realtors take advantage of their status as trusted experts to manipulate buyers, and they feel no responsibility when their statements are exposed as lies.

Irvine Home Address … 7 THORNWOOD Irvine, CA 92604

Resale Home Price …… $549,000

You're so good at stretching the truth,

into a sugar coated lie.

Everyone takes a bite.

I have been dining with the enemy.

It was a wolf in sheep's clothing.

Now it's so clear to me.

Oh-hhh-ohh

I've had enough of your games

if you're not trembling, you'd better be

cause we're gonna be the end of you

I've had enough of your games

I'm gonna show them who you really are

And I can tell you right now, it won't be pretty

The Providence — Wolf In Sheep's Clothing

There are some things that never made sense to me. I remember when I first read about prejudice, slavery, and segregation in grade school. I didn't understand how people could treat each other that way. It still doesn't make much sense to me.

Realtors are liars. We all know that, yet we tolerate and even encourage the behavior. Why would anyone want to hear bullshit? Apparently some people do. That doesn't make much sense to me either.

I proposed regulating the realtors in The Great Housing Bubble. Now others are calling for restrictions on realtors ability to represent financial performance.

Dr. Brent White of the University of Arizona has been featured in IHB articles on a number of occasions: Should You Walk Away from Home Debt? — Dec 21st, 2009; Strategic Default Is Merely Collecting On Home Price Protection Insurance Sold By Lenders — Apr 30th, 201; The Latest Lie about Strategic Default: Borrowers Are Emotional Fools — Jun 1st, 2010. He has consistently been right about the housing bubble.

Since Dr. White's paper is so long — and so good — I am reprinting it with some edits for brevity with limited commentary. I am not indenting and italicizing the quoted text to make it easier for you to read. What follows is not my original writing.

Arizona Legal Studies

Discussion Paper No. 11-10

Trust, Expert Advice, and Realtor Responsibility

Brent T. White The University of Arizona James E. Rogers College of Law

March 2011

Abstract: Real estate agents benefit from the trust associated with portraying themselves as real estate experts, yet are generally not legally responsible for the advice that they give. This lack of legal responsibility is at odds with psychological propensity of individuals to trust perceived experts. It also creates a genuine moral hazard, fueled the housing market bubble and contributed to the suffering of homeowners whose real estate agents encouraged them to buy as the market began to burst. In response to this problem, this article proposes a new regulatory regime requiring real estate agents to choose between two paths: (1) accept legal liability when they negligently, recklessly or intentionally make inaccurate or misleading pronouncements about a home’s value or investment potential; or (2) embrace their role as “salespersons” and refrain from offering advice or opinions about the real estate market to their customers.

TRUST, EXPERT ADVICE, AND REALTOR RESPONSIBILITY

Introduction

As the housing crisis enters its fourth year, national home prices are down over 30%, more than 11 million homeowners are underwater on their mortgages, and over 6.5 million homeowners have already lost or given up their homes to foreclosure. Over 4 million more homes are in the pre-foreclosure process – and most economists predict that the crisis has yet to run its course.

Public discussions over the causes and responsibility for the housing crisis have focused primarily on homeowners, who are said to have bought homes that they could not afford; lenders, who are alleged to have been irresponsible in their lending practices; and the government, which is alternatively accused of meddling too much in the mortgage market or failing to regulate the market when it should have. Largely lost in this discussion has been the role of the real estate brokerage industry in both stoking the housing bubble and then delaying public recognition that the bubble had burst.

Moreover, while homeowners, lenders, and the government – and by extension taxpayers – have all taken significant losses due to the housing meltdown, those in the real estate brokerage industry have borne no financial responsibility for their role in creating the housing bubble and burst. This includes not only the National Association of Realtors (NAR), but also individual real estate agents. Indeed, even real estate agents who knowingly conveyed overly-optimistic forecasts for the housing market and intentionally gave misleading advice to their clients have escaped responsibility for the financial suffering caused by their actions in the wake of the housing collapse.While such real estate agents may be a minority, even the most unscrupulous agents escape responsibility – as courts generally treat real estate agents as mere salespersons, who are simply not responsible for their advice or opinions.

Courts’ treatment of real estate agents as mere salespersons is at odds with most agents’ self-description as professionals who have specialized expertise on the housing market and who owe a fiduciary duty to their clients. Court decisions are also detached from the concrete reality of real estate transactions in which buyers hire and trust real estate agents to guide them through the complex process of purchasing a home. Indeed, literature from the cognitive sciences suggests that, because homebuyers are generally novices making complex decisions on the basis of limited information, real estate transactions are exactly the type of transactions where individuals are most likely to hire and trust a perceived expert.

This discrepancy between homebuyers’ psychological propensity to trust perceived experts and the legal rule that a buyer may not reasonably rely upon his real estate agent’s advice, creates a genuine moral hazard in which real estate agents benefit from the trust associated with portraying themselves as real estate experts, yet avoid responsibility for the advice that they give. This discrepancy is made more problematic by the fact that many buyers are likely unaware that their real estate agents bear no legal responsibility for their advice and opinions, and buyers are thus likely to place undue reliance upon their agents’ recommendations.

In response to this problem, this article suggests two possible paths: (1) fully professionalizing the real estate agent’s role, including regulations subjecting agents to legal liability when they negligently, recklessly or intentionally make inaccurate or misleading pronouncements about a home’s value or investment potential; or (2) de-professionalizing the real estate agent’s role by requiring mandatory disclosures to buyers that real estate agents are “mere salespersons” and barring real estate agents from offering advice or opinions as to a home’s value or investment potential. But – as the housing meltdown has shown – the middle path, in which real estate agents may represent themselves as professional experts but are treated as mere salespersons when it comes to legal liability, is both untenable and unfair.

The Rhetoric of Homeowner Responsibility

Looking back to 2005 and 2006, when the United States was in the throes of the housing bubble, it seems remarkable – if not downright foolish – that so many people in overpriced markets were willing to pay hundreds of thousands more for average-sized homes than those same homes would have sold for just a few years before. Moreover, in order to do so, these home buyers were willing to take on mortgage payments that frequently required all of their disposable income and were two to three times more than they would have paid to rent a similar home. Now that home prices have come crashing down, many of these homeowners find themselves throwing all of their disposable income into homes worth much less than they owe.

Any sympathy for these homeowners aside, they made the decision to purchase their homes. Thus, the common view holds, they must bear the consequences of their actions. They should have known that paying three times more for a mortgage than they could have paid to rent the same house was simply unwise. They should have foreseen that hugely inflated home prices might decline. And they shouldn’t have been so careless in taking on the burden of a mortgage payment that required all or most of their disposable income. If they now find themselves in a terrible predicament, it’s one of their own making. They signed their mortgage knowing full well that they were taking on a huge financial responsibility – and, if they now regret that decision, they have no one to blame but themselves.

This argument has great emotional appeal, as it ties into the American ethos of personal responsibility and the angst in some quarters that Americans are increasing losing sight of this value. This American ethos holds that ultimate decision-making responsibility lies with self. Messages of personal responsibility are big winners when it comes to the public dialogue related to underwater homeowners.

Indeed, many underwater homeowners themselves believe that they should accept responsibility for their mistake in buying at the wrong time. They blame themselves for being foolish – for not seeing this coming. If they hadn’t been in such a rush to buy a home, if they had listened to that voice inside themselves telling them that housing prices seemed crazy, if they had done some more research about the state of the housing market before making such a big decision, if they had bought a more modest home and not put all their eggs in the homeownership basket, and – better yet – if they had just rented instead, they wouldn’t find themselves in this mess.

The “Buyers Agent”

Such self-recrimination aside, it’s not typically the case that homebuyers make their decisions in isolation. While the ultimate decision may be their call, potential homebuyers are subject to a variety of outside influences including family, friends, and – critically – real estate agents (aka, “realtors”). Indeed, over 79% of homebuyers work with an agent in purchasing a home. As self- described experts on the housing market, buyer’s agents serve a variety of functions including assisting buyers in finding a suitable property, preparing an offer, and negotiating with the seller. Agents also typically advise the buyer as to an appropriate price, and whether the property is a good investment.

… Buyers may worry, for example, about whether they are purchasing at the right time or making a good financial decision by investing in real estate. This was particularly likely to be the case when housing prices reached the stratosphere during the boom and a reasonable person might have questioned whether it really made sense to buy at those prices. Anxieties are also likely to be pronounced now in a declining market, when a buyer might reasonably worry that the market still has a ways to go to hit bottom. Buyers in both situations will typically turn to their real estate agents for advice and reassurance. Real estate agents not infrequently respond – both in booming and declining markets – by assuring their clients that it is a “great time to buy,” and that buying a home is a wise and safe investment. Real estate agents will also typically offer some rationale why this is the case.

Because most buyers lack the perceived knowledge or experience of their real estate agents, buyers frequently trust their agents’ opinions and representations on such matters. Indeed, the buyer has probably engaged the agent for their expertise. Many successful agents work hard to further cultivate this trust throughout the relationship, including the sense that the agent is not simply “a salesperson,” but rather “a reliable adviser who cares more about the customer than the transaction.” If the agent succeeds in engendering this trust, it can pay “back in spades” at decision time, when the buyer is called to trust the agent as the “expert.”

But while homebuyers are called to trust real estate agents as experts, real estate agents also sell houses for a living. This dual role as advisor and salesperson creates an inevitable conflict of interest for real estate agents. For example, if a real estate agent had told her clients in 2005 and early 2006 that some of the country’s most prominent economists believed that housing prices were unsustainable or, in late 2006, that these same economists were arguing that home prices were headed for significant declines, her clients might have decided not to buy. If too many of her clients made this decision, the realtor could not have earned a living. It’s not good business to tell prospective homebuyers that the housing market may crash.

While highly-conscientious real estate agents might have nevertheless issued such warnings, many undoubtedly did not. Such agents were not necessarily acting nefariously, as many agents may have truly thought that residential real estate was a great investment. Like most homebuyers, many real estate agents didn’t see the crash coming. One doesn’t have to look far to find real estate agents who lost their own shirts in the housing collapse. Many real estate agents, however, must have at least heard the warnings that the real estate market was headed for trouble – and, if they didn’t, they weren’t paying attention.

NAR Spin

While an average person, caught up in their own lives and deluged by information in the internet age, might not have been aware of this debate, a real estate expert should have been – at least in order to be worthy of the expert label. Indeed, these warnings so alarmed those in the real estate brokerage industry that the New York Times reported that in August of 2005 that Robert Shiller had already “become the bugaboo of the multibillion-dollar real-estate industry. Its executives, like many Wall Street economists, say that low interest rates and a growing population will keep house prices rising, even if future increases are smaller than recent ones.” In other words, at least some experts in the real estate brokerage industry were well aware of the housing bubble warnings – and actively dismissed them.

The NAR, in particular, tended to discount any concerns about the housing market in 2005, 2006, and even well into 2007. The persistent line of the NAR during the height of the housing bubble was that there was no bubble – and that buyers should jump before prices got even higher. Moreover, as the housing market began to weaken in 2006, the NAR’s chief economist, David Lereah, explained that the market would land on a “high plateau” in 2006, and that the market was just leveling out, “headed for a soft landing.” Lereah argued that home prices had never declined on a national level before, and that worries of a national bubble bursting were absurd:

I’m getting tired of all these doomsayers. We live in houses, and our houses are not going to crash. This isn’t the stock market…. Local economies are relatively healthy. There’s job creation – this isn’t a scenario where bubbles burst. Can there be one or two or three or several local markets where prices actually go down? Yes. But to generalize for 30 markets or the whole real estate marketplace – that’s absurd.

Once prices did start to decline on a national level and continued to do so into 2007, the NAR assured its members and prospective buyers each month – for months on end – that the housing market had hit bottom and prices would soon begin to rise again. As Mr. Lereah would famously declare in March of 2007: “It looks like we've bottomed out. . . . When it's all said and done, this contraction in housing is probably going to be the least severe contraction we've ever had, which is going to surprise a lot of people.” Prices continued to decline for over three years thereafter, declining an additional 23% by July 2010. …

… Given all the indications of trouble in the residential real estate market beginning in late 2005, the NAR has been criticized for repeatedly dismissing concerns of a bubble and for not warning buyers that it might, in fact, not be a good time to buy:

By being such dishonest brokers of information, the NAR has now made themselves look ridiculous. No one knows what the future will bring, but consistently absurd spin offered up by the Realtor group not only does a disservice to the public, but is now working against the interest of Realtors themselves.”

Indeed, after leaving the NAR, Mr. Lereah himself admitted that he had put a “positive spin” on the housing numbers:

I worked for an association promoting housing, and it was my job to represent their interests. If you look at my actual forecasts, the numbers were right in line with most forecasts. The difference was that I put a positive spin on it. It was easy to do during boom times, harder when times weren't good. I never thought the whole national real estate market would burst…. [Looking back] I would not have done anything different. But I was a public spokesman writing about housing having a good future. I was wrong. I have to take responsibility for that.

The Blind Leading the Blind

Mr. Lereah’s admission of having spun the numbers aside, one can understand why many individual real estate agents – most of whom have no training as economists or as investment advisors – might have believed what they were being told by the NAR’s chief economist. As such, an agent might have understandably decided that there was no need to mention to his clients in 2005 and 2006 that some economists were predicting a bursting of the bubble and huge price declines to follow – assuming of course that the agent was paying attention to these warnings.

While this may seem reprehensible in retrospect, individual real estate agents would have had a powerful psychological need to believe that there was no housing bubble – and later that prices would land softly. This need would have arisen from the fact that a real estate agent who did not believe these things, yet failed to advise her clients that buying a home in 2005, 2006 or 2007 was a risky proposition, could not have seen herself as ethical and honest individual. However, an agent who advised her clients that buying a home was risky would have likely driven many clients away.

In other words, a real estate agent’s built-in conflict of interests – and the psychological need to see herself as ethical and honest person – would have consciously and unconsciously motivated her to selectively perceive information that supported her belief that residential real estate was a good investment and to discount information that did not. Confirmation bias, disconfirmation bias, and the tendency of individuals to engage in motivated reasoning are well-documented in scientific literature – and it’s safe to assume that real estate agents suffer from the same psychological biases as all other human beings. [The OC Register Says California had no real estate bubble.]

Additionally, real estate agents as a class would have been susceptible to herding behavior, which refers to the tendency of individuals to go along with the crowd – often despite their own misgivings. A real estate agent who had his own doubts as to the sustainability of the housing market would have been confronted by the apparent fact that few of his fellow agents agreed. If most other real estate agents were bullish on the housing market, an agent might reasonably have concluded that he must be wrong about his doubts – especially to the extent that he was not sure about his own judgment in the first place. Few individuals will stand alone and reject the reasoning of their cohort. Ironically, however, the more individuals who cast their own judgments aside and go along with the crowd, the stronger the herding behavior becomes, even though many – or even the majority – of the real estate agents in the crowd may have heard the warnings about the overheated housing market and privately feared that the herd was about to run off a cliff.

Given these psychological biases, one can also understand those real estate agents who, once the housing market began to soften, told their clients that the market was just leveling out, and would not decline. Moreover, to the extent that real estate agents believed the “all real estate is local” mantra,80 they might have felt justified in keeping any concerns or negative information about the national housing market to themselves, so as long as the buyer was not paying more than local “market prices.” In short, it’s understandable that many realtors may have chosen in 2005 and early 2006 to “accentuate the positive” and to say nothing to their clients about signs of trouble brewing in the housing market. Some might also have genuinely felt certain that their clients were making a good investment. …

Walking Away Scot-Free

Unlike buyers, who have been stuck in underwater homes, and lenders, who have also taken significant losses, the NAR has walked away scot-free from its role in contributing to the housing crash and the losses that its inaccurate advice caused homebuyers. Moreover, real estate brokers and agents have kept the billions of dollars in commissions, including $100 billion in 2005 alone, generated, at least in part, from assurances to their clients that the prices they paid for their homes actually reflected the homes’ value and that buying a home was a good investment. Indeed, the NAR indicated to the New York Times that it is not aware of any case where a real estate agent has been held liable for inaccurate representation as to a home’s value or its investment potential. Westlaw and Lexis-Nexis searches similarly reveal no cases holding real estate agents liable for price or investment advice – and many that do not.

Real estate agents generally escape liability because courts treat them as mere salespeople, or connecters of sellers and buyers, who bear no legal liability for their pronouncements about the health of the housing market or their investment advice, including statements affirmatively guaranteeing a buyer a positive return on their investment. Courts also generally refuse to hold realtors responsible when they misrepresent a property’s fair market price – or mislead investors as to a property’s rental value. Instead, courts typically hold that matters of price are matters of opinion, not fact; that the buyer is assumed to have done their own research; and that the buyer is not entitled to rely upon their agent’s opinions. Courts generally find that, absent fraud or non-disclosure of a material“fact,” real estate agents are not responsible for their opinions, no matter how wrong or recklessly given. In short, courts echo the popular view that homebuyers have no one to blame but themselves for their decision to purchase their house.

… But one might question why, if a real estate agent negligently, recklessly or intentionally made inaccurate pronouncements about the housing market or gave misleading investment advice to his client, the agent should completely escape personal responsibility for his actions – either for the advice itself or for offering opinions as to matters outside his expertise. It is unclear why the ethos of personal responsibility does not extend to the agent. Moreover, absolving real estate agents of responsibility for their advice creates a genuine moral hazard in which agents profit from the buyer’s purchase of a home, but bear no risk if the advice that they gave to induce that purchase is wrong, or intentionally misleading. Real estate agents risk other people’s money – and get paid even if the agent knows that the risk is reckless, or downright foolish.

Treating real estate agents as mere salesmen also runs counter to their self-description as professionals and to their representations to their clients that they owe them a fiduciary duty to look out for their best interest – an obligation that a mere salesperson does not have. Nevertheless, courts seem to assume that homebuyers do or should understand that, despite their agent’s protest to the contrary, their agent is no different in principle than a car salesperson. Everyone knows not to trust a car salesperson to look out for their best interests. Puffery is to be expected and one should enter a car lot at their own risk. As far as most courts are concerned, the same apparently goes for hiring a real estate agent. …

Choosing a Path

At a basic level, courts’ descriptions of what individuals should do when making complex financial decisions about whether to purchase homes (i.e. – ignore the opinions of their agents) is at odds with what people actually do (which is to seek and trust expert advice). Moreover, most people likely hire a real estate agent without any knowledge, or reason to suspect, that their agent’s “false statements concerning the market are held to be matters of opinion, judgment, seller’s talk” – and that their agents are not legally accountable for the advice that they give.

This approach is not only detached from the concrete reality of real estate transactions, but also fundamentally unfair to buyers, who are doing exactly what an amateur who must make a complex decision typically will do: engage and trust an advisor that they believe to be a qualified expert to guide them through the process. In addition to leaving unsuspecting homeowners without redress, not holding real estate agents to account runs counter to notions of professionalism and the ethos of personal responsibility.

There are two basic ways to address the discrepancy between homebuyers’ psychological propensity to trust their real estate agents and the general legal rule that buyers may not reasonably rely upon their agents’ advice. The first path is to change the legal rule, fully professionalize the real estate agents’ relationships to their clients, and formalize their fiduciary duty. The second – and opposite – path is to bring the real estate agent’s role in line with the legal rule, which means de-professionalizing the realtor-client relationship and clearly delineating real estate agents “mere salespersons.”

The first path may find the most support with real estate agents, as there has been and continues to be a substantial movement among real estate agents to professionalize their vocation. Indeed, as previously discussed, the NAR markets “realtors” as professionals and many real estate agents tend to see themselves as professionals, rather than mere salespersons. But despite strides toward professionalization, the real estate brokerage industry has still resisted legal responsibility when real estate agents negligently or recklessly offer inaccurate advice, or even intentionally manipulate their clients into making poor decisions.

If real estate agents are to be treated as “professionals,” however, they should be subject to regulations similar to those to which other advisory professionals are subject. As an analogous profession, for example, investment advisors have an “affirmative obligation” under the Investment Advisors Act “of utmost good faith and full and fair disclosure of all material facts to their clients, as well as a duty to avoid misleading them.” Investment Advisers must also be competent, “have reasonable and objective basis for investment recommendations,” and must ensure that that “any investment recommendations are appropriate considering the client's financial objectives, needs and situation.” …

Regardless of a client’s ultimate decision, being a professional carries an obligation to be vigilant in fully advising clients of the risks associated with purchasing a home (particularly in an inflated or declining market). Professional advisors should not, as the NAR Realtor Magazine suggests, push their clients “off the fence” by misleadingly suggesting that renting costs 7 times more than owning, or by telling them that they can “pretty much count on” appreciation of inflation plus 2 percent. Professional advisors should not practice scripts that “accentuate the positive” or engage in any form of puffery. Rather, they should soberly caution clients about potential negatives and positives and help clients dispassionately weight benefits and risks. And they must put their clients’ interests ahead of their own at all times, even if it means losing the sale or the client. In other words, if professionalism is to be the chosen path, real estate agents must accept a fundamental change in their role in real estate transactions. They must also give up the benefits of being mere salespersons, including the benefit of being largely free from legal liability.

If professionalism comes at too great a cost, real estate agents could embrace their role as salespersons,171 not only when sued but also when representing themselves to clients. Indeed, given that real estate agents are unlikely to agree as to the best path, there could be two categories of agents: “real estate advisors” and “real estate brokers” – just as there are investment advisors and stock brokers. In this two-tiered system, real estate advisors would be free to represent themselves as professional real estate experts (provided that they could demonstrate sufficient knowledge of real estate valuation, real estate investment and housing market economics). Such advisors might be in high demand to buyers looking to make wise purchasing decisions. But in exchange for the trust of buyers, real estate advisors would be required to accept potential legal liability similar to that of investment advisors.

Real estate brokers, on the other hand, would bear no responsibility for customers’ unwise purchasing decisions – aside from being required to disclose known material facts and defects about the property itself. In exchange for this free pass, and to protect buyers, brokers under such a system would be barred from representing themselves real estate advisors, as “professionals,” or as “experts” possessing specialized knowledge in real estate. Rather, brokers would be limited to representing themselves simply as salespersons. As salespersons, brokers could still provide many helpful services, including helping their customers find a suitable home, analyze and select neighborhoods and schools, and navigate the closing process.

But brokers would be strictly prohibited from offering advice or opinions as to the appropriate purchase price for a particular property, the current state or direction of the real estate market, or whether purchasing real estate is a wise investment decision. Broker training would emphasize that brokers are not to volunteer such opinions, and must respond to questions seeking such opinions by telling their customers that they are not legally allowed to offer an opinion. Brokers who broke this rule should also be strictly liable if their advice or opinions turned out to be inaccurate. …

Conclusion

The above discussion is not intended to disparage the majority of real estate agents who work conscientiously and ethically for their clients. Rather, the proposals in this article are all forward-looking and borne of the recognition that real estate agents – like homebuyers, mortgage brokers and banks – played a significant, if unwitting, role in creating the housing bubble and burst. In others words, by drawing lessons from the past, the proposals are designed to prevent its reoccurrence. Moreover, the hope is to engage real estate agents in discussing these forward-looking proposals – and not to punish them for past mistakes.

That said, it must be recognized that many homeowners might not currently be stuck in underwater homes if more real estate agents had listened to that voice inside themselves telling them that the market was crazy, had sought to educate themselves about the dangers of an inflated market, and had advised their clients that they might want to sit it out. Additionally, much suffering could have been avoided if the NAR had been a more objective purveyor of information to the public and to its members – instead of a cheerleader for the housing market encouraging potential buyers to get in before the “window of opportunity” closed.

A genuine moral hazard underlies the current role of real estate agents and the NAR. This moral hazard fueled the housing market bubble and contributed to the suffering of many people that the NAR and its realtor members encouraged to buy homes as prices began to decline. Unfortunately, the legal system allows real estate agents to benefit from the trust associated with portraying themselves as professionals, yet to avoid the consequences of the advice that they give – no matter how reckless or objectively misleading that advice may be. Other than their reputation, real estate agents have no skin in the game. They profit if people buy, but suffer no loss if they buy in error. This state of affairs is unfair to unsuspecting buyers and runs counter the ethos of personal responsibility. It should continue no more.

Real estate agents should be required to choose between two paths: (1) fully professionalize their role, including accepting legal liability when they negligently, recklessly or intentionally make inaccurate or misleading pronouncements about a home’s value or investment potential; or (2) embrace their role as “salespersons” and refrain from offering advice or opinions about the real estate market to their customers.

[end of academic report]

I fought the urge to add to Dr. White's already lengthy report with my agreeing comments. He laid out the case for regulating realtors clearly and backed it up with rigorous research. I highly recommend reading the unabridged version.

I think they got it all

I've been trying to find other interesting stories in the property records, so I pass on a number of run-of-the-mill HELOC abuse properties. Today's featured property stood out because these owners managed to extract the maximum value out of their tenure in this house.

• The property was purchased on 3/31/1998 for $263,500. The owners used a $255,500 first mortgage and a $ 8,000 down payment. They never owed this little again.
• On 9/21/1998 they refinanced with a $261,000 first mortgage and withdrew most of their down payment.
• On 11/12/1998 they obtained a stand-alone second for $50,000. These owners had lived in the house only 8 months before they got their first $50,000 in free money.
• On 12/28/2000 they refinanced with a $284,000 first mortgage and a $71,000 stand-alone second.
• On 1/8/2003 they refinanced with a $396,000 first mortgage.
• On 1/23/2004 they refinanced with a $489,250 first mortgage.
• On 5/3/2005 they obtained a $70,000 HELOC.
• On 2/16/2006 they obtained a $576,000 first mortgage and a $72,000 HELOC.
• On 3/7/2007 they made one last trip to the home ATM for a $572,000 first mortgage and a $143,000 stand-alone second.
• Total property debt is $715,000.
• Total mortgage equity withdrawal is $459,500.
• Total squatting time is about two and a half years so far.

Foreclosure Record

Recording Date: 11/23/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 08/09/2010

Document Type: Notice of Default

Foreclosure Record

Recording Date: 12/04/2008

Document Type: Notice of Sale

This one is bad. Think about the unceremonious fall from entitlement this family is about to endure. This property has been supplementing this families income from the day they moved in. They created a mountain of Ponzi debt, defaulted the moment the ATM was shut off, and they have been allowed to squat ever since. It will come as a big shock to them when they have to start paying for their housing. They're accustomed to the house paying them.

Irvine Home Address … 7 THORNWOOD Irvine, CA 92604

Resale Home Price … $549,000

Home Purchase Price … $263,500

Home Purchase Date …. 3/31/98

Net Gain (Loss) ………. $252,560

Percent Change ………. 95.8%

Annual Appreciation … 5.7%

Cost of Ownership

————————————————-

$549,000 ………. Asking Price

$109,800 ………. 20% Down Conventional

4.82% …………… Mortgage Interest Rate

$439,200 ………. 30-Year Mortgage

$111,358 ………. Income Requirement

$2,310 ………. Monthly Mortgage Payment

$476 ………. Property Tax

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

$92 ………. Homeowners Insurance

$82 ………. Homeowners Association Fees

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

$2,959 ………. Monthly Cash Outlays

-$392 ………. Tax Savings (% of Interest and Property Tax)

-$546 ………. Equity Hidden in Payment

$203 ………. Lost Income to Down Payment (net of taxes)

$92 ………. Maintenance and Replacement Reserves

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

$2,315 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

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

$5,490 ………. Closing Costs @1%

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

$109,800 ………. Down Payment

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

$125,172 ………. Total Cash Costs

$35,400 ………… Emergency Cash Reserves

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

$160,572 ………. Total Savings Needed

Property Details for 7 THORNWOOD Irvine, CA 92604

——————————————————————————

Beds: 3

Baths: 2

Sq. Ft.: 1458

$377/SF

Lot Size: 4,416 Sq. Ft.

Property Type: Residential, Single Family

Style: One Level, Cottage

Year Built: 1978

Community: Woodbridge

County: Orange

MLS#: S652285

Source: SoCalMLS

Status: Active

On Redfin: 1 day

——————————————————————————

Single story home located in the Woodbridge Village of Irvine. Spacious open floor plan with a large living room and a cozy fireplace. Upgraded kitchen with granite counter tops and newer cabinetry. Upgraded bathrooms, crown moldings, custom paint. Two car garage with driveway.

Nevada has a great many empty homes, and after my experiences flipping occupied properties, I will be happily focused on the empty ones.

Home Address … 7625 VELVET MIST ST, LAS VEGAS, 89131

Resale Home Price …… $95,900

Don’t ask me how, but guess who hit the big time.

Don’t look now, but guess who’s back in town.

It’s so easy, don’t even have to try.

You’re the winner you can take the prize.

Loverboy — Lucky Ones

In the cleanup phase of the Great Housing Bubble, the lucky ones are those profiting from recycling the dead carcasses from yesteryear. I have been sifting through the debris in Las Vegas for about six months now. For a variety of reasons, I have been mum on my activities, but today I am going to share some anecdotes and lessons learned from my new adventure.

The most important of these lessons relates to the topic of today's featured article. According to the US Census Bureau, there are 167,564 houses in Nevada. That's a lot of empty homes — which is good if you want to survive as a flipper. Occupied homes are troubles magnified. Buying them is harmful to your financial health.

The pros and cons of occupied properties

Buying occupied properties at auction is always riskier because you never know what will happen with the previous occupants. I purchased two occupied houses for investors who were able to enjoy positive cashflow from the first month of ownership, so there are potential advantages. Since occupied properties have more risk, they have appealingly large margins — at least they look like they have large margins. When you factor in the lost time and the potential for litigation or damage by the occupants, houses with people in them are something to be avoided.

Squatters on my dime

I have one property I purchased in November, and the former owners are still squatting there. The former owners pulled an interesting legal move. They had the wife file for bankruptcy in her maiden name a few days after the foreclosure auction, and they put the property into the estate. Well, our search didn't pick up the bankruptcy because it wasn't in the owner's name, so we began foreclosure proceedings. Late in the process, the bankruptcy attorney accuses us of harassment, and we had no idea what he was talking about.

Once we discovered the suit, we had to initiate our own suit to have the property removed from the bankruptcy proceedings. They didn't own the property when they filed, so they can't obtain protection from the bankruptcy court to stay there. If they had filed before the foreclosure, they would have had other rights, but if they had filed before the foreclosure, it would have shown up in a title search, and I wouldn't have bid on the property.

The cost of all this legal maneuvering is expensive. The time to properly evict these people has been costly in two ways. First, the declining market means my resale price is declining while i wait. in addition, I have opportunity cost on money tied up in a non-performing asset. I am not a bank. I can't amend, extend, and pretend I am making money. I either sell quickly for a profit or I don't profit.

Ye ol' crack house

By far the most bizarre story I have is a property I purchased in October.

Back in 2005, a recent Salvadoran immigrant obtains his citizenship. With his workman's salary and a penchant for liar loans, he puts together an empire of 8 properties in Las Vegas from 2005 to 2007. The last of these properties was his crown jewel — the property I bought.

The property is in a older Las Vegas neighborhood called Spring Valley. The neighborhood is dominated by ranch style houses ranging from 1,400 SF to 1,800 SF. It has seen better days, but this is not a bad neighborhood. It is mostly median income middle-class families trying to get by.

My property is the large 5 bedroom home at the end of a cul-de-sac. It is the only one in the area with a large pie shaped lot with an outbuilding and RV parking. Back in 2007 when Vicente the Fox, our recent immigrant, bought this property with his liar loan, it was the finest property on the street.

Vicente the Fox began using his large property as a salvage yard. He put individual locks on all the bedroom doors and leased out the rooms to boarders and skimmed their rent. He tried to convince them to keep paying him even after I bought the house.

The boarders were united by their love for crystal meth. There is no evidence this place was used as a meth lab — thankfully — but when the constables came by to evict the last boarders, they confiscated a cigar box full of used pipes and other paraphernalia. In the two weeks after we took possession, the house was broken into three times.

The amount of junk on this lot is staggering. There are eight automobiles on this property, and none of those are in the garage because the garage was full of stuff. All eight cars are in the back and side yards. There were 4 working refrigerators on the property, a dirt bike, an air conditioner, anything and everything you can imagine, and lots of it.

I call our former owner Vicente the Fox because he carefully avoided us whenever we tried to serve him formal eviction papers. He didn't live at this house, and his former address is an apartment where he skipped out on the rent. However, since I was unable to serve him, I could not fully divest him from the property and the junk sitting on it.

He teams with a local attorney bandito to shake me down for wrongful foreclosure, stealing his property, and so on. Since I couldn't get him served, his weak case was strong enough to tie me up in court for a while. I settled.

Surprisingly enough, it turned out in my favor because when I let him back on the property to get his stuff, he cleared out much of the garbage along with the stuff of value. My worst fear was him picking over the good stuff and leaving me with a $5,000 mess to clean. He took a number of paint cans and other items that would have required me to bring in special disposal teams.

There is no good resolution for this property. I will lose money on the deal, and Vicente the Fox will have a roving pile of garbage scattered at friends and acquaintances houses all over town.

Eventually, this property will get sold. Hopefully, it will be to a good family that restores it as the jewel of the neighborhood. That's the outcome I want.

Flippers are maligned for bringing down the quality of life in neighborhoods. The reality is that the delinquent former owners are the ones who brought down the neighborhood. Flippers like me are the ones taking back the crack houses from rent-skimming former owners and putting families back into them.

After those two experiences, it's easy to see why dealing with vacant properties is much preferred. I'll focus on the empty ones. There are plenty to choose from.

Nevada's boom ends in record number of empty homes

(AP) – 6 days ago

LAS VEGAS (AP) — The promise of palm tree groves and low-priced real estate lured Alan and Katherine Ackerly across the Rocky Mountains from Denver to Nevada in 2004, where thousands of new houses beckoned brightly as any neon sign.

They came to buy their retirement home. But the real estate bust took its toll, with a flood of short sales and foreclosures in the market, and last month the Ackerly's dream home was foreclosed on, too.

“I pretty much gave it back to them,” said Alan Ackerly, a 57-year-old electrician who stopped paying his mortgage because he owed more than the house was worth.

The Ackerly's home is now among a swelling number of abandoned houses in Nevada. There were 167,564 empty houses in the state last year, according to newly released U.S. Census data, more than double the number in 2000. The number of vacant homes represents about one out of every seven houses across Nevada.

I haven't looked into the Census Bureau's methodology, but that number sounds a bit too big, doesn't it? There are unquestionably a large number of vacant homes, but that many?

The figures are another striking example of how the housing crisis has pummeled Nevada, casting a new light on the severely weakened market after years of boom.

One result is an increase in code violations. In Clark County, home to Las Vegas, such complaints nearly doubled from 2008 to 2009 and the median price of resale homes dropped to $115,000 in January.

That put's their median somewhere in the late 90s. The Las Vegas market is the apocalypse bubble bloggers predicted would occur in every market. As a reaction to Las Vegas, lenders decided it was wiser to build a huge shadow inventory. The likely have saved themselves a great deal of strategic default.

Neighbors call to complain of abandoned houses, stagnant pools, wild yards and unsecured doors, said Joe Boteilho, the county's code enforcement chief. But the neighborhoods of newly constructed homes are not facing the same blatant signs of disrepair seen in other foreclosure-ravaged states such as Florida, Michigan and California.

It has been a deep plunge for Nevada. Once a leader in job creation and construction, the state had the highest foreclosure rate in the country in January. Delinquent mortgages, meanwhile, are on the rise, with Las Vegas, Reno and Carson City all in the top eight cities per capita in a national real estate study published last month.

Strategic default will dominate the Las Vegas housing market for the foreseeable future. With prices stuck 60% below the peak, late buyers have little or no hope of getting back to breakeven in their lifetimes. How many of you are willing to work 20 years to pay off a mistake like that?

More than 16 percent of Nevadans relocated to new residences within the state in 2008 alone, the highest mobility rate in the nation, the Census data shows.

“We were the hottest market in the nation in terms of the shape of the bubble, how fast it went up,” said Nasser Daneshvary, director of the Lied Institute for Real Estate Studies at the University of Nevada, Las Vegas. “And, of course, when something goes up, it comes down hard, too.”

The growth fueled by tourism and the gaming industry has yielded few winners. Short sales and foreclosures have slashed homes prices, ravaged neighborhoods and fueled unemployment in the construction sector, one of Nevada's primary industries. The jobless rate is 14.2 percent, and the state's estimated budget gap starts at $1.5 billion.

In Fernley, the fastest growing city in Nevada from 2000 to 2010, the only sign of construction in recent months was a new Walgreens and a Catholic church. One in 49 homes is in foreclosure.

“It was just very explosive,” said Mayor LeRoy Goodman. “We hit bottom.”

The economy had become overly dependent upon construction. This cruel purging has wiped out everyone in real estate and construction. When activity returns, it will feel like a huge resurgence compared to the severe contraction of 2008. The industry will regrow into a smaller economic engine utilizing less of the workforce. Perhaps they will only build one mega-resort at a time for a while.

This in what was once the land of plenty. The expansion of glass towers and sprawling casinos on the Las Vegas Strip saw a 3.8 percent unemployment rate statewide in the beginning of 2000. Over the next decade, Nevada would grow by 35 percent, the fastest rate in the nation.

Men and women in hard hats carved homes into mountainsides, raised superstores from the dust and wedged plush golf courses into the desert. The state's residential properties grew by more than 40 percent to 1.17 million homes during those years, affording Nevada the youngest housing stock in the country in 2009, according to the Census data. In Clark County, the school district saw an average of 10 new schools a year at its peak growth.

The people who are down on Las Vegas forget its phenomenal growth prior to this recession. Las Vegas is not Detroit. Detroit watched the auto industry leave with no replacement to fill the void. The economic engine of Las Vegas is gaming and sin.

My wager is that vice will be popular in the future and people will continue to flock to Las Vegas for its vices. Therefore, Las Vegas will recover, and so will its real estate market. I could be wrong. I could lose my bet on Las Vegas's future.

As houses and condominium towers rose from the ground, so did prices. The median home price went from $150,000 to $300,000 between 2000 and 2007, according to a University of Nevada, Las Vegas study.

“It was a new town,” said Dennis Smith, president of Home Builders Research, a Las Vegas real estate firm. “There was money everywhere. Everyone wanted to invest in Vegas.”

The state's growing wealth and relaxed lending practices allowed workers with limited incomes to gain home ownership. In many cases, these were the same people who later faced foreclosure. Most Nevadans who lost their homes earned between $24,000 and $72,000, according to a homeowners survey published by the Nevada Association of Realtors in January. Roughly 60 percent said they lost their jobs first, then their homes.

I would like to see that NAr study. I know several who strategically defaulted there because their mortgage was too big relative to the value. Perhaps they are the other 40%? The strategic defaulter's there aren't hiding their faces in shame.

The crash came in 2008, when unemployment passed 7 percent for the first time during the decade.

Even so, nearly 74,000 new homes were built in 2010, according to Census data. Realty companies said there are still buyers who prefer newly-built houses.

A general recovery seems far away. The state's Foreclosure Mediation Program helped more than 4,200 homeowners since its creation in 2009. Nearly 2,000 of those owners were able to keep their properties.

More short sales and foreclosures are projected to further depreciate homes values across Nevada in 2011. Census data to be released starting in June was expected to highlight the state's robust renters' market.

The rental market is strong because many people were booted out in a foreclosure, but they still had jobs, so they stayed in the area and rented. If there were a major exodus from the area — as is happening in Detroit — then rents would decline along with prices.

“This year will be the worst,” said Rep. Shelley Berkley, D-Las Vegas, who co-chairs the Democratic Caucus Housing Stabilization Task Force in Washington. “The unemployment rate is not going down. The values of the homes keep going down and the ability to pay your mortgage is just not there.”

The Ackerly family moved into a rental house after they defaulted on their mortgage. The value of their $240,000 North Las Vegas home was worth $80,000 by the time they left. Unlike some of their neighbors, they didn't take the new kitchen cabinets, or the palm trees they had planted in the yard, or any of the other improvements they lovingly made to the house after they moved in.

“We were done with it,” said Alan Ackerly.

The things people take and leave behind

One of the properties I bought in March had the kitchen stripped out by the former owners. It's an empty room with a pipe-hole in the wall.

For some reason, people like to leave vacuum cleaners behind. Perhaps they don't want the dust from a foreclosure in their new house? I don't know. But I find one left behind in nearly every property.

I had one property where the former owner removed every doorknob in the house, but then they left them in a pile on the floor and didn't take them. In that same house, they took the garbage disposal. What's the resale value of a used garbage disposal?

A few weeks ago I wrote about the losers who left their family pets to die. We saved them, but not before they endured countless days without food or water trapped in the back yard.

The owners of today's featured property left it broom clean. They even left a note on the water softener telling the next owner it needed service. Who does that? Who leaves a maintenance note on a property they are losing in foreclosure? Good people. That's who.

The virtue of quick processing

In early March, with B of A coming off its Nevada moratorium, I had a few properties in escrow, so I decided to deploy the last $200K I had available. The number of properties pushed through the Las Vegas auction site in March to third parties has been remarkable. I picked up five this month. Any rumors of an end to the foreclosure problems in Las Vegas will be dashed when the March foreclosure numbers are announced. Remember you heard that here first.

On March 2nd, I bought two properties, and with a new sense of urgency rivaling a FedEx operation, we got one of the two properties on the market two days later in time for weekend showing.

214 Mariposa, Henderson, NV 89015

We still had work to do on this property. Basically, I decided to list the property while we were working on it to see what happened. Worst case is that I turn off some potential buyers who see it before it is ready. I wouldn't do that here in Irvine, but Las Vegas is a different market, so I thought I would try it.

Early the next week, even before Jacki gets crews out to start work, an interested buyer makes an as-is offer within $5,000 of my asking price. Since I was just about to embark on a $5,000 renovation, this offer was a no-brainer, and I took the deal. I was in escrow within eight days of the auction.

That was eye opening.

I realized I had been operating as if I were flipping in Irvine or Orange County. In Las Vegas time-to-market is more important than quality of presentation. The properties in my existing inventory — the stuff that is losing value as it ages — all show very well. We focused a great deal of attention on small details, and likely overspent what we should have to make these properties show well. It hasn't made a difference. Price is what sells in Las Vegas. Get to the market quickly and less expensively than your competition, or you lose money.

As good as good can get

This week as I was patting myself on the back for the quick flip, I took the money from some recent closings and bought three more properties. The featured property below was purchased on Friday, March 18, 2011. That's last Friday.

On Saturday, Jacki has the locks changed, took a few photos, and installed the Supra key. Sunday morning some prospective buyers looked at the property. Monday morning (yesterday) we got a full asking price offer which I have accepted.

Four days from auction purchase to full-price offer. We may open escrow today. It doesn't get better than that.

Home Address … 7625 VELVET MIST ST, LAS VEGAS, 89131

Resale Home Price … $95,900

Home Purchase Price … $67,100

Home Purchase Date …. 3/18/2011

Percent Change ………. 34.3%

Annual Appreciation … 515.1%

Cost of Ownership

————————————————-

$95,900 ………. Asking Price

$3,357 ………. 3.5% Down FHA Financing

4.23% …………… Mortgage Interest Rate

$92,544 ………. 30-Year Mortgage

$18,154 ………. Income Requirement

$454 ………. Monthly Mortgage Payment

$83 ………. Property Tax

$8 ………. Homeowners Insurance

$280 ………. Homeowners Association Fees

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

$825 ………. Monthly Cash Outlays

-$41 ………. Tax Savings (% of Interest and Property Tax)

-$128 ………. Equity Hidden in Payment

$5 ………. Lost Income to Down Payment (net of taxes)

$12 ………. Maintenance and Replacement Reserves

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

$673 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$959 ………. Furnishing and Move In @1%

$959 ………. Closing Costs @1%

$925 ………… Interest Points @1% of Loan

$3,357 ………. Down Payment

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

$6,200 ………. Total Cash Costs

$10,300 ………… Emergency Cash Reserves

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

$16,500 ………. Total Savings Needed

Property Details for 7625 VELVET MIST ST, LAS VEGAS, 89131

Beds: 3

Baths: 2

Sq. Ft.: 1,241

$/Sq. Ft.: $77

Lot Size: 4,356 Sq. Ft.

Property Type: Single Family Residential, Detached

Year Built: 2003

Community: Lynbrook

County: Clark

MLS#: 1129717

Source: GLVAR

Status: Exclusive Right

On Redfin: 1 day

Cumulative: 2 days

New Listing (24 hours)

————————————————-

MOVE IN READY! Not a Short Sale or REO. Quick Response from Seller. 1-Story Home, 3 Bedroom, 2 Bath in a gated community. Neighborhood near Schools, Shopping, Dining, Parks and Recreation. Charming Open Floor Plan with lots of Natural Light.

Flipping Out

I hope you enjoyed my Las Vegas anecdotes. As you can see, most of my time and energy have been devoted to that end. I don't think I have revealed any trade secrets or given my competitors any valuable information. Perhaps a few may be dissuaded from trying when they know how hard it really is.

It's a hard business, and if you don't know what you're doing, you can quickly lose a lot of money. It requires a lot of time, money, patience, the ability to accurately value property, and a working understanding of real estate law. It can be a lucrative business if you can figure out before the opportunity disappears.

Surviving the turnover of the first group of properties, I feel like I have the team and the systems in place to do well. I am looking forward to the rest of 2011. For those of you interested in my fund, I'm sorry, but it is closed to new investors. Maybe next year….

The battle lines in the fight to create a stable housing market is being waged over minimum down payment requirements on qualified residential mortgages.

Irvine Home Address … 2306 SCHOLARSHIP Irvine, CA 92612

Resale Home Price …… $254,900

Oh but ain't that America for you and me

Ain't that America somethin' to see baby

Ain't that America home of the free

Little pink houses for you and me

John Mellencamp — Pink Houses

America was a frontier country. People flocked to America from Europe for the opportunity to own their land, something denied to most living in post-feudal Europe. The idea of having a piece of property with your own pink house is deeply woven into the American culture. it's part of our history, and to this day, many identify home ownership with being American.

I wrote about our modern perversion of ownership in Money Rentership: Housing and the New American Dream. Questions of our concepts of financing and ownership are coming to surface in Washington as we take up debate on down payment requirements for the new qualified residential mortgage.

Homeownership should not be part of the American Dream

Posted by Nin-Hai Tseng, writer-reporter

March 15, 2011 8:30 am

Most banks want to securitize loans made to borrowers buying homes with little money down. Did we learn nothing from the financial crisis?

Lenders did learn from the financial crisis. They learned they can underwrite unconscionable loans to make a quick buck at origination, and when the loans go bad, the government will cover their losses. Why would lenders want to change that system? Keep that in mind as you watch the lending lobby posture in Washington to game the rules in their favor.

In an attempt to fix some of the problems that caused the housing bubble and financial crisis, banking regulators are coming up with new mortgage lending rules that will address what lower-risk quality mortgages should look like. The goal is to let lenders sell so-called “qualified residential mortgages” to investors without having to retain the risks.

The question the Treasury Department must now answer is what makes a qualified mortgage? Regulators including the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency are pushing for a 20% down payment on such loans. While the big banks like Bank of America (BAC) and JP Morgan Chase (JPM) have not formally weighed in, their lobbyists at American Bankers Association and the Mortgage Bankers Association say that requirement is far too high and would price many buyers out of the housing market.

The most pernicious lie in real estate lending is that restricting access to loans prices buyers out of the market. The hidden assumption is that bids must always be raised because prices never go down. If the government chose to enact the most Draconian standards possible, it may reduce sales volumes at current pricing, but it does not price buyers out of the market — it prices sellers out of the market. As credit tightens, asking prices need to go down for transactions to occur.

Lenders want to make the largest loan possible at the highest interest rate they can. That is their business model. Of course, they would also like the borrower to repay that money, so pushing loan balances up too high leads to Ponzi borrowing, widespread insolvency, and a catastrophic market crash as we have witnessed. However, lenders don't care about the risks as long as Uncle Sam backstops them. They will push for the ability to make the largest loans they can and pass the risk off to whoever they can.

The debate will have broad implications for how homebuyers finance their mortgages. During the housing boom, many Americans took out home loans with little to no money down. When prices fell steeply following their mid-2006 peak, many borrowers didn't have enough equity to cushion the blow, leading to record foreclosures nationwide. Meanwhile, the big banks and investors holding these risky loans suffered huge losses.

We have witnessed many tempest-in-a-teapot issues like robo-signer that flare up and go away without long-term impact on the housing market. This issue is different. The minimum qualifying standard on this loan is going to become the bedrock of mortgage finance. If we get this wrong, we will rebuild the mortgage market on a weak foundation.

Joseph Pigg, vice president and senior council of the ABA, says the 20% proposal is much too narrow and he worries it could further hamper demand for homes, especially when the fragile real estate market is still recovering. And while a heftier down payment generally reduces the risks of a loan, he says, other factors such as income, credit score, and the property's location determine the quality of a loan.

Yes, there are other factors besides the down payment that impact loan quality. There are undoubtedly many buyers who put less than 20% down that will not default on their loan. So what? We are talking about establishing a minimum threshold for all loans. It should be a conservative measure with little or no real risk exposure. Lowing down payment requirements for this loan shifts risk from lenders to the US taxpayer who will end up paying the bills if we create another unstable Ponzi scheme.

But perhaps it's time to question whether homeownership should even be part of the American Dream.

Tighter mortgage lending rules could return the housing market to the way it was in the 1970s, when homeownership was much lower and virtually all homebuyers put down at least 20% of the value of the house. Standards began changing around the 1980s as home prices appreciated significantly and mortgage financing became more sophisticated.

Sophisticated?

Financing has become more sophisticated… sophisticated at creating new Ponzi schemes.

Finance professionals view lower lending standards as progress and tightening lending standards as regression. For an industry of parasites trying to siphon the cashflow from all the world's assets, that paradigm makes sense. In reality, their progress generally amounts to some new Ponzi scheme. I wrote in The Fallacy of Financial Innovation,

“Many in the lending industry think their work is like science that continually advances. It is not. It is far more akin to assembly line work where the same widgets are pumped out year after year. When lenders start to innovate, trouble is brewing. The last significant advancement in lending was the widespread use of 30-year amortizing loans that came into favor after World War II. Prior to that time, home loans were interest-only, short-term loans with very high equity requirements (50% was most common.) This proved problematic in the Great Depression as many out-of-work owners defaulted on their loans. A mechanism had to be found to get new buyers into the markets and allow them to pay off the loan. The answer was the 30-year, fixed-rate amortizing loan. To say this was an innovation is a stretch as this loan has been around as long as banking has existed, but it did not become widely used until equity requirements were lowered. The lenders were willing to lower the equity requirements as long as the loan was amortizing because their risk would decline as time went by and the loan balance was paid off.”

Lenders used to originate loans with an assumption of flat pricing. The reasoning was that they didn't know if that borrower may not be compelled to sell within months of purchase. They wanted to be sure they could discount the sales price, pay a sales commission, and still recover their capital. That meant at least a 10% cushion from day one. Twenty percent was better.

During the housing bubble, the originators of the Option ARM made the assumption that house prices would go up 3% per year every year because past history confirms that house prices rise with inflation. As a lender, if you believed the value of your collateral was rising 3% per year, you could originate with low down payments, increasing mortgage balances, and the whole host of problems the Option ARM created because even when the loans go bad, the loss severities would be low due to the increasing value of the collateral. Hah. That didn't go as planned.

Borrowing against the increasing value of an asset destabilizes the price of that asset. Once aggregate debt levels get too high, a financial disruption can cause prices to crash which in turn spawns wave after wave of strategic default which drives house prices well below fundamental values. The upward frenzy of rally buying is closely mirrored by the downward spiral of default, foreclosure, excess supply and lower prices which causes more default.

It's easy to see why bankers would gripe about the 20% minimum. Smaller loans translate into smaller profits, and a smaller market for securitized mortgages. And lenders can fully securitize only qualified mortgages — any loans made without the designated down payment can still be sold, but the lenders would have to retain 5% of their value on their books.

Wells Fargo (WFC) is the one exception among the banks on this rule — it's arguing for a 30% down payment for qualified mortgages. Wells executives call it skin in the game, but smaller lenders are calling it an unfair competitive advantage — as one of the largest lenders, Wells would be able to tolerate more risk on its balance sheet from the many borrowers who won't be able to afford such a down payment.

That is fantastic. With internal division on policy, it will be much harder for the lending lobby to push a 10% down mortgage.

Certainly a 20% down payment — much less a 30% one — isn't easy for many homebuyers, especially as unemployment stays unnervingly high. The average loan-to-value ratio for January 2011 was 73%, which means borrowers on average put 27% down, according to the Mortgage Bankers Association.

The Irvine bulls always tout the high down payments of Irvine buyers as a sign of special interest by FCBs. Apparently, averaging more than 20% down is normal for real estate markets. Considering almost of third of homeowners own outright, it isn't surprising some amount of ported equity moves from property to property keeping down payments up. Perhaps Irvine is not that special after all?

But while home sales have started to tick up slightly, demand is mostly coming from cash-rich investors who are scooping up foreclosed properties at bargain prices, not from first-time buyers. Economist Paul Dales of Capital Economics recently pointed out that more than two-thirds of existing home sales since last summer were made to cash buyers or investors, while a mere 6% were sold to first-time homebuyers.

Maybe the answer isn't to give borrowers more leeway, but less. Given all we've learned in the years following the housing crash, perhaps a little time travel back to the 1970s might not be so bad. During the boom years, many lenders passed on their mortgages, including all of the risk, to speculative investors. That proved disastrous, leading to a banking crisis and a housing bubble that all too quickly went bust.

It will be painful to endure a longer, deeper housing crisis that could come from tighter standards. But do we want to relive the nightmare that got us here?

I wholeheartedly agree with the author's contentions. Returning to sane lending standards is not regression, it is progress from where we are today. Lending lost its way. The billions in losses prove that. We need to retreat to what works. Some may chose to view that as going back to the stone ages. I prefer to view it as a return to fiscal sanity and a stable housing market.

Nearly $500,000 for a one bedroom apartment condo?

The Jamboree Corridor condos were 20 years before their time, just like the prices of 2006 in general. These condos don't make sense. They never did. Even after a 50% decline in prices and below 5% interest rates, these properties still don't make sense. The prices on these properties are only now reaching rental parity — and these properties should trade at a discount to rental partiy because it is not a place people want to live long term. This is a great 20-something apartment, but it makes for a less desirable family home.

My data service doesn't pick up this particular address, but the details of who lost what isn't important. The lender didn't likely require a big downpayment, so the first mortgage is taking a big hit.

The assymetric nature of drawdown

People who study financial markets and portfolio returns note an interesting phenomenon regarding returns on financial investments: losses are more devastating to returns than slow gains. This property has declined nearly 50% in value since it was purchased in 2006. So when the property goes back up 50% in value, will it be back up to the peak?

Nope. A 50% decline requires a 100% increase to offset it. By the time peak buyers see values reach their entry points, buyers from today will have accumulated $250,000 in equity. Timing does matter.

The frenzied rally of the Great Housing Bubble saw double-digit appreciation for several consecutive years. Depending on the market, most of all of that gain was wiped out in two-years of double-digit declines in 2007 and 2008.

The savvy buyer who picked up this great investment undoubtedly expected double-digit appreciation from his starting point. This should be reselling for a $1,000,000 by now. instead it's REO hoping for a quarter of that.

Irvine Home Address … 2306 SCHOLARSHIP Irvine, CA 92612

Resale Home Price … $254,900

Home Purchase Price … $478,500

Home Purchase Date …. 6/12/06

Net Gain (Loss) ………. $(238,894)

Percent Change ………. -49.9%

Annual Appreciation … -13.0%

Cost of Ownership

————————————————-

$254,900 ………. Asking Price

$8,922 ………. 3.5% Down FHA Financing

4.82% …………… Mortgage Interest Rate

$245,979 ………. 30-Year Mortgage

$51,703 ………. Income Requirement

$1,294 ………. Monthly Mortgage Payment

$221 ………. Property Tax

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

$42 ………. Homeowners Insurance

$310 ………. Homeowners Association Fees

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

$1,867 ………. Monthly Cash Outlays

-$121 ………. Tax Savings (% of Interest and Property Tax)

-$306 ………. Equity Hidden in Payment

$16 ………. Lost Income to Down Payment (net of taxes)

$42 ………. Maintenance and Replacement Reserves

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

$1,499 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$2,549 ………. Furnishing and Move In @1%

$2,549 ………. Closing Costs @1%

$2,460 ………… Interest Points @1% of Loan

$8,922 ………. Down Payment

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

$16,479 ………. Total Cash Costs

$22,900 ………… Emergency Cash Reserves

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

$39,379 ………. Total Savings Needed

Property Details for 2306 SCHOLARSHIP Irvine, CA 92612

——————————————————————————

Beds: 1

Baths: 1

Sq. Ft.: 0738

$345/SF

Lot Size: –

Property Type: Residential, Single Family

Style: One Level, Modern

Year Built: 2006

Community: Airport Area

County: Orange

MLS#: P774302

Source: SoCalMLS

Status: Active

On Redfin: 2 days

——————————————————————————

REO Bank Owned – New complex near John Wayne Air Port between Irvine and Newport Beach. Excellent amenities include tennis courts, pool, spa, BBQ area, basketball court A rare opportunity Make you best offer.

Today's featured article looks at how Americans are changing their views on the rent-versus-buy decision.

Irvine Home Address … 4162 SALACIA Irvine, CA 92620

Resale Home Price …… $699,990

Back when real estate always went up — or at least when that was a commonly accepted as fact — the rent-versus-buy decision wasn't primarily financially or investment oriented. Most often people would chose to rent instead of own because they valued mobility, didn't want the liability and responsibility of home ownership and maintenance, or a variety of other reasons. Until the market crashed, renters did not consider losing their down payment and more if they need to sell unexpectedly. Much to the chagrin of realtors, potential buyers now know crashes are possible.

Buy? Nah, Rent. Nah, Buy.

Deciding used to be simple—buying a home always made sense. Then the bubble burst.

By Alina Tugend — Wednesday, March 16, 2011

Jean Sica-Lieber owned homes all of her life—when she was married and divorced, when her children were young and when they were grown. But recently, after selling her Rochester, N.Y., town house at a loss, she decided to rent. Sica-Lieber assumed it would be for a year and then she would buy a small place with a garden. But now, she’s rethinking that plan.

“Part of me, and I think this exists in most Americans, wants to be a property owner, despite the fact that unless we buy outright, the bank really owns most of it,” the 58-year-old publishing specialist said.

There are some people who get it. Equity is ownership. Negative equity is an oxymoron invented by the lending industry who preferred a nonsense term that made money-renters feel like home owners.

“But when it came right down to it, I’m single and don’t have children to do chores. How do I want to spend my time? Would I rather do more travel or pay property taxes?”

She recognizes the opportunity cost of loan ownership. Without HELOC money to supplement income, high debt-to-income ratio living is a real drag.

So Sica-Lieber decided to hold off on buying that little house, and she renewed her lease on her town house for at least another year.

For Kelly Stettner, 41, who had rented all her adult life, buying a house brought unexpected joy. When their landlord put the duplex she and her husband were renting up for sale, they ended up purchasing a 1929 bungalow on an acre in Springfield, Vt. They, their two children, and their dog couldn’t be happier.

“Budgeting is different, but we’re exploring many options that we never had considered while renting—a solar panel, a vegetable garden, [do-it-yourself] landscaping, and much more,” said Stettner, an administrative assistant. “But the emotional end is what I couldn’t imagine. There’s a self-esteem from the responsibility of owning it. We’re responsible for keeping it energy-efficient, keeping it clean. We get to do what we want, when we want, on our own terms, and we directly benefit from it. That was something I hadn’t really anticipated.”

Those are the emotional payoffs of home ownership — or at least the perception of home ownership minus the inconvenient reality of debt. When people feel ownership of something, they tend to take better care of it.

For example, I recently moved to a different rental (I am still Irvine Renter), and this property has beautiful wood floors. I so enjoy the beauty of these floors that I take care of them as if i were an owner. I am caring for the floors because I appreciate their beauty. I get the benefit of use, so I feel and act like an owner even though I merely rent. I take better care of the floors in my rental because I feel that emotional sense of ownership.

I haven't owned my primary residence for over 10 years now. I never thought that would happen, and I do miss many aspects of home ownership. Unfortunately, the reality of local price declines and the still staggering cost makes me stay on the sidelines. I can see the stars and moon aligning sometime in the next two or three years. I feel no urgency.

To buy or to rent? That was never much of a question for most Americans. Buy as soon as possible, of course, to show that you’ve grown up and made good. Paying rent, the thinking went, is just throwing money away; owning a house is an investment in the future.

It amazing how much those myths are embedded in our culture.

Until the past few years, that is, when too many Americans who bought homes with too little down and at too high a price discovered that they couldn’t pay the mortgage and couldn’t sell either. That unaffordable house became an albatross. So now, potential homeowners are more likely to seriously consider renting. But which makes more economic sense in the short- and long-term?

It depends.

In nearly three-fourths of the nation’s top 50 cities, it is better to buy than to rent, according to the real-estate website Trulia.com. The site, one of the most popular for real-estate research, offers a “Rent versus Buy” calculator that compares the costs of two-bedroom apartments, condominiums, and town houses. The data for January show that cities where the housing bubble burst with a vengeance—Miami; Las Vegas; Arlington, Texas; Mesa and Phoenix, Ariz.; and Jacksonville, Fla., in that order—were the best places to buy instead of rent.

Renting was a far better deal in New York City; Seattle; Kansas City, Mo.; San Francisco; Memphis, Tenn.; and Los Angeles—less because of cheap rent than the continued high cost of buying in those cities despite the recession, according to Tara-Nicholle Nelson, Trulia’s consumer educator.

The website considers a home to be fairly valued, Nelson explained, if buying it costs about 15 times a year’s rent. So if you pay $10,000 a year to rent, you should be wary of paying more than $150,000 to purchase an equivalent piece of property.

The comparative advantages of buying versus renting aren’t easy to figure, though. Numerous websites offer calculators that have the user enter the requisite data and supposedly learn which course to pursue. But Russell James, who teaches personal finance at Texas Tech University, has researched these online tools and found them unreliable. When he plugged the same information into the top 10 online calculators, eight advised him to buy and two told him to rent. “At one extreme, I was told buying would save me around $61,500,” he reported, “and at the other end, I was told renting would save me $15,000.”

We developed the IHB calculator because most of the online calculators are intentionally misleading. Most rent-versus-buy calculators were not designed to give people accurate information. Most of these calculators were designed by realtors with the intention to present buying in a favorable light no matter the truth. It part of the ongoing campaign by realtors to dupe buyers into action — even if buying is harmful to the buyer — to generate sales commissions.

We are planning an upgrade to the IHB calculator this year. We may go high tech. I believe it can be a very useful tool if it can be streamlined for easier use and to present accurate information as clearly as possible.

James also warned that online calculators may be particularly misleading for lower-income buyers, who are more likely to purchase older homes that need repairs and are less energy-efficient. These buyers are also less likely to itemize their tax deductions, losing the advantage of the federal tax break for mortgages.

Whether you rent or buy, some costs may not be obvious. Home­owners must pay property taxes, private mortgage insurance (if they plunked down less than 20 percent when they bought), home insurance, and all utilities—some of which landlords may have paid before. They’re also responsible for buying any needed big-ticket items such as lawn mowers, snowblowers, and washer/dryers. Renters, Nelson said, face the “opportunity cost” of lost equity and the prospect of never owning a home free and clear; they also could pay substantially higher taxes if their income is large enough to deduct property taxes and mortgage interest. And any improvements a tenant makes to a rental property belong to the landlord, of course. Tenants might also face unexpected rent hikes and evictions.

The sad reality is most new homeowners underestimate their monthly costs by 20% to 30%. The most difficult period for most first-time buyers is the first year or two when they adjust to what their house really costs.

Real-estate experts warn that it’s important for potential homebuyers to plan ahead. The common wisdom is that a buyer should anticipate staying in a house for seven to 10 years to recover all the costs. Yet these days, most people expect to be more mobile, in pursuit of new jobs and careers. “The two things are working in opposition,” Nelson said, “the mobility of the job market versus how tough it is to recoup housing costs.”

An astute observer noted I have stated several times — perhaps too many times — people should expect to hold for seven to ten years to break even. Fair enough, but it is a message worth repeating, because most in Orange County real estate are still telling people rapid appreciation awaits those who buy today.

For buyers, times are very different than they were before the housing crash triggered the Great Recession. Then, the saying went, you just needed a pulse to get a mortgage. Now, you need a pristine credit score (in the high 600s, at least) and history without any outstanding debt or defaults, according to broker Allyson Bernard, the owner of Real Estate Professionals of Connecticut. And expect to put down at least 10 percent.

Many people who want prices to go back up quickly have complained about the tightening credit. I believe credit will tighten further and become more expensive going forward. The comment above reflects the current “bar” people must reach to buy a home. A FICO in the high 600s and 10% down is not onerous by historic standards.

Many in the lending industry have equated lower lending standards with progress. We are somehow going back to the stone ages of the 1970s by raising lending standards. Progress should not measured by how stupid banks can be with giving out free money to people who won't pay it back. Relaxed lending standards do not reflect progress, they reflect regression and stupidity.

Lenders, she noted, also demand a strong employment history: “[They’re] not just looking at your stability, but at the stability of the market you work in.” The restrictions are toughest, Bernard said, on the increasing numbers of self-employed, who find it harder and harder to obtain a “non-verified” mortgage. Bernard noted that she owns her home, but that if she didn’t, as a self-employed real-estate agent, “I couldn’t even get a mortgage.”

When stated-income became the easiest conduit for Wall Street money, those programs were doomed. In many instances, we have probably thrown out the baby with the bath water when it comes to stated-income loans.

Some version of stated-income can be underwritten successfully. There are many ways the self-employed can demonstrate income, and programs using these sources as documentation will eventually return. However, right now, if you don't get a W-2, it is very difficult to provide lenders with income documentation they will accept. We should never return to the days of signature mortgages, but programs that accommodate alternate sources of income can and will return to the market in time.

Still, now that housing prices are down and interest rates are low, many economists and most real-estate agents say that if you can find the credit, this is the time to buy. But Elizabeth Weintraub, a Sacramento agent who writes on the subject for the website About.com, isn’t so sure. “People think owning a home is their destiny, but maybe you’re not cut out to be a homeowner,” she said. “You’re making a commitment to buy more than four walls and a roof. You need to think, ‘Do I have a maintenance account set up? Will the tax consequences be significant? Can I afford to make improvements?’

“It’s OK to give yourself permission not to own a home,” Weintraub concluded.

That is the most important statement in the article. Prior to the collapse of the housing bubble, renting was universally derided as a sub-standard way of life. A tremendous amount of emotional baggage is attached to our desires to be home owners. Sometimes people just need to be given permission, the comfort of the herd, to make a change. The whole point of this article was to prepare people to emotionally accept the statement above.

By some accounts, the traditional stigma against renting is easing. There is even a small movement, Nelson of Trulia.com pointed out, of people who call themselves renters by choice.

Perhaps Irvine Renter is the start of a small national movement?

Texas Tech’s James, however, said he doesn’t expect any significant shift, partly because of Americans’ long-standing love for homeownership and partly because of the law. In Europe, where longtime renting is far more common, he noted, “there’s a totally different attitude.” Renters have strong legal protection—too strong, some argue—against eviction and dramatic rent increases. But in the United States, except in places (such as Manhattan) with a semblance of rent control, the cost of renting is unstable, he said, and therefore less appealing over the long haul.

That truism is only factual when borrowers use fixed-rate mortgages. ARM borrowers do not gain the certainty of costs lower than renting that fixed-rate mortgage borrowers gain.

Still, in deciding whether to rent or buy, the numbers matter only so much. Kelly Stettner regards owning a home in her Vermont town as good not only for her family but for the community, too. “It really does make us better citizens,” she said. “We’re responsible for keeping up good relations with our neighbors and making sure that our house looks good from the street.”

What does it say about her that she is a lesser citizen when she rents?

Upstate New York renter Jean Sica-Lieber thinks that the decision depends on where you are in life and what you want out of your future. “There’s a freedom that goes with owning,” she said. “And there’s a freedom that goes with not owning.”

The author writes the ShortCuts column for The New York Times. Her book, Better by Mistake, is being published this month. She’s at twitter.com/@atugend.

Freedom is renting. Given my new line of work, I strongly considered moving to Las Vegas. Since I rent, that is an option for me. A quarter to a third of home owners in America do not have the same freedom, and many of those people will not regain their freedom for a very long time.

Irvine Home Address … 4162 SALACIA Irvine, CA 92620

Resale Home Price … $699,990

Home Purchase Price … $260,000

Home Purchase Date …. 8/23/96

Net Gain (Loss) ………. $397,991

Percent Change ………. 153.1%

Annual Appreciation … 6.8%

Cost of Ownership

————————————————-

$699,990 ………. Asking Price

$139,998 ………. 20% Down Conventional

4.82% …………… Mortgage Interest Rate

$559,992 ………. 30-Year Mortgage

$141,984 ………. Income Requirement

$2,945 ………. Monthly Mortgage Payment

$607 ………. Property Tax

$150 ………. Special Taxes and Levies (Mello Roos)

$117 ………. Homeowners Insurance

$0 ………. Homeowners Association Fees

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

$3,818 ………. Monthly Cash Outlays

-$714 ………. Tax Savings (% of Interest and Property Tax)

-$696 ………. Equity Hidden in Payment

$258 ………. Lost Income to Down Payment (net of taxes)

$117 ………. Maintenance and Replacement Reserves

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

$2,784 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$7,000 ………. Furnishing and Move In @1%

$7,000 ………. Closing Costs @1%

$5,600 ………… Interest Points @1% of Loan

$139,998 ………. Down Payment

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

$159,598 ………. Total Cash Costs

$42,600 ………… Emergency Cash Reserves

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

$202,198 ………. Total Savings Needed

Property Details for 4162 SALACIA Irvine, CA 92620

——————————————————————————

Beds: 4

Baths: 3

Sq. Ft.: 2550

$275/SF

Lot Size: 6,200 Sq. Ft.

Property Type: Residential, Single Family

Style: Two Level, Ranch

Year Built: 1970

Community: Northwood

County: Orange

MLS#: S651772

Source: SoCalMLS

Status: Active

On Redfin: 2 days

——————————————————————————

Premiere Location on Cul de Sac Street-3 Bedrooms, 2.5 Baths w/ Approx. 1915 S. F. , Wood Floors, Vaulted Ceilings, Sunny Kitchen w/ Newer Appliances, Tile Counters, Wood Floor, Garden Window, Breakfast Nook w/ Pantry, Spacious Family Room w/ Double French Doors & Sidelights Opens to Private Backyard, Built-In Entertainment Unit, Brick Fireplace & Recessed Lights, Formal Living Room & Dining Room, Master w/ Walk-In Closet & Window Shutters, Master Bath w/ Dual Vanity, Tile Floor & Tiled Shower, Private Backyard has Hardscape w/ Brick Accents & Grassy Area, Walk to Tot Lot & Large Grassy Area Behind Home, Walk to Award Winning Schools including Prestigious Northwood High, Enjoy Resort-like Association Amenities w/ Pools, Huge Spa, Tennis Courts, Volleyball Courts, BBQ's & Remodeled Clubhouse, No Mello Roos, Low Tax Rate, Assoc. Dues $83/Month

I play too much Wii Golf

I really enjoy playing Wii Golf. I have the Tiger Woods golf game, and it is more realistic, but Wii Golf captures the essence of golf. The thrill of golf. Sometimes you are forced to cope with unfair bounces and bad breaks. Wii Golf is more like real life. Golf has always been a metaphor for life, for dealing with capricious fate. Wii Golf is an instructional spiritual practice.

Wii Golf was designed by gamers who were interested in good gameplay. Some of the architectural devices they use (trees in fairways, ridiculous green slopes, and others) are a turn-off to many seeking the golf course experience. I love these features because they force you to overcome them.

Wii golf is broken down into groups of three holes, a par 3, a par 4, and a par 5. Once you become proficient at the game, you expect to birdie nearly every hole. The par 5s offer an opportunity for an eagle 3 if the wind is favorable. Practically speaking, the best you can achieve on each three-hole group is -4 (four under par). I will usually be either -2 or -3 for each three-hole group. Most often I will shoot between 6 and 9 under par for a nine-hole round, but sometimes, when everything comes together, I can get to -10 or better. The round above was perfection.

I will spare you the shot-by-shot description of my brilliant play. No need to go into detail about the masterful judgment of ball physics and creative shotmaking only a golfing genius could ever attain. No, I won't recount the amazing three wood I sliced onto the third green to within 10 feet. but i have to share the final hole.

The par 5 ninth has always been a nemesis. It's set up to be reachable in two only if the wind is behind. No backwind, no chance for eagle. The green is severe with mounds and plateaus on the left side and a steep gradient on the right. There are many difficult pin placements and few easy ones.

I got my favorable backwind, and I judged my tee shot perfectly between a large central pine tree and the nearby left rough. it provides a hilltop driver “from the deck” that lands in a small patch of fairway between two greenside bunkers. Too short, and the ball is in the water, and too long, and it hits the green and bounds over the back. If you don't hit this tiny square, your ball does not end up on the green.

After managing to get on in two, I pinpointed the cup on the other side of the green — the side you can't access with your second shot. I faced this 50+ foot putt with a swinging left-to-right break of great severity.

I stopped to laugh to myself about the degree of difficulty for a perfect score. The game was not making it easy for me. I used all my experience to try to pick a line and speed I believed would rattle the cup from three-putt land. As I watched it arc into the hole with perfect speed and break (I think the Wii helps you out sometimes), I felt a sense of satisfaction as deep as any experience I have enjoyed on a golf course. In some ways, more so.

Today I have a guest author who came to share his insights into what happens after mortgage delinqency.

Irvine Home Address … 3 East ALBA Irvine, CA 92620

Resale Home Price …… $610,000

I've never been so poor.

I bought something I can't afford

Most people can relate with a new car

but this is more value by far

Bankruptcy — Antifreeze

Joe Weber is a local bankruptcy attorney, a daily reader of the IHB, and a frequent astute observer. (I won't tell you who he is.) I have gotten to know Joe over the last year, and I asked him to share his perspective with the broader IHB readership.

From Joe's website, www.bkrights.com, “Attorney Joseph A. Weber has represented thousands of people and businesses in bankruptcy. He is a graduate of St. Leo University, the American College of Law, and has been a member of the Orange County Bar Association, The National Association of Chapter 13 Trustees, The National Association of Consumer Bankruptcy Attorneys, and the Orange County Bankruptcy Forum. He is the author of Credit Limits, a book about the proliferation of bankcards.”

Joe sees what happens at the end of the line. When Ponzis implode, most of them end up in Joe's office. He is privy to the gory details of Ponzi debt as he sees it every day in his practice. He has seen the credit bubble inflating and taking over consumers lives for decades now.

Joe Weber's observations on debt, foreclosure, and bankruptcy

When I first saw a person with six figure credit card debt I was shocked. That was in the middle 80s. Now I see it every day. Since the 1960s, non-rich people having large lines of unsecured credit became commonplace. Since the 80s, my law partner and I have filed thousands of Bankruptcy cases. Almost all of them have significant credit card debt, in addition to the traditional medical and store debt. I wrote the book “Credit Limits” in the early 90s about this phenomenon. In the nearly 20 years since then, more people have universal (e.g. Visa, Master Card, Discover) cards than ever before. Kids still in or just out of high school have them, many with credit lines of 5K or more.

After the housing bubble burst and many banks failed, credit tightened up. Of the folks we saw coming in for Bankruptcy consults, many had had their credit limits cut, and the interest rates on their cards sharply raised. Like the housing bubble, this created a “musical-chair” effect: monthly payments increased, but those who regularly took advances to meet installment payments on other accounts couldn’t do that anymore. And those who regularly took 30-40K out of their home “equity” to pay down the credit cards, couldn’t do that anymore as this particular ATM was shut down too. Then, many of those who would work longer hours or take a second job to service their debt found it impossible, as overtime and employment opportunities also dried up.

As 2011 starts I’m seeing more people in debt who are unemployed or grossly underemployed than any time in my career, even compared with the early 90s. I just don’t believe that government statistics accurately give the true picture- almost every day I talk with someone who is not only unemployed or underemployed, but who has just given up looking for work altogether, living back with parents or crashing on a friend’s couch.

As IHB has clearly laid out, people with low income can’t qualify for large mortgages when liar loans and other “alternative financing” aren’t available. I believe that many more people have to become employed or better employed before things go back to normal.

All Bankruptcies concern debt and assets and how they are treated. Natural persons (unlike “paper” entities like corporations and LLCs) get their debts discharged or wiped out in Chapter 7. Natural persons get their debts reorganized in Chapter 13. The two big housing-related issues I’m seeing now are: 1) Junior lien deficiencies during or after foreclosure; and 2) Homeowners behind on their mortgage payments reorganizing mortgage back payments in Chapter 13.

During the Great Housing Bubble, many people bought houses with 80/20 loans. In California, if the house later goes down in foreclosure and the junior lien (2^nd mortgage) was never refinanced, then the lender cannot collect money from the former homeowner. If that loan was acquired AFTER the original purchase, (non-purchase money), then whoever signed the note could be liable for any money not realized from the foreclosure sale. These days, what usually happens is the holder of the 1^st Deed of Trust forecloses and becomes the owner of the property, the lien of the 2^nd TD is extinguished; the holder of the 2^nd never gets a dime, then they look to the former homeowner for whatever the balance was. This can be devastating, as the balance could easily be in six figures and most people can’t just write a check for it.

If the person files a Chapter 7 Bankruptcy and receives a Discharge, this obligation is then wiped out. Another strategy Bankruptcy clients employ is to file a case under Chapter 7 and delay foreclosure- once a case is filed a “stay” goes into effect, preventing collection actions including foreclosure. If back mortgage payments aren’t brought up to date and the bank wants to continue with the foreclosure, they have to apply to the Bankruptcy judge for permission to continue, or what is called “Relief from the Automatic Stay.” If the creditor moves at top speed they can get relief in as little as 5-6 weeks. Some mortgage holders/servicers elect to do nothing, and wait for the Chapter 7 case to end, typically 4-5 months after it was first filed. This affords the debtor/homeowner even more time to stay in the property without making payments.

In Chapter 13 Bankruptcy a person can propose a Plan to the court to make up back mortgage payments over time, usually 60 months. And in Chapter 13, junior liens (2nds, 3rds, etc.), if there is no value to secure them, can be stripped off the house, leaving only the 1^st mortgage.

(Joe Weber is a Bankruptcy attorney in Costa Mesa. His site is www.bkrights.com)

[end of commentary]

As a follow up question, I asked Joe:

I have believed from the start that foreclosure followed by bankruptcy was going to be the ultimate resolution for those who succumb to mortgage distress. Right now that is shaping up to be millions and millions of bankruptcies. What do you see as the ultimate resolution for those who stop paying their mortgages?

His response was:

Foreclosure. I've seen too many people pay too much for a house they never could afford in the first place. And many of them STILL can't afford that house, even after saving it through Chapter 13 restructuring or non-Bankruptcy loan modification. A large percentage of homes nationwide have negative equity. We've yet to understand, then see the long-range effect of this.

Unfortunately, I see more foreclosures “cleansing” the market and bringing prices back in line to true value.

Thank you, Joe.

The impact we don't see

Many flamboyant spenders during the bubble are quietly contemplating their options. Joe only sees borrowers who have decided to do something about their problem. But many more are in denial, ignoring creditor queries, and hoping the problem will simply go away. Perhaps the lender will forget they were owed money, right?

Usually it isn't until the collection calls get overwhelming that people realize they have to act. With so many bad loans and bigger issues to deal with, following up with collections on old bad debts has not gotten the attention it will over the next several years. Also, since lenders are pretending many non-performing loans will still be paid, they are ignoring the problem too, probably hoping for another government bailout.

In the end, these debtors will be coaxed out of hiding, and they will be forced to work out something with their creditors. For an increasingly large number, the only workout is a bankruptcy.

The trend of increasing bankruptcies will likely continue. Bankruptcy reform in 2005 was supposed to reduce the number of bankruptcies permantenly. As the number of bankruptcies continues to rise, the failure of this legisltation will be apparent.

Gold in shadow inventory

There is a group of delinquent borrowers in shadow inventory that don't concern the bank: squatters with equity. The owner of today's featured property hasn't made a payment in a couple of years.

Foreclosure Record

Recording Date: 10/30/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 07/21/2009

Document Type: Notice of Default

However, the bank is in no hurry to foreclose? Why is that? Well, as long as they property has equity, the bank is merely adding to the principal balance the lost interest, penalties, and every fee they can dream up.

From a banks perspective, shadow inventory can be divided up into two broad categories: 1. those delinquent borrowers with equity where they can recover their capital in foreclosure, and 2. those delinquent borrowers with no equity that will cause a huge loss. The bank has no urgency to foreclose on the first group, the ones with equity, because its actually better than if the loan were performing. Not just are they booking the interest as income, they are also getting fees and penalties.

Banks will not move aggressively to foreclose on squatters with equity because they are a hidden cash cow. The probably watch reports to see if the remaining equity is getting low enough that they may not recover their capital in a foreclosure. When a borrower's equity runs dry is when their foreclosure will be bumped to the front of the queue.

Banks are in no hurry to foreclose on the group with no equity because of the losses it will cause. Basically, the only people the bank feels any urgency to act on are those with marginal equity. These are the delinquent borrowers who consumed their equity with non-payment. As soon as equity is gone, they are a prime target because the bank has extracted all they can, and any further delay costs them money.

Today's featured owners were minor Ponzis. They did consistently add to their mortgage, but it was very small amounts that shouldn't have been a source of financial distress. Unemployment is a likely culprit here.

Irvine Home Address … 3 East ALBA Irvine, CA 92620

Resale Home Price … $610,000

Home Purchase Price … $236,000

Home Purchase Date …. 7/21/97

Net Gain (Loss) ………. $337,400

Percent Change ………. 143.0%

Annual Appreciation … 7.0%

Cost of Ownership

————————————————-

$610,000 ………. Asking Price

$122,000 ………. 20% Down Conventional

4.82% …………… Mortgage Interest Rate

$488,000 ………. 30-Year Mortgage

$123,731 ………. Income Requirement

$2,566 ………. Monthly Mortgage Payment

$529 ………. Property Tax

$150 ………. Special Taxes and Levies (Mello Roos)

$102 ………. Homeowners Insurance

$139 ………. Homeowners Association Fees

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

$3,486 ………. Monthly Cash Outlays

-$436 ………. Tax Savings (% of Interest and Property Tax)

-$606 ………. Equity Hidden in Payment

$225 ………. Lost Income to Down Payment (net of taxes)

$102 ………. Maintenance and Replacement Reserves

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

$2,771 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$6,100 ………. Furnishing and Move In @1%

$6,100 ………. Closing Costs @1%

$4,880 ………… Interest Points @1% of Loan

$122,000 ………. Down Payment

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

$139,080 ………. Total Cash Costs

$42,400 ………… Emergency Cash Reserves

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

$181,480 ………. Total Savings Needed

Property Details for 3 East ALBA Irvine, CA 92620

——————————————————————————

Beds: 3

Baths: 3

Sq. Ft.: 1915

$319/SF

Lot Size: 3,825 Sq. Ft.

Property Type: Residential, Single Family

Style: Two Level, Contemporary

View: Park/Green Belt

Year Built: 1980

Community: Northwood

County: Orange

MLS#: S651655

Source: SoCalMLS

Status: Active

——————————————————————————

Premiere Location on Cul de Sac Street-3 Bedrooms, 2.5 Baths w/ Approx. 1915 S. F. , Wood Floors, Vaulted Ceilings, Sunny Kitchen w/ Newer Appliances, Tile Counters, Wood Floor, Garden Window, Breakfast Nook w/ Pantry, Spacious Family Room w/ Double French Doors & Sidelights Opens to Private Backyard, Built-In Entertainment Unit, Brick Fireplace & Recessed Lights, Formal Living Room & Dining Room, Master w/ Walk-In Closet & Window Shutters, Master Bath w/ Dual Vanity, Tile Floor & Tiled Shower, Private Backyard has Hardscape w/ Brick Accents & Grassy Area, Walk to Tot Lot & Large Grassy Area Behind Home, Walk to Award Winning Schools including Prestigious Northwood High, Enjoy Resort-like Association Amenities w/ Pools, Huge Spa, Tennis Courts, Volleyball Courts, BBQ's & Remodeled Clubhouse, No Mello Roos, Low Tax Rate, Assoc. Dues $83/Month

Thank you for reading the Irvine Housing Blog.

Astutely observing the housing market and combating California Kool-Aid since 2006.

Have a great weekend,

Irvine Renter