Category Archives: Short Sale

Wells Fargo: Full Speed Ahead with Foreclosures

Despite the political pressure, Wells Fargo is pressing ahead with its planned foreclosures.

Irvine Home Address … 14492 GUAMA Ave Irvine, CA 92606

Resale Home Price …… $499,000

If you believe in the power of magic,

I can change your mind

And if you need to believe in someone,

Turn and look behind

When we were living in a dream world,

Clouds got in the way

We gave it up in a moment of madness

And threw it all away

Don't answer me, don't break the silence

Don't let me win

Alan Parsons Project — Don't Answer Me

Borrowers believe in the power of magic. Either the market will save them or the government will. Fortunately, not every bank answered the politicians' call to stop foreclosures. B of A answered this call and in a moment of madness, they threw it all away.

Wells Fargo Foreclosures Proceed After Data Queried

Wells Fargo & Co. is standing by the accuracy of its foreclosure filings and won’t follow competitors in delaying seizures, after an employee testified he signed documents for proceedings without personally reviewing records.

The bank said yesterday it doesn’t plan to halt repossessions because its “procedures and daily auditing demonstrate that our foreclosure affidavits are accurate.”

In a May 20 deposition, a Wells Fargo Home Mortgage employee said he signed 50 to 150 documents a day, including statements describing debts and borrowers used to justify foreclosures, without personally confirming the information was correct. His testimony related to a civil claim against the bank in a Washington state court. A judge dismissed the case in June.

Can you guess why the judge dimissed the claim? Because it was baseless. Who cares if some employee batch signed a few documents. Supervisors do this all the time. These documents were probably already reviewed by an army of staff before the signer ever saw them. The statement above implies that the banks were not reviewing these documents which is crazy.

Mortgage firms have drawn fire from borrowers, lawyers and state officials for letting employees sign affidavits for court- monitored foreclosures without personally checking loan records. JPMorgan Chase & Co. and Bank of America Corp. last week delayed foreclosures to review the accuracy of their filings. Last month, Ally Financial Inc. said its GMAC Mortgage unit would halt evictions for a similar review.

Let's be clear here: mortgage holders do not have the power of eviction. If they did, we wouldn't have so many squatters. They only have the power to foreclose, an act that leads to auction and later an eviction if the former owner doesn't leave on their own.

The Wells Fargo employee said he relied on foreclosure lawyers and personnel in other departments to check files, according to a deposition transcript provided by Melissa Huelsman, the Seattle attorney representing the homeowner. The employee said he confirmed the date on the file before signing without verifying other information.

‘Out of Context’

Those comments “should not be taken out of context,” Wells Fargo said in yesterday’s statement, e-mailed by a spokeswoman, Vickee Adams. The judge “reviewed Wells Fargo’s procedures, documents and declarations and summarily dismissed the borrower’s case, confirming that the foreclosure was valid,” the bank said in the statement.

For once, I agree with a bank. These lawsuits are silly.

Such a dismissal doesn’t necessarily invalidate testimony, said Peter Henning, a professor at Wayne State University Law School in Detroit and a former federal prosecutor.

“It’s not that the judge rejected the deposition, or found that the deposition was incorrect,” he said. “The firm probably went back into court and said ‘Here you go, you can inspect all the documents.’ Maybe that was enough.”

Wells Fargo is the second-largest servicer of U.S. home loans, according to industry newsletter Inside Mortgage Finance. The San Francisco-based bank handles about $1.8 trillion of residential mortgages, according to company filings. Bank of America, JPMorgan, Citigroup Inc. and Ally round out the top five. Through June, 92 percent of Wells Fargo’s mortgages were current, according to the statement.

If 92% of its loans are current, then 8% are delinquent. That is still an astonishingly high number.

‘How Do You Know?’

Andrew Yates, a Seattle-based lawyer representing the employee, didn’t return calls for comment. Adams declined to comment beyond the statement.

During questioning from Huelsman, the bank employee described his efforts before signing filings.

“So you’re simply signing the document that’s presented to you and you’re just making sure the date is correct?” Huelsman asked during the deposition.

“Correct,” the employee said.

“So how do you know when you’re signing this document that it’s true and correct?” Huelsman said.

There are people that are responsible for” maintaining the paperwork, the employee said.

This is akin to asking the guy on the assembly line who installs doors if he knows anything about the motor mounts. If it isn't his responsibility, how is he supposed to have knowledge of it?

States Take a Stance

The employee said he oversaw 53 full-time staff and 15 contract workers, and that other supervisors within the department signed the same amount of paperwork. That would amount to each supervisor signing 1,000 to 3,000 documents during 20 business days each month.

In a separate case in Florida, an employee at New York- based JPMorgan said in May that her team of managers signed about 18,000 documents a month. In a December deposition, an employee at Detroit-based Ally said he signed about 10,000 documents a month. Attorneys general in at least seven states including Texas, Illinois and Ohio are investigating practices at Ally’s GMAC Mortgage unit.

In Wells Fargo’s home state, California Attorney General Jerry Brown asked JPMorgan to prove its foreclosures are legal or else freeze them, and made a similar request to Ally in September.

“This goes to the internal processes and oversight at these institutions with respect to the conduct of their employees,” said Jacob Frenkel, a partner at Potomac, Maryland- based law firm Shulman Rogers Gandal Pordy & Ecker, which isn’t representing any lenders in foreclosure proceedings. “It’s not in the banks’ interest for the records not to be right. As a lawyer I want to go into court with papers that are solid.”

If the fact that banks are processing large amounts of documents is the best these plaintiffs can do, no wonder the judges are dismissing these cases.

Published: Thursday, 7 Oct 2010 — Diana Olick

I'm not going to tally the number of Attorneys General filing lender lawsuits or lawmakers demanding foreclosure moratoria, because the minute I do the number will change.

Suffice it to say that you're not in political fashion these days if you're not "demanding" a federal investigation into shoddy foreclosure procedures or "ordering" a freeze on foreclosures for the foreseeable future, even though you might not exactly have the jurisdiction to do so.

“Our families deserve to know that an action with such a huge and lasting impact is the absolute last resort, and that every effort has been made to keep them in their homes prior to foreclosure,” wrote Oregon Senator Jeff Merkley. He's a Democrat, by the way, and they appear to be in the majority of those screaming at the wind; gee I wonder why.

No less than the Speaker of the House, Nancy Pelosi, and her cadre of California lawmakers noted that, "Avoidable foreclosures end up being unnecessarily costly for homeowners, lenders and servicers, and our housing market, whose health is essential to our economic recovery," in a letter addressed to the U.S. Attorney General, Fed Chairman and the acting Comptroller of the Currency. "Recent reports that Ally Financial (formerly GMAC), JP Morgan, and Bank of America may have approved thousands of unwarranted foreclosures only amplify our concerns that systemic problems exist," she adds.

And it's not just the Dems posturing on this one. Far be it for Republicans to pass up a chance to use the scandal as a weapon. Alabama Senator Richard Shelby, ranking Republican on the Banking Committee is calling for a hearing: "I am highly troubled that once again our federal regulators appear to be asleep at the switch.”

I'm not going to feign surprise at any of this. It's to be expected, especially given this particular upcoming election. I just wish these folks would stick to the facts. This scandal is largely about bad paperwork, not "unwarranted foreclosures." Right now close to 10 percent of borrowers in this country are delinquent on their loans.

Translation: They're not paying their mortgages.

Another 4 percent have been delinquent for so long that they're now in the foreclosure process.

Yes, the process is flawed because the banks clearly aren't equipped to handle the numbers.

Yes, there may be some loans that could have been saved, but the vast majority can't.

Still lawmakers want to freeze all foreclosures to make sure all of them are fair because, as Speaker Pelosi writes, "People in our districts are hurting."

Boo Hoo.

The question is, how much would a foreclosure freeze hurt the greater housing market?

I asked some mortgage mavens and got the following responses:

Josh Rosner, Graham-Fisher: With REO sales being a large part of supply we would see home prices artificially and unsustainably rise, foreclosure volumes paint a false picture of stability and investors in MBS would be further harmed as their losses grow. Once the moratorium ended prices would fall and foreclosures would skyrocket. But, it would paint a prettier picture than reality heading into mid-term elections.

That is a brilliant synopsis of what would happen if this moratorium continues and becomes more widespread.

Guy Cecala, Inside Mortgage Finance: Instead of having a ton of mortgage borrowers who haven’t made any payments in at least a year, we would have a ton who haven’t made a payment in a year-and-half. Keep in mind we will have new problem loans entering the system throughout any moratorium whether we acknowledge them or not. Do we seriously believe that a foreclosure moratorium can change the outcome of potentially 5 million or more homeowners losing their homes over the next two years? Ultimately, if we don’t do something to handle distressed properties more efficiently (and faster), the housing market is going to remain stuck in limbo with no recovery in sight.

Right again. any widespread moratorium will encourage strategic default.

Janet Tavakoli, Tavakoli Structured Finance: Banks are vulnerable to lawsuits from investors in the [securitization] trusts. This problem could cost the banks significantly more money, which could mean TARP II (Washington Post)

Another very likely outcome. Banks are going to either lose money through foreclosure or lose money through lawsuits due to their failure to foreclose.

Rick Sharga, RealtyTrac: If foreclosure sales are prohibited, home sales would tail off dramatically…foreclosures and REOs accounted for over 30% of all sales during the quarter [Q3] Fewer home sales will put more pressure on home prices, reduce tax receipts for already-strapped municipal and state governments, and put even more pressure on an already-moribund economy. This could cause at least a temporary loss of jobs in a number of sectors. A 90-day moratorium would also extend the housing market downturn, pushing the anticipated recovery from early 2014 into late 2014 – and possibly even longer.

Any foreclosure moratorium would be a disaster. Since B of A is at least temporarily going that route, perhaps Wells Fargo and other banks will take advantage and push a few more foreclosures through the system. If I were in their shoes, I would.

They got their share of the HELOC riches

  • The owners of today's featured property paid $486,000 on 5/29/2003. The used a $388,800 first mortgage, a $48,600 second mortgage, and a $48,600 down payment.
  • On 6/4/2004 they refinanced with a $437,000 first mortgage.
  • On 9/27/2004 they obtained a $75,000 HELOC.
  • On 3/16/2005 they refinanced with a first mortgage for $439,000.
  • On 1/26/2006 they refinanced the first mortgage for $555,000.
  • On 8/28/2006 they refinanced with a $564,000 Option ARM with a 1.25% teaser rate, and they obtained a $100,000 HELOC.
  • Total property debt is $664,000.
  • Total mortgage equity withdrawal is $226,600.
  • Total squatting time is about 18 months.

Foreclosure Record

Recording Date: 10/29/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 07/24/2009

Document Type: Notice of Default

Irvine Home Address … 14492 GUAMA Ave Irvine, CA 92606

Resale Home Price … $499,000

Home Purchase Price … $486,000

Home Purchase Date …. 5/29/2003

Net Gain (Loss) ………. $(16,940)

Percent Change ………. -3.5%

Annual Appreciation … 0.3%

Cost of Ownership


$499,000 ………. Asking Price

$17,465 ………. 3.5% Down FHA Financing

4.21% …………… Mortgage Interest Rate

$481,535 ………. 30-Year Mortgage

$94,234 ………. Income Requirement

$2,358 ………. Monthly Mortgage Payment

$432 ………. Property Tax

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

$42 ………. Homeowners Insurance

$43 ………. Homeowners Association Fees


$2,875 ………. Monthly Cash Outlays

-$371 ………. Tax Savings (% of Interest and Property Tax)

-$668 ………. Equity Hidden in Payment

$26 ………. Lost Income to Down Payment (net of taxes)

$62 ………. Maintenance and Replacement Reserves


$1,924 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$4,990 ………. Furnishing and Move In @1%

$4,990 ………. Closing Costs @1%

$4,815 ………… Interest Points @1% of Loan

$17,465 ………. Down Payment


$32,260 ………. Total Cash Costs

$29,400 ………… Emergency Cash Reserves


$61,660 ………. Total Savings Needed

Property Details for 14492 GUAMA Ave Irvine, CA 92606


Beds: 4

Baths: 1 full 2 part baths

Home size: 1,897 sq ft

($263 / sq ft)

Lot Size: 5,130 sq ft

Year Built: 1971

Days on Market: 9

Listing Updated: 40457

MLS Number: S634529

Property Type: Single Family, Residential

Community: Walnut

Tract: Cp


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

Ready to work, Here is great opportunity for you. Located in cul-de-sac. Walking distance to elementary school. Large house for little money.

Politicians Encourage Strategic Default with Foreclosure Moratoria

The announcement by BofA — who was blackmailed by numerous government officials — to suspend all foreclosures strongly encourages strategic default. Why would anyone pay their mortgage when they know they can stop paying and keep their house?

Irvine Home Address … 13 GREENWOOD Irvine, CA 92604

Resale Home Price …… $415,000

C'mon and hold me

Just like you told me

Then show me

What I want to know

Why don't we steal away

Why don't we steal away

Into the night

I know it ain't right

Robbie Dupree — Steal Away

Steal away. No, i don't mean to move quietly off into the night, I mean brazenly steal the house your living in. Why don't borrowers steal away? Why don't they keep the house and ignore the mortgage. With news like this, I really don't understand Why Struggling Homeowners Keep Paying Their Mortgages; after all Squatting is Becoming a Way of Life for Many Delinquent Borrowers, and now, the bank is stopping all foreclosures. Given these circumstances, isn't strategic default the most prudent course of action?

Not everyone will strategically default. Many borrowers really can afford their payments, and they rightfully figure the foreclosure moratorium will end; however, the struggling masses who are considering accelerating their defaults have just been given the green light to bail because they know the bank isn't going to foreclose on them. This is a dumb policy the banks will later regret.

BofA Halts Foreclosures

Bank Expands Freeze After Pressure From Government-Run Mortgage Firm


Bank of America Corp. imposed a nationwide moratorium on foreclosures and the sale of foreclosed homes after it came under intense pressure from a government-run housing-finance giant worried about documentation problems, people familiar with the situation said.

The bank called the halt as concern mounted from legislators and state prosecutors about procedures used by lenders to foreclose on homes. Many banks use so-called robo signers, employees who sign hundreds of documents a day, without carefully reviewing their contents, when foreclosing on homes. Critics say that could result in improper foreclosures.

Improper foreclosures? Has anyone anywhere documented a case where a borrower who was current on their payments was foreclosed upon? Anyone who is not making their payments who ends up in foreclosure has experienced a "proper foreclosure." The notion of an improper foreclosure is simply a politician's fantasy. It gives those seeking election to public office something emotional to bluster about. The reality is there are no improper foreclosures.

Freddie Mac, the government-run mortgage-finance company that along with Fannie Mae owns many of the mortgages serviced by banks, pressed Bank of America to expand its search for problems with the foreclosure documentation process, said the people familiar with the situation.

On a call Thursday with several banks that included Bank of America, a Freddie official said the mortgage company wanted the institutions to look at foreclosure documentation across all 50 states, and asked them to consider putting a stop to the entire foreclosure process, say people familiar with the call.

Freddie Mac, an entity under government conservatorship and run by the Treasury department, asked major commercial banks to stop foreclosing on delinquent borrowers. This is one of two things: (1) It is a purely political act of desperate Democratic incumbents (Harry Reid and others) to make themselves look good going into next month's elections, or (2) the GSEs want to ramp up their own foreclosures while prices are still elevated and they don't want competition from the major banks (Government Expedites Foreclosures, Threatens Banking Cartel). I lean more toward political causes, but the economic issue cannot be dismissed.

Many in the banking industry fear that the widening paperwork problem could cause further delay on foreclosures and threaten an already weak housing market, which in turn is stalling the broader U.S. economic recovery. On the other hand, it could provide a brief financial respite to people who have defaulted on their mortgages and are still occupying their homes.

Could provide a respite? Do we need to give squatters any more breaks? For those of you waiting for these squatters to move out of your future home, how do you feel about this? You are paying a subsidy to the people living in your future home while you continue to work, pay bills, and rent.

As of August, there were more than 4.4 million home loans that were either in the foreclosure process or 90 days past due, according to mortgage research firm LPS Analytics. Since 2006, about 6.4 million homes have been lost through the foreclosure process.

Lost through the foreclosure process? Where did those houses go? Into the black hole of shadow inventory? The idea that these houses have been "lost" is very irritating. Any of those homes "found" on the MLS have been purchased by an owner-occupant or a cashflow investor who rented it out. While the squatter is living in the house, it is a completely non-productive asset; it costs money to maintain, but it produces no income. Foreclosure is the process by which we recycle these homes and obtain value from them. Nothing is lost in the foreclosure process.

Edward DeMarco, who heads the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, said in an interview that officials were working to find a "tailored" response to the foreclosure problem that won't cause broader problems for the fragile housing market. "We are trying to be quick but measured in the approach and the response taken," he said. "We're concerned about the whole housing market, and we're concerned about what this means for taxpayers and other market participants."

Can you find any substance to Mr. DeMarco's comment above? I read only bullshit.

Last week Bank of America, J.P. Morgan Chase & Co. and Ally Financial Inc. agreed to more closely examine documents used in 23 states where a court's approval is required to foreclose on a home. J.P. Morgan said its review suspended nearly 56,000 foreclosures.

In conversations with Bank of America, Freddie said financial penalties or litigation could result if the bank did not take additional steps, said a person familiar with the conversations. Bank of America told Freddie that an audit of procedures in the 23 states uncovered no errors, this person said.

But Freddie said the work didn't go far enough and asked for a review in all 50 states, as well a stop to any foreclosure sales, said people familiar with the situation. Freddie Mac declined to comment.

Of course Freddie Mac declined to comment, they just threatened B of A with a lawsuit if B of A didn't do what Freddie Mac asked. This is government extortion through an intermediary.

Bank of America Chief Executive Brian Moynihan said Friday that the bank hasn't found problems in its foreclosure process, but opted to temporarily halt all foreclosures to "clear the air." He said the bank wants to "go back and check our work one more time."

Its decision is expected to stop "a couple of thousand" foreclosure sales scheduled for the next week, according to one person familiar with the matter said. The bank declined to specify how many homes it has in the foreclosure pipeline.

All this is only expected to stop a few foreclosures for a single week? Talk about a tempest in a teapot. i hope the politicians get some mileage out of this.

So far, Bank of America is the only lender to expand its foreclosure freeze, but others may be forced to begin or broaden a review, banking executives say. Wells Fargo & Co., one of the nation's largest mortgage lenders, says it hasn't stopped foreclosing on any properties.

Apparently, the government is threatening other major banks, and they fully expect them to capitulate. Unbelievable.

At this point, J.P. Morgan isn't expanding its foreclosure moratorium, but is widening its document review beyond the 23 states where it has frozen foreclosures, according to a person close to the bank.


Bank of America services 14 million mortgages, or one out of every five in the U.S., and its loan-servicing portfolio exceeds $2.1 trillion in size. Of its mortgages, 10 million came from its 2008 acquisition of troubled California lender Countrywide Financial Corp. More than 80% of its delinquent loans were acquired through Countrywide.

What a great bargain that deal turned out to be, right?

A push over the last week from politicians and law-enforcement officials troubled by reports of foreclosure problems only intensified the pressure on Bank of America, which has been working to improve its relations in Washington. It concluded that reviews in just 23 states wouldn't cut it with elected officials in the other states, a person close to the bank said.

"In this intense political season we are in, it didn't play well to say do it in some states but not your state," this person said.

That confirms this is nothing but a political ploy. Disgusting.

Senate Majority Leader Harry Reid (D., Nev.), whose state has been hit hard by foreclosures, and House Oversight and Government Reform Committee Chairman Edolphus Towns (D., N.Y.), both said Friday they welcomed Bank of America's move and called on other banks to follow.

Cassandra Toroian, chief investment officer at Bell Rock Capital LLC, a money-management firm, says the additional reviews are unlikely to significantly impact the outcome for homeowners who are facing foreclosure. "It's just delaying the inevitable," she says.

Actually, this policy is likely to have impact — it is going to cause more accelerated default.

Momentum builds for full moratorium on foreclosures

By Ariana Eunjung Cha, Steven Mufson and Jia Lynn Yang

Washington Post Staff Writers

Saturday, October 9, 2010

Senior Obama administration officials said Friday that a nationwide moratorium on foreclosure sales may be inevitable, despite their grave reservations about the impact a broad freeze would have on the nation's housing market and economic recovery.

Their remarks were made as pressure for a nationwide moratorium mounted Friday when Bank of America, the nation's largest bank, halted evictions in all 50 states. Senate Majority Leader Harry M. Reid (D-Nev.), who is locked in a tight reelection campaign, called on other major lenders to follow suit.

The White House has so far resisted joining the election-season calls for action but convened two interagency meetings this week to discuss reports that banks filed fraudulent documents to evict borrowers who missed payments as well as fundamental questions about whether banks are seizing properties without having clear ownership of the mortgages.

I know the Democrats are desperate right now, but this kind of pandering is a major turnoff. It's the kind of thing that makes me want to see them lose. It's also clear evidence that the pressure being exerted by Freddie Mac is coming directly from the Obama administration and Harry Reid.

One meeting was made up mostly of groups that regulate the housing industry, including the Department of Housing and Urban Development, the Treasury Department and the White House. The other, which involved the U.S. Securities and Exchange Commission, the Internal Revenue Service and U.S. attorneys from across the country, was focused on the question of whether financial fraud was committed.

With foreclosed properties comprising one in every four homes sold in the United States, the spreading moratorium could disrupt real estate deals in progress, slow down the process of clearing the backlog of troubled home loans and prolong the economic recovery, analysts said.

A freeze would also strike at the financial sector, just two years after it suffered one of the worst crises in its history. One government official who has been in discussions with several big financial firms said the banks are bracing themselves for a wave of lawsuits from homeowners who are fighting to keep their homes and from investors who had bought mortgage loans on Wall Street. On Friday, while the Dow Jones Industrial Average crossed 11,000, most major bank stocks fell.

It looks as if the government is going to delay the recovery by keeping a huge overhang of shadow inventory despite the inevitably lawsuits.

… Also Friday, the Federal Housing Administration said it had asked agency-approved mortgage servicers – which includes the nation's largest banks – to immediately audit their foreclosure operations. The FHA can impose financial penalties on companies that do not follow rules set by housing regulators.

Questions over the legal standing of banks in foreclosure proceedings as well as reports that these firms cut corners as they pushed foreclosures through the legal system fueled calls in Congress for a nationwide freeze and federal investigations.

Another tool of threat the government has is the FHA.

Reid, who had earlier sent a letter to major banks asking them to suspend foreclosures in Nevada, expanded that call Friday after Bank of America's announcement.

"I thank Bank of America for doing the right thing by suspending actions on foreclosures while this investigation runs its course," he said.

The Senate banking committee's chairman, Christopher J. Dodd (D-Conn.), said Friday that his panel will hold hearings Nov. 16 to investigate the morass.

Rep. Edolphus Towns (D-N.Y.), chairman of the House Committee on Oversight and Government Reform, said the top 10 mortgage lenders should immediately suspend foreclosure proceedings in all states.

"The implications of ignoring the foreclosure problems are far too great to be ignored," he said Friday.

Bullshit. I can't believe these guys have the nerve to say these things. I suppose they are politicians in close elections, so nothing should surprise me. These guys are unbelievable.

… "Calls for a blanket national moratorium on all foreclosures are a bad idea and would cause significant harm to communities at risk, the unstable housing market and the fragile economy," the industry letter said.

Suspending foreclosures could end up forcing banks, which act as service companies for the loans, to spend billions of dollars to compensate investors who own the pools of mortgages they manage. And it could add to the losses at Fannie Mae and Freddie Mac, the two government-owned mortgage financiers.

Pension funds and other investors in the pools of mortgage securities are worried that the big banks will get special treatment from Washington.

"What's happened is a gross mishandling of paperwork and often times a misrepresentation of the transaction," said Chris Katopis, a spokesman for the Association of Mortgage Investors. "The banks have to have some responsibility and accountability for this."

The only people who benefit from a moratorium are politicians and squatters. Everyone else gets screwed.

HELOC abusing squatters will benefit from a moratorium

As you contemplate whether or not this moratorium idea is good or bad, take a hard look at the people who will benefit the most. Today's featured property is a particularly bad case of HELOC abuse and squatting. They went to the housing ATM every year for another withdrawal. The income subsidy was enormous. After you see how these people lived over the last decade, ask yourself if this is the kind of behavior we want to subsidize and see more of.

  • This house was purchased on 7/22/1998 for $132,000. Their original mortgage and down payment does not show up in my records. Let's assume they used an 80% first mortgage ($105,600) and a $26,400 down payment. This may have been a 3% down FHA purchase, but I don't know.
  • On 10/4/2001 they refinanced with a $130,000 first mortgage.
  • On 12/24/2002 they refinanced with a $175,000 first mortgage.
  • On 10/30/2003 they refinanced with a $279,300 first mortgage.
  • On 11/15/2004 they refinanced with a $385,000 first mortgage.
  • On 11/14/2005 they refinanced with a $450,000 first mortgage.
  • On 12/28/2006 they refinanced with a $524,000 Option ARM.
  • Total mortgage equity withdrawal is $418,400.

  • Total squatting time is about 20 months.

Foreclosure Record

Recording Date: 09/11/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 06/08/2009

Document Type: Notice of Default

Foreclosure Record

Recording Date: 05/12/2009

Document Type: Notice of Rescission

Foreclosure Record

Recording Date: 05/06/2009

Document Type: Notice of Default

This family lived off their housing ATM machine. They were pulling out an average of $83,680 per year. That was roughly the median income in Irvine during that time.

Do you think we should encourage this kind of financial management? If we bail these people out or let them keep their house, we are ensuring we will have many more borrowers who emulate them in the future.

Irvine Home Address … 13 GREENWOOD Irvine, CA 92604

Resale Home Price … $415,000

Home Purchase Price … $132,000

Home Purchase Date …. 7/22/1998

Net Gain (Loss) ………. $258,100

Percent Change ………. 195.5%

Annual Appreciation … 9.2%

Cost of Ownership


$415,000 ………. Asking Price

$14,525 ………. 3.5% Down FHA Financing

4.21% …………… Mortgage Interest Rate

$400,475 ………. 30-Year Mortgage

$78,371 ………. Income Requirement

$1,961 ………. Monthly Mortgage Payment

$360 ………. Property Tax

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

$35 ………. Homeowners Insurance

$320 ………. Homeowners Association Fees


$2,675 ………. Monthly Cash Outlays

-$309 ………. Tax Savings (% of Interest and Property Tax)

-$556 ………. Equity Hidden in Payment

$22 ………. Lost Income to Down Payment (net of taxes)

$52 ………. Maintenance and Replacement Reserves


$1,884 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$4,150 ………. Furnishing and Move In @1%

$4,150 ………. Closing Costs @1%

$4,005 ………… Interest Points @1% of Loan

$14,525 ………. Down Payment


$26,830 ………. Total Cash Costs

$28,800 ………… Emergency Cash Reserves


$55,630 ………. Total Savings Needed

Property Details for 13 GREENWOOD Irvine, CA 92604


Beds: 3

Baths: 1 full 2 part baths

Home size: 1,642 sq ft

($253 / sq ft)

Lot Size: 2,110 sq ft

Year Built: 1976

Days on Market: 128

Listing Updated: 40459

MLS Number: S619881

Property Type: Condominium, Residential

Community: El Camino Real

Tract: St


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

Wonderful 3 bedroom 2.5 bath, two car garage with enclosed paito. Close to shoping, fwy, school and parks. Price to sell!

paito? shoping? That description is fewer than 20 words, and the realtor managed to misspell two of them.

What Really Prompts Borrowers to Accelerate Their Default?

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

Irvine Home Address … 23 FOXHOLLOW Irvine, CA 92614

Resale Home Price …… $319,900

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

In perfect synchronicity of which so many speak

We feel so close to heaven in this roaring heavy load

And then in sheer abandonment, we shatter and explode.

Judas Priest — Turbo Lover

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

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

Strategic Defaults Threaten All Major U.S. Housing Markets

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

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

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

Strategic Default Defined

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

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

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

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

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

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

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

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

Why Do Homeowners Walk Away from Their Mortgage?

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

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

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

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

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

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

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

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

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

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

Why Do Struggling Homeowners Keep Paying Their Mortgages?

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

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

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

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

Two Key Studies Show that Strategic Defaults Continue to Grow

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

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

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

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

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

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

The following chart clearly shows this difference.


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

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

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


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

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

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


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

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

The Key Factor Behind Strategic Defaults

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

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

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

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

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

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


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

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


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

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

Where Do We Go From Here?

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

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

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

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

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

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

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

The HELOC Lifestyle

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

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

  • The owners of today's featured property paid $175,000 on 3/18/1999. They used a $169,750 first mortgage and a $5,250 down payment.
  • On 11/15/2001 they refinanced with a $229,500 first mortgage.
  • On 12/4/2002 they refinanced with a $240,000 first mortgage.
  • On 2/11/2003 they refinanced with a $278,000 first mortgage.
  • On 11/1/2004 they refinanced with a $300,000 first mortgage.
  • On 2/11/2008 they refinanced with a $323,000 first mortgage.
  • Total mortgage equity withdrawal was $153,250.
  • Total squatting time is about 15 months so far.

Foreclosure Record

Recording Date: 09/14/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 03/24/2010

Document Type: Notice of Rescission

Foreclosure Record

Recording Date: 03/09/2010

Document Type: Notice of Default

Foreclosure Record

Recording Date: 10/30/2009

Document Type: Notice of Default

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

Am I the only one who thinks this is crazy?

Irvine Home Address … 23 FOXHOLLOW Irvine, CA 92614

Resale Home Price … $319,900

Home Purchase Price … $175,000

Home Purchase Date …. 3/18/1999

Net Gain (Loss) ………. $125,706

Percent Change ………. 71.8%

Annual Appreciation … 5.2%

Cost of Ownership


$319,900 ………. Asking Price

$11,197 ………. 3.5% Down FHA Financing

4.74% …………… Mortgage Interest Rate

$308,704 ………. 30-Year Mortgage

$64,292 ………. Income Requirement

$1,608 ………. Monthly Mortgage Payment

$277 ………. Property Tax

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

$27 ………. Homeowners Insurance

$340 ………. Homeowners Association Fees


$2,252 ………. Monthly Cash Outlays

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

-$389 ………. Equity Hidden in Payment

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

$40 ………. Maintenance and Replacement Reserves


$1,774 ………. Monthly Cost of Ownership

Cash Acquisition Demands


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

$3,199 ………. Closing Costs @1%

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

$11,197 ………. Down Payment


$20,682 ………. Total Cash Costs

$27,100 ………… Emergency Cash Reserves


$47,782 ………. Total Savings Needed

Property Details for 23 FOXHOLLOW Irvine, CA 92614


Beds: 3

Baths: 1 full 1 part baths

Home size: 1,300 sq ft

($246 / sq ft)

Lot Size: n/a

Year Built: 1985

Days on Market: 17

Listing Updated: 40443

MLS Number: S632715

Property Type: Condominium, Residential

Community: Woodbridge

Tract: St


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

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

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

Have a great weekend,

Irvine Renter

The Market Is Accepting That House Prices Will Not Go Up

Hope springs eternal, and denial rules downtrodden financial markets. However, locally it appears that housing market watchers are beginning to accept that house prices will not be going up soon.

Irvine Home Address … 22 BUTTERFLY Irvine, CA 92604

Resale Home Price …… $460,000

There's gonna come a time when the scene'll seem less sunny

It'll probably get druggy and the kids'll seem too skinny

There's gonna come a time when she's gonna have to go

With whoever's gonna get her the highest

The Hold Steady — Stay Positive

No matter how bad things get, some people just choose to stay positive. It is a healthy way to manage one's emotions, but it is an incredibly poor way to manage one's finances.

Is 'flat' the new 'normal'

BY JONATHAN LANSNER — Sept. 30, 2010

Perhaps "flat" is the "new normal."

It's hard to find anybody who's really excited about housing's short-run outlook as the real estate market seems to be having some difficulty adjusting to homebuying without federal tax incentives.

LOL! Having some difficulties? If by difficulties he means that New Home Sales Plummet with Expiration of Tax Credits and Existing-Home Sales Sink to Lowest Level Ever Recorded, then yes, the market is having some difficulties.

Take housing tracker Veros from Santa Ana. They project Orange County home prices will rise 2.2 percent in the year ended September 2011.

Eric Fox, Veros' economic modeling VP, says "affordability is the driver" that will keep local housing prices up. Previously, Veros' forecast that home price will be up 1.8 percent in the year ending June 2011.

To Fox, local home affordability – a mix of depressed values and cheap mortgage rates — will largely offset the area's relatively weak job market. Fox also think rent-seeking investors will play a big role in supporting local home prices, as these cash-rich buyers won't have the tall hurdles — overall angst or loan qualification challenges — that currently chill some buyers seeking their own shelter.

Nearly every market myth in one brief statement. I can't say Mr. Fox has earned much of my respect.

First, market values are not depressed. We are recovering from a housing bubble, and prices are still artificially elevated not depressed.

Second, cheap mortgage rates are not offsetting the weak job market. Low Interest Rates Are Not Clearing the Market Inventory. The banking cartel's withholding of inventory is what is offsetting the weak job market. Demand is very low as sales volumes are well off historic norms. Only the lack of inventory is preventing a total price collapse.

Third, rent-seeking investors are not attracted to Orange County's housing market. Why would anyone accept a 4% return in Orange County when they can get an 7% return in Riverside County or a 9% return in Las Vegas? Only foolish speculators who believe rapid appreciation will return to Orange County are buying at current valuations.

Forth, foreign cash buyers can not, will not, and are not saving the Orange County housing market. This dumb idea is brought up periodically, and it is crazy. Perhaps FCBs have some small impact in some small neighborhoods and isolated enclaves where the activities of a few buyers can make a difference, but the OC housing market is much too large, and the number of FCBs is much too small to stem the tide.

That outlook for essentially flat pricing fits a pattern we've seen lately: Home-price gains – at least what's reported in various indexes — have been shrinking.

The latest reading of the price pulse in Los Angeles and Orange counties in July's Standard & Poor's/Case-Shiller housing indexes:

  • On a month-to-month basis, LA/OC prices rose 0.35 percent in July — fourth consecutive gain but the smallest since a drop in March.
  • On a year-over-year basis, LA/OC home prices rose 7.5 percent in July — seventh consecutive gain but also the smallest since March.
  • Sobering thought: Even with the recent gains, LA/OC prices by this measure are 35.6 percent below the 2006 peak.

Be prepared to watch the Case-Shiller index roll over in the coming months. We all know that the market hit some severe "turbulence" in May when the tax credits expired. Since the Case-Shiller is both a moving average and delayed by three months, we are only now seeing the impact of the sudden drop in demand and pricing. Nobody watching the market since May has reported increasing demand or rising prices. Going into the fall and winter with elevated inventory, these numbers can only get worse.


And it's not just pricing, as buyers pull back in many parts of the market

In the 22 business days ending September 8, DataQuick found 52 of 83 O.C. ZIPs had year-over-year sales declines as overall countywide sales were off 14.9 percent vs. a year ago. The current sales pace is 69 percent of the average 3,597 homes sold per month in the 20 years ended in 2009.

Statewide, California Association of Realtors said August's homebuying was down 14.9 percent from a year ago. And what sells takes more effort: CAR's unsold inventory index for single-family resales in August was 6.1 months (to deplete the supply of homes on the market at the current sales rate) vs. 4.6 months a year earlier.

These sales numbers are a catastrophe. If the majority of the market were not tied up by banks who refuse to sell, prices would crater.

As expected, homeowners sense house shoppers' change of heart.

According to surveying by online real estate trackers HomeGain, 15 percent of Californian homeowners predicted this summer that their home's value will rise in the next six months — slightly less than half of the 34 percent who foresaw appreciation just three months earlier in the spring. Nationwide, the drop off wasn't as steep as 18 percent expected appreciation in the most recent survey vs. 27 percent in the second quarter.

But here's what really noteworthy: when just 15 percent of Californian homeowners see appreciation — and that makes our state a national leader in property optimism!

That is a very low number. Homeowners are the group most likely to have a rosy outlook for appreciation because they all want home prices to go up. Position bias is strongest among those who stand to make large amounts of money if a position goes in their favor.

HomeGain's third-quarter survey placed California in a tie for 9th place ranking among the states (along with Maryland) for the share of folks predicting upcoming appreciation. (Back in the second quarter, optimism was tied for 7th with New York and Colorado!)

California real estate agents, who were also polled, had equally and curiously "high" relative optimism — as 14 percent told HomeGain pollsters that they foresaw appreciation within six months. That tied us for the 6th most upbeat real estate pros among the states (withTexas.)

I am shocked! realtors think house prices are going up? Actually, I am surprised that so few (only 14%) do believe house prices are going up. Of course, all of them are telling their buyer-clients that house prices are going up in order to manipulate them into buying, but secretly only a small handful truly believe prices will rise. The duplicity is disgusting.

Perhaps, growing Californian pessimism comes from what buyers (or the lack thereof) are saying, as pollsters found agents saying 25 percent of California homebuyers currently believe homes are overpriced by 10 percent or more vs. 13 percent in the second quarter


Still, the market watchers at Beacon Economics don't think the current malaise will turn to anything ugly.

"Although home prices are not going to rocket back to pre-recession peaks anytime soon, fears of a significant double dip in home prices are likely exaggerated," Beacon economists wrote in a recent forecast. "The fundamental drivers of long-term home prices paint a picture of a housing market that has emerged from collapse healthier. Home prices have largely stabilized despite a small drop in the wake of falling sales; the price of an existing home is still more than 16% above the April 2009 trough. Additionally, measures of affordability show that California appears poised for slow but steady growth once the labor markets have healed. At roughly 6-times per capita income in the state, home prices are beginning to make sense again. As income continues to grow at a moderate pace, home prices will likely follow suit at a more tepid but sustainable pace."

Six-times income is now a good measure of affordability? It is amazing how super-low interest rates distort reality. Ordinarily, I embrace most of what I read from Chris Thornburg and Beacon Economics, but the above statement reads a bit like market cheerleading. I'm sure many loan owners read that will a small sense of relief. Denial requires constant reinforcement.

Flat is not where it's at

House prices are going to head lower in Orange County. When the bulls start to accept that prices may actually stay flat, it becomes pretty obvious that prices will head lower. We are not witnessing the despair after the crash which signals the bottom, we are witnessing the acceptance that comes before capitulation. Expect to see house prices grind lower for the next two or three years with greater declines at the high end than at the low end. Afterward, expect tepid appreciation until the overhang of distressed inventory is pushed through the system. The bear rally engineered by the Federal Reserve is over. The second leg down — a less steep and more controlled decline — is about to begin.

HELOC Metamorphosis

I don't think most HELOC abusers set out to be thieves. It is a slow transformation. Like Patty Hearst went from being a shy heiress to a gun-toting bank robber, most HELOC abusers get a taste of free money, like what they get from it, and then they just dig the hole deeper and deeper until there is no escape. Perhaps HELOC abusers will blame banks for keeping them financially hostage and claim mass insanity as another manifestation of the Stockholm syndrome.

  • The owners of today's featured property paid $317,000 on 10/31/2001. They used a $253,600 first mortgage, a $31,700 second mortgage and a $31,700 down payment.
  • On 2/26/2003 they refinanced with a $290,000 first mortgage.
  • On 10/23/2003 they took out $100,000 in a HELOC.
  • On 4/7/2004 they got a $150,000 HELOC.
  • On 5/7/2004 they obtained a $136,000 HELOC.
  • On 3/17/2006 they opened a $250,000 HELOC.
  • Finally, on 8/3/2006 they refinanced the first mortgage with a $560,000 Option ARM.

In short, these people committed every sin of bad mortgage management including periodic refinancing and obtaining an Option ARM. The worst part is that they probably don't realize they did anything wrong. I imagine they think they were behaving responsibly and if the housing market hadn't crashed, everything would be fine. I believe people have failed to learn the lessons of poor financial management, and I also believe we will likely repeat this cycle because of the poor lessons people have learned.

Irvine Home Address … 22 BUTTERFLY Irvine, CA 92604

Resale Home Price … $460,000

Home Purchase Price … $317,000

Home Purchase Date …. 10/31/2001

Net Gain (Loss) ………. $115,400

Percent Change ………. 36.4%

Annual Appreciation … 4.2%

Cost of Ownership


$460,000 ………. Asking Price

$16,100 ………. 3.5% Down FHA Financing

4.74% …………… Mortgage Interest Rate

$443,900 ………. 30-Year Mortgage

$92,448 ………. Income Requirement

$2,313 ………. Monthly Mortgage Payment

$399 ………. Property Tax

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

$38 ………. Homeowners Insurance

$215 ………. Homeowners Association Fees


$2,965 ………. Monthly Cash Outlays

-$377 ………. Tax Savings (% of Interest and Property Tax)

-$560 ………. Equity Hidden in Payment

$29 ………. Lost Income to Down Payment (net of taxes)

$58 ………. Maintenance and Replacement Reserves


$2,115 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$4,600 ………. Furnishing and Move In @1%

$4,600 ………. Closing Costs @1%

$4,439 ………… Interest Points @1% of Loan

$16,100 ………. Down Payment


$29,739 ………. Total Cash Costs

$33,300 ………… Emergency Cash Reserves


$63,039 ………. Total Savings Needed

Property Details for 22 BUTTERFLY Irvine, CA 92604


Beds: 3

Baths: 2 full 1 part baths

Home size: 2,000 sq ft

($230 / sq ft)

Lot Size: 2,720 sq ft

Year Built: 1976

Days on Market: 122

MLS Number: S619416

Property Type: Single Family, Townhouse, Residential

Community: El Camino Real

Tract: Ig


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

Great Value for SQ/Footage, Spacious Home with Vaulted Ceilings, Open Floor Plan. HUGE Family Room with Lovely Bricked Fireplace and Wet Bar. Living Room with Fireplace, Formal Dining Room, Kitchen with Newer Appliances and Countertops. Extra Room with air conditioner off of the Large Master Bedroom that can be used as an office, den, playroom or storage. Central air through rest of the house Large Private backyard that backs to Greenbelt 2 Car Garage with newer roll up door. Walk to shopping, Restaurants, Award winning Schools

The Right to Rent Would Flatten the California Housing Market

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

Irvine Home Address … 247 ORANGE BLOSSOM Irvine, CA 92618

Resale Home Price …… $217,900

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

I never stick around quite long enough to make it

It's just a thought, only a thought

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

Well I deserve nothing more than I get

Cos nothing I have is truly mine

Dido — Life For Rent

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

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

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

by CHRISTINE RICCIARDI — Wednesday, September 22nd, 2010

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

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

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

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

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

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

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

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

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

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

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

And it would lower house prices to rental parity.

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

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

Permanent Rental Parity

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

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

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

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

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

Sold to Countrywide at the peak

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

  • This property was purchased on 10/23/1998 for $88,000. The owners used a $66,000 first mortgage, and a $22,000 down payment.
  • On 3/5/2003 they refinanced with a $150,000 first mortgage.
  • On 7/30/2007 they refinanced with a $296,000 first mortgage. These owners were not regular HELOC abusers, but they did manage to double their mortgage on two occasions.
  • Total mortgage equity withdrawal is $230,000. That is great for a 1 bedroom condo.

Foreclosure Record

Recording Date: 07/19/2010

Document Type: Notice of Default

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

Irvine Home Address … 247 ORANGE BLOSSOM Irvine, CA 92618

Resale Home Price … $217,900

Home Purchase Price … $88,000

Home Purchase Date …. 10/23/1998

Net Gain (Loss) ………. $116,826

Percent Change ………. 132.8%

Annual Appreciation … 7.8%

Cost of Ownership


$217,900 ………. Asking Price

$7,627 ………. 3.5% Down FHA Financing

4.31% …………… Mortgage Interest Rate

$210,274 ………. 30-Year Mortgage

$41,642 ………. Income Requirement

$1,042 ………. Monthly Mortgage Payment

$189 ………. Property Tax

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

$18 ………. Homeowners Insurance

$230 ………. Homeowners Association Fees


$1,479 ………. Monthly Cash Outlays

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

-$287 ………. Equity Hidden in Payment

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

$27 ………. Maintenance and Replacement Reserves


$1,137 ………. Monthly Cost of Ownership

Cash Acquisition Demands


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

$2,179 ………. Closing Costs @1%

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

$7,627 ………. Down Payment


$14,087 ………. Total Cash Costs

$17,400 ………… Emergency Cash Reserves


$31,487 ………. Total Savings Needed

Property Details for 247 ORANGE BLOSSOM Irvine, CA 92618


Beds: 1

Baths: 1 bath

Home size: 814 sq ft

($268 / sq ft)

Lot Size: n/a

Year Built: 1976

Days on Market: 62

Listing Updated: 40419

MLS Number: I10079989

Property Type: Condominium, Residential

Community: Orangetree

Tract: Cpwas


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

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

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

Where the local renters are