Over the last few months, falling interest rates, falling prices, and rising rents have made payment affordability hit an eleven-year high.

Irvine Home Address … 14772 DONCASTER Rd Irvine, CA 92604

Resale Home Price …… $505,000

Work it harder,

make it better

Do it faster,

makes us stronger

More than ever,

Hour after

Our work is never over

Daft Punk — Harder, Better, Faster, Stronger Lyrics

For the first time in the nearly five years I have been writing for this blog, prices across most of Irvine are trading at or below rental parity. There are significant market headwinds which will likely prevent house prices from moving higher, so relatively affordable prices may be with us for a while, and I think that is great news.

Today, we are going to take a detailed look at the Irvine data. This is the same data I present in our monthly OC housing market presentations. We will be taking December off, but we will be back in January to provide a live presentation of the current market data.

Months of Supply

In October and November, months of supply typically increases. Many sellers keep their homes on the market hoping for a late-year sale, but the demand dries up. With low demand and large supply, the months-of-supply calculations move much higher. The market is undeniably weak, but these numbers make circumstances look worse than they really are.

The importance of rental parity

I write frequently about rental parity because it represents the threshold of affordability. When prices are above rental parity, it costs more to own than to rent, so owning is not a wise financial decision. Owning may still be right for people, and many are willing to pay the premium to own to obtain the emotional benefits of ownership; however, on a purely financial basis, paying more than rental parity is generally not wise.

When prices are below rental parity, it costs less to own than to rent, so owning under these circumstances is generally a wise choice. Since a buyer who pays less than rental parity for a house is saving money, there is a clear financial benefit obtained irrespective of fluctuations in resale price.

When the cost of ownership is less than rental parity, an owner is far less likely to be forced to sell at a loss. The property can always be rented to cover costs rather than sell for a loss. Further, this ability to rent and at least break even provides the owner with flexibility to move if necessary. Mobility to take a new job or buy a different house is denied to those who overpaid and who are stuck paying more in the cost of ownership than they can obtain in rent.

With these advantages, buying at a price below rental parity using fixed-rate financing is critical. Every buyer should consider rental parity in their buying decision.

How rental parity is calculated

Each month I calculate rental parity using aggregate data from the MLS. It requires two data points to make the calculation:

1. Average rental rate
2. Current mortgage interest rate on 30-year fixed-rate loans.

I also make some key assumptions.

First, as mentioned previously, I assume a 30-year fixed-rate mortgage. It's the only mortgage product which provides sufficient payment stability to ensure the property will always be affordable.

Second, only a percentage of the rent can be put toward a mortgage payment. It's not as simple as assuming the rent equals the payment.

The payment is generally smaller than the actual cost of ownership (today's featured property is a rare exception). The cost of ownership usually includes other costs like HOA dues, Mello Roos, maintenance expenses, and insurance. These costs erode the buying power of the rental payment. There are offsets with tax breaks and loan amortization, but generally, the cost of ownership is bigger than the payment.

Conventional financing

There are two assumptions which change depending on the type of financing used. A buyer using conventional financing does not pay private mortgage insurance or FHA insurance premiums. This means the cost of ownership is much closer to the actual payment. Or looked at another way, the rent which would be applied to the payment would be higher. When I make these calculations, I assume 90% of the rent could go toward making a loan payment. In areas with no HOAs or Mello Roos (like today's featured property) that assumption is too low, but in areas where the HOA and Mello Roos is high, the assumption is too high.

I take 90% of the aggregate rent as a potential loan payment. I calculate the mortgage balance such a payment would service at today's interest rate. The result is the loan component of rental parity. To the loan balance, I add an appropriate down payment. For conventional buyers, the down payment applied is 20%.

For example, if an area or zip code has an aggregate rent of $2,500 — a common number in Irvine — I will assume $2,250 is available to make a mortgage payment. At 4% interest, a $2,250 payment would service an astounding $471,288. If $471,288 were the loan balance, the down payment would be $117,822. The sum of those two is $589,110 which represents the rental parity equivalent of a $2,250 payment applied to a 4% fixed-rate mortgage using conventional terms.

FHA financing

FHA financing yields very different results, so I track both of these separately. The two main differences are the mortgage insurance and the lesser down payment. With FHA financing, I assume only 75% of the rent goes toward the loan payment, and the down payment is only 3.5%.

In the example above, the $2,500 rent yields only $1,875 toward a loan payment. At 4% interest, a $1,875 payment only services $392,740. Further, a 3.5% down payment means the borrower is only adding $14,244 to the loan balance. The resulting rental parity for an FHA buyer is only $404,984 instead of the $589,110 for the conventional buyer.

The added costs and smaller down payments make houses much less affordable for FHA borrowers than they are for conventional borrowers. It's the main reason Irvine and other move-up communities are maintaining higher prices while those communities dominated by FHA financing are experiencing more serious declines.

Data for buyers using conventional financing

The following two graphics show the state of house prices relative to rental parity for buyers using conventional financing in Irvine, CA. Notice that prices are the lowest relative to rental parity of any time over the last 11 years.

Nearly every zip code and Village in Irvine is at or below rental parity. The lone exceptions are the Villages in the 92603 zip code of Turtle Rock, Turtle Ridge, Quail Hill and Shady Canyon.

Data for buyers using FHA financing

The following two graphics show the state of house prices relative to rental parity for buyers using FHA financing in Irvine, CA. Prices for FHA buyers are still inflated, although the recent declines have put them at nine-year lows.

The FHA data may be a bit misleading because FHA insurance used to be much less expensive than it is today. Prices are still inflated for FHA buyers, but it may not have been quite as inflated a few years ago when FHA insurance was much more affordable.

Year-over-year percentage change

Real estate market exhibit strong seasonal patterns and a strong tendency to trend for long periods. The only way to gain an accurate understanding of what's happening in the market is to ignore the month-to-month fluctuations and focus on year-over-year changes.

Further, I prefer to look at data on a per-square-foot basis. The median is too susceptible to fluctuations based on the change of mix to be reliable. Looking at per-square-foot costs provides a more accurate picture of what buyers are obtaining for their money.

As you can see, prices are falling all over Irvine. On a per-square-foot basis, prices are down nearly 10% year-over-year, and they have been falling at that pace for the last 4 months. Much of the increase in affordability is explained by this decline in price.

The other factor which has improved the rental parity picture is a firming of rents over the last year. Rents stopped their decline in late 2010, and rents have been climbing at a slow but steady pace ever since.

The zip code showing the most weakness is still 92620 which is Northwood and Woodbury. Rents finally turned positive in the last two months after a year of steady declines.

The bottom line is that prices are falling, interest rates are falling and rents are rising. That combination of factors is making houses much more affordable, and this trend should continue through the winter until the season spring rally bumps prices up a bit.

Short-Sale and REO Workshop

Shevy Akason and Larry Roberts will host a short sale and REO workshop at 6:30 PM Wednesday, November 16, 2011, at the offices of Intercap Lending (9401 Jeronimo, Suite 200, Irvine, CA 92618).

Long term owners who went Ponzi

The previous owners of today's featured property bought so long ago their purchase is not on my database. Their taxable basis was $93,605 which suggests they likely bought in the 1970s. By 4/6/1999 they had increased their first mortgage to $169,600. They followed by refinancing a few times including a $343,000 HELOC on 6/21/2005 and a $270,000 mortgage on 8/28/2006. The bank took the property back on 2/14/2011 for $238,000. They did get to squat for a while…

Foreclosure Record

Recording Date: 12/01/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 08/12/2010

Document Type: Notice of Default

Foreclosure Record

Recording Date: 12/09/2010

Document Type: Notice of Default

Their loss is your gain

In real estate many times buyers profit at the expense of distressed or motivated sellers. The Ponzi who dumped this property on the bank is long gone, but now the bank has to deal with the property. Bank REO is, by definition, distressed property.

The point of this post is to demonstrate how affordable the combination of lower prices and low interest rates is having on affordability. Today's featured property is a 2,336 SF three bedroom two bath home with a monthly cost of ownership for a conventional buyer of $1,884. This house would certainly rent for much more than $1,884 per month.

——————————————————————————————————————————————-

This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707

949.769.1599

sales@idealhomebrokers.com

Irvine House Address … 14772 DONCASTER Rd Irvine, CA 92604

Resale House Price …… $505,000

Beds: 3

Baths: 2

Sq. Ft.: 2336

$216/SF

Property Type: Residential, Single Family

Style: One Level, Traditional

Year Built: 1970

Community: El Camino Real

County: Orange

MLS#: S679315

Source: CRMLS

Status: Active

On Redfin: 2 days

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BANK OWNED!!! New carpet and paint throughout. Great curb appeal, single level with lots of space for a growing family. Additional family room, dining room perfect for entertaining or easily converted to bedroom. Added wetbar. Mirrored wardrobe doors in master, nice fireplace in family room. Gated front courtyard. Close to schools, shopping and freeway. Excellent Irvine school district

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Proprietary IHB commentary and analysis

Resale Home Price …… $505,000

House Purchase Price … $238,000

House Purchase Date …. 2/1/2011

Net Gain (Loss) ………. $236,700

Percent Change ………. 99.5%

Annual Appreciation … 93.8%

Cost of Home Ownership

————————————————-

$505,000 ………. Asking Price

$101,000 ………. 20% Down Conventional

4.06% …………… Mortgage Interest Rate

$404,000 ………. 30-Year Mortgage

$96,218 ………. Income Requirement

$1,943 ………. Monthly Mortgage Payment

$438 ………. Property Tax (@1.04%)

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

$105 ………. Homeowners Insurance (@ 0.25%)

$0 ………. Private Mortgage Insurance

$0 ………. Homeowners Association Fees

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

$2,486 ………. Monthly Cash Outlays

-$316 ………. Tax Savings (% of Interest and Property Tax)

-$576 ………. Equity Hidden in Payment (Amortization)

$144 ………. Lost Income to Down Payment (net of taxes)

$146 ………. Maintenance and Replacement Reserves

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

$1,884 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$5,050 ………. Furnishing and Move In @1%

$5,050 ………. Closing Costs @1%

$4,873 ………. Interest Points

$17,675 ………. Down Payment

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

$32,648 ………. Total Cash Costs

$39,200 ………… Emergency Cash Reserves

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

$71,848 ………. Total Savings Needed

——————————————————————————————————————————————————-

Government officials and the federal reserve are working feverishly to reinflate the housing bubble. It's a fools errand doomed to fail.

Irvine Home Address … 52 GRAY DOVE Irvine, CA 92618

Resale Home Price …… $1,075,000

The world's a nicer place in my beautiful balloon

It wears a nicer face in my beautiful balloon

We can sing a song and sail along the silver sky

For we can fly we can fly

Up, up and away

My beautiful, my beautiful balloon

The Fifth Dimension — Up, Up and Away

The housing bubble was a wonderful time. Inflated housing prices created illusory wealth for everyone, and lenders allowed people to quickly convert this newfound wealth to anything a homeowner desired. If it would have been sustainable, it would have been wonderful. The ultimate Ponzi fantasy of endless free money for doing absolutely nothing.

I can see why ordinary citizens and loan owners wouldn't want the situation to change. Free money is certainly more convenient than money you have to earn, particularly when the free money isn't a one-time lump sum. When the golden goose is laying a steady stream of eggs, life is grand.

The ideas and fallacies of the housing bubble seem laughable now, but many people embraced the too-good-to-be-true concepts of the housing bubble, and many became very upset when anyone suggested it was all a financial fantasy created in their own minds. Of course, we all know now the housing bubble was a massive Ponzi scheme, but that doesn't stop the powers-that-be from trying to reflate it.

Caroline Baum, ©2011 Bloomberg News

Nov. 4 (Bloomberg) — It's almost six years since the air started to leak, then gush, out of the U.S. housing market, and the best one can say is that residential real estate is bouncing along the bottom.

Almost every housing indicator, from starts to sales to prices, has been flat-lining for three years. Various government initiatives, including a first-time-homebuyer tax credit, gave home sales a temporary boost in 2009 and 2010. But just as water seeks its own level, home prices are still seeking theirs.

We are now into the liquidation phase of the housing bust. Lenders will spend the next three to five years cleaning up their mess. During this period, high priced areas will slowly deflate while low prices areas will bounce along right were they are. Areas will less distress will begin to recover first, but even these markets will be held back by the substitution effect in nearby lower cost markets. Prime areas will not see rapid or sustained appreciation while nearby subprime areas are still clearing out the REO and shadow inventory.

They've had lots of impediments along the way, well- intentioned though they may have been. (The counterargument, that things would have been worse without intervention, can't be proven.) From the Federal Reserve's purchase of $1.25 trillion of agency mortgage-backed securities in 2009-2010 as part of its first round of quantitative easing to renewed talk of additional MBS purchases to temporary tax credits to mortgage modification and forgiveness programs, housing has been the center of government attention and ministration — at least until President Barack Obama pivoted to jobs last summer.

Even now it's very much in the administration's cross hairs. Earlier attempts to facilitate mortgage modifications via programs with abbreviations like HAMP and HARP all fell short of expectations. Fewer than 900,000 homeowners have refinanced their mortgages through the Home Affordable Refinance Program compared with the 4 million to 5 million touted by Obama when he introduced the program in 2009.

HARP 2.0

So last month, the president said he was revamping HARP, waiving fees and the 125 percent loan-to-value ceiling so that borrowers with no equity in their homes will now qualify for a refinancing. (For every borrower who sees his mortgage payment reduced there's an offsetting saver who receives less interest income from his MBS. In some circles this would be considered a wash.)

Actually it isn't a saver who pays the price of the MBS refinancing, it's an investor and the US taxpayer. Some of these loans are bundled into MBS pools owned by private investors, and these investors are absorbing the cost of the government's actions (I smell lawsuits in the future). The remainder will be losses covered by the GSEs themselves as these MBS pools are held on their books. The US taxpayer will absorb that cost in a larger bailout.

Why is so much energy being directed, or misdirected, at housing? Wouldn't those efforts be better spent charting a sound course for the overall economy rather than targeting a specific sector?

For starters, housing's footprint is larger than its current 2.4 percent share of gross domestic product. Even at its recent peak in 2005, residential investment, as it's known in the GDP accounts, made up only 6 percent of GDP, the highest since the 1970s when inflation was driving demand for real assets.

For most Americans, their home is their major store of wealth. The value of household real estate peaked in the fourth quarter of 2006 at $25 trillion, falling to $16.2 trillion in the second three months of this year, according to the Fed's latest Flow of Funds report. A reverse wealth effect is depressing consumer sentiment and spending.

The real drain on the US economy is in the lack of mortgage equity withdrawal. The housing ATM is shut off, and with our HELOC economy, that spells bad news.

It's also limiting mobility. Unemployed homeowners who owe more on their mortgages than their homes are worth can't pick up and move to areas of the country where labor is in demand.

Finally, home purchases beget spending on big-ticket items, such as refrigerators, washing machines and furniture.

Between 1997 — when home-price appreciation started to outpace the consumer-price index — and the peak in 2006, the average price of an existing home rose about 125 percent, according to the S&P/Case-Shiller U.S. Home Price Index. It was arguably the biggest real-estate bubble in history. I know of no law of nature, or finance, that allows for the reflating of a burst bubble. (Another asset class, yes; the same one, no.)

This is a key point. Attempts to reflate a housing bubble will invariably go to another asset class. The problem with bubbles is that prices get detached from their underlying values. The inevitable crash refocuses investors on value, so even when cheap money is made available, that money will not flow into the previously inflated asset class. Instead, the cheap money will flow into some other asset class and form a bubble there. Anyone noticed how well commodities have done since housing and stocks crashed?

Not that politicians aren't trying. Complaints about lending standards being too tight — from the same folks who pressured lenders to lower their standards — would be funny if they weren't so sad.

“Underwriting standards are too tight?” asks Michael Carliner, an economic consultant specializing in housing. “Relative to six years ago, they are. And they should be.”

Everyone who wants higher prices and lower lending standards harkens back to the prices and standards of the bubble which by definition were not stable. Lending standards are not too tight today. In fact, they are still loose by pre-bubble standards. Many in the real estate industry viewed looser lending standards as a sign of innovation in finance. In reality, it was merely folly, and we are all paying the price for this epic failure.

Fourth Rail

Housing is still the most tax-advantaged asset, which contributes to its appeal. Mortgage interest and real-estate taxes are tax-deductible. In 1997, the tax laws on capital gains were relaxed. Instead of a one-time exclusion of $125,000, the first $250,000 of capital gains ($500,000 for a married couple) is exempt from taxation provided the owner lived there for two years. What a coincidence that home prices took off just about that time.

All the discussion about closing tax loopholes to raise revenue tiptoes around the mortgage deduction. Why? Because it's a bad time to remove an incentive for home purchases.

It's always a bad time, but good times won't return to the real-estate market until prices are allowed to fall so they can perform their traditional role of allocating supply.

She is right. realtors will always argue against removing any housing subsidy no matter the circumstances. The arguments they will make will differ, but their clamoring for subsidies will always be the same.

There are still plenty of reasons to own a home, but the deductibility of mortgage interest isn't one of them. For the last two decades, the nation's housing policy was designed to convert as many Americans as possible into homeowners. It was aided and abetted by Fannie Mae and Freddie Mac, which lowered the standards on mortgages they guaranteed; lax lenders; fraudulent loans, with borrowers and lenders often in cahoots; bankers that securitized and sold the mortgages; credit-rating companies that thought enough collateralized junk was worthy of a AAA; and, yes, a public eager for a free lunch.

What a wonderful synopsis of the housing bubble.

The 11 million homeowners currently upside down on their mortgages probably wonder about the wisdom of such a policy, which succeeded beyond anyone's wildest imagination. The homeownership rate rose to 69.2 percent in 2004 from 63.8 percent a decade earlier before slipping back to 66.3 percent now.

The rest of us can only imagine what other calamities (think ethanol) lie in store, courtesy of a tax code that encourages what the government deems to be “good” behavior at the time. Good can turn bad without warning.

Short sale and REO workshop

Last month was our first short sale and REO workshop. I was very impressed with the outcome. I knew Shevy was very good at what he does, or he wouldn't be the #1 agent in sales volume at his 900+ agent brokerage, but listening to him go through the details of his strategies gave me a deeper understanding of how he adds value to a typical transaction. But don't take my word for it, come out and listen for yourself. You too will come to recognize the value he adds to the process.

Shevy Akason and Larry Roberts will host a short sale and REO workshop at 6:30 PM Wednesday, November 16, 2011, at the offices of Intercap Lending (9401 Jeronimo, Suite 200, Irvine, CA 92618).

Register by clicking here or email us a sales@idealhomebrokers.com.

Down payment and HELOC money lost

For the first several years of the bust, many were of the opinion that Irvine's high end was going to be spared the bust. Of course, this belief only requires one to change their definition of high end to suit market reality.

At first, it was Columbus Grove that collapsed because the builder was still actively selling there as prices were falling. This lead many to decry the lack of quality or some other supposed features of this community.

As the high-end communities fall one-by-one, the definition of what is immune keeps getting narrower. Some small enclaves in Irvine may survive, and if any do, the bulls will point to that block or neighborhood as evidence of Irvine's supreme market immunity. People see what they want to see.

Today's featured property was a high end property in Portola Springs. Now it's asking price represents a 25%+ decline from the peak. I profiled this property when it was a short sale back in January:

The owner of today's featured property paid $1,410,500. He used a $1,000,000 first mortgage, a $269,404 HELOC and a $141,096 down payment. For this he obtained his unique tract home that surely was going to hold its value in the bad times and appreciate like crazy when times are good. We all know how that is turning out. This is another 25%+ loss on a high-end property.

Foreclosure Record

Recording Date: 11/30/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 08/19/2010

Document Type: Notice of Default

Apparently, he did not complete the short sale as this is now an REO. The bank paid $1,148,909 at auction which was the full amount due on the note. It isn't clear how long the former owner was not making payments, but the bank racked up nearly $150,000 in fees on the first mortgage during that time.

——————————————————————————————————————————————-

This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707

949.769.1599

sales@idealhomebrokers.com

Irvine House Address … 52 GRAY DOVE Irvine, CA 92618

Resale House Price …… $1,075,000

Beds: 4

Baths: 4

Sq. Ft.: 3383

$318/SF

Property Type: Residential, Single Family

Style: Two Level, Tuscan

Year Built: 2006

Community: Portola Springs

County: Orange

MLS#: S678715

Source: CRMLS

Status: Active

On Redfin: 2 days

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Beautiful Executive home in Portola Springs. This home boasts lavish upgrades. Refinished hardwood floors throughout. 3 Bedrooms suites each with its own private bath. Separate casita located off courtyard and has its own separate entrance. Sizeable bonus room upstairs. Gracious Master suite. Formal living room and dining room combo. Gpourmet kitchen w/ granite counter tops, vegetable sink in center island, glass front cabinets, breakfast bar and nook. Adjacent to the kitchen is a spacious family room w/ fireplace. Good size rear yard w/ upgraded hardscape. Eentertainers home. Additional features include 3 car garage, mud room, upstairs laundry room, plantation shutters, recessed lighting, and crown molding throughout. Must See!

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Proprietary IHB commentary and analysis

Resale Home Price …… $1,075,000

House Purchase Price … $1,410,500

House Purchase Date …. 12/26/2006

Net Gain (Loss) ………. ($400,000)

Percent Change ………. -28.4%

Annual Appreciation … -5.5%

Cost of Home Ownership

————————————————-

$1,075,000 ………. Asking Price

$215,000 ………. 20% Down Conventional

4.08% …………… Mortgage Interest Rate

$860,000 ………. 30-Year Mortgage

$228,535 ………. Income Requirement

$4,146 ………. Monthly Mortgage Payment

$932 ………. Property Tax (@1.04%)

$467 ………. Special Taxes and Levies (Mello Roos)

$224 ………. Homeowners Insurance (@ 0.25%)

$0 ………. Private Mortgage Insurance

$136 ………. Homeowners Association Fees

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

$5,904 ………. Monthly Cash Outlays

-$1080 ………. Tax Savings (% of Interest and Property Tax)

-$1222 ………. Equity Hidden in Payment (Amortization)

$308 ………. Lost Income to Down Payment (net of taxes)

$154 ………. Maintenance and Replacement Reserves

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

$4,065 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$10,750 ………. Furnishing and Move In @1%

$10,750 ………. Closing Costs @1%

$8,600 ………… Interest Points @1% of Loan

$215,000 ………. Down Payment

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

$245,100 ………. Total Cash Costs

$62,300 ………… Emergency Cash Reserves

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

$307,400 ………. Total Savings Needed

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High end Orange County asking prices continue their long-term decline. With declining prices, strategic default among jumbo loan holders continues to rise.

Irvine Home Address … 5021 BARKWOOD Ave Irvine, CA 92604

Resale Home Price …… $469,000

When it will be right, i don't know.

What it will be like, i don't know.

We live in hope of deliverance

From the darkness that surrounds us.

Paul McCartney — Hope of Deliverance

Hope springs eternal, and each spring realtors will call the bottom, and for several months each spring, prices will rise. This is a normal seasonal pattern. By late summer, reality sets in, and the dreams and delusions of the spring give way to the cold reality of winter declines.

Hope of future equity is what motivates underwater loan owners. Most should strategically default, and many will, but what keeps from from doing so is hope. Hope of a better future is a basic human need, and when hope is lost, people are often motivated to take more drastic measures such as strategic default. Declining home prices erode hope, and the biggest worry of most lenders is that a sustained decline will cause underwater borrowers to abandon hope.

More price cuts from high-end O.C. house sellers

November 1st, 2011, 2:14 pm — posted by Jon Lansner

Whatever hopes that high-end sellers of Orange County homes had for a price rebound this year melted in the summer and have continued in an autumnal fall.

HousingTracker.net follows the Orange County market by an interesting metric: the 25th and 75th percentiles of asking prices listed in brokers’ MLS system. Or in simple words: this website follows a median of the top and bottom of the market, by price.

Through October, HousingTracker shows:

• 75th percentile at $641,160 — that is down 1.69% in a month and the 4th consecutive cut after five straight increases — longest upswing in two years. October pricing is also back at February’s levels and down 6.5% in a year (19th straight year-to-year cut).
• 25th percentile at $286,000 — that is down 1.37% in a month (3rd drop in a row.) It’s also down 6.8% in a year (11th straight dip.)
• Using HousingTracker data, we see that the gap between top and bottom shows the 75th percentile listings running 124.2% more expensive that the 25th percentile vs. 123.5% a year ago and a 133.1% average during the past four years.
• By the way, HousingTracker’s overall median listing price of $407,800 is down 2.84% in a month (4th consecutive month-to-month drop.) The median is also down 8.8% in a year (18th such straight drop.)

Strategic default is caused by a number of factors, but the primary reason is a lack of equity and the belief the loan owner won't have equity any time soon.

Mortgages are like call options. Just because the owner doesn't currently have any equity, there is still value in the house if the owner believes prices are rising and they will have equity soon. The moment a loan owner no longer believes they will have equity in a reasonable period of time, they lose hope and strategically default.

This is one area where lenders embrace the bullshit market puffing of realtors. Lenders and realtors both want to convince people prices will rise but for very different reasons. realtors want to induce people to buy, and if that takes telling them prices are going up, that is what realtors will say. Lenders want to convince loan owners prices are going up so they will not strategically default.

Unfortunately for both realtors and lenders, prices are not going up, and prices will not go up any time soon. The liquidation phase of the housing bubble is going to drag on for a long time, and in all likelihood prices will drift lower while lenders clear out their books. In particular the high end of the market is most likely to see the downward drift because prices are still inflated, and there is no move up market. Therefore, strategic default will be an ongoing problem for the high end where the jumbo loans are concentrated.

Strategic default risk growing for negative equity jumbo mortgages

by JON PRIOR — Tuesday, November 1st, 2011, 4:19 pm

Projected losses on securities backed by subprime mortgages are beginning to stabilize, according to Moody's Investors Service, but the risk of borrowers defaulting on jumbo loans is growing.

The subprime borrowers most at risk of defaulting already have, analysts said. The risk is looming however for jumbo loans, those originated above the conforming limits set by Fannie Mae and Freddie Mac. More than 80% of jumbo loans backing RMBS are current but more than half owe more than the home is worth.

Subprime borrowers have largely already defaulted because their mortgages recast and reset earlier, and since lenders foreclosed on the subprime defaulters, prices where subprime loans dominated have been crushed.

The experience of jumbo borrowers has been very different.

1. First, the toxic loans this group took on blew up later.
2. Second, most jumbo borrowers have enough other resources to juggle their finances longer than subprime borrowers, so they can hold back the crashing waves.
3. Third, banks learned from the subprime crash, so they haven't foreclosed on jumbo borrowers and have instead allowed this group to squat in the bank's house.
4. Fourth, and probably most importantly, because lenders haven't foreclosed, prices where jumbo loans predominate have not crashed nearly as hard, so fewer underwater borrowers have strategically defaulted. Many have been suffering from the delusion their neighborhood is immune or that the crash may bypass them. As they realize this isn't the case, many jumbo loan owners will default like their subprime brethren.

As jumbo loan price points continue to erode (see chart in above story), more and more jumbo loan owners will submerge beneath their debts, and the long-term nature of this decline will cause many of them to lose hope that equity is in their near-term future.

Comparatively, roughly 22% of all outstanding mortgages are underwater, according to CoreLogic.

“Since home prices have been fairly stable over the past year, that increasing proportion of underwater borrowers likely reflects the ability of the stronger borrowers to refinance and exit the mortgage pools,” Moody's analysts said.

Borrowers in negative equity are more likely to walk away or default in order to receive a modification or some other loss mitigation service. Falling home prices from a still flooded foreclosure pipeline are simply pushing more of these borrowers further underwater.

Those circumstances will not change any time soon. People will continue to default in larger numbers.

Loans considered always current or those with LTV ratios below 100% are shrinking in the jumbo space. In September 2011, these loans made up less than 35% of the jumbo universe, down from more than 50% in November 2009.

“Indeed, default rates among always-current borrowers have not come down as much as in the subprime sector, meaning that the pool of current borrowers has not strengthened as much over time,” Moody's said.

I have no data to back this, but I speculate that jumbo borrowers are more likely to strategically default than subprime borrowers. Many subprime borrowers recognize that the subprime loan they never should have been given is their only reasonable opportunity to attain and sustain home ownership. This will motivate them to hang on tighter and sacrifice more. On the other hand, jumbo loan owners know they will be given another change to borrow and own again, so if things don't work out in their favor, they can simple walk away and start over. It is much more of a business and financial decision for a jumbo borrower.

The Obama administration and the Federal Housing Finance Agency revamped new rules for the Home Affordable Refinance Program to help more of these borrowers refinance into lower interest rates. Analysts at Moody's said the retooling could result in 1.6 million more refinancings before the program expires at the end of 2013, benefiting the hardest hit states of Florida and Nevada the most (see the graph below).

As of September, home prices in Las Vegas remain 63% below their peak in November 2006. But the problem is widespread. Marta Libby, a real estate agent in Victorville, California, said several rental houses she manages were bought as new housing tracts similar to Vegas at $312,000 at the peak in 2006 but are now selling for $81,000.

Write to Jon Prior.

Follow him on Twitter @JonAPrior.

They got $80K

• Today's featured REO was purchased on9/16/2004 for $646,000. The borrowers used a $513,000 first mortgage and a $132,400 down payment.
• On 1/19/2005 they liberated some equity with a $63,800 HELOC.
• On 8/8/2005 they obtained another $123,200 HELOC.
• On 12/29/2005 they refinanced with a $600,000 Option ARM with a 1.5% teaser rate and obtained a $75,000 HELOC.
• On 10/31/2006 they refinaced with a $646,000 Option ARM with a 1.25% teaser rate and obtained a $80,000 stand-alone second.
• Total property debt was $726,000 plus negative amortization.
• Total mortgage equity withdrawal was $213,000. Not large by Irvine standards, but considering they purchased this property on late 2004, they managed to get this $213,000 in just over two years.

It was great being a homeowner during the bubble, wasn't it?

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This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707

949.769.1599

sales@idealhomebrokers.com

Irvine House Address … 5021 BARKWOOD Ave Irvine, CA 92604

Resale House Price …… $469,000

Beds: 4

Baths: 3

Sq. Ft.: 1800

$261/SF

Property Type: Residential, Single Family

Style: Two Level, Contemporary

Year Built: 1971

Community: El Camino Real

County: Orange

MLS#: P801778

Source: CRMLS

Status: Active

On Redfin: 3 days

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Wonderful family home on Cul-De-Sac. The property has a good lay-out, offers a bright and open floor plan, two bedrooms and two bathrooms, kitchen, living room, dining area/ family room downstairs, and two bedrooms and one batroom upstairs. Includes french doors in family rm & master br, master bath , kitchen tile counter & appliances, large country kitchen/family rm w/ fireplace and laminate wood flooring.

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Proprietary IHB commentary and analysis

Resale Home Price …… $469,000

House Purchase Price … $646,000

House Purchase Date …. 9/16/2004

Net Gain (Loss) ………. ($205,140)

Percent Change ………. -31.8%

Annual Appreciation … -4.4%

Cost of Home Ownership

————————————————-

$469,000 ………. Asking Price

$16,415 ………. 3.5% Down FHA Financing

4.08% …………… Mortgage Interest Rate

$452,585 ………. 30-Year Mortgage

$124,114 ………. Income Requirement

$2,182 ………. Monthly Mortgage Payment

$406 ………. Property Tax (@1.04%)

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

$98 ………. Homeowners Insurance (@ 0.25%)

$520 ………. Private Mortgage Insurance

$0 ………. Homeowners Association Fees

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

$3,206 ………. Monthly Cash Outlays

-$340 ………. Tax Savings (% of Interest and Property Tax)

-$643 ………. Equity Hidden in Payment (Amortization)

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

$137 ………. Maintenance and Replacement Reserves

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

$2,384 ………. Monthly Cost of Ownership

Cash Acquisition Demands

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$4,690 ………. Furnishing and Move In @1%

$4,690 ………. Closing Costs @1%

$4,526 ………… Interest Points @1% of Loan

$16,415 ………. Down Payment

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

$30,321 ………. Total Cash Costs

$36,500 ………… Emergency Cash Reserves

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

$66,821 ………. Total Savings Needed

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Shevy Akason and Larry Roberts will host a short sale and REO workshop at 6:30 PM Wednesday, November 16, 2011, at the offices of Intercap Lending (9401 Jeronimo, Suite 200, Irvine, CA 92618).

Register by clicking here or email us a sales@idealhomebrokers.com.

The bank settlement deal being negotiated limits future exposure and inflicts little pain on the banks.

Irvine Home Address … 71 GOLDENROD #47 Irvine, CA 92614

Resale Home Price …… $458,900

Lighten up while you still can

Don't even try to understand

Just find a place to take your stand

and take it easy

The Eagles — Take It Easy

The negotiations with banks over their shoddy foreclosure practices are working out in the banks' favor. I contend Robo-signer and other issues which have delayed foreclosures are merely a ruse to buy time for the banks who are praying the market will come back and bail them out. Banks managed to turn this issue to their favor. By negotiating immunity from further lawsuits, banks are limiting their risk and shoring up a gaping hole in their balance sheets. When its over, they can take it easy, and push forward with foreclosing on the squatters and restoring the nation's housing markets.

A Deal That Wouldn’t Sting

By GRETCHEN MORGENSON

Published: October 29, 2011

AFTER months of back and forth, a deal that is supposed to punish large financial institutions for foreclosure misconduct may be nigh.

While the exact terms remain under wraps, some aspects of this agreement — between banks on one side, and the federal government and a raft of state attorneys general on the other — are coming into focus.

Things could change, of course, and the deal could go by the boards. But here’s the state of play, according to people who have been briefed on the negotiations but were not authorized to discuss them publicly.

Cutting to the chase: if you thought this was the deal that would hold banks accountable for filing phony documents in courts, foreclosing without showing they had the legal right to do so and generally running roughshod over anyone who opposed them, you are likely to be disappointed.

By and large, banks have not been foreclosing improperly. There are very few stories of errors by the banks where they foreclosed on a debtor who was current on their payments. 99.9% of the foreclosed were not paying their mortgage and should have expected to be foreclosed on. Despite beliefs to the contrary, banks are under no obligation to “work with” delinquent mortgage squatters, and loan modifications are not an entitlement.

That being said, I do want to see the banks punished — not because of their foreclosure practices but because their activities inflated a massive housing bubble which required them to foreclose on millions of people. Banks need to bear the full brunt of their losses or they will repeat this mistake.

This may not qualify as a shock. Accountability has been mostly A.W.O.L. in the aftermath of the 2008 financial crisis. A handful of state attorneys general became so troubled by the direction this deal was taking that they dropped out of the talks. Officials from Delaware, New York, Massachusetts and Nevada feared that the settlement would preclude further investigations, and would wind up being a gift to the banks.

Banks are only interested in a settlement because they want to preclude further investigations to limit their ongoing liability. This is essential for the banks to recover. Otherwise, as they make profits, the attorneys both public and private will sue them to take their money. These lawsuits will be endless. This is why banks are pushing for this settlement, and it's why their are willing to pay billions to get it. It's better to plug the leak for $5 billion than sink slowly into a $30 billion hole.

It looks as if they were right to worry. As things stand, the settlement, said to total about $25 billion, would cost banks very little in actual cash — $3.5 billion to $5 billion. A dozen or so financial companies would contribute that money.

The rest — an estimated $20 billion — would consist of credits to banks that agree to reduce a predetermined dollar amount of principal owed on mortgages that they own or service for private investors. How many credits would accrue to a bank is unclear, but the amount would be based on a formula agreed to by the negotiators. A bank that writes down a second lien, for example, would receive a different amount from one that writes down a first lien.

The loans they reduce principal on are likely to be the lost causes they were going to lose anyway in a foreclosure. Most likely they will forgive part of the principal on some deeply underwater loan owners to induce them to make a few more payments. By giving false hope to the hopeless, they will actually gain a few additional payments they would otherwise miss to strategic default.

Sure, $5 billion in cash isn’t nada. But government officials have held out this deal as the penalty for years of what they saw as unlawful foreclosure practices. A few billion spread among a dozen or so institutions wouldn’t seem a heavy burden, especially when considering the harm that was done.

What harm? She makes it sound like millions of people who were current on their mortgages were foreclosed on. This simply isn't true.

What we have seen in the mainstream media is a focus on a few sensational incidents which they have blown all out of proportion. For example, Bank of America foreclosing on home that no longer exists, no missed payments is a story about a rare clercal error, the type of which occurs when you are servicing several million loans, and this rare incident is being portrayed as a huge systemic problem with bank servicing. It isn't.

The real purpose stories like this serve is to demonize the banks and make delinquent mortgage squatters feel better about sticking it to the man. Don't get me wong, I want to see the banks suffer, but not because they are foreclosing on those who don't make their payments but because their shoddy lending practices inflated a massive housing bubble which precipitated the economic decline we are still struggling with today.

The banks contend that they have seen no evidence that they evicted homeowners who were paying their mortgages. Then again, state and federal officials conducted few, if any, in-depth investigations before sitting down to cut a deal.

The two sentences together above represent the worse form of tawdry reporting. She reveals a fact, which is that banks are not foreclosing on their good customers, but then she smears them by implication by insinuating if investigations were conducted, they would find all manners of wrongdoing. Yellow journalism is alive and well.

Shaun Donovan, secretary of Housing and Urban Development, said the settlement, which is still being worked out, would hold banks accountable. “We continue to make progress toward the key goals of the settlement, which are to establish strong protections for homeowners in the way their loans are serviced across every type of loan and to ensure real relief for homeowners, including the most substantial principal writedown that has occurred throughout this crisis.”

All principal reduction is a bad idea, but as I noted above, banks will use this as a loss mitigation measure to try to induce some deeply underwater loan owners to make a few more payments.

Still, a mountain of troubled mortgages would not be covered by this deal. Borrowers with loans held by Fannie Mae and Freddie Mac would be excluded, for example. Only loans that the banks hold on their books or that they service for investors would be involved.

One of the oddest terms is that the banks would give $1,500 to any borrower who lost his or her home to foreclosure since September 2008. For people whose foreclosures were done properly, this would be a windfall. For those wrongfully evicted, it would be pathetic. Roughly $1.5 billion in cash is expected to go into this pot.

Doesn't this feel like guilt money? The banks did nothing wrong in the foreclosure process. Why should they be giving former loan owner's money? It is because they screwed the masses when they inflated the housing bubble and they are paying guilt money for that misdeed? Of course, this further rips off those who haven't gone through foreclosure and are struggling with bloated payments. Doling out bailout money is never fair.

The rest of the cash that would be paid by the banks is expected to be split this way: the federal government would get about $750 million, state bank regulators about $90 million. Participating states would share about $2.7 billion. That money is expected to finance legal aid programs, housing counselors and other borrower support. If 45 states participated, that would work out to about $60 million apiece.

OBVIOUSLY, the loan modifications would make up a majority of the deal. And this is where real questions arise. For example, how can we be sure this plan won’t reward banks for modifications that they would have agreed to or should already have done absent the deal?

Why is that important? Banks are going to do what's in their best interest financially. They want to keep borrowers paying. The deal doesn't have to be punitive to be effective.

Perhaps most important, will the banks change the terms of loans enough to ensure that borrowers can actually meet their obligations over time? Or will these modifications default again, as is often the case? If so, the banks will have received a lucrative credit, even though borrowers fall back into trouble.

Why do we want to give borrowers who foolishly overextended themselves a break. I would be more upset if irresponsible loan owners were given a break than if the banks foreclosed on all of them.

Such concerns are justified because past settlements promising big help to borrowers have failed to live up to their hype. An example is the 2008 settlement with Countrywide Financial that was struck by Illinois and California. Characterized as providing $8.7 billion in relief to troubled borrowers, it turned out to generate nowhere near that benefit.

She obviously has not figured out that the only purpose behind the fanfare associated with the various bailouts has been to create false hope in the minds of loan owners sot they keep paying mortgages they cannot afford. Politicians got involved to look like they were doing something when they really weren't.

The deal being discussed now may also release the big banks that are members of MERS, the electronic mortgage registry, from the threat of some future legal liability for actions involving that organization. MERS, which wreaked havoc with land records across the country, was sued last week by Beau Biden, Delaware’s attorney general, on accusations of deceptive trade practices.

The MERS registry was also subpoenaed last week by Eric Schneiderman, the attorney general of New York, as part of his investigation into the fun-while-it-lasted mortgage securitization fest. If he were to sign on to the settlement, his investigation into MERS could not move forward.

“Rules matter,” Mr. Biden said in announcing his suit. “A homeowner has the obligation to pay the mortgage on time and lenders must follow the rules if they are seeking to take away someone’s house through foreclosure.”

Abiding by the rules has not been the modus operandi in the foreclosure arena. That’s why any settlement must be tough, truly beneficial to borrowers and monitored for compliance. Otherwise, the deal would be another case where our government let the big banks win while Main Street loses.

Gretchen Morgenson is full of crap — as usual. This poor article panders to the emotions of loan owners but fails to identify the real behind-the-scenes workings of this issue. The New York Times must feel her reporting helps sell papers, but it does little to enhance the reputation of the newspaper.

She couldn't afford it

The main thing which kept me from buying during the housing bubble was a recognition of the fact I couldn't afford a property equivalent to what I could rent with a 30-year fixed rate mortgage. I never researched beyond that. I knew from my finance background that terms other than a fixed-rate amortizing mortgage are not stable, so I didn't look around for other alternatives. Unfortunately, I was in the minority.

Everyone else embraced the financial innovation and its embedded Ponzi financing scheme, and they believed they could afford properties as long as another creditor would always be around to give them Ponzi loans to make their payments. Obviously, these borrowers were wrong.

The former owner of today's featured REO bought back in 2003, increased her mortgage once, and took out an $80,000 HELOC later on. It isn't clear whether or not she needed the cash out or even took it, but what is clear is that she could not keep up with the payments, and the property went to auction on 3/16/2011.

Fannie Mae owns the property now, and despite it taking seven months to get to market, they will not fool around with its disposition. Expect this to be sold in the next 120 days for whatever the market will bear. During this time of year, that won't be much.

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This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707

949.769.1599

sales@idealhomebrokers.com

Irvine House Address … 71 GOLDENROD #47 Irvine, CA 92614

Resale House Price …… $458,900

Beds: 3

Baths: 2

Sq. Ft.: 1370

$335/SF

Property Type: Residential, Condominium

Style: Two Level, Mediterranean

Year Built: 1986

Community: Woodbridge

County: Orange

MLS#: U11004357

Source: CRMLS

Status: Active

On Redfin: 22 days

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WELCOME HOME TO THE CITY OF IRVINE AND TO ONE OF THE VERY BEST CITIES IN ORANGE COUNTY. THIS IS A CONDOMINIUM THAT LIVES LIKE A SINGLE FAMILY HOME. LOCATED IN THE SOUGHT AFTER COMMUNITY OF WOODBRIDGE. THE PROPERTY FEATURES 3 BEDROOMS, TWO AND ONE HALF BATHROOMS, WITH CLOSE TO 1,370 SQUARE FEET OF INTERIOR LIVING SPACE THAT MAY BE JUST THE RIGHT SIZE FOR YOUR ACTIVE LIFESTYLE. WE THINK THAT YOU WILL AGREE, THAT THE HOME IS IN MOVE IN CONDITION, AS IT HAS BEEN REFRESHE WITH NEW PIANT AND CARPET AND MORE. YOU ARE PART OF AN ASSOCIATION THAT CREATES THE FEELING OF BEING ON VACATION IN AN EXCLUSIVE RESORT. YOU WILL ENJOY THE ASSOCIATION POOL, SPA, AND MANICURED COMMON AREAS. THE LOCATION IS FANTASTIC YOU ARE CLOSE TO ALL THE GREAT THINGS IN IRVINE; PARKS, SCHOOLS, RECREATION, TRANSPORTATION AND SO MUCH MORE. SO COME HOME TO IRVINE, AND START TO LIVE THE ORANGE COUNTY LIFESTYLE TODAY.

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Proprietary IHB commentary and analysis

Resale Home Price …… $458,900

House Purchase Price … $445,000

House Purchase Date …. 12/19/2003

Net Gain (Loss) ………. ($13,634)

Percent Change ………. -3.1%

Annual Appreciation … 0.4%

Cost of Home Ownership

————————————————-

$458,900 ………. Asking Price

$16,062 ………. 3.5% Down FHA Financing

4.08% …………… Mortgage Interest Rate

$442,838 ………. 30-Year Mortgage

$132,938 ………. Income Requirement

$2,135 ………. Monthly Mortgage Payment

$398 ………. Property Tax (@1.04%)

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

$96 ………. Homeowners Insurance (@ 0.25%)

$509 ………. Private Mortgage Insurance

$297 ………. Homeowners Association Fees

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

$3,434 ………. Monthly Cash Outlays

-$333 ………. Tax Savings (% of Interest and Property Tax)

-$629 ………. Equity Hidden in Payment (Amortization)

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

$77 ………. Maintenance and Replacement Reserves

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

$2,573 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$4,589 ………. Furnishing and Move In @1%

$4,589 ………. Closing Costs @1%

$4,428 ………… Interest Points @1% of Loan

$16,062 ………. Down Payment

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

$29,668 ………. Total Cash Costs

$39,400 ………… Emergency Cash Reserves

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

$69,068 ………. Total Savings Needed

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