The latest estimate to clear shadow inventory is 40 months. Based on tightening credit standards and very low sales rates, this estimate is likely too low.

Irvine Home Address … 14 BLUEBELL Irvine, CA 92618

Resale Home Price …… $499,000

I'd rather kill myself than turn into their slave

Sometimes

I feel that I should go and play with the thunder

Somehow

Cause somehow I just don't wanna stay and wait for a wonder

I've been watching

I've been waiting

In the shadows for my time

The Rasmus — In The Shadows

How many of you lurk in the shadows waiting for lenders to release their shadow inventory? Personally, I refuse to become a debt slave, so I've been watching, and I've been waiting in the shadows for my time.

Some pundits believe Shadow Inventory Signals Three Years of Falling Prices. Some think it will take much longer. I side with the latter group.

The whole reason banks have accumulated a shadow inventory is because there are not enough buyers to replace all the delinquent borrowers — at any price. It is clear that Low Interest Rates Are Not Clearing the Market Inventory, and Low Interest Rates Will Not Create Demand. There is only one viable solution: Fix the Housing Market: Let Home Prices Fall.

Las Vegas has demonstrated that if you lower prices, sales rates go up. All estimates of time to clear the shadow inventory assume sales rates will be at or near historic norms. Right now, that isn't happening. In August Existing-Home Sales Sank to Lowest Level Ever Recorded. Inflated markets like Orange County see sales rates about 20% or more below normal.

As the economy improves and people go back to work, the sales rate will improve somewhat, but until prices are lower, sales will not improve enough to clear out the shadow inventory in a timely manner.

Further, estimates of shadow inventory are static. They are not estimating how many more homes will be added to shadow inventory as other borrowers give up and accelerate their defaults. The big false assumption here is that an improving economy will eliminate the mortgage distress and people will start paying back their loans again. That isn't going to happen. The debt is far too large. Many of the people who are hanging on will eventually succumb to the debt disease. As these people give up, they will add new delinquencies to shadow inventory.

The market needs a cathartic event. The kool aid intoxicated borrowers need to puke up their debts and clear the system. Until then, the economy will sputter as the over-indebted give up their meager incomes to keep the illusion of solvency at our major banks.

Over 7 Million 'Shadow Homes' May Take 40 Months to Clear, Says Fitch

Posted by Alex Finkelstein 11/09/10 8:00 AM EST

If you thought the U.S. housing market is showing any signs of improvement, a new report by New York City-based Fitch Ratings puts the damper on that view.

Fitch says seven million homes in the "shadows" will take 40 months to clear.

Just in case you are in the "Irvine is different" crowd, keep in mind that There are 3,600+ Distressed Properties in Irvine, and There are 36,000+ Distressed Properties in Orange County. Further, Emergence of Shadow Inventory to Push Prices Lower in 2011: Altos Research, Fiserv.

The agency defines the shadow supply of properties as loans that are delinquent, in foreclosure, or real-estate-owned (REO) by the servicer. Fitch says based on recent liquidation trends, it will take at least 3 ½ years to clear this existing distressed inventory.

DSNews.com reports that according to the ratings agency, the number of months between the date of the borrower's last payment and the date of liquidation has steadily increased over the past several years, and is now at more than 18 months on average.

Fitch says that is the highest figure on record.

Thinking About Accelerated Default? The Average Squatting Time Is Up to 449 Days. .

While the volume of newly delinquent mortgages has begun to improve in recent quarters, Fitch says liquidation rates of existing distressed properties have been constrained by weak demand and expanded initiatives to modify loans for troubled borrowers, DSNews reports.

On top of that, the agency's analysts believe the recent discovery of defects in the residential mortgage foreclosure process will further extend liquidation timelines, slowing the resolution of distressed properties in the shadow inventory and preventing home prices from finding a floor.

"While the reduced volume of distressed sales since 2009 has temporarily helped home prices, Fitch believes that the extension in foreclosure and liquidation timelines is simply prolonging the housing correction underway," the agency reported.

Government Props Weakened the Housing Market and Delayed the Recovery. Notice that Fitch is talking about a temporary bottom. They see prices rolling over too.

The total number of troubled loans reached a peak in early 2010 and had begun to show some improvement prior to the most recent foreclosure moratoriums resulting from documentation issues, Fitch said.

Fitch says for judicial foreclosure states, such as Florida, it is expected to take longer than the national average of 40 months to resolve the distressed loans, while for non-judicial foreclosure states, like California, the inventory will likely be resolved faster.

The agency points out in its report that the market's ability to absorb the supply of distressed homes has been affected by limited demand for home purchases, DSNews reports.

While interest rates are near historical lows and affordability has improved, fewer potential buyers can qualify for new loans due to the heightened credit standards, Fitch says.

Fed: Banks expect tight lending standards for foreseeable future. "In general banks have stopped tightening standards (they are already very tight), and demand has stopped falling (there is little demand for loans). …[A] special question asked banks whether their current level of lending standards remained tighter than the average level over the past decade and, if so, when they expected that standards would return to their long-run norms, assuming that economic activity progressed according to consensus forecasts. For all loan categories, substantial fractions of respondents thought that their bank's lending standards would not return to their long-run norms until after 2012 or would remain tighter than longer-run average levels for the foreseeable future."

Banks will never return to the standards to the 00s unless they want to lose a trillion dollars again. What we now consider tight standards — 20% down and conventionally amortized loans — were the standards prior to the housing bubble. All we are doing is returning to what works and what's stable.

Additionally, high unemployment, weak consumer confidence, and uncertainty about the future of home prices have prevented some potential buyers from entering the market.

"Recent concerns about the title-transfer process for foreclosed homes could further weigh on demand," Fitch noted.

The agency says at this point, it is still unclear how much the foreclosure process will be extended specifically due to document defects.

Should You Fear You Won’t Get Clean Title to Real Estate? .

However, even prior to recent developments, Fitch assumed the ultimate resolution of the backlog of distressed properties would result in further home price declines and prevent sustained home price increases for a number of years, DSNews reports.

"Fitch is currently assuming approximately a further 10 percent home price decline nationally, with the majority of the adjustment occurring by the end of 2012," the agency says.

"However, the timing of the adjustment will be affected by the timing of the distressed inventory resolution."

Absolutely correct: How The Lending Cartel Disposes Their REO Will Determine the Market’s Fate.

How long will it take? I estimate it will take five to seven more years before this mess is behind us. For three to five years, the foreclosure machines will be operating 24/7 at the maximum rate the market will absorb. After that, it will take another two to four years of elevated foreclosure volumes to finish the job. It's a bit like draining a bathtub when your drain is partially clogged. It's going to take a long time, and there isn't much that can be done to speed the process.

The Squatter's Lair

I first profiled today's featured property back in September of 2009 in the post Bluebell, and then I profiled it again in One Defaulting Owner’s Free Ride: Three Years and Counting.

• The owner of today's featured property paid $465,000 on 10/23/2003. She used a $372,000 first mortgage, a $93,000 second mortgage, and a $0 down payment.
• On 12/30/2004 she refinanced into an Option ARM for $486,500.
• Two months later on 2/3/2005 she opened a HELOC for $67,000.
• Total property debt is $553,500 plus 3 years of missed payments, negative amortization, and fees.
• Total mortgage equity withdrawal is $88,500.

Foreclosure Record

Recording Date: 02/08/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 12/03/2008

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 08/28/2008

Document Type: Notice of Default

Foreclosure Record

Recording Date: 08/08/2007

Document Type: Notice of Rescission

Foreclosure Record

Recording Date: 05/25/2007

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 01/24/2007

Document Type: Notice of Default

First the bank lost a great deal of money, and now a flipper is going to lose money too.

This property was purchased by a flipper (Mamo Properties Inc.) on 8/23/2010 for $470,000. I don't know what they thought they could sell this for, but it looks like they spent about $20,000 fixing the place up, and with the other costs and fees, they are likely in this for over $500,000. Unless this is a no-cost listing, the flipper is going to lose money.

While I was raising money for the fund, I told many people that I was hesitant to buy in Orange County because in July and August, I was watching flippers pay what I thought was too much, and I believed prices were going to roll over. So far, both my observations have proven correct.

How much do you think this flipper will lose on this property?

Irvine Home Address … 14 BLUEBELL Irvine, CA 92618

Resale Home Price … $499,000

Home Purchase Price … $470,100

Home Purchase Date …. 8/23/2010

Net Gain (Loss) ………. $(1,040)

Percent Change ………. -0.2%

Annual Appreciation … 24.1%

Cost of Ownership

————————————————-

$499,000 ………. Asking Price

$17,465 ………. 3.5% Down FHA Financing

4.21% …………… Mortgage Interest Rate

$481,535 ………. 30-Year Mortgage

$94,234 ………. Income Requirement

$2,358 ………. Monthly Mortgage Payment

$432 ………. Property Tax

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

$83 ………. Homeowners Insurance

$160 ………. Homeowners Association Fees

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

$3,183 ………. Monthly Cash Outlays

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

-$668 ………. Equity Hidden in Payment

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

$62 ………. Maintenance and Replacement Reserves

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

$2,232 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

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

$4,990 ………. Closing Costs @1%

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

$17,465 ………. Down Payment

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

$32,260 ………. Total Cash Costs

$34,200 ………… Emergency Cash Reserves

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

$66,460 ………. Total Savings Needed

Property Details for 14 BLUEBELL Irvine, CA 92618

——————————————————————————

Beds: 2

Baths: 2 full 1 part baths

Home size: 1,508 sq ft

($331 / sq ft)

Lot Size: n/a

Year Built: 2000

Days on Market: 31

Listing Updated: 40484

MLS Number: S635284

Property Type: Condominium, Residential

Community: Oak Creek

Tract: Acac

——————————————————————————

Quiet, Cul-De-Sac location. This beautiful home shows like a model featuring maple hardwood floors, new upgraded carpet, gourmet kitchen with granite countertops and new appliances. Great floorplan with dual master suites: Oversided garage, one suite with full bath on ground level and one suite with loft/office on top level. Tropical Oasis backyard with palm trees. Enjoy resort-style amenitities such as pool and spa. Walk to shopping, dining and more!

Oversided? amenitities?

Low interest rates are not created the demand for housing that low prices does.

Irvine Home Address … 19 GEORGETOWN 25 Irvine, CA 92612

Resale Home Price …… $439,000

Man I ain't getting nowhere

I'm just living in a dump like this

There's something happening somewhere

baby I just know that there is

You can't start a fire

you can't start a fire without a spark

This gun's for hire

even if we're just dancing in the dark

Bruce Springsteen — Dancing in the Dark

Not long ago I noted, Low Interest Rates Are Not Clearing the Market Inventory. Well, I am not the only one who has noticed. Richard Fisher, President of the Federal Reserve Bank of Dallas, has also noted that low interest rates will not fix the ailing economy, but super low rates will have many deleterious effects not anticipated by others at the Fed.

Dallas Fed president: Low interest rates won't spark demand

by JACOB GAFFNEY — Monday, November 8th, 2010, 3:28 pm

The environment of exceedingly low interest rates is great for banks, according to Richard Fisher, President of the Federal Reserve Bank of Dallas, but is doing little to help the overall economy get back on track.

"Despite their theoretical promise, reductions in interest rates to Lilliputian levels have not done much thus far to spark loan demand," he told the Association for Financial Professionals in San Antonio Monday.

Home loan demand is well off historic highs as Existing-Home Sales Sink to Lowest Level Ever Recorded and refinance demand has dropped because everyone either already has refinanced or they are unable to because they are under water on their mortgage. Plus, who is anxious to use low interest rates to buy assets at inflated prices? There is only one sure-fire way to stimulate demand: lower the price. Fix the Housing Market: Let Home Prices Fall.

On the weekend open thread, the clearest example of lower prices stimulating demand can be readily seen in Las Vegas:

Notice the crash in prices has resulted in a large boost in sales. Buyers in Las Vegas are currently more active than they were at the peak of the bubble.

So how is Southern California doing?

While home prices have bounced off the false bottom, the rate of sales has declined significantly from the peak and remains at very low levels? Why is that? Why are sales rates higher in Las Vegas than in Southern California relative to the peak?

It's the price.

Every once in a while I see threads in the comments where the sales strength of the market is touted. Look carefully at the charts above: sales rates are down in Southern California — way down. Anything else is spin. Yes, people are buying homes, but they are buying far fewer of them because the prices are too high. In Las Vegas more people are buying homes because the prices are lower. In fact, they are so much lower that outside people like me are buying homes because the prices are so low.

Lower prices stimulate demand, not lower interest rates.

Back to the article….

Liquidity seems to exist in other markets, notable commodities, he said. But it worries him that the money markets aren't coming back strong enough and short-term lending to small business remains restricted to a point of macroeconomic pain.

"It concerns me that liquidity is omnipresent on bank and corporate balance sheets, and yet it is not being used to hire American workers," he said.

Who are the banks going to loan that money to? The over-indebted American consumer? Few creditworthy borrowers exist in the current economic environment. Too much bank money is tied up in non-productive loans, non-productive assets, and low yield government treasuries.

Fisher claims that banks already hold over $1 trillion in excess reserves. Holdings of government securities as a percentage of total assets on bank balance sheets are growing, he said, and loans as a percentage of assets are declining.

The recent Fed cash pump, referred to as QE2, will also keep rates low and weaken the dollar, Fisher said. And the inflow may not stop at the current allotment to purchase $600 billion in Treasuries between now and the end of the second quarter of next year, which is on top of the amount projected to replace the paydown in mortgage backed-securities.

"I could not state with conviction that purchasing another several hundred billion dollars of Treasuries — on top of the amount we were already committed to buy in order to compensate for the run-off in our $1.25 trillion portfolio of mortgage-backed securities — would lead to job creation and final-demand-spurring behavior," he said. "But I could envision such action would lead to a declining dollar, encourage further speculation, provoke commodity hoarding, accelerate the transfer of wealth from the deliberate saver and the unfortunate, and possibly place at risk the stature and independence of the Fed."

Wow! A guy at the Fed who really gets it. Bernanke has openly stated he wants a weaker dollar too help stimulate inflation. The excess liquidity is bound to find its way into momentum plays as money chases the few asset classes with any real prospects and other money follows. This speculation leads to mis-allocations of resources and continued economic weakness. The theft from savers is obvious. Have you seen the interest rate on your savings account lately?

This activity should put the stature and independence of the Fed at risk. It is clear the Fed exists to promote moral hazard and prevent the normal cleansing function of recessions from occurring.

Despite the Feds best efforts, house prices in Las Vegas have crashed back to mid 90s levels, and because of it, the debt is being purged, citizens have affordable housing, sales rates are up, and the groundwork is being laid for a healthy recovery.

Because of the Feds best efforts, house prices in Orange County remain elevated at 2003-2005 prices, and because of it debt is being preserved, citizens have expensive housing, sales rates are down, and a sustained economic recovery is being delayed and weakened.

Las Vegas will prosper because once the crash has erased the excess debt, home owners will have more spending money as a percentage of their income than Orange County residents will have. This extra spending money will make its way to auto dealerships, local restaurants, and other businesses.

Borrowers in Orange County will be spending a much higher percentage of their incomes on interest and debt service, and only the hope of future mortgage equity withdrawal based on herd-induced appreciation keeps the whole system together. The local economy will suffer as local incomes are diverted to far-away interest recipients who are not stimulating the California economy. We can have high house prices or a vibrant economy, but we can't have both without Ponzi borrowing.

Federal Reserve chairman Ben Bernanke recently defended QE2 in an editorial in The Washington Post:

“This approach eased financial conditions in the past and, so far, looks to be effective again. … Easier financial conditions will promote economic growth … lower mortgage rates will make housing more affordable and allow homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending.”

Whenever I read one of Bernanke's statements, I assume he says stupid things like that because he has to. It frightens me that he might actually believe it. I think Greenspan believed his own bullshit.

First, easier financial conditions — whatever that means — will not necessarily promote economic growth. Bernanke's zero interest rate policy hasn't fixed things so far. It has prevented asset prices from crashing to market-clearing levels, but I consider that a failure of policy; Benanke considers that a success.

Second, lower mortgage interest rates will not allow underwater loan owners to refinance, and even if they did, they still have too much debt relative to their incomes. Financing enormous sums at 4% isn't doing borrowers any favors as long as they have too much debt.

Third, lower bond rates may not encourage businesses to invest. What will they invest in? What is there a demand for that is not already over-supplied? Real estate? LOL!

Forth, higher stock prices — when inflated by air from the Federal Reserve — are Ponzi profits likely to evaporate once the Fed stops its inflationary policies. Is this a sustained element of demand upon which we should build our economy?

Fisher said he is already seeing foreign money go to other lands, funds that would normally be diverted into the American economy and that if more careful steps aren't taken, the nations can experience "super ordinary" levels of inflation.

The sad part of our policy is that we will export the inflation we tried to create at home. Japan's decades-long low interest rate policy helped inject excess liquidity into other Asian economies over the last 20 years, yet inflation in Japan remains elusive. It's hard to say where our excess liquidity will end up. China perhaps? Like water seeking its natural level, the liquidity will flow somewhere, and that isn't likely to be into the inflated real estate values in Southern California. With such low cap rates and only the prospect of Ponzi profits, why would rational money flow there? To pick up "investments" like today's featured property?

Orange County's version of a cashflow property

Most investors in Orange County who claim they are cashflow investing are still buying because they plan on obtaining and spending the price appreciation as income. it isn't true cashflow investing. Today's featured property is the type of property a cashflow investor should look for. It is near the university, so it is easy to rent, and it is relatively small, so there is not as much maintenance. The HOAs are ridiculously high, and so is the price relative to rents, but if you can extract equity to boost your returns, properties like this can be profitable. The problem is that appreciation is not stable and consistent, and it may or may not materialize. Contrary to popular belief, it will not materialize here to any degree over the next several years. As a true cashflow investment, this one is a loser.

• This property was purchased on 8/3/1999 for $235,000. The owner used a $223,250 first mortgage and a $11,750 down payment. Even at that price, this isn't a particularly good cashflow investment. With the huge HOA, this property doesn't start to be attractive until it gets below $150,000.
• On 11/30/1999 he opened a $24,750 HELOC. Think how that boosted his return.
• On 11/6/2000 he obtained another HELOC for $47,000. If you can extract an additional $20,000 a year from the property, suddenly the cashflow looks much better. Of course, since that is an unsustainable Ponzi scheme, I don't consider that much of an investment.
• On 11/15/2001 he refinanced the first mortgage for $236,000 and obtained a $29,500 stand-alone second.
• On 9/23/2002 he refinanced with a $260,000 first mortgage and obtained a $32,000 HELOC. Notice the steady mortgage equity withdrawals are mimicking income. In reality, he is steadily increasing his debt.
• On 3/3/2004 he refinanced with a $260,000 first mortgage and obtained a $223,000 HELOC.
• On 1/4/2006 he obtained a $60,000 HELOC.
• On 3/1/2006 he refinanced with a $480,000 first mortgage.
• On 3/17/2006 he obtained a private party loan for $150,000. Given the short timeframe between the two loans, I wonder if the private party knew he was subordinate to that huge new first mortgage?
• Total property debt is $630,000.
• Total mortgage equity withdrawal is $406,750 over a seven year stretch. If you believe that is sustainable, this property was a tremendous bargain when he purchased it in 1999. Since this has proven not to be sustainable, it was a costly mistake. He made good money during the bubble, but now he doesn't have any income from this property, and his credit is ruined. In this instance, I would rather be the tortoise than the hare.

Foreclosure Record

Recording Date: 06/16/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 01/04/2010

Document Type: Notice of Default

Irvine Home Address … 19 GEORGETOWN 25 Irvine, CA 92612

Resale Home Price … $439,000

Home Purchase Price … $439,000

Home Purchase Date …. 4/4/1999

Net Gain (Loss) ………. $(26,340)

Percent Change ………. -6.0%

Annual Appreciation … 0.0%

Cost of Ownership

————————————————-

$439,000 ………. Asking Price

$15,365 ………. 3.5% Down FHA Financing

4.29% …………… Mortgage Interest Rate

$423,635 ………. 30-Year Mortgage

$83,696 ………. Income Requirement

$2,094 ………. Monthly Mortgage Payment

$380 ………. Property Tax

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

$37 ………. Homeowners Insurance

$282 ………. Homeowners Association Fees

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

$2,793 ………. Monthly Cash Outlays

-$332 ………. Tax Savings (% of Interest and Property Tax)

-$579 ………. Equity Hidden in Payment

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

$55 ………. Maintenance and Replacement Reserves

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

$1,961 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$4,390 ………. Furnishing and Move In @1%

$4,390 ………. Closing Costs @1%

$4,236 ………… Interest Points @1% of Loan

$15,365 ………. Down Payment

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

$28,381 ………. Total Cash Costs

$30,000 ………… Emergency Cash Reserves

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

$58,381 ………. Total Savings Needed

Property Details for 19 GEORGETOWN 25 Irvine, CA 92612

——————————————————————————

Beds: 2

Baths: 2 full 1 part baths

Home size: 1,457 sq ft

($309 / sq ft)

Lot Size: n/a

Year Built: 1983

Days on Market: 87

Listing Updated: 40480

MLS Number: L33738

Property Type: Condominium, Residential

Community: University Town Center

Tract: Cc

——————————————————————————

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

APPROVED SHORT SALE at $450,000.00 !! 2 Bedroom , 3 bath attached condo. With upgraded kitchen, granite counters and custom cabinets. Great location, near Univeristy High School and UCI.

IHB Special Event

Tomorrow night, Wednesday, November 10, 2010, at 6:30, there will be an IHB special event at Dave and Busters in the Irvine Spectrum. We will be gathering in the patio room to the left as you enter.

We have a long history of these events. Back in 2007, the first meetings were held when we still kept our identities secret. The biggest meeting was two years ago in November 2008, when I revealed my identity on the cover of the OC Register and held the big book-signing event for The Great Housing Bubble.

We have continued our meetings on and off over the last two years. During the summer, we held a number of meetings to raise money for the fund. I want to invite all the fund investors to come out on Wednesday evening. I can give you an update on my progress in person. Also, anyone else considering investing can come out and talk to me about getting in before the November 18 closing date.

One thing that was interesting about the investor meetings was how many long-term readers attended these events — readers I had never met. I would like to invite all the lurkers out there to attend as well.

Everyone is invited to a night of real estate talk, free appetizers and drinks, and a chance to meet with some reporters who find these IHB gatherings interesting. Please come out and show your support for the IHB.

Thank you.