Ireland experienced a housng bubble even larger than ours, and they are facing many of the same problems.

Irvine Home Address … 24 Wayfarer Irvine, CA 92614

Resale Home Price …… $695,000

Life's backwards

People turn around

The house is burned

The house is burned

Sinead O'Connor — Fire on Babylon

The day investors stopped using toxic loans as a conduit to inflate prices, credit crunched, and the fate of the housing market was sealed. It was only a matter of how long and painful the journey back to reasonable valuations was going to be.

Many with a vested interest in real estate refuse to face that the value of the house is burned. Owners don't want to face it, banks don't want to face it, and the government isn't forcing them to face it. Lenders have life backwards: they have a value on their books that determines what they need to get for their bad loans or its underlying collateral. Markets don't work that way.

Irish Banks Seek to Delay `Evil Day' as Home-Loan Losses Rise

By Joe Brennan – Mar 10, 2011 4:01 PM PT

Perched on a chair overlooking a wood panel-lined room in Dublin’s High Court, a bespectacled Judge Elizabeth Dunne has become all-too-used to hearing from the victims of Ireland’s economic meltdown.

Each Monday, Dunne presides over repossession hearings, with one in 10 Irish mortgages now in trouble. At the end of last year, more than 79,000 borrowers were behind on payments or had loan terms altered due to “financial distress,” the country’s central bank said on Feb. 28.

“Things are getting worse and worse,” said Dunne, as she weighed the case of a couple about 114,000 euros ($158,000) in arrears on a 558,938-euro home loan, one of 74 cases on her list on March 7. “Putting off the evil day is not going to help.”

I don't think the banks share her view on the evils of putting off the day of reckoning.

Our mortgage default rate runs at about 10% just like Ireland's, and their banks are delaying repossession just like ours are.

Irish mortgages account for more than a third of about 270 billion euros of loans that remain with the nation’s so-called viable lenders — Allied Irish Banks Plc (ALBK), Bank of Ireland Plc, Irish Life & Permanent Plc and EBS Building Society. The country’s new coalition parties are not convinced “that there has been proper transparency or full disclosure by the banks” on home-loan impairments, Alan Shatter told RTE Radio on March 7, two days before his appointment as Minister for Justice.

Wow! Someone in Ireland's government actually seems to care about what happens on banks balance sheets. No politician in the United States is questioning the accounting gimmicks currently being used by our major banks.

Historically, banks have always controlled the Republicans, but now with Democrats showing little or no spine when it comes to reigning in the banks, lenders are being allowed to post bogus accounting numbers on the idea that the market will come back and they will be made whole. That isn't gong to happen. There are far too many banks on the wrong side of the trade. They all have copious amounts of property, and they all need to dispose of it at top dollar.

“There has been a continual under-estimation of loan impairments in Irish banks over the past few years,” Ray Kinsella, banking professor at the Smurfit Business School at University College Dublin, said by telephone. “I am seriously concerned about mounting loan losses in their mortgage books.”

New Stress Test

The bad loans may be reassessed as early as this month when Ireland’s central bank concludes a third round of stress tests on the country’s lenders. The results will determine how much of a 35 billion-euro international bailout fund Ireland will need to draw down.

A year ago, Irish regulators stress-tested for a 5 percent loss rate on Irish mortgages. This year’s review “will take account of the deteriorating economic conditions and hence” loan-loss assumptions “may be higher,” said Nicola Faulkner, a spokeswoman for the central bank, by e-mail.

What a joke. Their real estate prices are going to halve over a five year period, and they will take forever to get back to the peak. Their 5% loss rate likely didn't factor in the market conditions created by their own inventory.

Ireland is suffering after a decade-long real estate boom collapsed in 2007. Already, the state has bought 72.3 billion euros of risky commercial property loans from the banks, at an average discount of 58 percent. Irish house prices, which quadrupled in the decade to 2007, have since plunged more than a third. Unemployment has tripled to 13.5 percent over the same period.

Who is lining up to buy their overpriced homes?

House Price Declines

This year’s tests may stress loan books against the unemployment rate rising to 16 percent, house prices falling 60 percent from their peak and “negligible” economic growth, said analysts including Jim Ryan and Michael Cummins of Glas Securities, the Dublin-based fixed-income firm, in a note to clients March 9. The central bank declined to comment.

That is classic. These private analysts portray the reality of what is going to happen to the economy and the housing market. Obviously, the central bank doesn't want to run that stress test (a realistic one) because it would show how totally screwed they really are.

More than 300,000 households, or about 40 percent of mortgages, may find their mortgages are worth more than their homes, so-called negative equity, before the property market bottoms out, said David Duffy, an economist at the Economic & Social Research Institute in Dublin, who estimates that house prices will fall by as much as half from peak to trough.

We currently have 25% of our mortgages underwater, but if prices drop another 10%, we could easily reach 40% of mortgages underwater at the bottom.

His estimate of a 50% drop in Ireland looks reasonable when you consider prices more than doubled in 7 years.

Prices in Ireland are probably near where they would have been if no housing bubble occurred. However, a housing bubble did occur, and after the collapse, the downward price momentum and problems with supply will continue to push prices lower and cause an overshoot to the downside.

Morgan Kelly, a University College Dublin economics professor dubbed “Doctor Doom” for his bleak assessments of Ireland’s housing market, wrote in the Irish Times on Nov. 8 that banks face “mass mortgage defaults” and a “wave of foreclosures.” Kelly declined to be interviewed.

Strategic default will ravage what's left of the market there just as it has in Las Vegas.

EU Bailout

Iceland, where almost 40 percent of residential mortgages were in negative equity by December, decided that month to write off mortgages and other household debt by as much as $858 million. Unlike Ireland and other western nations, the Nordic nation placed its biggest lenders in receivership in 2008 rather than offer taxpayer-funded capital injections.

Ireland has bolstered its banks with 46.3 billion euros of additional capital over the past two years. The nation was forced to agree to an 85 billion-euro bailout on Nov. 28, led by the European Union and the International Monetary Fund. That package includes 10 billion euros to recapitalize the banks up- front and a further 25 billion euros of “contingency” capital to be used if required.

“When the teams from the EU, ECB and IMF arrived in November, they probably thought they would find huge holes remaining in the banks’ loan books, but they did not,” said Alan Ahearne, who was economics adviser to Brian Lenihan, the former finance minister. “It’s not that there’s some black hole in the Irish banks that hasn’t previously been discovered.”

Actually, I think there is…

10 Billion Euros

Still, a previous regulatory target for banks to hold 8 percent core tier 1 capital, a gage of financial stability, “wasn’t enough to support confidence in the banks” given the economy’s problems, Ahearne said. Ireland agreed as part of the bailout to increase lenders’ capital levels to no less than 10.5 percent by the end of this month.

The 10 billion euros of initial capital destined for banks under the rescue package “pretty much covers our base case scenario” for remaining losses in Irish banks, said Ross Abercromby, a London-based analyst at Moody’s Investors Service, by telephone. “The additional 25 billion euros contingency fund would cover our stress scenario, which is pretty severe.”

Moody’s estimates that losses on Irish mortgages may be as high as 14 percent where the loan-to-value ratio is over 90 percent. That rises to 16 percent “in our worst case,” the ratings company said.

Household debt soared from 48 percent of disposable income in 1995 to 176 percent in 2009, catapulting Irish consumers into fourth place in 2008 in an international league table of personal indebtedness from 17th place in 1995, according to Ireland’s Law Reform Commission.

Are the analysts correct, or will Ireland's banks be looking for more bailouts?

Savings Rise

On the other hand, Irish households’ net savings as a percentage of disposable income rose from zero in 2007 to 12 percent in 2009, according to the Central Statistics Office. The savings rate should remain around the same level for this year and next, the ESRI said on Jan. 20.

That is impressive. Savings will provide the internal capital for Ireland to prosper again. Americans are not quite so thrifty.

Irish Life & Permanent Plc Finance Director David McCarthy said he doesn’t believe there are undiscovered losses in banks’ mortgage books. The group, which has 26.3 billion euros of Irish home loans, saw arrears of less than 90 days peak in mid-2010, McCarthy said on March 2, and they’ve “been falling, albeit quite slowly, since then,” he said.

Bank of Ireland spokeswoman Anne Mathews referred to CEO Richie Boucher’s Nov. 12 statement to analysts that there was “clear evidence” that arrears were “beginning to stabilize.” Allied Irish and EBS spokesmen declined to comment.

‘Different Phenomenon’

The Irish home-loan market is “a totally different phenomenon” to the commercial real-estate market, said John Reynolds, chief executive officer of Belgian-owned KBC Ireland.

“Irish banks have been hamstrung by a narrative that has been allowed to develop that all their lending was as mad as their real-estate lending,” said Reynolds. “The reality is that the Irish banks, when they didn’t do the real-estate stuff, which was a seductive drug, did bog-standard, criteria-driven lending.”

If that statement is accurate, Irish banks may be better off than we give them credit (pun intended). Our banks are hamstrung by real estate losses, but they are severely hampered by derivative losses and commercial losses. It wasn't housing that brought down Citi.

“Banks are exercising huge forbearance on borrowers in arrears,” partly because of pressure from the authorities “but also because they don’t want to repossess houses as there’s no second-hand market to sell them,” said Kinsella, the banking professor. Lenders only held 585 repossessed residential properties at end-2010, according to the central bank.

The new government said on March 6 it may bring in a two- year moratorium on repossessions “of modest family homes where a family makes an honest effort to pay their mortgages.” Currently, mortgage holders can enjoy 12-month protection from legal action if they are co-operating with lenders.

The coalition also pledged to fast-track changes in laws requiring bankrupted individuals to wait 12 years before they are discharged from their debts.

Wow! That really is different than what we are doing. Here in the United States, the GSEs have been moving to relax the waiting period so they can manufacture enough buyers to recycle their bad loans.

If Ireland does make it more restrictive to get a new loan, their housing market is really going to crumble. I believe this policy to be an empty threat to deter strategic default. Nice idea, but the defaults are going to occur anyway, and the policy will end up quietly being changed to get buyers back into the queue.

Rising Interest Rates

The issue of full recourse for mortgage loans is positive for banks, if not for borrowers in negative equity, said Abercromby. “If that level of recourse is watered down, by introducing less stringent bankruptcy laws, you could be looking at higher losses,” he said.

And if they don't relax those laws, they are sentencing an entire generation to debt servitude.

That's really the issue faced both here and abroad: increase bank losses and reduce the debt burden on the population, or limit the bank losses and force families to spend their entire working lives to pay for the mistakes of bankers. Each government through its own process will determine who the winners and losers are in the battle of the banks versus the people.

From what I am seeing here in the US, the banks will probably win. Prices will stay inflated, debt-to-income ratios will remain elevated, and everyone will be forced to put the maximum amount of income possible toward a house payment if they want to own something comparable to a rental. People will drink the appreciation kool aid, but with everyone already stretched to the max, prices won't go up any faster than inflation. What happens then?

There is also concern that rising interest rates will hit borrowers who have managed to remain out of trouble so far. ECB President Jean-Claude Trichet signaled on March 3 the bank may raise its benchmark rate from a record low of 1 percent as soon as next month.

Banks have already increased variable home loan rates from an average of 3.16 percent in mid-2009 to 3.87 percent by November, according to the ESRI. Lenders, including Irish Life and EBS, have hiked borrowing costs again since then.

Meanwhile, at least half of all Irish mortgages are so- called tracker products, with pricing linked to ECB’s key rate, according to the Irish Banking Federation.

More than fifty percent of Irish mortgage are ARMs underwritten at the bottom of the interest rate cycle. Hmmm… do you think they may have some payment shock to deal with over the coming years as interest rates rise?

Adjustable rate mortgages will separate the successful owners from the unsuccessful ones over the next decade. Those trying to save a few dollars today will pay a higher price when they refinance. If they roll over a series of 3-year ARMs, in nine years, they may be paying the same mortgage balance at 9% instead of the 5% or less borrowers are locking in today.

ARM holders are signing up to give ever-increasing payments to their lenders for the foreseeable future.

Tracker Rates

While banks may be able to contain bad-loan losses on their mortgage books, “a big and ongoing problem is that a large part of their mortgage books are based on ECB tracker rates, which banks are funding at a loss,” said Karl Deeter, operations manager with Dublin-based Irish Mortgage Brokers.

Back in the High Court, Dunne is listening to how a house builder from Co. Cavan, close to the border with Northern Ireland, is 67,000 euros in arrears on a 360,000 euro home loan taken out three years ago.

Times are hard out there, says the man, who has a plant hire and quarrying business, but is making partial remortgage payments. “I understand that well,” says Dunne. “I see that every Monday.”

To contact the reporter on this story: Joe Brennan in Dublin at jbrennan29@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

ireland had a real estate bubble very similar to ours, and they are grappling with the same issues we are in its deflation.

I wonder if you can pick up any good cashflow properties there now that prices have crashed?

That pesky comparable

It must be nice to believe a precious cottage still commands peak pricing. Well, good luck to these sellers with the appraisal because a model-match just sold last week for $488,000.

$488,000 9 SPRING BUCK Sold on Mar 09, 2011

0.05 miles 3 bd / 2.5 ba 1,571 Sq. Ft.

It's pretty hard for an appraiser to ignore a week-old model-match a few blocks away that just sold for $207,000 less. Perhaps he can bump up the value with the upgrades. Pehaps a price as high as $525,000 might be justifiable, if the appraiser were so inclined.

If these owners want to get $695,000, it better be an FCB with a lot of cash. The're going to need it.

For the record, these people were responsible borrowers. They only increased their mortgage once, and it certainly appears that money was put into the property.

Irvine Home Address … 24 Wayfarer Irvine, CA 92614

Resale Home Price … $695,000

Home Purchase Price … $236,000

Home Purchase Date …. 7/21/97

Net Gain (Loss) ………. $417,300

Percent Change ………. 176.8%

Annual Appreciation … 7.9%

Cost of Ownership

————————————————-

$695,000 ………. Asking Price

$139,000 ………. 20% Down Conventional

4.82% …………… Mortgage Interest Rate

$556,000 ………. 30-Year Mortgage

$140,972 ………. Income Requirement

$2,924 ………. Monthly Mortgage Payment

$602 ………. Property Tax

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

$116 ………. Homeowners Insurance

$139 ………. Homeowners Association Fees

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

$3,931 ………. Monthly Cash Outlays

-$709 ………. Tax Savings (% of Interest and Property Tax)

-$691 ………. Equity Hidden in Payment

$256 ………. Lost Income to Down Payment (net of taxes)

$116 ………. Maintenance and Replacement Reserves

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

$2,904 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$6,950 ………. Furnishing and Move In @1%

$6,950 ………. Closing Costs @1%

$5,560 ………… Interest Points @1% of Loan

$139,000 ………. Down Payment

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

$158,460 ………. Total Cash Costs

$44,500 ………… Emergency Cash Reserves

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

$202,960 ………. Total Savings Needed

Property Details for 24 Wayfarer Irvine, CA 92614

——————————————————————————

Beds: 3

Baths: 3

Sq. Ft.: 1571

$442/SF

Lot Size: 3,024 Sq. Ft.

Stories: 0002

Year Built: 1980

Community: Irvine

County: Orange

MLS#: 11003979

Source: VCRDS

Status: Active

On Redfin: 1 day

——————————————————————————

A Beautiful 3 bedroom 2 1/2 a bath remodeled cottage home inside the loop in desirable Woodbridge. The kitchen features granite counter tops, new appliances, hardwood floors and new cabinets. Crown molding throughout the house. Remodeled bathrooms with granite counter tops and tile flooring. New paint throughout the home. Custom wood shutters, mirrored wardrobe doors. Painted garage floor. Dining room and family room opens to a beautiful landscaped private patio. New front landscape. Woodbridge offers community lakes as well as the community pools.

I would like to wish my visiting Irish mother-in-law a

Happy St. Patrick's Day!

The median home price declined on a year-over-year basis in February for the first time since October of 2009. Home sales hit a three-year low.

Irvine Home Address … 38 WILLOWGROVE Irvine, CA 92604

Resale Home Price …… $534,900

It's not

What you thought

When you first began it

You got

What you want

Now you can hardly stand it though

Prepare a list of what you need

Before you sign away the deed

'Cause it's not going to stop

No, it's not going to stop

Aimee Mann — Wise Up

Many buyers purchased for appreciation, and they got the property they wanted, but now that they are underwater, they can hardly see it through. Many walk away.

They make a list of what they need before they give back the deed because they know the pressure on prices is not going to stop.

Wise up! Record low sales, high rates of foreclosure and falling prices are not good signs for the real estate market.

Southland February Home Sales At 3-year Low; Investor Interest High

March 15, 2011

La Jolla, CA—Southern California’s housing market remained sluggish in February despite relatively strong demand from investors and others paying cash for homes. Prices appeared fairly flat as many potential home buyers stayed on the sidelines and waited – whether for a sign values have bottomed, job security has improved or credit has loosened, a real estate information service reported.

How do they know what motivates buyers? Aren't those statements really just bullshit? Dataquick has consistently cheerleaded for the realtor community, and it comes through in their press releases where they always have some positive spin they put on the data.

Last month 14,369 new and resale houses and condos sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties. That was down 0.6 percent from 14,458 in January, and down 6.4 percent from 15,359 in February 2010, according to DataQuick Information Systems of San Diego.

A small change in sales – up or down – between January and February is normal for the season. On average, sales have risen 0.6 percent between those two months since 1988, when DataQuick’s statistics begin.

In other words, rather than showing normal seasonal strength coming off a January low, the market actually deteriorated. Is this spin true “A small change in sales – up or down – between January and February is normal for the season?” Well, the OC Register did some digging, and according to them, “This early year decline is a bit of a rarity: It’s only the 9th time since 1988 that homebuying activity was lower in February in January.” 9 times out of 23 seems rather rare.

See those huge down spikes on the chart below? Those are January sales numbers.

See those huge up spikes back to the normal range? Those are February's typical gains.

The total number of homes sold last month was the lowest for a February since 2008, when 10,777 sold, and the second-lowest since 1995, when 12,459 sold. Last month’s sales fell 19.5 percent short of the Southland’s average February sales tally – 17,848 – since 1988.

We have more houses than we did in 1988. We have more people living in Southern California that we did in 1988. How is it that sales are not at least in proportion to the increase in the number of homes or the number of people? I think we all know the answer, but it is worth noting that sales rates are very low by any standard measure.

The 847 newly built homes sold in the region last month marked the second-lowest level on record for a February, behind 842 sales in February 2009. Builders continue to struggle to compete with prices on resale homes, especially distressed properties.

Irvine is different, right? New home sales continue to outperform, right?

Last month’s distressed sales – the combination of sales of foreclosed homes and “short sales” – accounted for well over half of the resale market.

Whenever the percentage of distressed sales exceeds 40%, prices generally fall.

Foreclosure resales – properties foreclosed on in the prior 12 months – made up 37.1 percent of resales last month, up from 36.8 percent in January but down from 42.4 percent a year ago. Over the past year foreclosure resales hit a low of 32.8 percent last June but since then they’ve trended higher. Foreclosure resales peaked at 56.7 percent in February 2009.

Short sales – transactions where the sale price fell short of what was owed on the property – made up an estimated 19.8 percent of Southland resales last month. That was up from an estimated 19.7 percent in January, 18.4 percent a year earlier, and 12.0 percent two years ago.

The abundance of distressed homes for sale continues to attract unusually high levels of investor and cash-only buyers.

People portray this as some kind of investor conspiracy trying to squeeze out the little guy. The reality is that investors are stepping into the void left behind by owner occupants who could not sustain ownership. If there were an owner occupant capable of sustaining ownership, their bids for properties would almost certainly be higher than an investor's bid. Investors do not crowd out owner occupants. To the contrary, as the economy improves, it will be owner occupants that bid up prices and crowd out investors.

Absentee buyers – mostly investors and some second-home purchasers – bought a record 26.1 percent of the Southland homes sold in February, paying a median $198,000. Since 2000, absentee buyers have purchased a monthly average of 16.2 percent of all homes sold. (Absentee data go back to 2000.)

Buyers who paid cash accounted for a record 31.7 percent of February home sales, paying a median $200,000. That was up from 30.4 in January and 30.1 percent a year earlier. The February cash level was the highest for any month in DataQuick’s statistics back to 1988. The 10-year monthly average for the percentage of Southland homes purchased with cash is 13.1 percent. Cash purchases are where there was no indication in the public record that a corresponding purchase loan was recorded.

“The January and February sales data can be interesting, but we always caution that historically they’ve been a poor barometer for the rest of the year. What the past two months do tell us is that lots of people have bet, often with cash, that housing at today’s prices will prove a solid investment,” said John Walsh, DataQuick president.

“This spring we’ll see an infusion into the market of more traditional buyers, who aren’t necessarily purchasing with an investor mindset. If the stars line up right – low prices, low mortgage rates, available credit, higher job growth and higher consumer confidence – we could see sales shoot back up to more normal levels. There’s pent-up demand out there. Lots of people have been waiting for the right time to buy. But they’ve got to feel more confident in their jobs, they’ve got to qualify for a loan and, for some, they need to be convinced prices are at or near bottom. One group will still be stuck on the sidelines, though: Those who owe significantly more on their mortgages than their homes are worth.”

Did you recover from that kool aid overdose?

The median price paid for a Southland home last month was $275,000, up 1.9 percent from $270,000 in January, and unchanged from $275,000 in February 2010. In January this year, the median fell slightly (-0.6%) from a year earlier, marking the first year-over-year decline since October 2009.

Notice that they buried a key piece of information in the middle of the article as if it wasn't important. I used this as a headline because it is important news.

The median’s low point for the current real estate cycle was $247,000 in April 2009, while the high point was $505,000 in mid 2007.

Wow! the median in Southern California declined more than 50% from peak to trough — assuming you believe that was the trough.

The peak-to-trough drop was due to a decline in home values as well as a shift in sales toward low-cost homes, especially inland foreclosures.

Do they have any more excuses for the market's poor performance?

At the county level last month, the overall median sale price fell on a year-over-year basis in four counties and was unchanged in two. Declines from a year ago were logged in Orange (-1.7 percent), Riverside (-1.0 percent), San Diego (-4.3 percent), and Ventura (-1.4 percent) counties, while the median was the same as a year ago in Los Angeles and San Bernardino counties.

The median paid for the largest home-type category – resale single-family detached houses – fell year-over-year last month in Orange (-3.1 percent), San Diego (-3.1 percent) and Ventura (-9.6 percent) counties. The other three counties recorded annual gains ranging from 2.6 percent in Los Angeles and Riverside counties to 3.6 percent in San Bernardino County.

The beaten down markets are bottoming and starting to recover while the previously immune markets are beginning to falter.

Government-insured FHA loans, a popular low-down-payment choice among first-time buyers, accounted for 32.2 percent of all mortgages used to purchase homes in February. That was the lowest level since August 2008, when 26.8 percent of purchase loans were FHA. Last month’s FHA level was down from 33.2 percent in January and 36.8 percent in February 2010. Two years ago FHA loans made up 36.9 percent of the purchase loan market, while three years ago it was just 6.5 percent.

Last month 18.1 percent of all sales were for $500,000 or more, down from a revised 18.3 percent in January and down from 18.5 percent a year earlier. The low point for $500,000-plus sales was in January 2009, when only 13.6 percent of sales crossed that threshold. Over the past decade, a monthly average of 26.8 percent of homes sold for $500,000 or more.

Viewed differently, Southland zip codes in the top one-third of the housing market, based on historical prices, accounted for 34.6 percent of total sales last month. That was up from 33.4 percent in January and up from 32.7 percent a year ago. Over the last decade, those higher-end areas contributed a monthly average of 37.1 percent of regional sales. Their contribution to overall sales hit a low of 26.2 percent in January 2009.

High-end sales still suffer from tight credit policies. Adjustable-rate mortgages (ARMs) and so-called jumbo home loans have been relatively difficult to get ever since August 2007, when the credit crunch hit.

And none of that is going to change. When you hear pundits describe this situation, they make it sound like a temporary overreaction. Happy days will not be here again soon.

Last month ARMs represented 7.8 percent of Southland purchase loans, up from 7.0 percent in January and 4.1 percent a year ago. Last month’s figure was the highest since August 2008, when it was 10.5 percent. Over the past decade, a monthly average of about 38 percent of purchase loans were ARMs.

It is good to know that only 7.8% of buyers are foolish enough to take out an adjustable rate mortgage at the bottom of the interest rate cycle. It's amazing that the market typically has 38% of its loans as ARMs. That will change as interest rates begin they cyclic climb.

Jumbo loans, mortgages above the old conforming limit of $417,000, accounted for 15.6 percent of last month’s purchase lending, up from 15.2 percent in January and 14.8 percent a year earlier. However, in the months leading up to the credit crisis that struck in August 2007, jumbos accounted for 40 percent of the market.

Jumbo loans will not be 40% of the market any time soon. Since these loans are not government backed, the interest rates are about 3/4 of a point higher. That translates into a significant loss of affordability once jumbo financing is required.

Last month the percentage of Southland homes that was flipped – bought and re-sold on the open market within a six-month period – was 3.2 percent. That was up from a “flipping” rate of 3.1 percent in January but down from 3.4 percent a year earlier. Flipping varied last month from as little as 2.4 percent in Ventura County to as much as 3.8 percent in San Diego County.

DataQuick Information Systems monitors real estate activity nationwide and provides information to consumers, educational institutions, public agencies, lending institutions, title companies and industry analysts.

The typical monthly mortgage payment that Southland buyers committed themselves to paying was $1,174 last month, up from $1,128 in January and down from $1,180 in February 2010. Adjusted for inflation, current payments are 48.1 percent below typical payments in the spring of 1989, the peak of the prior real estate cycle. They are 57.4 percent below the current cycle’s peak in July 2007.

Now we are seeing real payments based on real incomes. During both housing bubbles, toxic financing became common, and payments became detached from reality.

Indicators of market distress continue to move in different directions. Foreclosure activity remains high by historical standards but is lower than peak levels reached over the last two years. Financing with multiple mortgages is very low, and down payment sizes are stable, DataQuick reported.

	Sales Volume			Median Price
All homes	Feb-10	Feb-11	%Chng	Feb-10	Feb-11	%Chng
Los Angeles	5,034	4,736	-5.90%	$315,000	$315,000	0.00%
Orange	1,986	1,903	-4.20%	$417,000	$410,000	-1.70%
Riverside	3,199	2,842	-11.20%	$197,000	$195,000	-1.00%
San Bernardino	2,095	1,974	-5.80%	$150,000	$150,000	0.00%
San Diego	2,465	2,330	-5.50%	$322,000	$308,000	-4.30%
Ventura	580	584	0.70%	$350,000	$345,000	-1.40%
SoCal	15,359	14,369	-6.40%	$275,000	$275,000	0.00%

Source: DQNews.com Media calls: Andrew LePage (916) 456-7157

Copyright 2011 DataQuick Information Systems. All rights reserved.

Irvine Shadow Inventory

realtors have been consistently denying the existence of shadow inventory. It's always rather surprising to me to see people deny the obvious. Did they think the shadow inventory would never surface or never be identifiable?

Todays' featured property was first profiled on 7/30/2008. Back then, an asking price of $569,000 was one of those ridiculous short sale prices well below market. Today, that would represent a $70,000 profit from today's asking price — plus the lender has eaten two years worth of lost payments. Today's featured property was purchased by the bank as REO on 6/11/2009. What have they been doing with this property for the last two years? If that's how fast their renovation crews work, they need better help.

The former owners paid $745,000 on 3/2/2006 using a $633,250 first mortgage, and a $111,750 down payment — now gone. They refinanced on 6/25/2007 with an option ARM. They obtained a $78,000 HELOC, but it is unclear if they used it to withdraw their down payment. If they didn't, I bet they wish they did.

This house was in shadow inventory for the last two years. Perhaps properties like this are picked up on a report somewhere, but it was not for sale on the MLS, and it was not rented out. It sat there empty. It makes more sense for the property to sit empty rather than sell it and lower prices — at least that's what the banks believe.

Expect to see more properties like this, particularly if lenders believe there is some demand to sell into. It's these properties coupled with the ongoing distress still hanging over the market that will prevent any meaningful appreciation for the foreseeable future.

It's more than an abstract idea. You will see it happen house by house here at the IHB.

Irvine Home Address … 38 WILLOWGROVE Irvine, CA 92604

Resale Home Price … $499,900

Home Purchase Price … $745,000

Home Purchase Date …. 3/2/06

Net Gain (Loss) ………. $(275,094)

Percent Change ………. -36.9%

Annual Appreciation … -7.5%

Cost of Ownership

————————————————-

$499,900 ………. Asking Price

$17,497 ………. 3.5% Down FHA Financing

4.82% …………… Mortgage Interest Rate

$482,404 ………. 30-Year Mortgage

$101,398 ………. Income Requirement

$2,537 ………. Monthly Mortgage Payment

$433 ………. Property Tax

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

$83 ………. Homeowners Insurance

$139 ………. Homeowners Association Fees

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

$3,342 ………. Monthly Cash Outlays

-$415 ………. Tax Savings (% of Interest and Property Tax)

-$599 ………. Equity Hidden in Payment

$32 ………. Lost Income to Down Payment (net of taxes)

$83 ………. Maintenance and Replacement Reserves

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

$2,444 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$4,999 ………. Furnishing and Move In @1%

$4,999 ………. Closing Costs @1%

$4,824 ………… Interest Points @1% of Loan

$17,497 ………. Down Payment

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

$32,319 ………. Total Cash Costs

$37,400 ………… Emergency Cash Reserves

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

$69,719 ………. Total Savings Needed

Property Details for 38 WILLOWGROVE Irvine, CA 92604

——————————————————————————

Beds: 4

Baths: 3

Sq. Ft.: 2040

$262/SF

Lot Size: –

Property Type: Residential, Condominium

Style: Two Level, Mediterranean

Year Built: 1978

Community: Woodbridge

County: Orange

MLS#: S651660

Source: SoCalMLS

Status: Active

On Redfin: 1 day

——————————————————————————

LARGE ATTACHED SINGLE FAMILY HOME IN BEAUTIFUL WOODBRIDGE NEIGHBORHOOD. LIGHT AND BRIGHT FLOORPLAN WITH VAULTED CEILING IN LIVING ROOM WITH FIREPLACE; FORMAL DINING ROOM; LARGE KITCHEN WITH GRANITE COUNTERTOP; FAMILY ROOM WITH MEDIA NICHE; LARGE MASTER WITH VAULTED CEILING; TRIPLE CLOSET WITH MIRROR DOORS; NURSERY; 2 ADDITIONAL SPACIOUS BEDROOMS; ATTACHED DIRECT ACCESS GARAGE; LARGE BACKYARD FOR TOWNHOME; JACCUZZI. NEEDS NEW PAINT, CARPET AND MINOR REHAB. .. SOLD AS IS.

Follow up story

Remember the attorney advising his clients to break in and squat in their old homes?

He is being reprimanded by the State Bar.

Discipline Case Filed Against Lawyer Who Advised Clients to Break Into Their Foreclosed Homes

Posted Mar 14, 2011 5:13 PM CDT

By Stephanie Francis Ward

Updated: A California lawyer who advised clients to break into their foreclosed homes while he argued in state court that the foreclosures were illegal faces from the State Bar of California discipline for his remarks, the attorney regulatory agency announced today.

The complaint against Michael T. Pines, filed in the State Bar Court, seeks to lift his law license. According to a press release the state bar issued, Pines in February was arrested for threatening the occupants of a house that used to belong to his clients, and the following day was cited for trespassing on the property. Four days later, according to the release, he was cited for violating a temporary restraining order at the site. According to the state bar, Pines told his clients that he may break into the property again.

And in October, according to the release, Pines notified Newport Beach, Calif., police that he and a client were going to take possession of a house that the client lost in foreclosure.

“To remove a lawyer from active practice on an interim basis before formal charges are filed is a drastic remedy,” James Towery, the state bar’s chief trial counsel, stated in today’s release. “That remedy is justified by the established misconduct of Michael T. Pines. He has shown complete disrespect for the law, the courts and especially the best interests of his clients. Removing Mr. Pines from active practice is an important step in our mission of public protection.”

Pines’ alleged actions have been widely noted. In January, the he told a Ventura County judge he’d hire a locksmith himself to get a husband and wife he represents back into their home. Pines admitted to breaking into homes at least half a dozen times so his clients could live in them while he defended their foreclosure proceedings. Also, the Ventura County judge criticized Pines for skipping a contempt hearing, and filing federal and state court lawsuits that he later abandoned. And it was reported that Pines himself has at least six properties in foreclosure, after working as a real estate broker specializing in distressed investments.

Updated March 15 to correct a reference to Michael T. Pines.

When a house was viewed purely as shelter, prices were generally stable. Once investment motives entered buyer's decision process, prices begin a wild ride resulting in a cycle of boom and bust.

Irvine Home Address … 16 FOXHILL Irvine, CA 92604

Resale Home Price …… $789,900

As you're watchin' all your days go by

Lookin' back on younger years

That's what our hopes and dreams are made of

All the laughter and the tears

Slaughter — Days Gone By

Most people who bought houses during the 00s did so with dreams of riches. Those dreams materialized in laughter for some, tears and financial slaughter for others.

Bricks and slaughter

Property is widely seen as a safe asset. It is arguably the most dangerous of all, says Andrew Palmer

Mar 3rd 2011

… Why is property so dangerous? One obvious answer is the sheer size of the asset class. The aggregate value of property held by American households in the peak year of 2006 was $22.7 trillion, their biggest single asset by a wide margin (pension-fund reserves were next, at $12.8 trillion). Working out the figures in other countries involves much more guesswork. Back in 2002 this newspaper reckoned that residential property in the rich world as a whole was worth about $48 trillion and the commercial sort $15 trillion: if you allow for property-price changes in the intervening period, the current values, even after the bust, would be $52 trillion and $28 trillion (see chart 1), or 126% and 67% respectively of the rich countries’ combined GDP in 2010. Whatever the precise number, property is so big that when credit conditions loosen it is likely to absorb a lot of the extra liquidity; and when something goes wrong the effects will be serious.

An even bigger reason to beware of property is the amount of debt it involves. Most people do not borrow to buy shares and bonds, and if they do, the degree of leverage usually hovers around half the value of the investment. Moreover, when stock prices fall, borrowers can usually get their loan-to-value ratios back into balance by selling some of the shares. By contrast, in many pre-crisis housing markets buyers routinely took on loans worth 90% or more of the value of the property. Most had no way of bringing down their debt short of selling the whole house. …

The leverage in housing is great when prices go up, but when they go down…. Stocks are primarily investments held with discretionary income whereas houses are consumptive shelter — a necessary expense of living. When stock prices crash, people may lose some money, but their losses are generally limited to their investment. Even in leveraged investing, a brokerage will liquidate before equity dips below zero. In housing there is no such stoploss. In a housing crash, people are wiped out and go bankrupt.

With only a small sliver of their own capital to protect them, many owners were quickly pushed into negative equity when property prices fell. As borrowers defaulted, the banks’ losses started to erode their own thin layers of capital. “Banks are leveraged and property is leveraged, so there is double leverage,” says Brian Robertson, who runs HSBC’s British and European operations and used to be the bank’s chief risk officer. “That is why a property crash is a problem for the banks.”

In other words, the money banks lost is money they didn't have.

Property bubbles almost always start because fundamentals such as population growth, interest rates and economic expansion are benign. A shrinking population weighs on Germany’s housing market, for example, and a rising one underpins long-term confidence in America’s. These fundamentals explain why many market participants are able to persuade themselves that huge price rises are justified and sustainable.

We see a microcosm of this phenomenon here where fools deny a housing bubble ever happened.

Chastened regulators now talk about a presumption of guilt, not innocence, when prices look frothy. That is because property markets are inefficient in several ways which make it more likely that they will overshoot.

Cycle paths

For the lenders, property is attractive in part because it attracts lower capital charges than most other assets. That makes sense—the loan is secured by a tangible asset that will retain some value if the borrower defaults—but it can also lead to overlending. Indeed, one of the bigger ironies of the property bubble was that lenders and investors probably thought they were being relatively prudent.

The investors buying toxic loans were usually purchasing them through collateralized debt obligations blessed by ratings agencies with AAA status.

Capital charges are higher for commercial property than for homes but banks can still be seduced by the apparent stability of a real asset producing predictable cash flows. “Commercial real estate is often a borrower of last resort,” says Bart Gysens, an analyst at Morgan Stanley. “It tends to be willing to absorb a bit more debt if and when banks and debt markets want to provide it.”

Collateralised lending offers a degree of protection to the individual lender, but it has some unfortunate systemic effects. One is the feedback loop between asset prices and the availability of credit. In a boom, rising property prices increase the value of the collateral held by banks, which makes them more willing to extend credit. Easier credit means that property can sell for more, driving up house prices further.

That is a fancy description of a banking Ponzi scheme.

The loop operates in reverse, too. As prices fall, lenders tighten their standards, forcing struggling borrowers to sell and speeding up the decline in prices. Since property accounts for so much of the financial system’s aggregate balance-sheet, losses from real-estate busts are likely to be synchronised across banks.

The credit cycle of boom and bust is just as the author describes. Once you understand the cycle, it is easy to foresee problems like the credit crunch of 2007 — the timing is always tough, but the inevitability is easy to see. It's a bit like inflation is today. We all know its coming, but nobody is quite sure when it will arrive.

Borrowers, too, contribute to the inefficiency of property markets, particularly on the residential side. Some people think that renting will enjoy a renaissance as a result of the crisis (see article), but few expect a wholesale, permanent shift in attitudes. Unlike other assets, housing is seen both as an investment and something to consume. In its latest survey of consumer attitudes in July 2010, Fannie Mae, one of America’s two housing-finance giants, found that Americans wanted to buy houses for a range of reasons, from providing a safe environment for their children and having more control over their living space to making a financial return. In China there is another item to put on the list: for many young men owning a property is a prerequisite for attracting a wife.

This mixture of motives can be toxic for financial stability. If housing were like any other consumer good, rising prices should eventually dampen demand. But since it is also seen as a financial asset, higher values are a signal to buy.

That's kool aid intoxication. What should be taken as a sign that prices are too high instead motivates more buying. Buy now or be priced out forever, right? Once that fear overcomes a market, the combination of greed and fear motivates some truly irrational buyer behavior. Remember when people used to write passionate letters to sellers to bestow them the honor of ownership?

And if housing were simply a financial investment, buyers might be clearer-eyed in their decision-making. People generally do not fall in love with government bonds, and Treasuries have no other use to compensate for a fall in value. Housing is different. Greg Davies, a behavioural-finance expert at Barclays Wealth, says the experience of buying a home is a largely emotional one, similar to that of buying art. That makes it likelier that people will pay over the odds. Commercial property is a more rational affair, although hubris can play a part: there is nothing like a picture of a trophy property to adorn a fund manager’s annual report.

Once house prices start to rise, the momentum can build up quickly. No single individual (except, perhaps, Warren Buffett) can push up a company’s share price by buying its stock at an inflated price, but the price of residential property is set locally by the latest transactions. The value of any particular home, and the amount that can be borrowed against it, is largely determined by whatever a similar house nearby sells for. One absurd bid can push up prices for lots of people.

I outlined a proposal to overhaul the appraisal system in the US to require cashflow valuations of properties in addition to the comparable value method. As the author notes, comparable value simply makes irrational behavior the standard of the market. it does nothing to curb the excesses or keep valuation in line with lender payment schedules. Markets trading at cashflow values don't crash. What price levels would they crash down to?

As prices rise, property is arguably more likely than many other asset classes to encourage speculation. One reason is that property is so much part of everyday life. People do not gossip about the value of copper and tin, but they like to talk about how much the neighbour’s house went for. They watch endless TV shows about houses and fancy themselves as interior designers, able to raise the price of their home with a new sofa and artful lighting. Eventually the temptation to take a punt on property becomes overwhelming. “Speculation is a bit like sex,” says Robert Shiller of Yale University, a long-standing observer of speculative bubbles. “People who have lots of sex are not approved of but they are thought to live life with gusto. People eventually decided to try for themselves.”

That is one of Dr. Shiller's more interesting analogies.

Even the risk-averse may well respond to rising prices by entering the market. Everyone needs somewhere to live, and many want to own their own homes. The amount of space that people need increases predictably over time as they find partners and have children. James Banks, Richard Blundell and Zoë Oldfield of Britain’s Institute for Fiscal Studies and James Smith of RAND, an American think-tank, find that this gives people an incentive to buy early in order to protect themselves against the risk of future price increases that would make houses unaffordable.

These guys are talking about NAr fear mongering. The belief that you need to buy the most house you can afford today because it may be unaffordable in the future is exactly how we got into this mess. Overextended borrowers are the root of housing's woes.

Another reason for momentum in property markets is the fact that there are no short-sellers. If you think property is overpriced, it is difficult to profit from that view. As Adam Levitin of Georgetown University Law Centre and Susan Wachter of the University of Pennsylvania pointed out in a recent paper on the causes of the housing bubble in America, it is impossible to borrow the Empire State Building in order to sell New York real estate short. HSBC probably came closest by selling its Canary Wharf tower in London for £1.1 billion ($2.18 billion) in 2007 and buying it back from its debt-laden Spanish owners for £250m less in late 2008—the greatest short sale in the history of property, says one observer.

That one is pretty good, but I know a local real estate developer who bought a property for $10M in 1999, sold it for $100M in 2005, and was negotiating to repurchase the property — with its $135M in improvements — for $40M in 2010. I don't think he closed the deal, but it would be a remarkable short trade if it happens.

Some investors infamously did make money from betting against American subprime mortgages, but their real achievement was to find a way of doing so, by buying up credit-default swaps that paid out when mortgage-backed securities soured.

There have been attempts to create instruments that allow property to be hedged or shorted. Mr Shiller himself has been involved in launching derivatives linked to home-price indices for both large and small investors, but with limited success to date. Commercial-property derivatives, however, are gaining ground.

Such products are conceptually appealing but face several obstacles. Some are common to all financial innovations: new products lack enough liquidity to lure buyers in, for example. Others are more specific to property. Individual properties and neighbourhoods differ, which makes it hard to construct accurate hedges. Government interventions to shore up the housing market add an extra element of unpredictability. And since house-price cycles tend to last for a long time, says Mike Poulos of Oliver Wyman, a consultancy, it can be expensive to sustain a short position.

Short positions in real estate using futures contracts will likely never catch on. Who is going to buy a short futures contract to hedge any possible loss in their homes value? In reality, most people who buy believe house prices are going up, and if any such futures contract were widely traded, most people would take the long side and magnify their exposure to real estate rather than hedge it.

Up, up and away with the fairies

The effects of buying a home when prices are rising are insidious. A 2008 paper by Hugo Benitez-Silva, Selcuk Eren, Frank Heiland and Sergi Jiménez-Martín used the Health and Retirement Study, a biennial survey of Americans over the age of 50, to compare people’s estimates of the value of their homes with actual values when a sale took place. The authors found that homeowners overestimate the value of their homes by an average of 5-10%.

Even now, many in Irvine believe their house values never declined. People have a selection bias when it comes to comps for their own property. They will almost always conclude the asking price of a similar but nicer property represents the actual resale value of their own property. Comps that might inject a bit of reality are routinely ignored, and Pollyanna assessments of valuations and appreciation abound.

Those who had bought during good times tended to be more optimistic in their valuations, whereas those who had bought during a downturn were more realistic. Expectations of higher prices explain why bubble-era buyers were more willing to buy risky mortgage products and take on ever greater quantities of debt. The amount of mortgage debt in America almost doubled between 2001 and 2007, to $10.5 trillion.

The rich-world buyers of today ought to be more realistic about the future value of their homes, but attitudes are deeply entrenched. When asked to rate the safety of various investments, two-thirds of the respondents in the Fannie Mae survey classed homeownership as a safe investment, compared with just 15% for buying shares. Only savings accounts and money-market funds, both of which enjoyed an explicit government guarantee during the financial crisis, scored higher than homes. Homeowners who were “under water” on their mortgages (ie, they owed more than their properties were worth) were just as sure as everyone else that housing was a safe investment.

If the Burj Khalifa shows that memories of property cycles are short, the Fannie Mae survey suggests that some of the lessons are never taken on board at all. Given the state of residential property around the rich world, perhaps the victims are suffering from post-traumatic amnesia.

How do we explain that level of ignorance. How can people be underwater, facing the reality of what a poor investment housing can be, how can these people continue to remain in denial?

I suppose many refuse to admit their mistakes even when maintaining denial is barely tenable. Cashflow real estate can be a great investment. Betting on appreciation is a fool's game more likely to be a great disaster.

Typical California home owner

I was asked recently if I believed Irvine has more Ponzis than other places. Well, compared to poor rural areas, there are likely more Ponzis because more people are given opportunity to show their cosmopolitan sophistication by taking on copious amounts of debt. Plus, there are greater pressures to keep up with the Joneses in places like Irvine that is difficult for many to resist. But Irvine isn't out of control.

The Ponzis here are more flamboyant in their consumption because house prices went up so much, but I don't believe Irvine is Babylon. Although the huge HELOC abuse cases are more interesting, owners like today's are much more common. These owners increased their mortgage, likely in response to burgeoning credit card debt and funding their entitlements, but by and large, they kept their spending under control and didn't spend the house to the point they are in financial distress and facing foreclosure.

• These owners paid $326,500 at the bottom of the last cycle on 6/3/1997. They used a $261,200 first mortgage, a $32,600 HELOC, and a $32,700 down payment.
• On 9/23/2003 they refinanced with a $282,000 first mortgage and a $100,000 stand-alone second.
• On 10/15/2004 they obtained a $200,000 HELOC, but it doesn't look as if it was used.
• On 1/20/2005 they refinanced with a $330,500 first mortgage and a $120,000 HELOC. This HELOC and the ones that followed where not fully used.
• On 6/14/2005 they opened a $155,000 HELOC.
• On 2/23/2007 they opened a $185,000 HELOC.
• On 5/20/2008 they obtained a new $417,000 first mortgage and a $35,000 HELOC.
• On 8/27/2010 they refinanced with a $442,000 first mortgage.
• This typical, somewhat-frugal Irvine couple still added $148,200 to their mortgage.

This behavior is so common that most don't even recognize is as a dangerous Ponzi scheme.

Look at it this way. In 1997 when this house was purchased, the aggregate DTI was very similar to Las Vegas. Houses were generally affordable, but not inexpensive by conventional cashflow measures. People in both places were paying a similar percentage of their incomes toward housing.

Fast forward to today, and prices in Las Vegas are hovering near their 1997 levels. Any amount of mortgage equity withdrawal — even the tame Irvine version above — would put a Las Vegas homeowner underwater. The housing bubble deflated there and is overshooting to the downside. Here in Irvine, the housing bubble has not deflated, and homeowners like today's stand to take a few hundred thousand with them on top of the $150K they already spent.

They should be very thankful banks are allowing their delinquent neighbors to squat in order to hold up housing values.

Irvine Home Address … 16 FOXHILL Irvine, CA 92604

Resale Home Price … $789,900

Home Purchase Price … $326,500

Home Purchase Date …. 6/3/1997

Net Gain (Loss) ………. $416,006

Percent Change ………. 127.4%

Annual Appreciation … 6.4%

Cost of Ownership

————————————————-

$789,900 ………. Asking Price

$157,980 ………. 20% Down Conventional

4.82% …………… Mortgage Interest Rate

$631,920 ………. 30-Year Mortgage

$160,221 ………. Income Requirement

$3,323 ………. Monthly Mortgage Payment

$685 ………. Property Tax

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

$132 ………. Homeowners Insurance

$139 ………. Homeowners Association Fees

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

$4,428 ………. Monthly Cash Outlays

-$806 ………. Tax Savings (% of Interest and Property Tax)

-$785 ………. Equity Hidden in Payment

$291 ………. Lost Income to Down Payment (net of taxes)

$132 ………. Maintenance and Replacement Reserves

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

$3,261 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$7,899 ………. Furnishing and Move In @1%

$7,899 ………. Closing Costs @1%

$6,319 ………… Interest Points @1% of Loan

$157,980 ………. Down Payment

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

$180,097 ………. Total Cash Costs

$49,900 ………… Emergency Cash Reserves

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

$229,997 ………. Total Savings Needed

Property Details for 16 FOXHILL Irvine, CA 92604

——————————————————————————

Beds: 4

Baths: 3

Sq. Ft.: 2580

$306/SF

Lot Size: 5,400 Sq. Ft.

Property Type: Residential, Single Family

Style: Two Level, Traditional

View: Park/Green Belt

Year Built: 1975

Community: El Camino Real

County: Orange

MLS#: S651471

Source: SoCalMLS

Status: Active

——————————————————————————

You can't beat this location! Sits right on the PARK. Glance through your french doors or sit on your front porch and enjoy the view! Remodeled from top to bottom! Enter your custom double doors and feel the warmth of this home. All new windows and sliding glass doors, lots of added can lighting, pecan hardwood throughout downstairs, new carpet upstairs, custom paints and more! Newly remodeled kitchen with cherrywood cabinets, granite counters, s/s appliances, center island w/ pot rack. .any chef would be happy to call their own. Downstairs bedroom currently used as office across from downstairs full bath featuring new cabinets, tumbled limestone counters and custom mirror. Master suite features enclosed sitting area, walk in closet and dual sinks. The large backyard is perfect for playing and/or entertaining. Kids can walk to elementary and middle schools! Community: Five pools, tennis courts, tot lots, sand volleyball court. This beauty is not to be missed!

Out of Bank of America's assets excretes a special home investment trust (SHIT) bank designed to hold their crap loans from the housing bubble.

Irvine Home Address … 174 CHERRYBROOK Ln Irvine, CA 92618

Resale Home Price …… $575,000

I don't give a damn about my reputation

You're living in the past it's a new generation

And a bank can do what it wants to do

And that's what I'm gunna do

And I don't give a damn about my bad reputation

Halfcocked — Bad Reputation

We are still living in the past. The legacy of the housing bubble is pockets of overpriced real estate and mountains of untenable debt. Banks will work to manage their reputations, but they really don't care what people think as long as government keeps bailing them out.

What are the banks going to do with all their REO?

I have written at length about the lending cartel. Their activity is important because how the lending cartel disposes their REO will determine the market’s fate. There were over a million foreclosures last year, and 2011 will likely break last year's record. Over two-thirds of those foreclosures end up as real estate owned or REO.

As banks convert more and more of their non-performing loans into real estate, they become less of a bank and more of a real estate investment trust (REIT). People who are investing in banks want to see their money put into loans to obtain the cashflow stream from interest. The large institutional investors become concerned when so much of the banks assets and income is tied up in real estate instead of a loan portfolio.

The easiest solution to this problem for banks is to compartmentalize it. If they take all of their bad loans and create a special home investment trust (SHIT), they can dump their SHIT on Wall Street. Investors can buy shares based on their opinion of the liquidation value of the portfolio. Rather than having to wait for the actual liquidation of the assets to regain their lost capital, the banks can get the capital from investors as they sell their SHIT in an IPO. By getting the SHIT off their balance sheets investors will regain confidence they are investing in loans rather than depreciating real property.

On an accounting basis, lenders can keep the value of the loan on their books at par value, convert the income stream from rental into a mock “payment” on the loan. If they reduce the interest rate enough, nearly any rental income can be use to amortize even very large loans to zero over 30 years. Basically, they can take the rent, pretend it was a loan payment, and ignore the real value of the collateral. If they hold it as a rental long enough, they will pay off the amortizing loan.

Right now, lenders have squatters in properties that are paying neither rent nor their mortgage. It is a completely non-performing asset tying up their capital, and to make matters worse, liquidation value is well below par value on the note. Creating a special home investment trust allows banks to remove toxic assets from their balance sheets, turn non-performing assets into performing ones, and if they are lucky, they will even get to recoup a significant portion of their capital.

BofA Segregates Almost Half of its Mortgages Into ‘Bad Bank’

By Dawn Kopecki – Mar 8, 2011 11:43 AM PT

Bank of America Corp. (BAC), the biggest U.S. lender by assets, is segregating almost half its 13.9 million mortgages into a “bad” bank comprised of its riskiest and worst-performing “legacy” loans, said Terry Laughlin, who is running the new unit.

I am always really annoyed when I see the term “legacy loans” associated with stupid toxic crap these same bankers peddled as safe affordability products. This is a classic euphemism designed to obscure the plethora of errors behind the existence of these loans.

Legacy conjures up images of wealthy benefactors and things from the past to be proud of. Further, it provides a convenient receptacle for all criticism of errors past. No matter what folly is exposed, it was one of those legacy loans, right?

“We are creating a classic good bank, bad bank structure,” Laughlin told investors at a meeting in New York today. He was promoted last month to manage the costs of resolving disputes stemming from the company’s 2008 purchase of Countrywide Financial Corp. “We’re going to get after this, we’re going to do it the right way and we’re going to put it to bed in the next 36 months,” he said.

I wish he was describing how quickly they will liquidate. In reality, he is saying it will take three years to make this SHIT and get all of their toxic crap into it. It will take a decade or more for this pile to stop steaming.

The legacy portfolio will hold 6.7 million loans with outstanding principal balance of about $1 trillion, according to a presentation to investors today. The split leaves home loan President Barbara Desoer with about half her previous portfolio, as well as new lending going forward.

Laughlin’s portfolio will include loans that are currently 60 or more days delinquent as well as riskier types of loans the bank no longer originates, such as subprime, Alt-A, interest- only and option adjustable-rate mortgages, he said. He said the portfolios will be completely split by March 31 and that his will be liquidated over time. Of the 13.9 million loans Bank of America services, about 3.5 million are held by the company on its balance sheet. The rest are owned by other investors.

About half of B of As loan portfolio is made of of that garbage? OMG! that is so much worst than I thought.

“It’s a way to get investors focus on the good,” said Paul Miller, a former examiner with the Federal Reserve Bank of Philadelphia and analyst at FBR Capital Markets in Arlington, Virginia. “It’s a way to talk about good things and ignore the bad.”

There's a brilliant investment strategy: focus on the good and ignore the bad. Winning combination, I'm sure.

JPMorgan, Wells Fargo

Laughlin’s portfolio includes loans the company originated in addition to Countrywide mortgages. That differs from practices at JPMorgan Chase & Co. (JPM) and Wells Fargo & Co. (WFC), whose legacy books include only loans they acquired through their respective purchases of Washington Mutual and Wachovia.

“Many of the assets that are coming over into the legacy asset-servicing portfolio are delinquent or are expected to go delinquent over the next three years,” Laughlin said.

Apparently, B of A expects the majority of the 6.7M loans in their SHIT to stink.

“As borrowers default, we’ll evaluate them for a loan modification.”

In case you needed any reminding, you must default on your loan before they will give you a loan modification. Free money is waiting for you if you just stop making your payments.

Laughlin is also responsible for overseeing foreclosure processes as well as negotiations with investor groups that are demanding the bank buy back faulty loans.

State Probes

State and federal law enforcement agencies are pushing lenders to cut outstanding loan balances as part of a proposed settlement they hope to reach with banks over their mortgage- servicing and foreclosure practices.

State attorneys general and federal agencies sent a 27-page settlement proposal last week to Bank of America, Wells Fargo, JPMorgan, Ally Financial Inc. and Citigroup Inc. (C), the five largest mortgage services, which process 59 percent of all U.S. home loans. Iowa Attorney General Tom Miller said regulators and law enforcement agencies want an agreement that leads to more loan modifications for struggling homeowners.

Laughlin said regulators have reviewed the bank’s foreclosure processes and “no findings came out of those exams that basically said the foreclosure process was fundamentally flawed.”

He said the bank was instituting a standardized affidavit form and providing better oversight of third-party attorneys and vendors. “Certainly there’s always room for improvement in process,” he said.

Bond Bagholder Group

Bank of America may face “material fines” from government probes into possible irregularities in foreclosure processes, it said in its annual earnings report filed with the Securities and Exchange Commission on Feb. 25. The firm also said that a bondholder group including Pacific Investment Management Co. has almost doubled the number of mortgage deals on which it’s challenging the bank.

Bank of America set aside about $3 billion late last year to settle certain demands from U.S.-controlled mortgage buyers Fannie Mae and Freddie Mac. The bank said other claims on so- called private label mortgages could cost an additional $7 billion to $10 billion.

To contact the reporter on this story: Dawn Kopecki in Washington at dkopecki@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net

During 2011 the other major banks will follow suit and make their own special home investment trust. Bank SHIT will be offered up to Wall Street who will likely bet on the recovery. This mechanism will work for the banks. Will it hold the lending cartel together? I doubt it.

What happens to the rental neighborhoods?

Many bubble era communities will be loaded with bank-owned rentals. These neighborhoods are converting from owner occupants to renters. What impact will all these rentals have on the communities they are in? Will lenders maintain their properties to a reasonable standard, or will they all become slumlords?

What happens to the housing market?

Perhaps of more interest to readers here is what impact will this bad bank liquidation have on house prices? Ordinarily, when a market crashes, there is capitulatory selling. Any debt used to finance the asset is expunged, and everyone holding out for a higher price gives up waiting and sells for whatever they can get. This activity lowers prices, but it also clears out the overhead inventory which allows appreciation to return. All markets behave this way.

Let's assume lenders will try to hold out for their asking prices even if that means holding on to properties for many years. They are determined not to capitulate. As some point either rising home values or declining loan balances (remember the rent is paying down the note) will make asking prices reasonable, and houses will be sold. What this bad bank will do — if it can resist pressures for liquidation — is create a huge amount of overhead supply. Basically, prices won't go down, but they won't be able to go up until the overhead supply is liquidated. That would cause prices to remain below the peak until the backlog of inventory is gone.

Irvine's version of a cashflow property

A few years ago, this property was for rent for $2,500. I went to see the property and met the owner. He bought the property as an investment. Based on his $370,000 purchase price, a few years of rent inflation made this unit cashflow positive. He managed his mortgage reasonably well, and the balance of $374,000 is only slightly over his purchase price.

Without appreciation, the rate of return on this investment was low, but since we did have a housing bubble, this investor stands to make a tidy profit on his 10-year hold. I don't believe in buying for appreciation, but some investors seem to make it work. Are appreciation speculators skilled, or are they lucky?

Irvine Home Address … 174 CHERRYBROOK Ln Irvine, CA 92618

Resale Home Price … $575,000

Home Purchase Price … $370,000

Home Purchase Date …. 6/1/2001

Net Gain (Loss) ………. $170,500

Percent Change ………. 46.1%

Annual Appreciation … 4.4%

Cost of Ownership

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$575,000 ………. Asking Price

$115,000 ………. 20% Down Conventional

4.82% …………… Mortgage Interest Rate

$460,000 ………. 30-Year Mortgage

$116,632 ………. Income Requirement

$2,419 ………. Monthly Mortgage Payment

$498 ………. Property Tax

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

$96 ………. Homeowners Insurance

$139 ………. Homeowners Association Fees

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

$3,302 ………. Monthly Cash Outlays

-$411 ………. Tax Savings (% of Interest and Property Tax)

-$571 ………. Equity Hidden in Payment

$212 ………. Lost Income to Down Payment (net of taxes)

$96 ………. Maintenance and Replacement Reserves

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

$2,628 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$5,750 ………. Furnishing and Move In @1%

$5,750 ………. Closing Costs @1%

$4,600 ………… Interest Points @1% of Loan

$115,000 ………. Down Payment

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

$131,100 ………. Total Cash Costs

$40,200 ………… Emergency Cash Reserves

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

$171,300 ………. Total Savings Needed

Property Details for 174 CHERRYBROOK Ln Irvine, CA 92618

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Beds: 3

Baths: 3

Sq. Ft.: 1500

$383/SF

Lot Size: –

Property Type: Residential, Condominium

Style: Two Level, Contemporary

Year Built: 2000

Community: Oak Creek

County: Orange

MLS#: S651239

Source: SoCalMLS

Status: Active

On Redfin: 2 days

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Welcome to this PRISTINE home in the Cobblestone tract! This PREMIUM location features three generous bedrooms PLUS a cozy second floor alcove, a full size driveway, and a direct access two-car garage! Enjoy an OPEN and SPACIOUS kitchen with an abundance of natural light, CHARMING French cabinetry, walk-in pantry, and ELEGANT wood flooring! Relax in this exquisite back yard featuring a CUSTOM fountain, BEAUTIFUL greenery, UPGRADED STONE fireplace, CUSTOM sit up bar with TRAVERTINE counter top AND equipped with a mini-fridge!! This FLOWING floor plan boasts a family room with a romantic fireplace, convenient upstairs laundry, an ENORMOUS master suite with walk-in closet, and dual vanities! FABULOUS include hardwood floors, custom carpet, intricately detailed crown moulding, ceiling fans throughout, designer paint and more! Enjoy Oak Creek's upscale dining and shopping, resort style amenities and award winning schools!!

I really don't get realtor writing techniques. Does someone give seminars on how to write badly? Why are there RANDOM capitalized words in the description? If she at least chose important words to capitalize, I could see a justification as an attention getting technique; however, in the description above, the word AND is capitalized. Why?