Category Archives: Real Estate Analysis

Bankster Bailouts Did NOT Save Us from the Second Great Depression

It is a widely held belief that the bailout of the banking system prevented the second Great Depression. This belief is wrong.

Today's featured high-end property is scheduled for auction on April 28th. Will the short sale be approved in time?

Irvine Home Address … 7 BUELLTON Irvine, CA 92602

Resale Home Price …… $1,224,800

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Monday finds you like a bomb

That's been left ticking there too long

You're bleeding

Some days there's nothing left to learn

From the point of no return

You're leaving

Hey hey, I saved the world today

And everybody's happy now

The bad thing's gone away

And everybody's happy now

The good thing's here to stay

Please let it stay

Eurythmics — I Saved The World Today

Did our brilliant politicians and the cool heads at the Federal Reserve save the world? Popular public opinion says yes. Me and many other astute observors say no. The only thing our collective actions has accomplished is to stop a group of greedy and ignorant fools from experiencing the consequences of their actions. Instead, the consequences have been passed on to us in the form of huge government bailouts and locally inflated house prices.

Blame It on the Bubble

Dean Baker

Politicians and the media continue to refer to the economic downturn as being the result of a financial crisis. This is wrong. We have 15 million people out of work because the housing bubble that drove the economy since the last recession finally burst. The financial crisis may have been good entertainment for those who like to see huge banks collapse, but it was a sidebar. The real story was the rise and demise of the housing bubble.

Those who claim that the real problem was the financial system and its faulty regulation can be disproved with a single word: Spain. Spain is noteworthy because it now has an unemployment rate of more than 19%, the highest rate in any of the wealthy countries. Spain did not have a financial crisis. In fact, its well-regulated financial system is often held up as model for the United States.

Spain did have a horrific housing bubble. As a result, the share of construction in the economy rose from less than 8% of GDP at the end of the 90s to 12.3% in 2007. By comparison, it is typically less than 6% of GDP in non-bubble years in the United States. This rapid rate of construction led to enormous overbuilding, which meant that a collapse was inevitable with construction falling to far below normal levels.

The run-up in house prices also had the predictable effect on consumption. Because people believe that the run-up in house prices is based on fundamentals, homeowners assume that their newly created housing wealth is real and they spend accordingly. Spain's saving rate fell from just under 6% in 2000 to 3% in 2007. When the housing wealth created by the bubble disappeared people naturally cut back their consumption.

This is Spain's crisis. According to the IMF, housing starts in Spain fell by 80% from the peak of the boom. While total construction has not fallen as much (repairs and non-residential construction did not decline nearly as much), if construction in Spain fell by 50%, this would imply a loss in annual demand of more than 6% of GDP. That would translate into a drop in demand of more than $800bn in the United States.

Similarly the loss of housing wealth reverses the housing wealth effect. If consumption fell enough to return the savings rate to its pre-bubble level, then this would imply a loss in annual consumption demand of more than three percentage points of disposable income. In the US this would amount to more than $300bn in lost annual consumption.

There is no easy mechanism to replace more than $1tn in lost demand. This is why Spain's economy is in a severe slump right now. Note that just about all analysts agree, Spain's financial system was well regulated and it had none of the loony loans and outright corruption that pervades Wall Street and the US financial system. Yet, it is suffering from this economic downturn even more than the United States.

The moral of this story is that the problem is not first and foremost a financial crisis. It might be fun to watch the Wall Street and government boys sweat as they stay up late trying to keep the big banks from drowning in the cesspools they created. But this is all a sideshow. No one saved us from a "second Great Depression," they just saved the jobs and wealth of the Wall Street crew.

The economy's real problem is simply the loss of demand created by collapse of the bubble. Throwing even more money at the banks is a way to ensure that they don't suffer from the consequence of their own greed and stupidity. It is not a way to restore the economy to health.

Restoring the economy to health is about finding a replacement for the demand lost as a result of the collapse of the bubble. In the short-term, this means increased government spending and tax cuts. Deficits put money in the economy, and using the old-fashioned view that people work for money, we can determine how much money we need to spend for the government to get the economy back towards full employment levels of output.

In the longer term, we need to move towards more balanced trade, with higher exports and fewer imports making up for the demand lost due to collapse of the housing bubble. This will require a lower-valued dollar – everything else in the trade picture is just for show.

We do need financial reform. We have an incredibly wasteful and reckless financial industry. But bad financial regulation by itself did not give us 10% unemployment, nor would good regulation have been sufficient to prevent it. Just ask the workers in Spain.

I have profiled hundreds of cases of HELOC abuse (or use depending on your point of view). This was an enormous economic stimulus that is now gone, and it isn't coming back. Our current economic woes are largely caused by the loss of HELOC demand and the unemployment caused by laying off most of the building industry and much of the finance industry. We still don't know how to replace that demand. We probably won't.

Why did we bail out the banks? We could have wiped out all the equity and bond holders, recapitalized with taxpayer funds, then sold the public interest later. Sweden did this in the mid 90s, and it worked well. The only reason we did not do this is because the equity and bond holders like Goldman Sachs control our government and knew they could pass the losses off to us.

Carte Blanche for the Banksters

Mike Whitney: fergiewhitney@msn.com

Housing is still on the rocks and prices are headed lower. Master illusionist Ben Bernanke has managed to engineer a modest 7-month uptick in sales, but the fairydust is set to wear off later this month when the Fed stops purchasing mortgage-backed securities (MBS). When the program ends, long-term interest rates will creep higher and sales will begin to flag. The objective of Bernanke's $1.25 trillion quantitative easing program was to transfer the banks’ toxic assets onto the Fed's balance sheet. Having achieved that goal, Bernanke will now have to find a way to unload those same assets onto the public. Freddie and Fannie, which have already been used as a government-backed off-balance-sheet dumping ground, appear to be the most likely candidates.

Bernanke's liquidity injections have helped to buoy stock prices and stabilize housing, but the economy is still weak. There's just too much inventory and too few buyers. Now that the Fed is withdrawing its support, matters will only get worse.

Of course, that hasn't stopped the folks at Bloomberg News from cheerleading the "nascent" housing rebound. Here's a clip from Monday's column:

"The U.S. housing market is poised to withstand the removal of government and Federal Reserve stimulus programs and rebound later in the year, contributing to annual economic growth for the first time since 2006. Increases in jobs, credit and affordable homes will help offset the end of the Fed’s purchases of mortgage-backed securities this month and the expiration of a federal homebuyer tax credit in April. ‘The underlying trend is turning positive,’ said Bruce Kasman, chief economist at JPMorgan Chase & Co. in New York."

Just for the record; there have been no "increases in jobs". Unemployment is stuck at 9.7 percent with underemployment checking in at 16.8 percent. There's no chance of housing rebound until payrolls start to rise. Jobless people cannot afford to buy homes.

I discussed the lag between the peak in unemployment and the bottom of house prices in UCLA Anderson Forecast 2010 with a chart from Calculated Risk:

The lag is caused by the foreclosure excess from the bubble that preceeded the recession. House prices really could turn up in 2010 if we were not facing a five-year overhang of foreclosures and distressed property owners who will sell at breakeven when given the chance.

Also, while it is true that the federal homebuyer tax credit did cause a spike in home purchases its effect has been short-lived and sales are gradually returning to normal. It's generally believed that "cash for clunker-type" programs (like the homebuyer tax credit) merely move demand forward and have no meaningful long-term impact.

So, it's likely that housing prices — particularly on the higher end — will continue to fall until they return to their historic trend. (probably 10 to 15 per cent lower) That means more trouble for the banks which are already using all kinds of accounting flim-flam ("mark-to-fiction") to conceal the wretched condition of their balance sheets. Despite the surge in stock prices, the banks are drowning in the losses from their non-performing loans and toxic assets. At the same time, they're about to get hit by the next wave of Option ARMs and Alt-As resets which will require another $1 trillion in financing.

I enjoy writers with a clear grasp of the situation.

So, let's summarize:

1–Bank bailout #1–$700 billion TARP which allowed the banks to continue operations after the repo and secondary markets froze-over from the putrid loans the banks were peddling to credulous investors.

2–Bank bailout #2–$1.25 trillion Quantitative Easing program which transferred banks toxic assets onto Fed's balance sheet (soon to be dumped on Fannie and Freddie) while rewarding the perpetrators of the biggest financial crackup in history.

3–Bank bailout #3–$1 trillion (or more) to cover all mortgage cramdowns, second liens, as well as any future liabilities including gym fees, energy drinks, double-tall nonfat mocha's, parking meters etc. ad infinitum. Basically, carte blanche for the banksters.

And as far as the banks taking "haircuts"? Forget about it! Banks don't take "haircuts". It looks bad on their quarterly reports and cuts into their bonuses. Taxpayers take haircuts, not banksters. Besides, that's what Geithner gets paid for–to make sure bigshot tycoons don't have to pay for their mistakes or bother with the niggling details of fleecing the little people.

It is hard to argue with the author's conclusions about the behavior of our government and the banksters. We have bailed them out and in the process provided them with the money to lobby and fight any real financial reform that might cut into their profits.

We have created moral hazard. Lenders know they can take unlimited risks an we will absorb the losses.

We are pwned. Our leaders have failed us.

“Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves.” — Andrew Jackson

Featured Property

This property was purchased on 4/17/2006 for $1,580,000. The owner used a $1,000,000 first mortgage, a $580,000 down payment, and simultaneously opened a $422,000 HELOC which probably wasn't used as purchase money (there is no way to be sure).

On 1/16/2007 the owners refinanced the first mortgage for $1,268,000 and opened a stand-alone second for $158,000.

Total property debt is $1,426,000

Foreclosure Record

Recording Date: 10/27/2009

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

Click here to get Foreclosure Report.

Foreclosure Record

Recording Date: 07/22/2009

Document Type: Notice of Default

The owners must feel good about the refinance that pulled their cash out of the property. They are stil going to lose $150,000 to $200,000, but they are passing much of the loss on to the lender.

Gazumping Short Sales

Have you heard the term gazumping? According to Wikipedia,

"Gazumping" is to refuse to formalise a property sale agreement at the last minute usually in order to accept a higher offer.

This phenomenon is not common here in the United States as it is in England because our purchase and sale agreements are binding; however, gazumping is alive and well in today's market with short sales and trustee sales.

Most short sales go to auction. When they do, all short sale offers are void because the previous owner is no longer in control of the property. Now that we can help people transact in the trustee market, we can gazump short sale offers. If you are in a back-up position — or even primary for that matter — if you want to ensure you get the property, you should be sending us to the aution just to make sure.

Irvine Home Address … 7 BUELLTON Irvine, CA 92602

Resale Home Price … $1,224,800

Home Purchase Price … $1,580,000

Home Purchase Date …. 4/17/2006

Net Gain (Loss) ………. $(428,688)

Percent Change ………. -22.5%

Annual Appreciation … -6.3%

Cost of Ownership

————————————————-

$1,224,800 ………. Asking Price

$244,960 ………. 20% Down Conventional

5.11% …………… Mortgage Interest Rate

$979,840 ………. 30-Year Mortgage

$256,792 ………. Income Requirement

$5,326 ………. Monthly Mortgage Payment

$1061 ………. Property Tax

$333 ………. Special Taxes and Levies (Mello Roos)

$102 ………. Homeowners Insurance

$145 ………. Homeowners Association Fees

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

$6,968 ………. Monthly Cash Outlays

-$1466 ………. Tax Savings (% of Interest and Property Tax)

-$1154 ………. Equity Hidden in Payment

$491 ………. Lost Income to Down Payment (net of taxes)

$153 ………. Maintenance and Replacement Reserves

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

$4,993 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$12,248 ………. Furnishing and Move In @1%

$12,248 ………. Closing Costs @1%

$9,798 ………… Interest Points @1% of Loan

$244,960 ………. Down Payment

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

$279,254 ………. Total Cash Costs

$76,500 ………… Emergency Cash Reserves

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

$355,754 ………. Total Savings Needed

Property Details for 7 BUELLTON Irvine, CA 92602

——————————————————————————

Beds: 5

Baths: 3 full 1 part baths

Home size: 3,627 sq ft

($338 / sq ft)

Lot Size: 7,617 sq ft

Year Built: 2002

Days on Market: 271

MLS Number: S580023

Property Type: Single Family, Residential

Community: Northpark

Tract: Hunt

——————————————————————————

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

Excellent interior deep cul-de-sac location, huge pool size lot, impressive curb appeal with flagstone/brick walkway, main floor bedroom/bath plus den/office, elegant entry w/cathedral ceiling/travertine floor, formal living/dining rooms w/wrought iron, gourmet kitchen w/sit-up center island, granite countertops, upgraded cabinets w/glass display, stainless appliance package, five burner cooktop, butler's pantry w/dual wine compartments, work desk, fireplace w/custom mantel, built-in media center, surround sound, decorator paint, crown moulding, shutters, ceiling fans, high baseboards, inside laundry w/sink, master suite extends to lavish bath w/travertine floor, separate shower, deep oval soaking tub w/marble surround, twin china sinks, individual vanity, professionally designed front/backyards w/patio cover, built-in counter space, fountain, garage w/epoxy floor, resort life-style amenities: pools, parks, spas,meandering greenbelts, clubhouse, tennis/sports courts

/w is annoying. Reading through slashes is very difficult.

Prior to decorating this house, the owners must have taken a trip to Italy and toured the great Italian Villas and the Sistine Chapel.

Can you picture Michelangelo lying on his back on a scaffold painting this ceiling?

Do you like the view of the grounds of your Italian Villa?

I like this property. I think that means I have no taste….

The Bernanke Put: The Implied Protection of Mortgage Interest Rates

The Federal Reserve under Ben Bernanke is continuing the policy of fostering moral hazard through implied guarantees. The Bernanke Put applies not just to the stock market, but directly to the home mortgage market as well.

Today's featured property is a delusional flipper lowering price to find the market.

Irvine Home Address … 14512 LARCH Irvine, CA 92606

Resale Home Price …… $775,000

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You don't tug on Superman's cape

You don't spit into the wind

You don't pull the mask of the old Lone Ranger

And you don't mess around with Jim

Jim Croce — You Don't Mess Around With Jim

Maybe that song should be, "You Don't Mess Around with Ben." Arguably, Ben Bernanke is a powerful man in Washington because decisions he makes have major impact on citizen's lives. His most consequential recent decisions concern the Federal Reserve's program of buying agency debt and what under what circumstances the program would be continued.

Analyst: Pressure Will Build on Fed To Extend Mortgage Program

By Nick Timiraos

With the Federal Reserve set to wind down its purchases of mortgage-backed securities in a little more than 30 days, there’s growing uncertainty about what will happen to mortgage rates. Already, rates bumped up last week after the Fed said it would raise the discount rate by quarter point to 0.75% last Thursday.

But the elephant in the room is the Fed’s planned exit from the mortgage market, and analysts expect rates to rise by anywhere from a quarter-point to a full percentage point or more. Bob Eisenbeis, the chief economist at Cumberland Advisors, has a provocative commentary piece on Wednesday morning arguing that there’s a growing chance that the Fed will have to come back to buy mortgage-backed securities because of ongoing concerns over the fragility of the housing market. Two indicators out Wednesday morning underscore that softness: the MBA reported that loan applications for home purchases was at a 12-year-low last week, and new home sales plunged 11.2% in January.

“What we expect is that toward the end of the first quarter political pressure on the Fed will increase from both [Fannie and Freddie] and Congress to temporarily extend the program because of the concern about hurting a still struggling housing and mortgage markets,” Mr. Eisenbeis writes. “But if this fails to persuade the FOMC to change its mind, the program stops, and interest rates jump up significantly, then the Fed itself will decide that the risks of another downturn are too great, and the program will be restarted. In either case, the most likely outcome is that there will be some form of extension of the MBS purchase program.”

In testimony on Wednesday, Federal Reserve Chairman Ben Bernanke said that while they anticipate ending the purchase program by the end of March, the Fed “will continue to evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets.” The statement seems to leave open the possibility for an extension.

Leave open the possibility? Does anyone believe the government will exit the mortgage market on schedule? Will they exit at all? Leaving open the possibility is implicit backing to markets. The Federal Reserve will intervene if problems become too big.

What is the threshold of the Bernanke Put?

So what would it take to have the Federal Reserve restart buying agency paper again? Some analysts have suggested that current interest rates a full point below market value due to market manipulation. An increase of one percentage point would reduce future loan balances by 10% and take prices down commensurately.

&ampamp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;ampamp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;nbsp;

My guess is that the Federal Reserve will not permit interest rates from moving 100 basis points or 1% from current levels, and they will maintain this 1% backstop over the next several years. Interest rates will be allowed to rise during this time, but only in proportion to increasing incomes so that house price levels are maintained.

Don't spit into the wind.

Basically, the Fed determined further price declines would wipe out the remnant capital in our banking system; therefore artificially low interest rates — a necessity to support artificially high prices — will remain in place to prevent significant future price declines. You can't fight City Hall. With an unlimited balance sheet an a direct financial conduit to the housing market through the conservatorship of the GSEs, our government in cooperation with the Fed can make financing available and inexpensive and inflate a housing bubble as large as they wish.

Will this policy be effective? I have my doubts, particularly at the high end where denial rules and high-end house sellers lower their sights only when they must, and anyone selling mansion can expect to wait 3 years. Supply is also artificially low due to the lack of discretionary sellers and an abundance of shadow inventory and unlisted foreclosures. The instability of the cartel should result in slowly declining prices, but anything is possible.

If Fed policy is successful, prices will behave like the ice scenario for the post Fire and Ice:

How fast can interest rates rise?

In the post Real Estate's Lost Decade we explored how quickly interest rates could rise if wage growth compensated for the lost borrowing power, and the results are in the chart below:

As you can see, interest rates can only rise about 35 basis points (0.35%) per year or prices will fall.

Calculating the Bernanke Put

Using the above chart as a basis and adjusting for actual performance, I developed the chart below. Mortgage interest rates from 2006-2009 are actual, and the maximum allowable increase to hold pricing is projected from 2010-2018. Further, if we assume 1% is a reasonable buffer from point-in-time interest rates, the red line in the drawing represents the interest rate threshold where I believe the Federal Reserve would step in and begin buying agency debt once more.

If mortgage interest rates rise above the red line, house prices will drop significantly, and both the Federal Reserve and the US taxpayer will absorb significant losses on the numerous loans they have purchased and insured over the last few years; therefore, the Federal Reserve will hold mortgage interest rates below the red line with the Bernanke Put.

Central banking puts and moral hazard

The discussion above reflects what I believe to be the most likely course of action for the Federal Reserve with respect to its purchase of agency debt to support the housing market. This wrongheaded policy will foster greater levels of moral hazard. How many idiotic bulls have you encountered that base their bullishness on the unprecedented level of government intervention in the markets? How much speculation is occurring due to buyer's beliefs in perpetual government supports? How is that a good thing?

Irvine Home Address … 14512 LARCH Irvine, CA 92606

Home Purchase Price … $570,200

Home Purchase Date …. 11/18/2009

Net Gain (Loss) ………. $158,300

Percent Change ………. 35.9%

Annual Appreciation … 95.7%

Cost of Ownership

————————————————-

$775,000 ………. Asking Price

$155,000 ………. 20% Down Conventional

5.12% …………… Mortgage Interest Rate

$620,000 ………. 30-Year Mortgage

$162,671 ………. Income Requirement

$3,374 ………. Monthly Mortgage Payment

$672 ………. Property Tax

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

$65 ………. Homeowners Insurance

$75 ………. Homeowners Association Fees

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

$4,185 ………. Monthly Cash Outlays

-$829 ………. Tax Savings (% of Interest and Property Tax)

-$729 ………. Equity Hidden in Payment

$312 ………. Lost Income to Down Payment (net of taxes)

$97 ………. Maintenance and Replacement Reserves

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

$3,036 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————–

$7,750 ………. Furnishing and Move In @1%

$7,750 ………. Closing Costs @1%

$6,200 ………… Interest Points

$155,000 ………. Down Payment

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

$176,700 ………. Total Cash Costs

$46,500 ………… Emergency Cash Reserves

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

$223,200 ………. Total Savings Needed

Property Details for 14512 LARCH Irvine, CA 92606

——————————————————————————–

4 Beds

3 full 1 part baths Baths

2,700 sq ft Home Size

($287 / sq ft)

5,005 sq ft Lot Size

Year Built 1971

47 Days on Market

MLS Number S601097

Single Family, Residential Property Type

Walnut Community

Tract Cp

——————————————————————————–

GORGEOUS HOME IN HIGHLY SOUGHT AFTER AND DESIRABLE NEIGHBORHOOD OF COLLEGE PARK. GREAT CUL-DE-SAC LOCATION AND VERY QUIET; DOWNSTAIRS BEDROOM WITH FULL BATH; MASTER BEDROOM W/ RETREAT; NEWLY AND TASTEFULLY REMODELED. OPEN FLOORPLAN WITH HUGE LIVING ROOM WITH FIREPLACE AND FAMILY ROOM WITH CUSTOM BUILT-IN WET BAR AND ENTERTAINMENT CENTER; CUSTOM OFFICE; SPACIOUS KITCHEN WITH ISLAND AND NEW APPLIANCES AND GRANITE COUNTERTOPS; NEW FLOORS THROUGHOUT; NEW INTERIOR AND EXTERIOR PAINT; NEW RECESSED LIGHTING; NEW EPOXY COATING FLOORING; LARGE MASTER SUITE; TURN-KEY AND READY TO MOVE IN

HIGHLY SOUGHT AFTER AND DESIRABLE? Is that redundant and repeated?

Property History for 14512 LARCH

Date	Price
Feb 19, 2010	$775,000
Jan 22, 2010	$785,000
Jan 14, 2010	$810,000
Jan 09, 2010	$835,000

$835,000? WTF? At $775,000 it is still too high for OMG. This flipper is holding out for a 35% gain. Good luck with that.

The Unceremonious Fall from Entitlement

Many cling to lifestyles of the Great Housing Bubble unable to accept reality of living within the confines of their wage income. Today we examine the inevitable and ignominious fall from entitlement.

80 FAIRLAKE 21 Irvine, CA 92614 kitchen

Irvine Home Address … 80 FAIRLAKE 21 Irvine, CA 92614

Resale Home Price …… $1,200,000

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Frozen in a timeless gaze

Nothing left, you fall from grace

What's the point in killing time

Waiting for your time to die

Leave the lies for yesterday

Sick – sick – fall from grace

Venom – Fall From Grace

The Great Housing Bubble cultivated a gentility of entitlement, a sordid societal residue, a system of reliance, a conviction among people that they may possess anything they wish just because; deserving without earning; Grace.

Divine acceptance is given; whereas, worldly possessions are earned — a basic truth lost through possessory entitlement. Few construct and contribute to the greater good, and many expect easy money from lenders, Governments, housing and stock markets or free-money Ponzi Schemes. We are impaired by our lender's failure and our Government's response to the crisis our lenders created; a wound that lingers as a festering sore no bailout balm can remedy.

The emotional fall from Grace has barely begun. The amend-pretend-extend dance will continue until lenders tire of paying the piper. Shadow Inventory contains the new entitlement class; while unemployed renters sleep in shelters, unemployed homeowners squat in luxury, sustain false lives on lender largess, and exalt their status in preparation for the unceremonious fall from entitlement.

The Unceremonious Fall from Entitlement

When famous people fall, it makes news, but when plebs fall, no notice is given; no ritual is performed. The silent souls quietly abandon their perceived privilege while the raucous proles forcefully defend their binding birthright through procedural delays and faithlessly modified promises. In the end, all fall to the support of their own resources and suffer to the degree they resist reshaping their lives to reflect reality.

We witness this fall as HELOC abuse posts, short sales and Trustee Sales. Like forensic examiners, we follow clues in the property records looking for what methods were used and what motivated homeowners to borrow and spend their family homes. This work is consequential because unless we see conditions for what they are, unless we see people's defective reasoning and overriding emotional gambits for what they are, we may fall victim to the same Siren's Song.

Who will fall, and how much will they suffer?

Suffering is a spiritual concept; suffering is a negative judgment of experience exacerbated by attachment, delusion and aversion. Suffering and attachment directly relate; each soul suffers in proportion to the attachments formed to objects, people, beliefs and ideas, or anything the mind's grasping can't bear to lose or give up. Are you aware of your own suffering?

Homedebtor suffering directly relates to their over-indebtedness and HELOC dependency; each suffers in direct proportion to (1) their debt-to-income ratio, (2) the magnitude to which they consistently outspend their wage income, (3) and the extent to which they must have that which they must lose. Rapid appreciation and HELOC spending to supplement lifestyle is not coming back, and all who hold their breath will give up, pass out or walk away. In the interim, they suffer. Quietly and anonymously they hatch fantasies of golden geese and high-flying home prices not to be.

Profiles in Entitlement

Prosaic descriptions of entitlement provides a skeletal structure, but to put meat on the bones we must examine the stories of individuals and families caught up in the compulsion for kool aid. I have profiled dozens of HELOC abuse posts over the years, and each one tells a story of greed and foolishness. If you want a deeper understanding of the motivations of various profiles in HELOC abuse, I recently encapsulated this phenomenon in the post HELOC Abuse Grading System.

The profiles selected each illustrate an aspect of consumer entitlement directly opposed to (1) wealth creation and accumulation or (2) personal responsibility and strength. The names and details have been changed or omitted to spare the guilty gratuitous embarrassment; I seek not to punish but to enlighten and inform.

Borrowing is weak

Dependency is weak, and borrowing is dependency; therefore, borrowing is weak. This simple deductive argument speaks to an oft-ignored truth; borrowing is weak. Saving and borrowing are dualistic opposites like strength and weakness, slavery and freedom.

The inescapable truth greets each debtor the moment their lender says "no." If a saver and a borrower each want something, the saver is in complete control of a purchase decision, whereas the borrower is utterly dependent upon lender approval. Have you ever been standing in line and watched someone's credit card be denied payment? Did the wouldbe purchaser seem strong and powerful to you? Did you cringe with embarrassment? I have — from both sides of the interaction.

The aging socialite

A reader emailed me about the property that became the post HELOC abuse Hollywood Style. The property was purchased in the early 70s in Hollywood for about $150,000. The property was owned by a frugal couple that paid down their debts. The husband died in the late 90s leaving the wife with a beautiful and historic property with millions in equity.

I can imagine the husband's state-of-mind and heart on his deathbed; he knew he provided well for his family, and although his wife might outlive him for quite some time, he was leaving her comfortably and securely set up for life. The inner peace he felt is something I covet for my own death. So should we all.

If there is an afterlife, and if we have the ability to look in on loved ones after we pass, I hope for this man's spirit that he resisted the temptation and rests in peace. Watching his wife either through foolish choices or bad advice spend the family fortune and be forced to abandon the family home — a home that had millions in equity at the moment of death — watching that from afar with no ability to intervene is more akin to hell than to heaven.

For the widow, she must move out of her stately mansion, destitute and alone with only memories of her life of entitlement and glamour to comfort her, or torture her, as she lives out her life in relative obscurity after her unceremonious fall from entitlement. Hopefully for her, California's social entitlement will survive to provide a minimal level of support.

The spendthrift landlord

Entitlement isn't always over the top, sometimes it is just flippant; a thoughtless attitude toward spending where people just obtain any object of desire at any time for any cost — and doing it like a big shot who is above it all.

A friend of mine (whom I am overdue to meet for coffee) told me this story of his now former landlord, a flippant spender quickly approaching his day of reckoning.

The owner had three properties; the one my friend rented was his original property purchased in the mid 90s for about $150,000, and a few months after my friend moved in, the owner received a Notice of Default on his $650,000 Option ARM. It turns out the owner used that money to buy another investment property and a $2,000,000+ Coto mansion at the peak in 2006. Based on the property records, we surmised he was facing about a $40,000 monthly nut on properties deeply underwater and precipitously declining in value.

What always struck my frugal friend was the cavalier attitude the owner had toward spending. The landlord would stop ~~buy~~ by in his pimped out truck, brag about decadent spending, and promise to fix items and fail to follow through. It was obvious that discretionary consumer spending took priority over other financial obligations including mortgages. Where is this guy's next cash infusion going to come from? What lender wants to pour grease down that gutter?

Outspending the Joneses

Truly successful and abundant people are unconcerned with impressing the neighbors or keeping-up-with-the-Joneses. Most inwardly flourishing people live joyous lives and keep a low profile because real wealth prefers anonymity to ostentation. However, the spiritually impoverished elevate themselves above others and seek to elicit jealousy. The jealous procure a fleeting power; addicted to the soul-drain of another, the jealous seek an endless charade of consumerism and comparison, and they pine for those ephemeral emotional payoffs when the jealous believe other people want what they have.

The compulsion toward jealousy leads some to recklessness as we witnessed in Ashes to Ashes; Dust to Dust where one family took out and spent $865,500, or in The Ultimate Post where the family absconded with $1,090,000 in lender money. Somebody has to be the trend setter, someone has to be the Joneses everyone else is keeping up with. When the Joneses are freebasing on lender crack, they set a very, very high bar. With no truly wealthy people spending such prodigious amounts, the Joneses actually surpass the spending of the wealthy they ostensibly emulate.

Is this wise behavior we should all imitate? Is the pleasure of spending and jealousy worth losing the family home? Carpe Diem?

The inconceivable owner

I remember a comment years ago from a married woman in her early 30s who could not conceive a scenario where she would not be owning a house in two years at most. WTF? Entitlement demanded she be housed in the property of her choosing in 18 to 24 months, and no matter the means or the outcome, it was going to happen. Let me provide images of her — absent a home — for her deficient imagination:

She could realize she cannot afford a home — not likely, but at least possible. Kudos if she does.

Her husband may realize she cannot afford the home and say no — not likely, unless he has a spine. Ditto above if he does.

Her family may not be given access to sufficient lender funds to obtain the property she feels entitled to, which means a lender has determined she cannot afford a home — a very likely outcome in the aftermath of the bubble. And wisely so as lenders just lost a trillion dollars lending too much.

It never occurred to this woman that the enablers of her entitlement may choose not to enable it further. Some lender may reveal her entitlement to be an illusion created in her own mind. Also, it never occurred to her that having the object she is entitled to could cause so much pain. Nobody who purchased in 2006 who has a rational understanding of the situation is rejoicing their good fortune.

The sophisticated financial manager

In the heyday of securitization, paper-pushers were tieing up any available, consistent cashflow and providing the owners with a huge, one-time infusion of cash. It was Enron accounting applied on an unprecedented scale. Emulating corporate titans, individuals embarked on personal Ponzi-Style finance and sought ways to liberate their equity for more productive and more indulgent pursuits. The money-changers eagerly embraced this new sophistication among the proletariat, which has come to view debt as something serviced rather than retired, something maximized rather than minimized, something chic rather than shunned.

The most egregious example I found was HELOC Abuse Laguna Beach Style where the owner took out over $5,000,000 in mortgage equity withdrawal. What did he do with that money? Was he saving a business? Was he partying and having a good time? Several not-so-astutely observed nothing wrong with the owner's behavior, as it was between the borrower and the lender. That sounds very reasonable until the lender looks to you and me to pay the loss.

In the recent post, Will Government Exit the Mortgage Market on Schedule? The property owner relayed the following open message:

“This gentleman makes a lot of assumptions – some of which are correct, and some of which are not. My business is largely about buying low, selling high, and utilizing equity to drive cash flow. The property has been a rental for 11 years. There are better opportunities, so I am selling to purchase some all cash deals. Good investors will use HELOC’s, but in this case there is nothing utilized on the 2nd. The other important aspect is to drive the total cost of your debt down among all the investments that you own – that is why this has been refinanced. Other properties are held all cash. Just funny how he interprets without all the data.”

I replied to the intermediary:

As for his statements about financial management, I think he is crazy, but if he feels good about it, good for him. He implies he took great care with the management of his cost of debt, but appears he was not as successful in managing the total amount of debt since the amount obviously ballooned out of control. Based on what he owes he is not going to net much cash out of this deal, and the only thing he really accomplishes is getting out from under the debt, which is a good thing. He extracted his cash and now he moves on. I don’t see where this improves his wealth much.

Why do people borrow themselves to oblivion? Because they can! Lenders enable this foolishness because they are siphoning borrower cashflow; lenders would prefer lifelong addiction, but if a few flame out, so be it. As long as wouldbe borrowers view this foolishness as reasonable, responsible and refined, it will continue. Crazy!

California's social entitlements and obligations

No discussion of entitlement is complete without discussing Our HELOC Economy. California's debt rating is among the worst of sovereign entities. Lenders simply don't believe in our willingness to raise taxes or cut spending to balance our budget. We are borrowing in the belief that tax revenues will return to bubble levels, and they won't. We are broke, and we are over borrowing because we want to maintain our entitlements.

I don't know what form it will take and who will get cut, but we will come crashing down to the level of support our economy sustains. It may be bond vigilantes making our debt so expensive we are cut off from borrowing. It may be a wise and concerted efforts among politicians to reign in our budget through thoughtful cuts and painful but necessary tax increases… (giggles to self). Or it may be that the economy replaces mortgage equity withdrawal with real productive output and State revenues improve… (not likely, but such denial is current status quo). Start watching California bond yields for signs of our upcoming political crisis.

Status and Entitlement

In the post The Grand Illusion, I discussed the pursuit of status:

Status is an internal perception about what people believe other people think about them. It has nothing to do with what other people actually do think about them (as if that mattered anyway).

For instance, I think the women on the The Real Housewives of Orange County are soulless gold-diggers. My derision is only eclipsed by my disrespect for the way they live, what they believe, and what they represent. However, they think I, and everyone else who knows them through the show, believes they are something special, something to envy as if they really have it "going on." They have status. Not because people regard them highly, but because they think people do. But I digress…

For people who don't have the internal strength to base their self worth on what they believe about themselves, they end up basing their self worth on their perceptions of what other people think about them. Once they have given their power away to others in this manner, people will expend tremendous amounts of time, energy and money in a vain attempt to influence other people — hence we have fancy cars, opulent houses, designer clothing, and all the other trappings of conspicuous consumption. In my opinion, this is a sickness (their mind control fails on me.) It is a consuming disease which fed on the borrowed money made available during the housing/credit bubble.

The Real Housewives of Orange County as form of entertainment sickens me as it appeals either to pure schadenfreude or ignorant emulation. Most watch and feel superior — how could you not — but some actually watch looking for role models or a how-to manual for being pretentious — a ghastly side effect our sons and daughters pay with their souls.

As you might imagine, I don't watch much TV, and I will probably not watch Thursday night's episode; however, if you feel like an overdose of schadenfreude, you can tune in and watch one pretending family endure the unceremonious fall from entitlement. Apparently, one family has been moving from one entitled situation to another, failing to pay any of their bills, and now they are facing eviction with cameras voyeuristically capturing the ceremonious, theatrical and educational fall.

80 FAIRLAKE 21 Irvine, CA 92614 front

Irvine Home Address … 80 FAIRLAKE 21 Irvine, CA 92614

Resale Home Price … $1,200,000

Income Requirement ……. $249,888

Downpayment Needed … $240,000

20% Down Conventional

Home Purchase Price … $460,000

Home Purchase Date …. 4/29/1994

Net Gain (Loss) ………. $668,000

Percent Change ………. 160.9%

Annual Appreciation … 6.2%

Mortgage Interest Rate ………. 5.05%

Monthly Mortgage Payment … $5,183

Monthly Cash Outlays …..….… $7,100

Monthly Cost of Ownership … $5,160

Property Details for 80 FAIRLAKE 21 Irvine, CA 92614

Beds 3

Baths 2 full 1 part baths

Home Size 2,320 sq ft

($517 / sq ft)

Lot Size n/a

Year Built 1984

Days on Market 12

Listing Updated 2/4/2010

MLS Number S603569

Property Type Condominium, Residential

Community Woodbridge

Tract Lk

One of a kind! Exquisite lakefront home with breathtaking 180 degree lakeview! Lakeview from almost everywhere. Owner spent $150K for numerous upgrades: Travertine flooring, Marble faced fireplace, Wood shutters, Custom paint,Custom leaded glass windows, Granite kitchen countertop, Beautiful kitchen cabinets, Stainless steel appliances, Granite tops in all bathrooms, Spa/tub in master bath, Recessed lightings, Mirrored closet doors & much more. Vaulted ceilings, Large masterbed with area for office, Breakfast nook, Inside laundry room, Large patio to enjoy the living on the lake.

Are there any rules of capitalization that realtors follow? It just seems random to me. "Wood shutters, Custom paint,Custom leaded glass windows" Why are any of those words capitalized? Is the writer treating commas like periods and capitalizing the first word after each one?

The British know how to joke about entitlement:

Foreclosure 101: Mechanics of a Trustee Sale

Today we conclude the three-part series, Foreclosure 101, with a look at the details of a Trustee Sale and a high-end Irvine property defying financial gravity.

1 SHADOW Gln Irvine, CA 92620 kitchen

Irvine Home Address … 1 SHADOW Gln Irvine, CA 92620
Resale Home Price …… $1,389,900

{book1}

I get up, and nothing gets me down.
You got it tough. I’ve seen the toughest around.
And I know, baby, just how you feel.
You’ve got to roll with the punches to get to what’s real

Oh can’t you see me standing here,
I’ve got my back against the record machine
I ain’t the worst that you’ve seen.
Oh can’t you see what I mean ?

Might as well jump. Jump !
Might as well jump.
Go ahead, jump. Jump !
Go ahead, jump.

Jump — Van Halen

The auction atmosphere of a Trustee Sale with its immediacy and permanence is not for the indecisive. Buyers need to be ready to jump when the deals are available, and these deals do exist prompting many to don wings and parachutes and take their chances.

This is the final installment of the Foreclosure 101 series which includes:

Foreclosure 101: Vesting Title

Foreclosure 101: Non-Judicial Foreclosure

Foreclosure 101: Mechanics of a Trustee Sale

Why Trustee Sales?

Most buy at Trustee Sales to make or save money. When compared to resale properties, Trustee Sales are generally discounted between 10% and 20% and sometimes the discounts are even greater. The first post in this series featured a property being flipped for a 25% gain, a significant profit for taking risks and trapping cash for a few months. However, flipping for profit is not the only reason to consider this market.

My disdain for flippers is apparent, but my ire is not spread evenly. Flippers who buy at auction provide necessary liquidity in a market isolated from lender financing, and flippers who renovate properties (even with pergraniteel) add tangible value; however, the flippers who annoy me are the ones who trade stucco boxes without making improvements or adding value as they merely drive up prices for families.

The problem is “how can families take advantage of this situation and save the flipper profit?” Families who have enough cash to purchase a property without financing at a Trustee Sale are missing a major opportunity to either (1) save money, or (2) buy from inventory unavailable to financed buyers. It isn’t always about the discount as simply having “first dibs” is big advantage, the fact that it is discounted to resale is a bonus.

So why don’t more buyers purchase at Trustee Sales?

Trustee Sale Risks and Limitations

The purchase of real estate at a Trustee Sale is inherently more
speculative, complicated, and risky than purchase by conventional
means. The above-average risk is due to such considerations as
potential title problems, the possibility of unknown liens, unpaid property taxes, delayed
holding periods, unknown property condition prior to purchase,
potential acts of vandalism, unforeseen governmental intervention, etc. Overcoming these obstacles requires a major investment of time and brainpower making Trustee
Sales suitable for buyers who can invest the time and effort and who will not be economically
devastated should they lose their entire investment. The major risks and limitations are as follows:

Cash Only: Trustee Sales allow cash bids only — Buyers will need to bring cashier’s checks for the full amount of the purchase to the sale.

Selection: A property fitting a Buyer’s property parameters and price range may not be scheduled for a Trustee Sale in a reasonable time.

No Inspection: Buyer will not be able to view the inside of the
property prior to the sale unless the property is actively listed in
the Multiple Listing Service, or in the unusual case where the current
owner allows access. The property is acquired “as is” which may include undetectable
physical damage.

No Insurance: Buyers can’t purchase title insurance at the sale and protect against unrecorded mechanic’s liens or judgment liens against the owner. This is rare, but it does happen, and the buyer is liable for these claims against the property.

No Remorse: The Sale is final – there is no recourse for buyers with remorse.

Unannounced Postponements and Late Cancellations: Most Trustee Sales are postponed at least once, and many are postponed numerous times, sometimes for a period of several weeks or months. If the Sale is postponed, the postponement may not be announced until buyer attends the scheduled sale, unused cashier’s checks in hand. Some owners are able to sell or refinance their properties at the last minute, cancelling the Trustee Sale altogether.

High Opening Bids: Most or all properties fitting Buyer’s criteria may
be over encumbered, and the published opening bids are often higher
than the property’s market value. The foreclosing lender has the option
of starting the bidding at less than market value, and they may not
decide whether or not to do so until the auctioneer begins to call the
Sale.

Competition: There will often be competing bidders at the Sale, and some will bid above the property’s market value.

When you think about it, the reason for the price discount is due to the combined effect of the factors listed above; prices need to be under resale to compensate buyers for the risks and unknowns. The more risks and unknowns, the greater the discount. In the post High End Auction Properties Abound I profiled the only property currently on the MLS scheduled for auction over the next several weeks. Assuming the property sells at the Trustee Sale, it will probably not be discounted as much from resale value as another property full of unknowns.

Trustee Sale Research

Most buyers when considering a Trustee Sale immediately run into a deficit of information. These properties are most often not on the MLS, and without MLS access to find basic information, to pull comps to estimate value or to locate old pictures, buyers have no way to conduct basic property research. This information barrier dissuades all but the most determined.

At a minimum, buyers need to determine the following:

Detailed description of Property

Property tax information (tax rate, Mello Roos status, etc.)

Basic Home Owners Association information, if any

Recent market comparable sales

Recent comparable foreclosure sales, if any

Updated Trustee Sale Status (confirmation of current Sale date, published bid, etc.)

In addition to the basics, most buyers will also want to know:

Title -all persons currently vested on title, or previously vested at any time as of or since the acquisition of the Property.

Liens – all Trust Deeds and all other liens currently encumbering Property, and an analysis of their effect or standing, if any, at or following the Sale

Property Tax Status – total property taxes owed against the property, if any, including current taxes, delinquent taxes, and penalties

Final Analysis – an estimate of the total amount that will still be owed on the Property, if any, following purchase at the Sale.

Since it is not possible to get Title Insurance at closing, a buyer is advised to obtain a title report on the property and the owner because judgment liens survive foreclosure. This does not protect the buyer from unrecorded mechanics liens.

The research list is long, and it may take several days, many phone calls, and out-of-pocket costs for title reports and other data. Given the difficulties of doing proper research and ignorance to what research is required, many buyers either take unnecessary risks by failing to do the proper research, or they give up on the idea and go back to shopping in the easier resale market.

Preparing for Trustee Sale

To prepare for a Trustee Sale, a buyer has three important tasks: (1) determine vesting, (2) establish a maximum bid amount, and (3) obtain Cashier’s checks in the amount of the maximum bid. We covered vesting in Foreclosure 101: Vesting Title. The buyer must give this information to the Trustee if a sale is successful.

Trustees like Cashier’s Checks, mostly because the buyer cannot stop payment after the sale. A buyer could attend the sale with a single Cashier’s check and wait for the Trustee to refund the difference. However, with a little effort, it is relatively easy to obtain a number of checks in various increments to cover bid amounts less than the maximum.

The best method for obtaining checks is to decide on your minimum increment and obtain checks starting with the initial increment and doubling in value with each successive check. For instance, a buyer would get Cashier’s checks for $1,000, $2,000, $4,000, $8,000, and so on until the negotiating range is covered, and then one remainder check brings the balance up to the total. The bidder on a $600,000 property who wanted to start bidding at $500,000 would obtain checks for $1,000, $2,000, $4,000, $8,000, $16,000, $32,000, $64,000, and $473,000. Some combination of those checks will cover every $1,000 increment between $473,000 and $600,000 allowing the bidder to leave the Trustee with only the amount of the winning bid.

The Cashier’s checks should be made out to the buyer, not the Trustee. If there is a sale, the buyer merely endorses the checks and gives them to the Trustee. If there is no sale, the buyer can either hold the checks for the next auction or redeposit them. There is no way for the money to be lost or stolen as the buyer is the only one who can cash the checks.

What happens at auction?

At the appointed time and place, a Trustee will call a public auction. The Trustee announces the property and asks the assembled if any wish to bid on the property. One at a time, the Trustee will meet privately with each bidder who must show the Trustee their Cashier’s checks to verify the amount held. The Trustee will not permit any bidder from exceeding the total of the Cashier’s checks on their person — nobody is “good for it.”

Once each bidder has shown the Trustee their money, the Trustee will call out the opening bid from the first mortgage holder. This is a pregnant moment because the advertised opening bids often do not match the actual opening bids, and even after all the preparation, a lender may come in and vastly overpay for the property because their loss mitigation procedures demand it. Lenders who underestimated the amount owed sometimes increase their advertised opening bid, but often, lenders drop their opening bid to avoid obtaining more REO.

Most buyers give up after attending a few postponed auctions. It takes half a day or more away from work or other responsibilities to attend a sale, and most busy people do not have the time. It is possible to go to only one auction and get a dream property at a 25% discount, but the more common scenario is for people to go to half a dozen auctions and obtain nothing.

In today’s market, dropped bids are the opportunities that bring third-parties to auctions. Assuming the first lien holder’s opening bid is less than the maximum price a third-party buyer is willing to pay, the auction begins. In an open outcry system, bidders verbally announce their bids and the Trustee acknowledges the highest bidder. There is no minimum increment to increase a bid, which leads to the rather tedious process of two bidders outbidding one another with small increments until one of them reaches their walkaway point. In fact, one of the major frustrations for many Trustee Buyers is the fact that they often get outbid by a single dollar, such is the nature of auctions.

If a buyer is the highest bidder, the Trustee takes the buyer’s vesting information and Cashier’s checks. In return, the Trustee gives the buyer a receipt at the sale. The buyer does not obtain the Trustee’s Deed at the auction.

Getting the Trustee’s Deed

The Trustee usually mails the Trustee’s Deed to the buyer within days of the sale; however, there is no legal timeframe the Trustee must adhere to. In contrast, the owner has 15 days to record the Trustee’s Deed in order to be considered the owner as of 8:00 AM the day of the Trustee Sale, otherwise ownership begins the day of recordation. The day of legal ownership is important because if a lien appears after the Trustee Sale but before recordation, the buyer can be liable, or at a minimum, have to deal with getting an invalid lien off the title of his new property. It is a rare occurrence, but the problem is best avoided by timely recordation.

Taking Equitable Title (possession)

Taking possession of a vacant house only requires the buyer to show up with a locksmith. If the house is not vacant, taking possession is more complex. The simplest solution is for the buyer to approach the occupants and offer them money to leave: cash for keys. Many holdover tenants, including the previous owners, are happy to get some money to cover the costs of moving out. Obviously, getting occupants to leave voluntarily is better for all concerned.

In situations where the holdover tenants are not cooperative, the new owner will need to employ the services of an eviction attorney to remove the occupants, and there are situations where renters do not have to leave due to local ordinances that protect renters. The rental contract itself is extinguished at the foreclosure sale, so renters cannot stay for the duration of their lease, and the new owner is not required to repay any security deposits. The exception to this is where the lease pre-dates the foreclosing lien – in this case the buyer takes title subject to the terms of the lease.

Is it worth it?

Buying at Trustee Sale is time consuming with (1) property research, (2) attending auctions and (3) following up to take possession, and the sale is fraught with risk, but for those who make the effort, saving what can amount to a year’s salary or more is very tempting, particularly when the resale market is likely to show further weakness. Buying at auction today puts an owner in a property well below rental parity, and likely below the resale bottom.

Ideal Home Brokers Trustee Sale Service

If you are interested in learning how you can become active in the Trustee Sale market, review Ideal Home Brokers Trustee Sale Service or contact us at sales@idealhomebrokers.com.

1 SHADOW Gln Irvine, CA 92620 kitchen

Irvine Home Address … 1 SHADOW Gln Irvine, CA 92620

Resale Home Price … $1,389,900

Income Requirement ……. $293,719
Downpayment Needed … $277,980
20% Down Conventional

Home Purchase Price … $1,470,000
Home Purchase Date …. 9/26/2006

Net Gain (Loss) ………. $(163,494)
Percent Change ………. -5.4%
Annual Appreciation … -1.6%

Mortgage Interest Rate ………. 5.18%
Monthly Mortgage Payment … $6,092
Monthly Cash Outlays ………… $7,790
Monthly Cost of Ownership … $5,570

Property Details for 1 SHADOW Gln Irvine, CA 92620

Beds 4
Baths 2 full 2 part baths
Home Size 3,800 sq ft
($366 / sq ft)
Lot Size 8,282 sq ft
Year Built 1998
Days on Market 1
Listing Updated 1/13/2010
MLS Number S601505
Property Type Single Family, Residential
Community Northwood
Tract Cris

Absolutely gorgeous inside and outside. Oversized lot on a cul-de-sac. Dramatic open floorplan with high ceilings and spiral staircase. Formal living room and separate dining room with vaulted ceilings and custom fireplace. Gourmet oversized kitchen open to family room and breakfast nook. Spacious family room with fireplace and custom built-ins. Den downstairs used as media room. Open loft perfect for home office or play area. Large master suite with large master bath and walk in closet. Tastefully upgraded with stone floors, custom paint, shutters, neutral carpeting and more. Oversized lot with new built-in pool and spa. Minutes from parks, schools, tennis courts shopping and freeways. Walk to Canyon View Elementary and Northwood High.

Irvine Housing Blog No Kool Aid

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

Foreclosure 101: Vesting Title

Today is the first in a three-day series on the foreclosure process. We will look at the legal aspects of home ownership and peek at a Northpark flip.

103 TERRA BELLA Irvine, CA 92602 kitchen

Irvine Home Address … 103 TERRA BELLA Irvine, CA 92602
Resale Home Price …… $449,000

{book1}

It’s mine it’s mine it’s mine
I can do whatever ever
I can do whatever ever

Give me lots of toys
So it don’t matter to me
This property belongs to me
And only me, let me break it down baby

It’s mine
I can give it if I want it
It’s mine
It don’t matter if they want it
I can give it to them
I can take it back (back)
It don’t matter ’cause I got it like that

It’s Mine — Girlicious

Ownership is primal. The first two words children learn in any language are “no” and “mine.” People have an deep intuition of what is theirs and what is not. Emotionally, It’s Mine defines ownership; in the real world, it is not so black and white.

When people own real estate, what they really “own” is a bundle of property rights. What rights are the bundle, and how are these rights held? Today, I want to take a step back and review real estate law and outline property rights and vesting title. As I recently took the excellent Broker’s review course from Real Estate Trainers, much of the legalese comes from their study manual.

Foreclosure 101: Vesting Title

Foreclosure 101: Non-Judicial Foreclosure

Foreclosure 101: Mechanics of a Trustee Sale

Who or what is an Owner?

The Owner of Real Property can be (1) an individual owning in his or her own name; (2) a group owning together either as Community Property, Tenants in Common, or Joint Tenants; (3) an entity such as an LLC or a Corporation, (4) or a living trust.

Many people hold unshared title in their own name, and it is not limited to singles as many married owners in California are listed as either a man or a woman owning as “sole and separate property.” This distinction is important in a Community Property state like California where it is assumed that husband and wife act as a family unit with ownership apportioned equally between the two parties. In instances of inherited wealth, prenuptial agreements, or other business dealings, spouses often buy and sell property in their own name; however, these separations are tenuous in a marriage, and in hostile divorces, sole and separate can be anything but.

Tenants in Common is the most common form of multi-party ownership other than Community Property. Each Tenant in Common can dispose of their share of ownership as they see fit including passing it to descendants upon death. This stands in contrast to Joint Tenants where the death of one tenant causes their share of ownership to pass automatically to the other. Joint Tenancy is more common as a form of spousal ownership in states without Community Property laws.

Investors and others hoping to limit liability and remain somewhat anonymous often buy and sell real estate through special entities. These entities have the legal status of individuals capable of entering into contracts including owning real estate. There are advantages and disadvantages of using entities, and anyone considering doing so should consult an attorney and a tax advisor.

Another way people hold title is through a living trust. The trust itself holds title just as an individual or entity would, the main feature of living trusts, which make them a desirable method of holding real estate, is that property can transfer upon death directly to the heirs avoiding probate.

{book4}

What does an Owner Own?

An owner, to the exclusion of all others, has a bundle of rights: possess, use, sell, enter, give away, lease, encumber, dispose, exclude or, do nothing subject to governmental powers and claims of others, and the owner may dispose of the whole bundle or any one of these rights at any time. Ownership can be held in a number of ways known as Estates, of particular interest to us is the perpetual Freehold Estate; it has no termination date and no party to accept ownership after reversion as does the Less-Than-Freehold estate known as a lease.

Most homeowners possess a Freehold Estate known as a Fee Simple Estate or Fee Simple Absolute where the owner holds title without any qualifications. In my description of property rights above, I mention ownership is subject to claims of others, the most common being the mortgage encumbrance. Owners whose properties are encumbered by Trust Deed (similar to mortgage) also signed a Promissory Note with a lender stating they will pay back borrowed funds according with terms and conditions described in the Note. These owners still possess a Fee Simple Estate, but the mortgage lien is such an onerous encumbrance that an argument can be made that lenders are owners, and owners are money renters.

Trustee sale occurs because borrowers, for whatever reason, are not meeting their financial obligations. A process is set in motion when borrowers default leading often to a change in ownership either through (1) market sale, (2) short sale, (3) deed-in-lieu (legal abandonment) or (4) trustee sale.

Mortgage or Deed of Trust?

The legal system of Mortgages and Promissory Notes identifies the parties to the transaction and establishes rights and responsibilities. There are two basic systems from managing the complexities: Mortgage or Trust Deed. In California as in some other states, we have a Trust Deed system, but since it is the more complicated of the two, I will address the Mortgage system first.

The Mortgage system is simple; the borrower signs a Promissory Note and issues a Mortgage to the lender. The borrower is the Mortgagor, and the lender is the Mortgagee. The borrower still holds title, and if the lender desires to force foreclosure auction, they must petition in court as any other litigant would. I can only imagine the court system backlog in Florida where this system is in place. In reality, in the Mortgage system, all foreclosures become judicial foreclosures because they move through the judiciary, but the term Judicial Foreclosure has special meaning and entails obtaining a judgment against the borrower (a topic for tomorrow).

Courts are ill-equipped to handle several hundred thousand mortgage actions. What is ordinarily a rare occurrence courts can easily handle can become a crisis, and the Trust Deed system avoids the court backlogs.

In a Trust Deed system, a neutral third-party is involved similar to an escrow; in fact, the trust deed system functions just like an escrow lasting the term of the Promissory Note because legal title is actually held by the Trustee not by the Owner. The borrowers have a recorded interest in a property, and they possess all the rights of ownership subject to the Trust Deed encumbrance, but their interest is not unencumbered ownership, and it will not become true ownership until they pay off the Promissory Note; until the Note is paid off, legal title is held by a Trustee while Owners have Equitable Title with rights of possession and use.

The trustee is empowered to call a public auction without going to court — avoiding court being the main reason the system was developed. This gives lenders the option of forcing sale at minimal cost and minimal delay. The system is streamlined and capable of expanding and contracting to meet demand. Lately, the Trustee business has been a stellar growth industry.

A business transaction

First and foremost, the documents exchanged by borrowers and lenders are a business transaction as Henry Blodget recently informed borrowers:

“Specifically, when you borrowed money to buy your house, you engaged
in a business transaction. The bank or mortgage-lender evaluated the
risk of the transaction and concluded that it would was a risk worth
taking. To protect its money, the lender also required that you pledge
the house as collateral, and it required you to have some equity in the
house as an additional cushion. In the event that you didn’t pay, the
lender retained the right to seize the house, sell it, and pay itself
off before you got your equity. The lender loaned you the money because
it concluded that this was a smart business decision.

You, meanwhile, also made a business decision. You decided to
borrow money to buy your house even though it meant risking your
equity, home, and credit rating.

And now it turns out that both of you made a bad decision.

Fortunately, you don’t have to fight about what happens next.
The contract between you spells everything out: If you stop paying, the
lender gets the house. That’s it. Unless the contract specifically
differentiates between a failure to pay based on hardship (involuntary)
and a failure to pay based on a collapse in the value of the house
(voluntary), there’s no difference. If the lender thought at the
beginning that you had a “moral obligation to pay,” it would have
specified that in the contract.

Now, compare this to a situation in which you DO have a moral
obligation to pay: When you borrow money from a friend at no interest,
for example, and you promise that friend that you will give him or her
every penny back.
THAT is a moral obligation to pay. In this case, your friend did not
lend you money to make a profit. Your friend loaned you money to help
you out–with no collateral or contract other than your promise to pay.”

Many people persevere in business transactions throwing bad money after bad for vanity, entitlement or misplaced moral obligation.

The big bluff

Threat of calling a foreclosure auction is supposed to be a bluff. Neither the lender nor the borrower want an auction, but similar to Texas Hold-em, each party has cards to play, and where they are in the process and the relative strengths of their bargaining positions matter.

Ordinarily, threat of forcible eviction from the family home compels borrowers to do whatever is necessary to make payments, and the carrot (keep a home) and stick (threat of foreclosure) are enough to keep the system working. However, when people don’t have equity or when it is in their best interest financially to get out of a loan, lenders find the threat of forcible eviction less compelling; in fact, the more underwater a homeowner is, the less power lenders have. What possible threat can a lender hold over a money renter who is 30% underwater?

What property right does the 30% underwater homeowner particularly value that they don’t obtain as a renter?

The right to improve a lender’s property? Good luck getting a loan for that.

The right to lease out for less than the mortgage payment? Not a great deal for the owner.

The hope of appreciation years from now? Bring on the kool aid….

To be continued…

In tomorrow’s post, we explore judicial and non-judicial foreclosure and go step-by-step through the non-judicial foreclosure process. On Friday, we will go through the mechanics of a Trustee Sale auction and discuss the difficulties and opportunities this market offers.

Ideal Home Brokers Trustee Sale Service

If you are interested in learning how you can become active in the Trustee Sale market, review Ideal Home Brokers Trustee Sale Service or contact us at sales@idealhomebrokers.com.

103 TERRA BELLA Irvine, CA 92602 kitchen

Irvine Home Address … 103 TERRA BELLA Irvine, CA 92602

Resale Home Price … $449,000

Income Requirement ……. $95,848
Downpayment Needed … $89,800
20% Down Conventional

Home Purchase Price … $357,000
Home Purchase Date …. 12/24/2009

Net Gain (Loss) ………. $65,060
Percent Change ………. 25.8%
Annual Appreciation … 309.2%

Mortgage Interest Rate ………. 5.27%
Monthly Mortgage Payment … $1,988
Monthly Cash Outlays ………… $2,840
Monthly Cost of Ownership … $2,330

Property Details for 103 TERRA BELLA Irvine, CA 92602

Beds 2
Baths 2 full 1 part baths
Size 1,343 sq ft
($334 / sq ft)
Lot Size n/a
Year Built 1999
Days on Market 1
Listing Updated 1/7/2010
MLS Number P716608
Property Type Condominium, Residential
Community Northpark
Tract Othr

Private gated community of North Park with full time gate guard. Beautifully landscaped, well maintened community. New custom paint and new carpet and Travertine floor. 2 car side-by-side garage. Association offers pool, spa, parks, tennis courts, club house and more.

maintened?

This kind of transaction is common at Trustee Sales. The cash markets often see discounts of 15%-20%. I haven’t pulled comps, but I suspect this is priced to the high side of reasonable, and the seller will drop the price $25,000 to quickly close the deal. In and out in 30-60 days with a $40,000 profit (10%) makes for a nice annual rate of return — if you could repeat flips over and over.

If you are a family with cash looking to buy at a discount, the Trustee Sale market is where you should be house shopping.

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The video below is a children’s lesson on how long-term property disputes slow economic development and give rise to eminent domain legislation. There is probably also a lesson about a stubborn refusal of buyers and sellers to move the little bit necessary to please both parties.