

And Trulia's research emphasizes two points that are absolutely spot on.

First, homeowners need to look first and hardest at present cashflow. The cult of homeownership made no sense. If renting is much cheaper than buying, think seriously about it.

Second: The markets that have fallen the furthest now look like good places to buy, while those that seem to be "safest" aren't. As the saying goes: There is no such thing as a "safe" investment, merely one whose risks are not yet apparent. It's a principle that a lot of people forget time and again.

Write to Brett Arends at brett.arends@wsj.com

When the spread between low-end and high-end prices becomes as extreme as it is now, market forces and the substitution effect will force this spread to tighten — either low-end prices must go up significantly or high-end prices must come down. Both scenarios suggest speculating at the high end is not a good idea.

Safe-haven speculation is kool aid intoxication

In The Great Housing Bubble, I described the three typical beliefs of a bubble:

  1. The expectation of future price increases.

  2. The belief that prices cannot fall.

  3. The worry that failure to buy now will result in permanent inability to obtain the asset.

The belief that prices cannot fall is the fallacy behind safe-haven speculation. This erroneous belief is supported by a host of other fallacies including:

  1. They Aren’t Making Any More Land

  2. Everyone Wants To Live Here

  3. Prices Are Supported By Fundamentals

  4. It Is Different This Time

Doesn't this all sound familiar? Long-time readers of the IHB used to see this nonsense frequently in 2007 when denial ruled the market. It disappeared for a couple of years, but it is resurfacing again. This is kool aid intoxication, a disease proven to be harmful to speculator's net worth.

Safe-haven buying is not true investment, it is speculation. It is purchasing property based on faith rather than math. It is following the herd rather than studying and analyzing financial performance. There is no logic to it, but there is the allure of emotional comfort from making the same mistake everyone else does. Everyone who bought in 2006 thought they were going to be rich following the herd. Most of them were slaughtered.

I wish the safe-haven argument were true

In case you didn't notice, the IHB also operates in the real estate sales market. Since most readers of this blog are interested in Irvine real estate, it would benefit my business greatly to embrace buying in Irvine as a safe haven. I don't for one simple reason: safe-haven speculating is foolish. Don't do it. It will cost you dearly.

If you want to buy in Irvine today, know the risks. Prices may go down further (they probably will), and the best case is tepid appreciation or an extended period of flat prices. With the low payments from 5% interest rates, many properties are affordable, but buyers may find themselves underwater while the distressed properties are pushed through the market and interest rates rise. Any buyers planning to buy should expect to stay put for at least five to seven years. If there is any chance of moving three years from now, would-be buyers should rent instead.

Air in the high end

Not many years ago, there was not much debt in the high-end market. Borrowers rarely took out loans over $1,000,000 partly because they were more difficult to qualify for and partly because you couldn't deduct amounts over $1,000,000. In neighborhoods with houses over $1,000,000, it was very unusual to see debt distress because there wasn't much debt used. People would buy into these exclusive neighborhoods with large amounts of cash. Not anymore.

Many nice tract-home neighborhoods became elevated to the $1,000,000 club by borrowed money. People used to sell their homes and port $500,000 in equity to buy a $1,100,000 home. During the housing bubble, they would borrow $2,000,000 with an Option ARM and push prices of homes up to the ridiculous prices we see today. The problem with this is simple: the debt buyers cannot be replaced with equity buyers. Some neighborhoods may survive, but the more debt a neighborhood has, the more it will fall — when lenders finally get around to pushing out the squatters.

  • Today's featured property was purchased near the peak on 10/16/2006 for $3,518,000. The owners used a $2,814,167 first mortgage, a $351,771 HELOC, and a $352,062 down payment. Think about that — these people only put about $350K of their own money in a $3.5M purchase.

  • On 12/8/2006 they obtained a HELOC for $356,078 to get access to their full down payment.

  • On 6/14/2007 they obtained a HELOC for $742,400.

  • Total property debt is $3,556,567

  • Total squatting time is at least 11 months.

Foreclosure Record

Recording Date: 04/06/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 09/24/2009

Document Type: Notice of Default

I recently published a list of about 60 properties with NODs filed where the debt is over $1,000,000. Who is going to buy all of these properties? If there were cash buyers to replace the deadbeats, don't you think the lenders would have foreclosed?

Irvine Home Address … 65 GRANDVIEW Irvine, CA 92603

Resale Home Price … $2,799,000

Home Purchase Price … $3,518,000

Home Purchase Date …. 10/16/2006

Net Gain (Loss) ………. $(886,940)

Percent Change ………. -20.4%

Annual Appreciation … -6.2%

Cost of Ownership

————————————————-

$2,799,000 ………. Asking Price

$559,800 ………. 20% Down Conventional

4.91% …………… Mortgage Interest Rate

$2,239,200 ………. 30-Year Mortgage

$573,637 ………. Income Requirement

$11,898 ………. Monthly Mortgage Payment

$2426 ………. Property Tax

$567 ………. Special Taxes and Levies (Mello Roos)

$233 ………. Homeowners Insurance

$395 ………. Homeowners Association Fees

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

$15,518 ………. Monthly Cash Outlays

-$1825 ………. Tax Savings (% of Interest and Property Tax)

-$2736 ………. Equity Hidden in Payment

$1061 ………. Lost Income to Down Payment (net of taxes)

$350 ………. Maintenance and Replacement Reserves

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

$12,368 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$27,990 ………. Furnishing and Move In @1%

$27,990 ………. Closing Costs @1%

$22,392 ………… Interest Points @1% of Loan

$559,800 ………. Down Payment

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

$638,172 ………. Total Cash Costs

$189,500 ………… Emergency Cash Reserves

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

$827,672 ………. Total Savings Needed

Property Details for 65 GRANDVIEW Irvine, CA 92603

——————————————————————————

Beds: 6

Baths: 6 full 1 part baths

Home size: 5,600 sq ft

($500 / sq ft)

Lot Size: 12,683 sq ft

Year Built: 2006

Days on Market: 34

Listing Updated: 40318

MLS Number: P734433

Property Type: Single Family, Residential

Community: Turtle Ridge

Tract: Lacm

——————————————————————————

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

Million $$ Views Luxury Estate – La Cima Model 1X on Single Loaded Street w Ocean/City Lights & Breathtaking Views * Welcome Entry Courtyard adjoints an Open Air Dining Loggia w Fireplace * 6 BR 6.5 BA + Hm Theater + Bonus Rm 4 Car Garage * Main Floor Master Suite * Complete Saparate Living Suite The Casita is a Private Oasis * 2nd Story Private Access to a spacious Living Rm w Open Kitchen * Super Launddry Rm * Lot of Custom upgrades.

Saparate? Launddry?

Does that description read like a $2,799,000 property?

How about this back yard?

California Millionaires: Debtors Who Service Over $1,000,000

An accepted Calfornia oxymoron is debt is equal to wealth. Today we take a special look at the lives of debt millionaires.

Irvine Home Address … 29 LOOKOUT Irvine, CA 92620

Resale Home Price …… $1,300,000

{book1}

Some boys kiss me, some boys hug me

I think they’re o.k.

If they don’t give me proper credit

I just walk away

They can beg and they can plead

But they can’t see the light, that’s right

’cause the boy with the cold hard cash

Is always mister right, ’cause we are

Living in a material world

And I am a material girl

You know that we are living in a material world

And I am a material girl

Madonna — Material Girl

Arriving Early

I have noticed that many in California believe the trappings of success are immediate. You get a job, and you lease the BMW. You get a $1,000 a year raise at work, you get an additional $10,000 credit line. You get married, and you borrow $1,000,000 and get your dream home. You have no need to save or wait, you can have it all now. You service the debt for your working life, and you obtain a reverse mortgage to retire on your boundless appreciation. Once you go into debt, you never, ever get out.

To "arrive" in life is to obtain every object of status you desire. Rich people arrive once they have saved enough money to pay cash for a few indulgences. High wage earners arrive once they can prove enough income to service a $1,000,000 debt.

Ponzis are changing the definition of a millionaire. In California debt equals wealth, so a millionaire is someone capable of obtaining and servicing a $1,000,000 debt. A million dollars in debt makes you rich.

I cannot fathom what is must be like to feed a beast that large. Right now the debt monster has a low 5% appetite, but what will those adjustable rate mortgages feel like when rates go up? To paraphrase and parody Irving Fisher, perhaps interest rates have reached what looks like a permanently low floor.

Irvine properties in default on $1,000,000+ mortgages

The following list of addresses are in default on mortgages over $1,000,000.

Address

Value

Loan Balance

SaleDate

Published Bid

59 GRANDVIEW $ 2,975,376 $ 3,350,000 6/9/2010 $ 3,542,938
65 GRANDVIEW $ 3,018,675 $ 3,556,567 5/28/2010 $ 3,351,639
1672 REYNOLDS AVE $ 1,924,306 $ 7,170,000 9/10/2010 $ 2,570,000
27 STARVIEW $ 2,149,100 $ 2,990,000 7/7/2010 $ 2,361,129
58 CEZANNE $ 1,339,060 $ 2,250,000 6/16/2010 $ 2,186,850
136 STARCREST $ 1,369,470 $ 3,900,000 7/19/2010 $ 2,119,577
31 VILLAGE WAY $ 1,842,061 $ 2,485,750 7/6/2010 $ 2,089,102
17801 CARTWRIGHT RD 250 $ 3,036,374 $ 3,487,500 6/10/2010 $ 1,981,419
8871 RESEARCH DR $ 2,788,321 $ 3,609,000 9/1/2010 $ 1,980,000
51 CEZANNE $ 1,549,068 $ 3,770,000 6/7/2010 $ 1,939,524
28 SYLVAN $ 1,739,418 $ 1,810,000 6/28/2010 $ 1,851,139
23 CLOUDS PT $ 1,617,945 $ 3,550,000 7/2/2010 $ 1,800,000
35 TRIPLE LEAF $ 1,128,734 $ 1,726,660 6/3/2010 $ 1,725,079
24 ROSE TRELLIS $ 1,212,019 $ 282,800 6/10/2010 $ 1,693,240
27 MOMENTO $ 1,794,521 $ 1,800,700 5/27/2010 $ 1,652,288
24 PISMO BCH $ 1,432,305 $ 1,700,000 5/27/2010 $ 1,644,278
23 SHADY LN $ 1,393,233 $ 1,990,000 7/28/2010 $ 1,600,000
33 TALL HEDGE $ 1,553,769 $ 2,836,709 6/3/2010 $ 1,563,247
29 ANTIQUE ROSE $ 1,127,091 $ 1,630,000 6/10/2010 $ 1,504,574
29 LILY POOL $ 1,218,079 $ 1,470,000 6/10/2010 $ 1,484,931
16500 ASTON $ 1,200,270 $ 2,916,000 8/13/2010 $ 1,458,000
11 GAVIOTA $ 1,520,671 $ 6,652,937 5/27/2010 $ 1,411,878
7 BUELLTON $ 1,179,546 $ 1,426,000 6/8/2010 $ 1,327,302
101 LATTICE $ 1,188,392 $ 1,104,000 6/10/2010 $ 1,322,836
24 TWIGGS $ 1,181,325 $ 1,529,800 6/1/2010 $ 1,301,968
3131 MICHELSON DR 1702 $ 1,276,361 $ 1,226,600 6/3/2010 $ 1,295,430
109 LATTICE $ 1,218,342 $ 1,282,500 5/28/2010 $ 1,270,512
20 ROSE TRELLIS $ 1,294,508 $ 1,883,023 6/16/2010 $ 1,267,500
24 ARBORWOOD $ 1,092,891 $ 1,428,000 6/18/2010 $ 1,228,000
22 FAITH $ 1,194,303 $ 2,650,000 6/4/2010 $ 1,223,705
40 DESERT WILLOW $ 964,519 $ 1,175,420 6/24/2010 $ 1,205,941
15 PASO ROBLES $ 1,219,922 $ 1,346,250 6/10/2010 $ 1,205,837
9 OLYMPUS $ 1,520,417 $ 1,200,000 7/10/2010 $ 1,200,000
103 RETREAT $ 1,200,302 $ 1,620,000 6/22/2010 $ 1,196,779
152 TAPESTRY $ 982,692 $ 956,250 6/14/2010 $ 1,183,656
23 WALNUT CRK $ 1,162,055 $ 1,247,467 6/9/2010 $ 1,153,285
39 CRIMSON ROSE $ 1,340,634 $ 1,760,000 6/2/2010 $ 1,089,990
28 CRIMSON ROSE $ 1,250,228 $ 1,530,000 5/27/2010 $ 1,088,739
147 TAPESTRY $ 1,183,862 $ 1,341,000 6/21/2010 $ 1,088,509
16480 BAKE PKWY $ 1,689,903 $ 1,946,700 6/30/2010 $ 1,081,500
5 BAYPORTE $ 1,060,316 $ 1,347,500 6/16/2010 $ 1,079,174
41 MOJAVE $ 1,248,973 $ 1,080,000 6/21/2010 $ 1,062,837
129 LATTICE $ 1,071,133 $ 1,000,000 6/10/2010 $ 1,062,797
29 LOOKOUT $ 1,248,257 $ 1,048,000 5/29/2010 $ 1,048,000
59 BAMBOO $ 857,115 $ 1,601,000 6/14/2010 $ 1,043,759
19 PETRIA $ 930,592 $ 1,080,000 6/7/2010 $ 1,034,881
8083 SCHOLARSHIP $ 1,313,197 $ 2,595,000 6/28/2010 $ 1,033,331
29 PASO ROBLES $ 1,395,677 $ 2,010,000 6/3/2010 $ 1,018,865
20 VILLAGER $ 1,018,786 $ 952,000 6/14/2010 $ 1,006,757
36 PRAIRIE $ 1,266,928 $ 1,401,486 6/22/2010 $ 1,000,000
20 TOPIARY $ 1,531,562 $ 1,704,347 7/29/2010 $ 999,950
12 GALAXY 24 $ 861,094 $ 1,062,000 6/11/2010 $ 988,749
20 BRIGADIER $ 1,824,777 $ 1,880,000 6/29/2010 $ 980,000
31 SHEPARD $ 1,148,118 $ 1,366,000 8/21/2010 $ 966,000
40 VACAVILLE $ 899,371 $ 1,289,880 7/16/2010 $ 960,000
13645 ALTON PKWY A $ 1,099,580 $ 2,047,000 5/27/2010 $ 899,679
18971 GLENMONT TER $ 1,064,859 $ 1,091,800 6/28/2010 $ 895,949
64 ROCKPORT $ 808,905 $ 1,026,000 6/2/2010 $ 872,698
2 HICKORY TREE LN $ 897,980 $ 1,102,900 6/10/2010 $ 863,428
5502 SIERRA ROJA RD $ 955,606 $ 1,375,250 6/2/2010 $ 818,490
6052 SIERRA SIENA RD $ 1,029,837 $ 1,000,800 6/10/2010 $ 801,982
46 WHITFORD $ 831,784 $ 1,016,000 7/24/2010 $ 791,000
17752 FITCH $ 2,752,146 $ 2,216,657 8/18/2010 $ 750,000
18 HIDDEN CRK $ 1,330,028 $ 1,911,641 7/20/2010 $ 200,000

This list barely scratches the surface on the problems stemming from the lack of a jumbo loan market. For example, only 6 homes in Irvine with an estimated value over the conforming limit of $729,750 went through foreclosure last month. There are 146 in pre-foreclosure or scheduled for auction. In Orange County, there are 2,046 in the foreclosure process over the conforming limit, and only 101 foreclosure sales.

Also, since banks know the jumbo market is hopeless, fewer of these homes have been served notice. The shadow inventory of squatters with huge loans is bigger than the banks are willing to face.

Shadow Inventory's Shadow

It isn't only the distress we see that feeds into the problems with housing. Visible inventory includes the properties on ForeclosureRadar.com on which there has been some filings. Shadow Inventory includes those properties where the owners are not making payments but the bank has not begun foreclosure proceedings. Shadow inventory's shadow includes all the Ponzis who are not currently behind on their mortgage payments but are completely dependant upon increasing debt in order to survive. The people in Shadow inventory's shadow living the life of a Ponzi will implode before this debacle is truly behind us.

Over the last few weeks, I have collected a few stories about Ponzis living in shadow inventory's shadow. The names and circumstances have been changed, but the essential facts of the following stories are true.

Property ladder to oblivion

One family lived in a 1,500 SF 3/2 in a comfortable area of Irvine. They HELOCed about $200,000 out of their property, but they still sold it in 2006 for a hefty profit and a check for $250,000 of remaining equity. They took this $250,000 and put it down on a $1,100,000 dream home. They now have an $800,000 interest-only mortgage. The husband is a sole breadwinner whose based salary is about $120,000 a year.

This family is treading water after borrowing 6.6 times their income. Unless or until house prices go back up and they are able to access HELOC money like they used to in their old house, they will not make it. In 2016, their $800,000 mortgage will amortize over 20 years, and their payment will go sky high. Of course, their plan is to refinance the $800,000 debt in 2016, probably with another interest-only loan. They cannot afford their house, but they pay the huge rent on money to stay there. They do not show up in statistics on shadow inventory, but they are doomed.

Baby on the way

One family bought a small home in a really expensive market in 2005. They put $100,000 down, and they have a $950,000 mortgage which is now underwater. The husbands job is secure, but the wife is pregnant and wants to quit work when the baby is born. She can't afford to. Because of their house loan, she must work to make ends meet. The HELOC money they were counting on to renovate the house and substitute for her wage income is not forthcoming. They are trapped and unhappy. They may not be doomed to lose the house, but keeping it is ruining their family life and future plans. They are very house poor.

Side business suffers

One family bought an ocean view property in 2004 for about $1,100,000. Two years later, they sink several hundred thousand into a renovation, and they refinance with a $1,400,000 Option ARM. The property would currently sell for about $1,000,000.

When they took out the Option ARM, the man had a base salary of $120,000 per year, and he was running a side business making about $100,000 — or so he said on his loan application. The side business dried up during the recession, so they have drained all savings and tapped their other credit lines to keep making the minimum payment on their Option ARM. The only way these people survive is another infusion of borrowed money or the side business coming back. Even then, their prospects are bleak. Their real hope was for the housing ATM machine.

I need that bonus

Many people spend like drunken sailors running up huge credit card bills and pay them off with yearly bonuses. Over the last two years, one family received no bonus which used to be almost 50% of the husbands take-home pay. The lack of a bonus did nothing to curb their spending. They are paying the bills on their $1,300,000 mansion, taking vacations, and generally continuing to spend in a conspicuous manner. So far they have managed on increasing credit card balances.

Perhaps they believe big bonuses are in the future, perhaps they think the housing ATM will save them, or perhaps they are simply committed to living as Ponzis until their creditors cut them off. Either way, it doesn't seem likely they will sustain ownership even when the bonus money comes in.

None of the people I described above appear on any measure of housing distress, but given their situations, most of them will not make in through the next five years in their homes. Financial distress will cause them to sell and move.

Who will take their place?

The Ponzis are far more common than frugal savers with huge down payments and high incomes. Heavy cash buyers are common in Irvine's market, not because there are so many of them, but because they are the only ones capable of paying our still inflated prices. Because there are more Ponzis than frugal replacements, there will be more Ponzi homes coming to market than the frugal buyers can absorb. Lenders know this. They are restricting inventory as long as they can hoping that somehow the Ponzis will get bailed out and the banks will have someone to sell their houses to. So far denial and inaction has worked out well for the banks — unless you count the loss of income from all those squatters….

Today's would-be millionaire couldn't cut it

The owner of today's featured property used his million dollar loan and a substantial down payment to acquire the property. Unfortunately, his reach exceeded his grasp.

Today's featured property was purchased on 11/16/2006 for $1,478,000. The first mortgage is $1,048,000 and the owner used a $430,000 down payment. The current asking price. would yield him about $180,000 out of the $430,000 he put down. I question whether he will get the asking price. Not much is selling at these price points.

Irvine Home Address … 29 LOOKOUT Irvine, CA 92620

Resale Home Price … $1,300,000

Home Purchase Price … $1,478,000

Home Purchase Date …. 11/16/2006

Net Gain (Loss) ………. $(256,000)

Percent Change ………. -12.0%

Annual Appreciation … -3.4%

Cost of Ownership

————————————————-

$1,300,000 ………. Asking Price

$260,000 ………. 20% Down Conventional

4.94% …………… Mortgage Interest Rate

$1,040,000 ………. 30-Year Mortgage

$267,342 ………. Income Requirement

$5,545 ………. Monthly Mortgage Payment

$1127 ………. Property Tax

$450 ………. Special Taxes and Levies (Mello Roos)

$108 ………. Homeowners Insurance

$105 ………. Homeowners Association Fees

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

$7,335 ………. Monthly Cash Outlays

-$1468 ………. Tax Savings (% of Interest and Property Tax)

-$1264 ………. Equity Hidden in Payment

$497 ………. Lost Income to Down Payment (net of taxes)

$163 ………. Maintenance and Replacement Reserves

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

$5,263 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$13,000 ………. Furnishing and Move In @1%

$13,000 ………. Closing Costs @1%

$10,400 ………… Interest Points @1% of Loan

$260,000 ………. Down Payment

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

$296,400 ………. Total Cash Costs

$80,600 ………… Emergency Cash Reserves

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

$377,000 ………. Total Savings Needed

Property Details for 29 LOOKOUT Irvine, CA 92620

——————————————————————————

Beds: 6

Baths: 6 full 1 part baths

Home size: 3,500 sq ft

($371 / sq ft)

Lot Size: 5,300 sq ft

Year Built: 2007

Days on Market: 16

Listing Updated: 40318

MLS Number: P734262

Property Type: Single Family, Residential

Community: Woodbury

Tract: Wdmf

——————————————————————————

3,500 sq2 house with 6 bedrooms, 6 1/2 baths, marble floor, granite countertop and island, fully landscaped and hardscaped, gorgeous conditions, more than $100,000 upgrade w/ backyard barbecue island for family entertainment.

Do you know anyone living in shadow inventory's shadow?

The California Economy Is Dependent Upon Ponzi Borrowers

After years of free HELOC money, our economy is not completely dependent upon Ponzi borrowers. Today's featured property was another spent by its owners who stimulated California's economy.

Irvine Home Address … 74 LINHAVEN Irvine, CA 92602

Resale Home Price …… $710,000

{book1}

It's like you're a drug

It's like you're a demon I can't face down

It's like I'm stuck

It's like I'm running from you all the time

And I know I let you have all the power

It's like the only company I seek is misery all around

It's like you're a leech

Sucking the life from me

Kelly Clarkson — Addicted

Californians are addicted to borrowed money. We are stuck waiting for lenders to make us feel powerful again. Borrowed money is a vice provided by lenders who suck the life blood from our economy.

Yesterday we explored what it means to be a Ponzi, and today, we are going to look at some of the ramifications of widespread Ponzi borrowing.

Ponzi borrowing and HELOC Abuse

Most people fail to budget properly for unexpected expenses or expenses that do not occur monthly. When these expenses occur, most will borrow the money, often on credit cards. During the year, this debt will accumulate like tooth plaque, and at the end of the year, many debtors hope for a work bonus or a tax refund to clean the debt from their balance sheets. Homeowners, particularly in California, would go to the housing ATM and add to their mortgage to pay for these un-budgeted expenses of daily life.

The sad reality is that this method of Ponzi borrowing can work as long as (1) the amounts added to the home mortgage are less than the sustained rate of appreciation and (2) if the payments are still affordable with wage income. During the housing bubble, many borrowed much more than the sustained rate of appreciation and took out every penny as it accumulated. With the steadily falling interest rates of the last 30 years and the profusion of toxic financing, affordable payments were seldom a problem. Therefore, many people have become accustomed to Ponzi borrowing on the home ATM, and that source of borrowing is shut down for a while — probably for a very long time.

Personal Ponzi Schemes

First, let's review how personal Ponzi Schemes work:

HELOC

Examine the graphic above. The first column shows a graphical breakdown of the income of a typical homeowner. Total home related debt (including taxes, insurance, HOA and other monthly expenses) is limited to 28% of gross income. Consumer debt including all other debt service payments is limited to 8%. Taxes take up about 24% (depending on income and tax bracket), and the remaining 40% is disposable income to cover the other expenses of daily life.

The second column shows what happens as people start to stretch to buy a home in a financial mania (charts are below). The increasing home debt reduces the tax burden a little, but the increased consumer spending and home debt takes a big chunk out of disposable income. The recession of the early 90s lingered for so long here in California because the people who bought in the frenzy of the late 1980s found themselves with crushing debts and greatly reduced disposable income. Prior to the increase in housing debt, this disposable income would have been spent in the local economy; instead, this money was sent out of state to the creditor who made the loan.

The big financial innovation—if you want to call it that—of the Great Housing Bubble was the nearly unrestricted use of cash-out refinancing and HELOCs to tap into home price appreciation. The third column shows the impact this new source of credit had on personal income statements. HELOC money allowed people to pay off their consumer debt while only modestly increasing their home debt. Since this income was untaxed (borrowed money is not truly income), the extracted money was entirely converted to disposable income. This incredible influx of disposable income caused our economy to explode.

Unfortunately, as is documented in the post Our HELOC Economy, the loss of this HELOC income is having devastating effects on local tax revenues and our economy. When you examine the personal income statements of borrowers in column four, you see that home debt and consumer debt have now become so burdensome that there is no longer enough disposable income to cover life’s basic needs; borrowers are insolvent.

The only solution to the problem of borrower insolvency is a monumental restructuring of both home and consumer debt. Realistically, the only way this is going to occur is through foreclosure and bankruptcy. We are not going to re-inflate this Ponzi Scheme because when sustainable loan terms are applied to real incomes, people cannot raise bids to sustain or inflate home prices—even with 4.5% interest rates. Without home price appreciation and subsequent HELOC borrowing, the Ponzi Scheme does not work.

The implications of this are clear; we are going to experience an extended recession bordering on depression here in California that is going to linger for many, many years. During this extended crisis, a significant percentage of California homeowners are going to face foreclosure and personal bankruptcy.

Lending to Ponzis

Lenders may loan to Ponzis for a time, but eventually the losses mount, and lenders realize their folly and stop making Ponzi loans. That is the market mechanism in place right now. The credit crunch was a direct result of lenders realizing they were making Ponzi loans and abruptly stopping.

The market-only solution to keeping lenders from making dumb loans is working for the most part. The US Government in cahoots with the Federal Reserve has completely taken over mortgage finance because they are the only entities willing to underwrite loans. Borrowers who try to get a jumbo loan, a HELOC or a stand-alone second right now are shocked at the qualification standards and the high interest rate spreads. The lack of a jumbo market is also why lenders are not foreclosing on anything above the $729,750 conforming limit and thereby allowing a great deal of squatting.

The problem with the market-only solution is that the mechanism that inflated the housing bubble is still in place, and the market will likely inflate another bubble once lenders believe they have no risk. Borrowers and owners would be delighted to see the lure of HELOC riches prompt a rally in prices. Lenders would also be delighted as they could sell their garbage into the rally. Without some basic reforms, our market will become very volatile as changes in credit availability take prices up and down. The ongoing turmoil and the capricious nature of winners and losers in the real estate market would be very unsettling just as it has over the last several years.

Ponzi borrowing and loan amortization

In Conservative House Financing – Part 1, I wrote about the basic loan types in mortgage finance:

There are 3 main categories of loans: Conventional, Interest-Only, and Negative Amortization. The distinction between these loans is how the amount of principal is impacted by monthly payments. A Conventional mortgage includes some amount of principal in the payment in order to repay the original loan amount. The greater the amount of principal repaid, the quicker the loan is paid off. An Interest-Only loan does just what it describes; it only pays the interest. This loan does not pay back any of the principal, but it at least “treads water” and does not fall behind. The Negative Amortization loan is one in which the full amount of interest is not paid with each payment, and the unpaid interest gets added to the principal balance. Each month, the borrower is increasing the debt.

A conventionally amortized mortgage loan pays off the principal over time — sometimes over a very long time. The best form of mortgage finance is the 15-year fixed-rate mortgage, but 30-year terms are common, and provide a reasonable balance between purchasing power and Time to Payoff. Japan experimented with 100-year loans as their housing bubble deflated. The marginal returns in the form of reduced payments get very small as the amortization length gets much over 30 years.

The interest-only loan is a Ponzi limit loan. This is the event horizon that leads to the singularity. Of course, the kool aid intoxicated think this loan is too conservative because it fails to capture and spend the inevitable and unending home price appreciation. The solution many fools employ is the interest-only loan in combination with a HELOC that can grow with appreciation. Once the cost of HELOC financing gets too high, the debt can be reconsolidated into a lower cost first mortgage or a stand-alone second. The trip to foreclosure and bankruptcy sounds very reasoned and reasonable, doesn't it?

The negative amortization loan (Option ARM) is the pinnacle of Ponzi financing. The Ponzi borrowing is directly built in to the loan itself. Borrowers are able to spend some of their appreciation each month through a payment subsidy built into the loan. Rather than combine an interest-only with a HELOC, the Option ARM indirectly builds the HELOC into it. As long as home prices go up faster than Option ARM loan balances, these loans successfully convert appreciation to income. Work of genius, when you think about it, except that the loan ignores the reality of Ponzi financing and the inevitable collapse that entails.

The larger impact of Ponzi borrowing

The cultural reliance on appreciation and Ponzi borrowing creates a number of disturbing conditions:

  1. Ponzis live a life of luxury that far exceeds their contribution, and responsible people pay for it.

  2. California's economy depends on borrowed money.

  3. The economic recovery depends on re-inflating the housing bubble and turning on the housing ATM.

  4. The collapse of the Ponzis will be a long-term drag on the economy.

Do you like paying the bills of the Ponzis? You are. If you are a responsible saver, the Federal Reserve has lowered interest rates to take money from you and give it to banks. If that form of theft is not enough, the Federal Reserve will keep interest rates low and steal from savers by devaluing the currency with inflation. One way or the other, the Federal Reserve is stealing from the responsible to pay for the irresponsible. If that wasn't enough, our own federal government is stealing from you with a variety of tax incentives and bogus loan modification programs to transfer the losses from banks to the taxpayer.

The dependency of California on Ponzi borrowing is evident. Our state budget is a Ponzi scheme imploding right now, but the real reason for the state budget problems isn't just Sacramento's inability to say no to special interest groups. The state budget is a wreck because tax revenues rely heavily on Ponzi borrowers spending borrowed money and circulating it through the economy.

How many people do you know that are borrowing from other sources until the housing ATM gets turned on? I will tackle this subject in more detail tomorrow, but for many Californians the end of the recession will not come when they find a job or get a raise, it will come when they get a new credit line or when house prices come back enough to allow them to get more HELOC money. Our state economy is on hold until HELOC money returns.

Since HELOC riches and ATM spending isn't coming back any time soon, our state economy will limp along with the Ponzis collapsing one at a time. With each Ponzi collapse, the money that used to go to debt service payments is freed up to circulate in the local economy. It is a slow and painful process, but weaning society off Ponzi borrowing is necessary to have a real economy based on wages and growth in productivity. Do any of you remember the lingering effects of the last bubble from 1993-1997? Unfortunately, we will probably take the short cut through Ponzi borrowing if given the chance.

Today's featured Ponzi borrower

  • Today's featured property was purchased on 11/13/1999 for $485,000. My records say the owners used a $502,000 first mortgage, but that is unlikely. It is more likely they used a $402,000 first mortgage and a $83,000 down payment.

  • On 5/13/2003 they opened a HELOC for $63,400

  • On 1/26/2004 they got a HELOC for $100,000.

  • On 2/1/2005 they refinanced with a $634,500 Option ARM with a 1% teaser rate.

  • On 3/23/2005 they obtained a $80,000 HELOC.

  • On 8/10/2005 they got a HELOC for $100,000.

  • On 11/3/2006 they refinanced with a $688,000 first mortgage and a $85,000 HELOC from Wells Fargo. Since Wells owns both mortgages, they are in no hurry to foreclose on this owner and wipe out their HELOC. Look for this property to be in the amend-pretend-extend dance forever.

  • Total property debt is $773,000.

  • Total mortgage equity withdrawal is $484,227 plus whatever down payment they put into the property.

  • Total squatting is at least 5 months.

Foreclosure Record

Recording Date: 04/15/2010

Document Type: Notice of Default

This couple spent almost half a million dollars in a four-year span. That is a one-family stimulus plan. If they were an isolated case, it may be a titillating story, but I have profiled hundreds of these here in Irvine. It is a widespread practice.

California implicitly endorses Ponzi finance

Since we have done nothing in California to reform mortgage finance, we are implicitly saying this is acceptable behavior. Apparently, we want people to do this. It stimulates the economy, and since the losses are passed on to investors around the world, California gets all of the benefit and endures only a fraction of the pain. And now that the US taxpayer is covering all future losses either through the GSEs or FHA, there is no reason at all for California to do anything other than inflate another housing bubble.

Truth be told, nobody in power to do anything in California sees HELOC abuse as a problem. It is spending. It stimulates the California economy, and fills the State's coffers with tax revenues. Few in Sacramento seem to care about the stability of the tax stream, so we will continue on this cycle of boom and bust completely dependent upon creditors. For all its economic prowess, California is the weakest state in the nation. Financially, everything here is an illusion.

What will happen to government entitlements and the individual entitlements of loan owners everywhere should lenders realize they are supporting a entire state of Ponzis? They might just cut us off.

I wish they would. California would be a much better place.

Irvine Home Address … 74 LINHAVEN Irvine, CA 92602

Resale Home Price … $710,000

Home Purchase Price … $485,000

Home Purchase Date …. 11/13/1999

Net Gain (Loss) ………. $182,400

Percent Change ………. 46.4%

Annual Appreciation … 4.3%

Cost of Ownership

————————————————-

$710,000 ………. Asking Price

$142,000 ………. 20% Down Conventional

4.94% …………… Mortgage Interest Rate

$568,000 ………. 30-Year Mortgage

$146,010 ………. Income Requirement

$3,028 ………. Monthly Mortgage Payment

$615 ………. Property Tax

$125 ………. Special Taxes and Levies (Mello Roos)

$59 ………. Homeowners Insurance

$200 ………. Homeowners Association Fees

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

$4,028 ………. Monthly Cash Outlays

-$738 ………. Tax Savings (% of Interest and Property Tax)

-$690 ………. Equity Hidden in Payment

$271 ………. Lost Income to Down Payment (net of taxes)

$89 ………. Maintenance and Replacement Reserves

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

$2,959 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$7,100 ………. Furnishing and Move In @1%

$7,100 ………. Closing Costs @1%

$5,680 ………… Interest Points @1% of Loan

$142,000 ………. Down Payment

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

$161,880 ………. Total Cash Costs

$45,300 ………… Emergency Cash Reserves

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

$207,180 ………. Total Savings Needed

Property Details for 74 LINHAVEN Irvine, CA 92602

——————————————————————————

Beds: 4

Baths: 2 full 1 part baths

Home size: 2,478 sq ft

($287 / sq ft)

Lot Size: 6,937 sq ft

Year Built: 1999

Days on Market: 14

Listing Updated: 40315

MLS Number: S616662

Property Type: Single Family, Residential

Community: West Irvine

Tract: Othr

——————————————————————————

This property is in backup or contingent offer status.

Highly upgraded home in West Irvine! Very private yard, extra long driveway, Granite countertops.

In case you missed it a few weeks ago, not all lenders are anxious to loan money to the Ponzis….

Nearly 500 Properties Are Currently Scheduled for Foreclosure Auction In Irvine

The MLS inventory is growing. The pre-foreclosure inventory is growing. And shadow inventory is growing. Will our spring rally fizzle out?

Irvine Home Address … 24 ROSE TRELLIS Irvine, CA 92603

Resale Home Price …… $1,900,000

{book1}

Give me no restrictions on what I do or say

Don't speak of tomorrow when it's still today

Leave me to my selfish ways, I'm well enough alone

That is what I tell myself as I stumble home

Derelict across the street in the garbage bin

Looks like he's found something neat judging by his grin

Such a long long way to go, hope I get there soon

Men At Work — No Restrictions

With the restricted inventory condition engineered by the banks, our market is not going to clear any time soon. They may be successful at holding up prices to some degree, but it will take a very long time to work off the overhanging inventory of distressed properties. As this process drags on, more Ponzis will flame out, and the distressed inventory will continue to grow. The housing bust is not over.

Only 650 on the MLS

About 650 homes are for sale on the MLS, and there very few properties in the foreclosure process currently for sale. Many of the short sales are in pre-foreclosure, but most of those in the foreclosure pipeline have already given up. They are squatting and waiting. The number of properties tied up in the foreclosure process exceeds our steadily increasing MLS inventory.

Pre-Foreclosure and Auction inventory continues to rise

According to ForeclosureRadar.com, visible inventory is as follows:

342 Pre-Foreclosure (NOD has been filed)

484 Auction (NOT has been filed)

826 Total Pre-foreclosure and Auction Properties.

Is 826 a big number?

In the last 30 days, the postponements have far exceeded the number of sales. There were 36 properties sold back to the bank, and 9 properties that were sold to third parties. That is 45 properties sold in one month out of an inventory of 826. At that rate of sales, it will take 18 months to clear the inventory.

Foreclosure inventory isn't like MLS inventory that needs three to six months supply available to make a market. Foreclosure inventory should be near zero. The total months to clear foreclosure inventory is usually less than one. The fact that we have over 800 properties in this visible inventory is troubling.

The homebuilders like the Irvine Company are taking advantage of the restricted inventory to sell new homes. As someone whose livelihood depends on the homebuilding industry, I think its great that sales are doing so well. As a consumer, I find it irritating that the reason homebuilding is coming back is because the inventory that should be available on the MLS is tied up by lenders who are allowing everyone to squat. It's really bad in Las Vegas where more than 1,000 new homes were built in a city with 9,000 empty ones.

At least 2,700 in Irvine shadow inventory

Bear in mind that none of these numbers capture the shadow inventory of those who are not paying their mortgage but the banks have not begun the foreclosure process. The latest report is that 8.4% of Orange County mortgage holders are delinquent on their payments. There are about 75,000 homes in Irvine and about 45,000 mortgages. If only 6% of those are delinquent, that amounts to 2,700 homes. If Irvine matches the 8.4% rate of Orange County, then 3,780 homeowners are delinquent The ratio of three to four houses in shadow inventory for each house in pre-foreclosure is about the same as national figures.

At the rate of distressed inventory sales of 45 per month, it will take 60 months to work off this inventory — and that is if we stopped adding to it today.

Eighteen months for visible inventory and sixty months for shadow inventory doesn't sound as bad as it really is because more properties will become distressed as this inventory is worked off. Many more borrowers that currently are not delinquent simply can't afford their homes. Large numbers of Ponzi borrowers are continuing to build their Ponzi debts. Most are resorting to credit cards right now waiting for the HELOC money to come back. It isn't going to. The long term ramifications of shutting down the home ATM is going to be more distressed properties and foreclosures as the Ponzis implode.

In the interim, we sit and wait.

Washington Mutual's Garbage

Below is a sample of one defunct lender's toxic waste. The first two properties account for over $10,000,000 in bad loans. Do you see why they are in no hurry to foreclose?

89 CANYON CRK 5/26/2010 $ 5,200,000 WASHINGTON MUTUAL BK FA
41 GOLDEN EAGLE 6/7/2010 $ 4,860,000 WASHINGTON MUTUAL BK FA
27 STARVIEW 7/7/2010 $ 2,240,000 WASHINGTON MUTUAL BK FA
8144 SCHOLARSHIP 6/2/2010 $ 1,674,282 WASHINGTON MUTUAL BK FA
11 GAVIOTA 5/27/2010 $ 1,260,000 WASHINGTON MUTUAL BK FA
3131 MICHELSON DR 1702 6/3/2010 $ 1,226,600 WASHINGTON MUTUAL BK FA
3141 MICHELSON DR 1402 5/27/2010 $ 1,000,000 WASHINGTON MUTUAL BK FA
28 CRIMSON ROSE 5/27/2010 $ 1,000,000 WASHINGTON MUTUAL BK FA
10 FIGARO 6/2/2010 $ 880,000 WASHINGTON MUTUAL BK FA
55 MIDNIGHT SKY 6/21/2010 $ 867,000 WASHINGTON MUTUAL BK FA
78 DOVECREST 5/28/2010 $ 815,000 WASHINGTON MUTUAL BK FA
61 DOVECREEK 6/28/2010 $ 760,000 WASHINGTON MUTUAL BK FA
26 DINUBA 6/10/2010 $ 744,000 WASHINGTON MUTUAL BK FA
89 LAMPLIGHTER 7/7/2010 $ 737,112 WASHINGTON MUTUAL BK FA
37 LAKEVIEW 54 5/21/2010 $ 682,500 WASHINGTON MUTUAL BK FA
6 CEDARSPRING 7/2/2010 $ 650,000 WASHINGTON MUTUAL BK FA
16 ARBORSIDE 5/25/2010 $ 643,700 WASHINGTON MUTUAL BK FA
2251 WATERMARKE PL 5/26/2010 $ 639,000 WASHINGTON MUTUAL BK FA
4911 KAREN ANN LN 6/2/2010 $ 638,250 WASHINGTON MUTUAL BK FA
196 WILD LILAC 6/14/2010 $ 608,000 WASHINGTON MUTUAL BK FA
4082 GERMAINDER WAY 6/18/2010 $ 594,000 WASHINGTON MUTUAL BK FA
14 SHENANDOAH 6/3/2010 $ 560,000 WASHINGTON MUTUAL BK FA
4056 WILLIWAW DR 6/3/2010 $ 550,000 WASHINGTON MUTUAL BK FA
17 MONTE CARLO 5/26/2010 $ 548,000 WASHINGTON MUTUAL BK FA
62 FRINGE TREE 6/17/2010 $ 536,750 WASHINGTON MUTUAL BK FA
35 WONDERLAND 5/26/2010 $ 534,000 WASHINGTON MUTUAL BK FA
4092 ESCUDERO DR 5/28/2010 $ 487,500 WASHINGTON MUTUAL BK FA
14 BLUEBELL 6/10/2010 $ 486,500 WASHINGTON MUTUAL BK FA
5 FASANO 6/7/2010 $ 420,000 WASHINGTON MUTUAL BK FA
4391 BERMUDA CIR 5/27/2010 $ 417,000 WASHINGTON MUTUAL BK FA
42 GILLMAN ST 6/7/2010 $ 416,500 WASHINGTON MUTUAL BK FA
14601 LOFTY ST 5/24/2010 $ 398,000 WASHINGTON MUTUAL BK FA
212 GREENMOOR 94 6/14/2010 $ 397,500 WASHINGTON MUTUAL BK FA
396 MONROE 190 5/24/2010 $ 390,000 WASHINGTON MUTUAL BK FA
132 OVAL RD 2 6/11/2010 $ 384,000 WASHINGTON MUTUAL BK FA
17 LAKEPINES 5/24/2010 $ 365,600 WASHINGTON MUTUAL BK FA
437 RIDGEWAY 5/24/2010 $ 315,000 WASHINGTON MUTUAL BK FA
10 LAKEPINES 5/20/2010 $ 286,780 WASHINGTON MUTUAL BK FA
87 ROCKWOOD 47 6/29/2010 $ 272,000 WASHINGTON MUTUAL BK FA
4 MAGELLAN AISLE 5/25/2010 $ 260,000 WASHINGTON MUTUAL BK FA
147 STREAMWOOD 6/21/2010 $ 200,240 WASHINGTON MUTUAL BK FA
406 ORANGE BLOSSOM 121 6/10/2010 $ 182,500 WASHINGTON MUTUAL BK FA

If any of you thought Irvine was immune, think again. All the households in the list above are squatters. Are any of your neighbors in there?

Prime mortgages going bust at an alarming rate

By KEVIN G. HALL

WASHINGTON — Aftershocks from the nation's financial crisis continue rumbling through the housing sector as fixed-rate mortgages held by the safest borrowers accounted for nearly 37 percent of new foreclosures during the first three months of this year, the Mortgage Bankers Association reported Wednesday.

Additionally, more than one in 10 homeowners were behind on their mortgage payments in the first quarter – a record, the association said. That's up from 9.47 percent in the last three months of 2009.

Prime loans, those made to the safest borrowers with the highest credit scores, account for almost 66 percent of outstanding U.S. mortgages, so their rising foreclosure numbers are troubling.

"People with higher scores are defaulting at rates we have not seen in the past," said Jay Brinkmann, the chief economist for the trade group.

I always get a kick out of industry insiders that act surprised. We have all known this problem was going to wipe out the alt-a and prime borrowers. It is only a matter of time.

If you have been paying attention to the news on delinquencies, for the last 3 years, this number has gotten worse month after month, and it shows no signs of peaking. Yet while the delinquency rates continues to climb, we get reports about declining default notices or declining foreclosure rates. Those rates become rather meaningless as long as the delinquency rate keeps climbing. The differential just adds to shadow inventory.

It is becoming obvious that shadow inventory is the only answer lenders have to the problem. They screw around with foreclosure statistics, and they allow a great deal of squatting. The result of their amend-pretend-extend is a restricted inventory condition supporting current pricing. I believe this is a cartel arrangement doomed to collapse. We will see.

The slide into foreclosure of the strongest borrowers is partly a function of the nation's unemployment rate, which is now 9.9 percent. The Great Recession has mowed down white-collar and blue-collar workers alike.

I would like to caution people against making a strong correlation between unemployment and delinquency. Unemployment is certainly making matters worse, but most of these people would have defaulted anyway in time. Unemployment simply accelerates the process.

The danger in this correlation is the false belief that an improvement in employment will bring about an improvement in the delinquency rate. It won't. Most delinquent borrowers couldn't afford their mortgages when they were fully employed. If they go back to full employment, they still won't be able to afford the mortgage.

In the first quarter, almost 21 percent of foreclosure starts were for adjustable-rate mortgages held by credit-worthy borrowers. Fixed and adjustable-rate prime mortgages combined accounted for more than 57 percent of all new foreclosures.

The MBA's data also showed that more than 6 percent of fixed-rated prime mortgages were delinquent from January to March and more than 13 percent of all homeowners with adjustable-rate prime mortgages were behind on payments.

California – the most populous state, which accounts for more than 13 percent of all U.S. mortgages – seems to have turned a corner in housing problems. It held 21 percent of all foreclosure starts during the first quarter of 2009 but only 14.5 percent in the first quarter of 2010.

Before we celebrate the improvement, consider what this statistic measures: the delinquency market share. California delinquencies are still rising, but other states are rising even faster. Our loss of delinquency market share isn't because borrowers here stopped going delinquent.

…One potentially troubling trend emerged: foreclosure starts rising in states that aren't commonly viewed as housing-bubble states. Washington state posted the largest increase in foreclosure starts overall in 2010's first quarter versus a year earlier, followed by Maryland, Oregon and Georgia. Washington state also posted the largest rise in foreclosure starts that involved prime and subprime adjustable-rate mortgages.

In another troubling trend, 42 states and the District of Colombia saw increased foreclosure starts for homes that were carrying FHA loans, which are considered among the safest. Only nine states, including Alaska and Idaho, saw foreclosure starts for FHA loans fall.

The rise in prime-mortgage foreclosures is important in the context of the sweeping revamp of financial regulation that's moving through Congress. Big financial institutions are trying to defeat a provision that would require them to retain 5 percent of the mortgages that they underwrite or sell into a secondary market to be packaged into mortgage bonds. They argue that they shouldn't have to do this for prime fixed-rate loans, but the latest data show that these loans aren't immune to delinquency and foreclosure.

Why would lenders resist a regulation to keep 5% of their mortgages in their portfolio unless they wanted to underwrite bad loans? The whole point of having a secondary market was to allow free movement of capital, not to allow banks to become origination machines with no responsibility, which seems to be what they want.

The data also suggest that the Obama administration's efforts to reverse the rate of delinquencies and foreclosures haven't been effective. The Treasury Department reported Monday that lenders or loan servicers had permanently modified only 68,000 mortgages in April, while more than 277,000 modification offers were canceled and presumed to be back on foreclosure tracks.

"It is jolting to see the persistence of the foreclosure epidemic," Michael Calhoun, the president of the Durham, N.C.-based Center for Responsible Lending, said in a statement.

It's only jolting to those who didn't expect this to go on so long. I have consistently maintained that loan modification programs have no chance of success other than to give borrowers false hope and get them to make a few more payments. The amend-pretend-extend policy has caused this crisis to drag on much longer than it should have.

HELOCs are a girl's best friend

Sometimes, I really wish I would have lied and levered myself into a $1,000,000+ home. The banks are not foreclosing on anyone over the conforming limit. Of the 36 properties that went back to the bank in Irvine over the last 30 days, only one of them was over $800,000 (it was a penthouse in the North Korea Towers). Of the nine properties that were sold to third parties, the most expensive was $700,000. The banks know there is no market outside of the GSEs and the FHA, so everyone who has defaulted on a jumbo loan is being allowed to squat.

The owner of today's featured property is like many other high-end Ponzis. She has taken enough money out of the walls to support an opulent lifestyle, and now she is squatting.

  • This property was purchased on 12/16/2004 for $1,293,000. The owner used a $969,650 first mortgage and a $323,350 down payment.

  • On 1/19/2005 she got a $129,000 HELOC.

  • On 7/19/2005 she refinanced with a $1,200,000 first mortgage.

  • On 9/28/2005 she opened a $195,000 HELOC.

  • On 5/1/2006 she obtained a $282,800 stand-alone second.

  • Then on 7/14/2006 she refinanced with a $1,499,900 Option ARM with a 1.85% teaser rate and a $189,000 HELOC.

  • Total property debt is $1,688,900.

  • Total mortgage equity withdrawal is $719,250.

  • Total squatting is at least 15 months.

Foreclosure Record

Recording Date: 08/31/2009

Document Type: Notice of Sale (aka Notice of Trustee's Sale)

Click here to get Foreclosure Report.

Foreclosure Record

Recording Date: 05/21/2009

Document Type: Notice of Default

You have to admire the thinking of these Ponzis. After extracting nearly three-quarters of a million dollars and squatting for more than a year, she lists the house at a WTF asking price hoping someone will step up and pay off her debts.

Any takers?

Irvine Home Address … 24 ROSE TRELLIS Irvine, CA 92603

Resale Home Price … $1,900,000

Home Purchase Price … $1,293,000

Home Purchase Date …. 12/16/2004

Net Gain (Loss) ………. $493,000

Percent Change ………. 46.9%

Annual Appreciation … 7.1%

Cost of Ownership

————————————————-

$1,900,000 ………. Asking Price

$380,000 ………. 20% Down Conventional

4.94% …………… Mortgage Interest Rate

$1,520,000 ………. 30-Year Mortgage

$390,731 ………. Income Requirement

$8,104 ………. Monthly Mortgage Payment

$1647 ………. Property Tax

$375 ………. Special Taxes and Levies (Mello Roos)

$158 ………. Homeowners Insurance

$410 ………. Homeowners Association Fees

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

$10,694 ………. Monthly Cash Outlays

-$1614 ………. Tax Savings (% of Interest and Property Tax)

-$1847 ………. Equity Hidden in Payment

$726 ………. Lost Income to Down Payment (net of taxes)

$238 ………. Maintenance and Replacement Reserves

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

$8,197 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$19,000 ………. Furnishing and Move In @1%

$19,000 ………. Closing Costs @1%

$15,200 ………… Interest Points @1% of Loan

$380,000 ………. Down Payment

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

$433,200 ………. Total Cash Costs

$125,600 ………… Emergency Cash Reserves

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

$558,800 ………. Total Savings Needed

Property Details for 24 ROSE TRELLIS Irvine, CA 92603

——————————————————————————

Beds: 3

Baths: 3 full 1 part baths

Home size: 2,650 sq ft

($717 / sq ft)

Lot Size: 6,139 sq ft

Year Built: 2004

Days on Market: 6

Listing Updated: 40316

MLS Number: S617693

Property Type: Single Family, Residential

Tract: Ledg

——————————————————————————

This home features a unique Casita with it's own entrance and it's own full bathroom. Custom Goumet kitchen along with custom hardscape and salt water pool.

The realtor couldn't spell gourmet properly….

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