A recap of recent events and how these issues impact the housing market.

Irvine Home Address … 5 PERIWINKLE Irvine, CA 92618

Resale Home Price …… $500,000

Freedom–calls my name

Serenity–keeps me sane

Happineses–it dulls the pain

Honest–to see my place

Open–to other ways

Willingness–to understand

Justice–but do not judge

Courtesy–for others' flaws

Kindness–it's not that hard

Self-restraint–of toungue and pen

Inventory–my daily friend

Analysis–let down your guard

Look in the mirror

What do you see?

The shattered fortress

That once bound me

Dream Theater — Shattered Fortress

The Walls Keep Tumbling Down: Foreclosure Flap and Other Housing Industry Woes

Published: October 13, 2010

After suspending foreclosures in order to review cases that may be flawed by procedural errors or fraud, major mortgage companies have injected new uncertainty into the already weak housing market. While few of the homeowners under scrutiny are likely to avoid foreclosure, the freeze adds additional confusion and delays recovery of the troubled housing sector, according to Wharton faculty and real estate analysts.

The foreclosure flap is the most recent of many setbacks for the troubled industry, even as a new generation of potential buyers is rethinking the traditional dream of homeownership. "Buying a home doesn't make sense for a large proportion of the population," says Wharton real estate professor Fernando Ferreira, noting that ownership reduces the flexibility to pursue work in other regions and ties up cash in a down payment that might be used for better investments. "We forgot these lessons in the housing boom. But I think the new generation is learning them — at least for the next five to 10 years."

Our government's obsession with home ownership has blinded lawmakers and bureaucrats to the advantages of renting. Real estate is not going to produce high returns over the next decade as we work off the excesses of the housing bubble, and everyone who has bought property because they think they will make a fortune on appreciation is going to be very disappointed.

After discovering that employees violated procedures while attempting to process a crush of foreclosure cases, three of the nation's leading mortgage servicers — J.P.Morgan Chase, GMAC and Bank of America — are holding off on further action in 23 states that require foreclosures to undergo judicial review. One GMAC "robo-signer" acknowledged signing off on as many as 10,000 cases a month, even though the law requires the signer to review all documents personally. Bank of America later extended its halt to foreclosures in all 50 states.

Wharton real estate professor Susan Wachter says the foreclosure freeze might temporarily buoy prices by keeping foreclosed properties off the market and could give some families another chance to come up with enough money to save their home. However, she expects that most of the now-stalled foreclosures will eventually move forward. "This will only delay the market clearing process."

The banks can't afford the write-downs associated with the market clearing process, so they actively encourage and participate in delaying foreclosures.

According to Wharton real estate professor Georgette Chapman Phillips, lenders may be guilty of shoddy paperwork, although she stops short of calling it fraud. Lengthy delays or overturning foreclosures based on improper documentation, she adds, would create new levels of moral hazard that might lead even more homeowners to stop paying their mortgages. "This is a horrible mess created by the banks and the secondary market. It's sloppiness, but the borrowers are not asserting fraud in the lending of money. We can't ignore that, at the bottom of all this, the people who were foreclosed upon didn't pay their mortgages."

All the nonsense about improper foreclosures seems to miss one basic point: the people being foreclosed on are not paying their mortgage. Banks are worried that walking away will be socially acceptable. Well, it has. People who are not paying their mortgages have now achieved victim status which will almost certainly make their ranks grow larger. The housing entitlement in this country has gotten so bad that people no longer believe they have to pay for their housing. Whatever they can move into they can keep.

The Key Driver: Jobs

The questionable cases are part of a backlog of more than 1.2 million loans that are in the process of foreclosure in the United States, according to RealtyTrac, a housing data firm based in Irvine, Calif. In addition, another 900,000 properties taken back by banks remain on lenders' books, while five million more loans are seriously delinquent. The National Association of Realtors reports that distress sales, including foreclosures, made up 34% of all existing home sales in August.

For every property in visible bank inventory, there are four that are in shadow inventory waiting for the banks to initiate foreclosure proceedings.

"The only way to clear prices is by getting rid of the foreclosure backlog, but that will take a long time to work out. It's still a multi-year process," says Wharton real estate professor Joseph Gyourko, adding that 20% to 25% of all U.S. homes are worth less than what their owners owe lenders. "Every one of them is a candidate for default and foreclosure. It will just take a while to work through."

It looks like flipping houses in Las Vegas will be a viable business plan for a while….

While housing is always highly cyclical, Gyourko says the current prospects for recovery are hampered by extremely low levels of activity throughout the market, including new housing starts and sales volume. And the current slump is different from others because it is driven not only by imbalances in the sector, but also by larger economic problems. "This recovery is different. It's slower than normal…. You won't get much pickup in housing market activity — buying and selling — until you get job growth." Wachter agrees: "The key driver in housing is still jobs."

It is ultimately about jobs, but we have a chicken and egg problem with housing. One reason growth in residential investment corresponds to the bottom of recessions is because once job growth creates housing demand, that puts people back to work in homebuilding which creates even more job growth and more housing demand. Since our current problems are centered in housing, any recovery will not get the same housing demand and homebuilding job growth that helps the recovery gain strength.

Rick Sharga, senior vice president at RealtyTrac, says the latest foreclosure problems represent a "breach of trust" but will have little effect on the final resolution of cases. "It really is more of a temporary delaying issue." The foreclosure reviews will probably add 60 to 90 days to the process, Sharga predicts. This could cause foreclosures to be delayed an additional 6 to 18 months and string out the adjustment in home prices by that amount of time, according to residential mortgage tracker Access Mortgage Research & Consulting. While Chase has disclosed that 56,000 cases are under review, the other companies have not said how many foreclosures will be delayed. Some of the states with the largest numbers of foreclosures — including California, Nevada, Arizona and Michigan — are not ones that require formal judicial review for a lender to take back possession of a property.

According to RealtyTrac, foreclosure filings — including default notices, scheduled auctions and bank repossessions — were reported on 338,836 properties in the U.S. in August, up 4% from July, but down 5% from August 2009. One in every 381 U.S. housing units received some form of a foreclosure filing during the month. Sharga suggests that 2011 will be the peak year in bank repossessions, and that "2012 will be a little better….In 2013, we could see foreclosure activity drop significantly [as] we deal with getting through the overhang of foreclosed properties."

I think he is dreaming to think foreclosure activity will see any significant decline in activity even when the economy picks up. People couldn't afford their houses in good times, so when the economy picks up, loan owners are still facing the fact that they can't afford their homes. Foreclosure activity will likely peak in 2012, but there will be a long tail as this drags on for many years.

Of the 900,000 foreclosed homes now owned by banks, only a third are on the market, he notes. Banks are carrying homes on their books because of delays in processing the volume of paperwork and also because of state laws that put a six-month hold on sales as a way of giving owners a last chance to pay back their loans. Another factor, Sharga says, is banks' unwillingness to take title to foreclosed properties because new accounting rules would require the homes to be valued at their current market price. In many cases, the amount would be less than the outstanding loan, diminishing the bank's financial statements.

While some forecasters have suggested there are as many as eight million homes in the so-called "shadow inventory" of properties waiting to come on the market, RealtyTrac estimates that the total number of distressed properties that will change hands as a result of the financial crisis will top out at 3 million to 3.5 million. According to Wachter, when homes are sold in foreclosure, they go for 40% to 50% less than in a standard transaction between homeowners.

I don't know why he thinks so many will ultimately keep their homes. I wager the number will be closer to eight million homes than three million homes.

… According to Wachter, a look at the city-by-city Case-Shiller data shows that homes in some markets are improving strongly while others are continuing to lose value. For example, the most recent data shows home prices are up in San Francisco (11.2%), San Diego (9.3%) and Los Angeles (7.5%) compared to the same month last year. At the same time, prices for the period are down in Las Vegas (4.9%), Charlotte (3.5%) and Tampa (3.2%). "Different markets are responding in different ways," Wachter notes. "The story now is that markets are bifurcating between the ones that are coming back and the markets that are very slow to recover."

The differences in the performance of various markets has largely been dictated by how much squatting the banks are allowing. In the markets doing the best, loan owners are not being foreclosed on. in the markets doing the worst, loan owners are being booted out.

Homeowners who are disappointed with their decision to buy a home are only discovering what housing economists have always known — a home should not be considered an investment, Gyourko states. Paying a mortgage can be a good way to save because it requires the discipline to make regular payments. But, he notes, a rise in the price of a home is less valuable than a rise in price for other investments, such as stocks or bonds. If a homeowner pays $100,000 for a house that appreciates in value to $200,000, the gain is not really $100,000; the homeowner would not realize the gain because he or she would still need to find a new place to live. A comparable home would also have appreciated as much, eating into the homeowner's gain. A stock that rose in value by the same amount would yield the full $100,000 gain upon sale, less taxes.

Did you catch that? Home price appreciation is not the great deal everyone thinks it is. You still have to live somewhere, and if you spend the house — like everyone else did — then you still need to replace it with a house that has also gone up dramatically in price. People who buy for appreciation do not get the same advantages as a competing investment. Of course, everyone ignores those issues when prices are rallying and lenders are giving out HELOCs like crack to an addict.

In the years leading into the crisis, Gyourko says, homeowners "fooled" themselves into thinking their homes were investment vehicles, and they leveraged the value of their homes to borrow new money for vacations, cars or college educations. "But that's risky. When prices dropped, these homeowners were underwater." The only time home price appreciation counts as savings is when the homeowner trades down in the quality of their housing, or dies and no longer needs a new place to live.

Homeownership also prevents workers from relocating to get a better job if they are locked into a home that cannot easily be sold. In a paper written with Ferriera, Gyourko found that between 1985 and 2007, people with negative equity in their homes were one-third less likely to move. "A lot of people are stuck," he says.

Loan owners don't move. If there is a better job in another town, forget it.

According to Ferreira, the market is close to being stabilized, but could continue to decline over the next two years; he does not expect a pick up in prices for five or possibly even 10 years. In addition, it is difficult to even forecast prices because so few transactions are occurring. Between 1980 and 1986, he says, the U.S. housing market recorded 600,000 to 800,000 home sales per year. That figure jumped to 1.4 million in 2005-2006. Now the market is down to 350,000-400,000 home sales per year, even though the nation's population has grown more than 30% since 1980.

Yet another problem that will weigh on the market in the future are those homes owned by people who are able to make their mortgage payments, or have paid off their loans, but would still like to move to a bigger or a smaller home, to a new neighborhood or to another state. These people, Ferreira says, have been holding off on listing their homes because the market is so weak. Eventually, he adds, they will grow tired of waiting and will put their homes up for sale, adding even more supply to the market and further depressing prices. "They can stick with the investment for now, but the reality is that eventually — and that can be one, two or three years from now — a lot of people will be tired of investing in housing and will sell for any price."

He is describing market capitulation. Until everyone abandons hope and sells, the overhang of supply will keep prices from rising.

Over the long run, Ferreira predicts that housing will return no more than 3% a year, barely keeping pace with inflation. Going forward, he says, homes should be considered a place to live, not an investment. "I strongly recommend not using housing as a potential investment. Leave that for the speculators. If you buy a house, you should buy it for your own consumption. That's all you should care about."

Owner occupants should never consider home price appreciation in their purchase decision. For one, most people dramatically overestimate how much house prices will go up. When people start factoring in appreciation, they are usually just playing games with numbers to find some rationalization for an emotional decision they already made.

This neighborhood is crumbling

I have written many times about how the banks have withheld supply to artificially support prices. The neighborhood where today's featured property is located is a perfect example of what happens when the inventory gets too abundant for the available sellers to mop up.

This particular neighborhood within Oak Creek is north of Alton and adjacent to the shopping center. There are numerous three-story units and a mix of other product types. The prices for these units has been holding steady at $610,000 to $650,000 for the last 18 months. Since the expiration of the tax credits, very little has sold, and a few of the properties not mired in short-sale debt have been competing for the few remaining buyers.

The bank bought this property at auction in February, and they put in on the MLS in June. The have been steadily lowering their price, and they are still unable to find a buyer:

Their first list price was reasonable for comps at the time. When they lowered the price below $600K, I imagine they where quite surprised the offers didn't come flooding in. Now they stand at $500,000. Where are the multiple offers over the ask? Why have they had to lower the prices 20% and they still haven't found a buyer?

The answer is simple: the tax credit pulled all the demand forward, and there are no buyers ready, willing, and able to pay the previous price equilibrium. I must admit, I am surprised by how far the banks and the flippers have had to lower prices to get out of these properties. When some of these properties close, the comps are going to be crushed, and a big drop will become reality.

Hat tip to Shevy for pointing out this neighborhood's activity.

A refi they will regret

The previous owner of today's featured property paid $695,000 on 6/28/2004. They used a $556,000 first mortgage and a $139,000 down payment. The wend into default in mid 2009, and the bank bought it at foreclosure for $617,971 which is the total of the note, missed payments, various fees, and so on — BTW, that means many of the bank losses I show are actually much larger.

The owners refinanced their first mortgage for $562,500 on 6/15/2007. They only took out $6,500 which probably covered their origination fees plus gave them a few dollars. The refinance cost them their non-recourse protections. When the bank finally disposes of the REO, they may go after this couple for the shortfall. The previous owners already lost $139,000 and their good credit, and later the bank may come back for another pound of flesh.

Irvine Home Address … 5 PERIWINKLE Irvine, CA 92618

Resale Home Price … $500,000

Home Purchase Price … $617,971

Home Purchase Date …. 2/16/10

Net Gain (Loss) ………. $(147,971)

Percent Change ………. -23.9%

Annual Appreciation … -31.4%

Cost of Ownership

————————————————-

$500,000 ………. Asking Price

$17,500 ………. 3.5% Down FHA Financing

4.25% …………… Mortgage Interest Rate

$482,500 ………. 30-Year Mortgage

$94,874 ………. Income Requirement

$2,374 ………. Monthly Mortgage Payment

$433 ………. Property Tax

$160 ………. Special Taxes and Levies (Mello Roos)

$42 ………. Homeowners Insurance

$43 ………. Homeowners Association Fees

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

$3,052 ………. Monthly Cash Outlays

-$375 ………. Tax Savings (% of Interest and Property Tax)

-$665 ………. Equity Hidden in Payment

$27 ………. Lost Income to Down Payment (net of taxes)

$63 ………. Maintenance and Replacement Reserves

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

$2,101 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$5,000 ………. Furnishing and Move In @1%

$5,000 ………. Closing Costs @1%

$4,825 ………… Interest Points @1% of Loan

$17,500 ………. Down Payment

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

$32,325 ………. Total Cash Costs

$32,200 ………… Emergency Cash Reserves

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

$64,525 ………. Total Savings Needed

Property Details for 5 PERIWINKLE Irvine, CA 92618

——————————————————————————

Beds: 2

Baths: 3 baths

Home size: 1,750 sq ft

($286 / sq ft)

Lot Size: 2,000 sq ft

Year Built: 2001

Days on Market: 117

Listing Updated: 40457

MLS Number: U10002802

Property Type: Condominium, Residential

Community: Oak Creek

Tract: Othr

——————————————————————————

According to the listing agent, this listing is a bank owned (foreclosed) property.

PRICE REDUCED! WELCOME HOME TO THE CITY OF IRVINE AND WHAT MAY WELL BE THE VERY BEST CITY IN ORANGE COUNTY.THIS IS A SINGLE FAMILY DETACHED CONDOMINIUM LOCATED IN THE SOUGHT AFTER OAK CREEK COMMUNITY. THE PROPERTY FEATURES TWO BEDROOMS PLUS A DEN, AND 3 BATHROOMS. YOU ARE PART OF A GATED ASSOCIATION THAT CREATES THE FEELING OF BEING ON PERMANENT VACATION IN AN EXCLUSIVE RESORT. YOU WILL ENJOY THE ASSOCIATION POOL AND SPA, AND MANICURED GREENBELTS. THE LOCATION IS FANTASTIC YOU ARE CLOSE TO ALL THE GREAT THINGS IN IRVINE; PARKS, SCHOOLS, GOLF,THE NATURE CONSERVANCY, RECREATION, THE SPECTRUM, AND SO MUCH MORE. SO COME HOME TO IRVINE, AND START TO LIVE THE ORANGE COUNTY LIFESTYLE TODAY. THE BUYER SHOULD INVESTIGATE THE PROPERTY WITH PROFESSIONAL INSPECTORS.

Anthony Mozilo, former CEO of Countrywide Financial, has settled his case with the SEC and paid a large fine. IMO, he is a crook, and he should go to jail.

Irvine Home Address … 159 TOPAZ Irvine, CA 92602

Resale Home Price …… $439,500

And the judge's gavel fell

Jury found him guilty

Gave him sixteen years in hell

He said "I ain't spending my life here

I ain't living alone

Ain't breaking no rocks from the chain gang

I'm breakin' out and headin' home

Gonna make a jailbreak

And I'm lookin' towards the sky

I'm gonna make a jailbreak

Oh, how I wish that I could fly

All in the name of liberty

All in the name of liberty

Got to be free

Jailbreak, let me out of here

Jailbreak, sixteen years

Jailbreak, had more than I can take

AC/DC — Jailbreak

If I had to narrow my list down to the people most responsible for the housing bubble, Anthony Mozilo would be near the top of the list.

The Option ARM loan was the primary loan product that inflated the housing bubble. Using negative amortization and teaser interest rates, people were able to borrow more than twice the amount than they could afford with a conventional 30-year fixed-rate amortizing mortgage. Once the Option ARM imploded and lending retreated to conventional mortgages, prices needed to fall significantly to rebalance affordability. The Option ARM was the Ponzi virus that caused the debilitating financial disease that inflated the housing bubble and created the current economic morass still plaguing the country.

The only person perhaps more responsible for the housing bubble is Alan Greenspan. If he hadn't let the Ponzi virus out of its vial, and if he didn't allow unregulated insurance "swaps" to encourage dumb money to flow into what they thought were riskless transactions, the air that inflated the housing bubble would not have found its way into Option ARM loans being peddled by Mozilo. Greenspan and Mozilo are my nominees for the fools most responsible for the housing bubble.

Alan Greenspan was clueless, incompetent, and philosophically blinded to the mess he created. What's arguably worse about Mozilo is that he recognized that he released a monster and did nothing about it. Personally, I hope he does go to jail, and he forfeits everything he made from about 2002 onward. It won't happen, but I can always wish for it….

How Countrywide Covered the Cracks

By GRETCHEN MORGENSON — Published: October 16, 2010

ON June 27, 2006, Countrywide Financial, the nation’s largest mortgage lender, was about to close its books on a record-breaking six-month run. The housing market was on fire and Countrywide’s earnings were soaring. Despite all the euphoria inside the company, some executives noticed that Angelo R. Mozilo, the company’s brash and imperious chief executive, seemed subdued.

At a town hall meeting that day with 110 of the company’s highest-ranking executives in Calabasas, Calif., Mr. Mozilo sat alone on a stage, fielding questions and offering rosy predictions about his company’s prospects. But then he struck a sober note in response to a question from one of his colleagues.

The questioner wanted to know what, if anything, worried Mr. Mozilo, according to a participant.

“I wake up every day frightened that something is going to happen to Countrywide,” Mr. Mozilo said.

A year and a half later, that day arrived. In January 2008, Countrywide, the company he had built from a two-man mortgage operation into a lending behemoth, had to sell itself to Bank of America at a bargain price because it was being smothered by losses tied to a mountain of sketchy loans.

Let's be very clear on this point: Anthony Mozilo made a fortune while running his company into bankruptcy. While his company profited hugely as the Ponzi Scheme took over, Mozilo divested himself of his options and shares so that very little of his personal fortune was lost when Countrywide went under.

Yet almost until the moment Countrywide was taken over, Mr. Mozilo was publicly buoyant about its ability to ride out the mortgage crisis. Privately, however, he occasionally offered a gloomier assessment of Countrywide’s prospects and practices, according to e-mail and interviews.

What Mr. Mozilo, now 71, knew about Countrywide’s problems, and precisely when he knew it, was what eventually led the Securities and Exchange Commission to file civil securities fraud charges against him last year. And on Friday, in the Los Angeles courtroom of John F. Walter, a federal District Court judge, representatives for Mr. Mozilo and for two of his top lieutenants — David Sambol, Countrywide’s former president, and Eric Sieracki, the company’s former chief financial officer — settled those charges.

As part of the settlement, Mr. Mozilo and his co-defendants didn’t admit to any wrongdoing. But Mr. Mozilo agreed to pay $67.5 million in a penalty and reparations to investors and is permanently banned from serving as an officer or a director of a public company. Mr. Sambol is paying $5.52 million in a penalty and reparations and agreed to a three-year ban from serving as an officer or director of a public company. Mr. Sieracki agreed to pay a $130,000 penalty.

The settlement is a signal event in the credit crisis and its aftermath, including the foreclosure debacle that is now rattling the mortgage market and upending the lives of average homeowners. Although Goldman Sachs settled securities fraud charges earlier this year, Mr. Mozilo is the first prominent chief executive to be held personally accountable for questionable business practices that contributed to the housing bubble, the dizzying financial machinations that surrounded it, and a ruinous lending spree that ultimately threatened to undermine the nation’s economy.

They got him! $67.5 million!

Mr. Mozilo and his two former colleagues were accused of misrepresenting the company’s declining lending standards during 2006 and 2007 and portraying themselves publicly as underwriters of high-quality mortgages even as they learned that the company’s loans were becoming increasingly risky.

The government also contended that Mr. Mozilo and Mr. Sambol improperly profited on inside information about the company’s problematic loans when they sold Countrywide shares. From May 2005 to the end of 2007, Mr. Mozilo generated $260 million from his stock sales, while Mr. Sambol’s sales produced $40 million, the government says.

$67.5M was not enough. He needs to forfeit all of his ill-gotten gains. With as large as his fine is, as long as he profited from the deal, there is no deterrent for others to do the same.

Lawyers for Mr. Mozilo declined to comment. Mr. Sambol’s lawyer said his client had “put the matter behind him for the benefit of his family and loved ones.” Mr. Sieracki’s lawyer noted that the S.E.C. had decided not to pursue fraud charges against his client and that his client had not been barred from serving at a public company. Bank of America is paying Mr. Mozilo’s legal bills. Countrywide is paying $5 million toward Mr. Sambol’s repayment to investors and $20 million of Mr. Mozilo’s reparations.

Bank of America is paying his legal bills and part of his fine? That's outrageous!

The S.E.C.’s legal team, led by John M. McCoy III, associate regional director of the enforcement division, said the settlement amounted to a hard-won victory.

In a statement on Friday, Mr. McCoy said: “This settlement will provide affected shareholders significant financial relief, and reinforces the message that corporate officers have a personal responsibility to provide investors with an accurate and complete picture of known risks and uncertainties facing a company.”

Actually, it reinforces that corporate CEOs can do whatever they want, and either the taxpayers or the shareholders will have to clean up the mess. CEOs are above the law.

Battered by widespread criticism that it failed to corral scam artists like Bernard L. Madoff and to effectively police Wall Street as a whole during the years leading up to the credit crisis, the S.E.C. may now regain some stature as a successful litigator and investor advocate from its settlement with Mr. Mozilo.

“As is the case with most settlements, this is a compromise where nobody comes out a complete winner,” said Lewis D. Lowenfels, an authority on securities law at Tolins & Lowenfels. “The S.E.C. gets a substantial monetary settlement and a bar with respect to Mozilo serving as an officer or director. On Mozilo’s side, he is probably satisfied to have this behind him. He suffers a considerable stain on his reputation, has to pay a substantial amount of money but retains significant wealth and at the age of 71 may find the possibility of being an officer or director of another public company less enticing.”

The fact that Mozilo finds any "win" in this situation is a loss for everyone.

COUNTRYWIDE FINANCIAL began operations in 1969, when Mr. Mozilo and his mentor, David Loeb, refugees from an established mortgage lender, decided to start their own loan originator. The company grew slowly at first, but by 2004, Countrywide was the nation’s largest home lender, generating annual revenue of $8.6 billion. Mr. Mozilo ran the company alone after Mr. Loeb retired in 2000. (Mr. Loeb died in 2003.)

After Mozilo's partner dies, Mozilo unleashes a Ponzi Scheme that ruins the company and the national economy.

An up-by-the-bootstraps entrepreneur — his father was a butcher in the Bronx — Mr. Mozilo was obsessed with wresting market share away from his buttoned-down rivals in the staid world of banking.

“I run into these guys on Wall Street all the time who think they’re something special because they went to Ivy League schools,” he told The New York Times in 2005. “We’re always underestimated. And we still are. I am. I must say, it bothered me when I was younger — their snobbery and their looking down on us.”

In an industry that favored low-key behavior and conservative dress, Mr. Mozilo stood apart. He offered blunt opinions about banking and was open about his corporate aspirations. To complement his ever-present tan, he wore flashy clothes and drove expensive cars like Rolls-Royces that were often painted in a shade of gold.

Still, he managed his business for most of its history with a tight focus on the bottom line and on vigilant lending practices.

If he was so vigilant, why did he approve the Option ARM? Sometimes I wonder if guys like him approach the end of their career and say "WTF, I will maximize short-term gains, make a fortune, and walk away when it all crashes." He is old enough, he probably couldn't spend his fortune if he tried. Like Greenspan, his reputation will never recover, but perhaps a couple of hundred million dollars makes you care less about that sort of thing.

For years, Countrywide specialized in plain-vanilla, fixed-rate loans. As recently as 2003, such mortgages accounted for 95 percent of the company’s loans, according to regulatory filings. Countrywide was the biggest supplier of mortgage loans to Fannie Mae, the federally backed mortgage finance giant that was also hobbled in the credit crisis.

Don't for a moment think that Mozilo is any less responsible for this disaster just because the GSEs got into the game late. The GSEs were trying to make up market share being lost to subprime lenders and lenders like Countrywide that were taking market share with Option ARMs.

In 2004, Countrywide’s sober-minded lending style changed significantly. It began aggressively offering loans to first-time home buyers and to borrowers with modest incomes. These mortgages were known in the industry as “affordability products,” but that ho-hum designation belied the potential financial dangers embedded in the loans if borrowers — particularly low-income borrowers — wound up unable to pay their debts.

Even so, Countrywide embraced such loans with gusto. For example, adjustable-rate mortgages — those with a low introductory rate that could ratchet up in later years — accounted for about 18 percent of Countrywide’s business in 2003. But a year later, they made up 49 percent of its loans.

Subprime loans also grew in 2004, to 11 percent of its originations, up from 4.6 percent in 2003. These loans often required no down payments and very little documentation of borrowers’ incomes, assets or employment; they generated immense profits to Countrywide but, again, presented a bevy of risks. And even when the going got rough for some homeowners, Countrywide didn’t hesitate to take a hard line with borrowers who fell behind.

Up until the time Countrywide collapsed, all lenders were taking a hard line with borrowers who fell behind. It wasn't until subprime foreclosures crashed the housing markets in places like Las Vegas, Riverside County, Arizona, and Florida that anyone cared about loan modifications, foreclosure moratoriums, and widespread squatting.

A born salesman, Mr. Mozilo promoted his company’s prospects wherever he went. In front of a crowd of investors or analysts, he would predict what Countrywide would generate in profits five years down the road and how many of its competitors the company would vanquish. No matter what, Countrywide would survive, he vowed.

“Over the entire history of this country, housing prices have never gone down nationally. They have gone down in some local areas, but never nationally,” he told an interviewer for CNBC in early 2005. “Secondly, any homeownership over the 10 years has proved to be the best investment that you could ever make. Over any 10-year period, housing prices go up.”

Mozilo was completely kool aid intoxicated.

Later that year, he was equally optimistic when he again visited CNBC’s studios.

“From our perspective — and we’ve been doing this for 38 years — we’re still in a terrific mortgage market,” he said. “So the road ahead to us appears to be extremely vibrant, very sound.”

Even as the wheels were coming off of the Countrywide cart in 2007, Mr. Mozilo’s upbeat public pronouncements continued.

“I think you have to keep things in perspective. You know, there’s an old saying that you don’t know who’s swimming naked until the tide goes out, and obviously the tide’s gone out,” he told CNBC in March 2007, when a number of once-successful subprime lenders were plunging toward bankruptcy. “I think it’s a mistake to apply what’s happening to them to the more diversified financial services companies such as Countrywide.”

When Bank of America invested $2 billion in Countrywide in August 2007 — a move that caused many analysts to question Countrywide’s financial wherewithal and its ability to remain independent — Mr. Mozilo again struck an optimistic note.

“Countrywide’s future’s going to be great. You know, it’s always been great,” he told CNBC at the time. “So I think, down the line, this is going to be a better company, a more profitable company and a company that’s going to be a great investment for shareholders as we continue down the line. Because the market ultimately will come to us. This is America. People want to own homes.”

PRIVATELY, however, Mr. Mozilo had long been worried about some of the loans his company favored, as indicated by e-mails he sent to his deputies. And this gulf between Mr. Mozilo’s private views and his public proclamations went to the heart of the S.E.C.’s case against him.

Mozilo knew the Option ARM was going to end badly, and yet he allowed that product to grow to nearly half of his origination volume. Why would someone do that? To me it seems obvious that he knew he could make huge short-term gains and bail before it all crashed.

Beginning in 2005, for example, he fretted about lending practices at Countrywide, e-mail messages show. One target of his ire was the “pay-option adjustable-rate mortgage,” a loan that let borrowers pay a fraction of the interest owed and none of the principal during an introductory period. These loans put homes within many borrowers’ financial grasp — at least initially.

When a borrower made only modest payments, the shortfall was added to the principal balance on the loan, meaning that the mortgage would grow in size. Given this arithmetic, borrowers could wind up owing more than their homes were worth.

In 2004, pay-option A.R.M.’s accounted for 6 percent of Countrywide’s originations. Two years later, they accounted for 21 percent of its loans. The loans were moneymakers for Countrywide; internal company documents show that the company made gross profit margins of more than 4 percent on such loans, double the 2 percent generated on standard loans backed by the Federal Housing Administration.

Countrywide pushed the lucrative loans hard. A sales document called “Pay Option A.R.M.’s Made Simple” asked rhetorically what kinds of customers would be interested in these loans. “Anyone who wants the lowest possible payment!” was one of the answers.

But these loans unnerved Mr. Mozilo, as his e-mails indicate. In April 2006, for example, he learned that almost three-quarters of the company’s pay-option customers had chosen to make the minimum payment the prior February, up from 60 percent the previous August, according to the S.E.C.’s complaint. In an e-mail to Mr. Sambol, Mr. Mozilo wrote: “Since over 70 percent have opted to make the lower payment it appears that it is just a matter of time that we will be faced with much higher resets and therefore much higher delinquencies.”

Mozilo knew exactly what was coming. The statement above from his emails could have been written on a bubble blog at the time.

Two months later, and just one day after he talked up his company’s pay-option A.R.M.’s to investors at a Wall Street conference, Mr. Mozilo wrote an e-mail to Mr. Sambol predicting trouble ahead for many borrowers in these mortgages. They “are going to experience a payment shock which is going to be difficult if not impossible for them to manage,” he said.

And in September 2006, Mr. Mozilo wrote an e-mail saying the company had no way to assess the risks of holding pay-option A.R.M.’s on its balance sheet. “The bottom line is that we are flying blind on how these loans will perform in a stressed environment of higher unemployment, reduced values and slowing home sales,” he wrote.

Another Countrywide product that concerned Mr. Mozilo was its so-called 80/20 loan, named for the fact that the combination allowed a borrower to receive money covering 100 percent of a home’s purchase price.

Mr. Mozilo had become worried about these loans in the first quarter of 2006, when HSBC Bank, a buyer of Countrywide’s 80-20 loans, began forcing the lender to repurchase some that HSBC contended were defective.

“In all my years in the business, I have never seen a more toxic product,” he wrote to Mr. Sambol in an April 17, 2006, e-mail cited by the S.E.C. “With real estate values coming down … the product will become increasingly worse.”

Such e-mails suggest that by mid-2006, Mr. Mozilo had recognized how reckless some of his company’s lending had become. And just three months later, according to the S.E.C. complaint, he met with his financial adviser to increase the amount of Countrywide shares he could cash in under a planned executive stock-sale program.

How else can you interpret his behavior? He obviously knew his company was going to implode, and he wanted to get as much money as he could out of the company before the end.

Mr. Mozilo had always been a big seller, and rarely a buyer, of the Countrywide shares he was granted as a part of his compensation. The timing of some of his sales, however, has drawn the scrutiny of the S.E.C.

For example, on Sept. 25, a day before writing the e-mail about how Countrywide was “flying blind” on pay-option A.R.M.’s, he set up a new planned stock-selling program for himself, known as a 10b-5 plan, the S.E.C. said.

Such plans allow executives to sell stock regularly, without running afoul of regulations governing the sale of stock around significant corporate announcements. Mr. Mozilo also set up plans enabling a family foundation and a trust he oversaw to sell shares.

Altogether, the S.E.C. said, from November 2006 to October 2007, he sold more than five million Countrywide shares under his personal plan. His gains were $140 million, the S.E.C. said.

Mr. Mozilo has long maintained that his stock sales were not unusual, and in the past Countrywide has said that it and Mr. Mozilo were battered by economic forces beyond their control.

Mozilo is a liar. His stock sales were unusual, and he did now that Countrywide was going to be battered by the economic forces his mistakes created.

“No one, including Mr. Mozilo, could have foreseen the unprecedented combination of events that led to the problems borrowers, lenders and investors face with many of these loans today,” a Countrywide spokesman told The Times in 2007. “Countrywide is proud of its role in making homeownership affordable to lower-income households.”

But lawyers and analysts say Friday’s settlement means that Mr. Mozilo’s legacy is likely to be something quite different from that of a banker who brought homeownership to the masses.

“Mozilo is agreeing to a permanent ban on serving as an officer or director of a public company,” said James A. Fanto, a professor at Brooklyn Law School and a specialist in corporate and securities law. “That is a significant punishment and does not look good for his legacy.”

Mozilo should be forced to face every borrower who took out his toxic loans. These people lost their family homes, and they should be angry.

Mozilo's legacy will be one of personal greed and foolishness. He drove his company into oblivion for his personal enrichment.

Bought at the bottom of the bear rally

The current bear rally began in the spring of 2009 when the Federal Reserve bought down the interest rates, regulators permitted amend-extend-pretend, and banks began the policy of widespread squatting in high-end homes. People who bought in that time period believe they purchased at the bottom and now they have some equity. We will see.

The previous owner of today's featured property bought the place for $416,000 on 6/24/2003. When this property sold for a loss in 2009, it was a 2003 rollback. That owner managed to own California real estate for 6 years and lose money.

The property was then purchased for $400,000 on 6/22/2009. Apparently the new owners have changed their minds and now would like to get out at breakeven. They have priced the property at $429,500. This gives them some room to negotiate and still get out at even.

So will they get it? Have prices of individual properties increased 10% since last year allowing these owners to get out at breakeven?

Irvine Home Address … 159 TOPAZ Irvine, CA 92602

Resale Home Price … $439,500

Home Purchase Price … $400,000

Home Purchase Date …. 6/20/2009

Net Gain (Loss) ………. $13,130

Percent Change ………. 3.3%

Annual Appreciation … 7.1%

Cost of Ownership

————————————————-

$439,500 ………. Asking Price

$15,383 ………. 3.5% Down FHA Financing

4.25% …………… Mortgage Interest Rate

$424,118 ………. 30-Year Mortgage

$83,394 ………. Income Requirement

$2,086 ………. Monthly Mortgage Payment

$381 ………. Property Tax

$71 ………. Special Taxes and Levies (Mello Roos)

$37 ………. Homeowners Insurance

$215 ………. Homeowners Association Fees

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

$2,790 ………. Monthly Cash Outlays

-$330 ………. Tax Savings (% of Interest and Property Tax)

-$584 ………. Equity Hidden in Payment

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

$55 ………. Maintenance and Replacement Reserves

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

$1,954 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$4,395 ………. Furnishing and Move In @1%

$4,395 ………. Closing Costs @1%

$4,241 ………… Interest Points @1% of Loan

$15,383 ………. Down Payment

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

$28,414 ………. Total Cash Costs

$29,900 ………… Emergency Cash Reserves

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

$58,314 ………. Total Savings Needed

Property Details for 159 TOPAZ Irvine, CA 92602

——————————————————————————

Beds: 2

Baths: 1 full 2 part baths

Home size: 1,500 sq ft

($293 / sq ft)

Lot Size: n/a

Year Built: 2002

Days on Market: 89

Listing Updated: 40420

MLS Number: P744558

Property Type: Condominium, Residential

Community: West Irvine

Tract: Mand

——————————————————————————

What a beauty! Perfectly designed for a roommate situation, this quality Lennar home with two big master suites has loads of upgrades: travertine flooring with an inlaid marble design pattern downstairs, elegant sand-colored corian kitchen counters and a BIG walk-in pantry. One of the master bedroom baths has a shower with dual heads, travertine floors, double sinks and a roomy walk-in closet. This popular plan has a big common room downstairs with a kitchen that opens directly to the living room with fireplace, and a big 2-car garage with easy direct access into the home. Relax on the front stone patio of this beautifully-designed community and have an afternoon cool drink or a casual barbecue with friends. Located walking distance to the huge community pool, spa, kiddy pool and public tennis courts, and popular Tustin Marketplace. Enjoy an evening stroll to the much-utilized year-round Tustin Sportspark with walking paths, tennis and baseball diamonds.

Zillow's Stan Humphries gives a clear explanation of the Mortgage Electronic Registration System and the problems it creates.

Irvine Home Address … 174 HAYWARD Irvine, CA 92602

Resale Home Price …… $480,000

Lend me your ear while I call you a fool.

You were kissed by a witch one night in the wood,

And later insisted your feelings were true.

Washed clean by the water but nursing its pain.

The witches promise was cunning,

And you're looking elsewhere for your own selfish gain.

Jethro Tull — Witches Promise

The mortgage industry was kissed by a witch in the night. Looking for their own selfish gain they came up with a cunning system to transfer mortgages and shortcut the public recording system. Washed clean by the market crash, mortgage holders insisted their title claims were true, and the system is nursing its pain.

Bubble, Bubble, Toil and Trouble in the Foreclosure Market

By: Stan Humphries, — October 11th, 2010

Well, what initially looked to be a technical road bump in the foreclosure process is now certainly blossoming into something with a more material impact on the housing market. Initially, this situation had the appearance of a sloppy record-keeping scandal, one that was important to resolve but that involved supporting documents that could ultimately be located and where correct procedures could be put into place. On the other hand, there are hints now of a mortgage system that has been put into place in service of mortgage securitization objectives that may have become detached somewhat from the underlying governmental recording procedures for titles and mortgages.

The latter situation involves a Reston, VA based company named Mortgage Electronic Registration System (MERS), which launched a mortgage tracking system in 1997. The system was designed to simplify the registration and transfer of mortgage ownership. From their website:

MERS acts as nominee in the county land records for the lender and servicer. Any loan registered on the MERS® System is inoculated against future assignments because MERS remains the nominal mortgagee no matter how many times servicing is traded. MERS as original mortgagee (MOM) is approved by Fannie Mae, Freddie Mac, Ginnie Mae, FHA and VA, California and Utah Housing Finance Agencies, as well as all of the major Wall Street rating agencies.

Note that MERS is used by the GSEs and other government mortgage entities. That makes it the standard in the industry.

Ok. For those fortunate individuals not initiated into the intricacies of deeds and mortgage notes, this statement might need further elaboration. Let’s use an analogy. Let’s say that you, I and a bunch of our friends all sell mortgages to people who want to buy homes. But, once we’ve sold a mortgage to an individual, we periodically re-sell it to each other. That is, I take the note that I’m holding on a house located at 123 Main Street (that obligates the homeowner to pay me a certain principal plus interest) and I sell it to you. Now the homeowner living at 123 Main Street pays their monthly mortgage payment to you and not me (and I’ve gotten a lump sum payment from you in return).

In the old days, this exchange would involve me walking down to the county courthouse and filling out some paperwork transferring the mortgage on 123 Main Street over to you. Not fun, but not the end of the world either. Enter mortgage-backed securities. Now, it’s not just a few of us friends holding onto mortgages. We create a bunch of companies that buy certain mortgages and then essentially sell shares in this new company to investors, each of whom now owns a small piece of all the mortgages owned by the new company (i.e., mortgage-backed securities). In this new world, we’re transferring mortgages on homes all the time. I’m not just having to go down to my local courthouse and assign the mortgage to another of my mortgage-holding friends. I’m having to go to the more than 3,000 courthouses around the country and assign the rights to a multitude of different parties. I’m on the road all the time just doing paperwork or I’m having to pay somebody in all the counties to do it for me. This whole recording process has become more than a minor nuisance. It’s now a major cost of business for me and it seriously affects the speed at which I can buy and sell mortgages.

So, you and I come up with an idea. We get our friend Sally to agree to be listed as the mortgagee on all these mortgage notes instead of you or me. Sally is someone we both trust and agrees to serve as an honest broker for recording agreements between you, me and all of our other mortgage-holding friends. So, for example, when I sell the homeowners of 123 Main Street a mortgage, we file a mortgage note that lists the homeowners as the borrower and Sally as the mortgagee (instead of me although I’m still listed as the lender, a distinction that will become important later).

The old system required recordation in the public record of every transaction that is secured by real estate. The public record has no organization at all which is why title companies sprung up to create a searchable database of all this recorded information. From the beginning of our property records system, private databases of public records have been the foundation of the real estate industry.

Title companies issue title insurance because they have organized the data and know all the encumbrances and transfers in a chain of title. Everyone relies on title insurance companies. If no insurance were offered on title, mortgage interest rates would be much, much higher because it would be impossible to loan on a secured basis. Every loan would become unsecured debt similar to a credit card. Loan balances would be a small fraction of what they are today.

Certainty of title is the foundation upon which our system of real estate finance is built.

Sally then starts a spreadsheet where she lists me as the actual lender of 123 Main Street. When I go to sell this mortgage to you, I don’t need to go down to the courthouse and transfer the mortgage to you. We simply call up Sally and tell her to update her spreadsheet with the information that you are now the lender for the mortgage on 123 Main Street and not me (I also send a letter to the homeowners telling them to send their monthly payment to you now and not to me).

This is a critical point: MERS allows the transfer of ownership of mortgages without that transfer being recorded in the public record. With the ownership of the promissory note is the mortgage, the right to foreclose in event the borrower fails to pay on the promissory note. The basic claim of those challenging this system is that transfer of the promissory note does not simultaneously transfer the mortgage unless both are recorded in the public record; therefore, the new holder of the promissory note does not have the right to foreclose.

This innovation makes the current lender of any mortgage quickly knowable by anyone and allows for the rapid transfer of mortgage rights. Think of it as a clever work-around to the Federal system put into place by our Founders (i.e., local, state and national governments, each of which controls different governmental functions) which can make nationalized businesses that deal with local-level processes cumbersome.

The current imbroglio that seems to have developed arises when the homeowners of 123 Main Street stop making payments to you (assuming I’ve sold the mortgage to you), thus necessitating you to foreclose on them. When this occurs, you tell Sally to head over to the county in which 123 Main Street is located and file a foreclosure notice (since Sally is the registered mortgagee for the property). Generally, this proceeds along the lines of any foreclosure: the house is foreclosed and you attempt to recoup some of your money by selling the house subsequently. Sally is really just acting as an agent on your behalf in this process.

In some cases, however, the local courts will take a dim view of the record-keeping system that you, Sally and I have set up. They will assert that, according to their records, Sally is the mortgagee but I’m still the lender of record. They’ll go on to say that since Sally is not the lender and they have no record that you are, in fact, the lender either (remember, my sale of the mortgage to you was just recorded in Sally’s spreadsheet, not with the county itself), neither Sally nor you can foreclose on the property. Only I can, but I’ve long since forgotten about this mortgage because I sold it to you (but only told Sally about the sale, not the county). This leads Sally to whip out her spreadsheet in open court and start explaining the system that we’ve set up. This, in turn, can leave the judge feeling a bit like a New York state judge who, when confronted with exactly this scenario in his courtroom this past May, observed that the mortgage and servicer companies seemed to be “operating in a parallel mortgage universe.” He actually called it the Twilight Zone. His opinion is a good read.

If a judge were to rule that the MERS system does not transfer the holder of the promissory note the right to foreclose, the entire MERS system would collapse. Every mortgage would need to be recorded in the public record as being transferred to the new holder of the promissory note. The result would be millions and millions of filings in recorders offices all over the country and months of delay while this happened.

Just to make sure we’re all on the same page in this analogy, you and I are mortgage-holding companies like Bank of America, HSBC, and others. Sally is the Mortgage Electronic Registration System, a company jointly owned by all the big financial firms which has as its members any financial firm that lends money for mortgages and wants to easily exchange them to other firms. Sally’s spreadsheet in the analogy is actually the MERS database which is online for anybody to look at. Any mortgage for which MERS is acting as the mortgagee will list a MIN number (see example below). Anybody can type this MIN number into the MERS website and find out the name of the servicer and the actual lender for the mortgage (note, sometimes the lender info is not shown and you must contact the servicer first). Try it yourself: Search for MERS on your county recorder website, type any MIN number that you happen to find into the MERS system and see what you get.

So, where does all this leave us?

• The securitization of mortgages in this country has been a powerful innovation which has created enormous benefits to homeowners. Mortgage-backed securities provide vastly more money for the mortgage markets than would be available in the prior system where lenders held onto each mortgage that they originated.

The benefits of securitization are debatable. Securitization is not the reason we had a housing bubble, but it was the mechanism by which the housing bubble was inflated. Look at securitization as the pumps the hoses that inflated home values. It was still foolish lenders and kool aid intoxicated homeowners who operated the pumps.

Ok, let’s be honest, it probably benefitted too many consumers during the bubble, lots of whom got mortgages because the money was there courtesy of securitization while the people approving the mortgages weren’t aware enough of the potential risks. By reaching deeper into the pool of potential homeowners to sell new mortgages, the risks were two-fold. First, they were lending to people with more credit risk (so, in bad times, default rates would be higher). Second, the expansion of homeownership helped fuel unsustainable price appreciation which, when markets began to correct, made real estate a depreciating asset. This depreciating asset roiled both the newer, less credit-worthy borrowers but also lots of the more credit-worthy people who now found themselves in negative equity precisely at a time when lots of them started to lose their jobs in the recession.

In short, securitization made the Ponzi Scheme possible.

• I’m not a real estate lawyer so I won’t comment on the legality of the MERS system, but it does seem a logical response to the tangible problem of complying with long-standing county recordation processes while still enabling a modern mortgage market. It’s been in place since 1997, has registered more than 64 million mortgages, and, notwithstanding the occasional legal challenge that I describe above, it seems pretty well established in most jurisdictions.

• If the entire MERS approach were deemed illegal tomorrow, the only thing that would change is the speed with which these foreclosures would occur. Back to our analogy, if a court deemed that neither Sally nor you could foreclose on the homeowners of 123 Main Street, they could ask me to come down to the courthouse and do the foreclosure myself. Or, more likely, I would make an official assignment of the mortgage to you, and then you now have the legal standing to proceed with the foreclosure. The house would still be foreclosed upon, a fact that was precipitated by the homeowner’s non-payment, not by anything about the record-keeping system itself. A reversion to the old county process would just make things go more slowly.

Everyone seems to forget that each of these "unwarranted foreclosures" is a delinquent borrower. This problem didn't spring up because people making their payments were suddenly facing foreclosure. A paperwork problem does not make the house belong to the delinquent borrower, nor does it make their debt go away. These people are not keeping their homes, they are keeping the bank's house through procedural delay.

• At the risk of understatement, slowing down the foreclosure process just for the sake of slowing it down is really not helpful at this point in the housing correction. In fact, it’s really quite bad for the market as it will delay the natural process of supply and demand reaching equilibrium because buyers will stay away from a market that they view as still heading down. And we’ll have less of a real sense of total supply because a lot of it will be tied up in homes that are in foreclosure limbo. We absolutely need to make sure that the foreclosure process is proceeding in a legal and transparent manner but, once that is satisfied, it’s not going to help real estate markets to delay foreclosure actions that are ultimately going to happen anyway at some point in time.

Clearly, the banks do not believe that delay hurts them. They have been looking for excuses to delay foreclosure for the last three years.

• With the various states serving as laboratories for different foreclosure processes, we have the opportunity to see the differing results produced by these processes. I believe that a key reason for why markets in some non-judicial states like California seem to be recovering faster than markets in judicial foreclosure states like Florida is because foreclosures are clearing through the market faster in the non-judicial foreclosure states. Since I risked understatement in my previous bullet point, let me be clear here: calls for a moratorium on foreclosures – while politically attractive for elected officials and their regulators – are misguided and would do significant damage to the nascent stabilization in home values.

Actually, the reason California has temporarily stabilized is because the banks have chosen not to foreclose and instead have chosen to create an enormous shadow inventory. His contention in support of his argument is pretty weak.

• Those of us who’d like to find a way to help stem the foreclosure crisis should focus on some of the concrete proposals to help homeowners like tweaking the FHA streamline refinance guidelines or more ambitious proposals like that of Hubbard and Mayer. I don’t always agree with every proposal but it’s ideas like these that explicitly target the foreclosure problem that merit our consideration, not putting our hope in gumming up the gears of government and commerce (again, unless we come to the conclusion that these gears are not legally constituted).

He is missing the bigger point: there is not foreclosure problem. Foreclosure is not the problem, it is the cure.

• My hunch is that the MERS approach will stand up to scrutiny and that this current situation will end up being more of a sloppy record-keeping scandal that should and will be cleaned up. This will result in a slowdown of foreclosures over the next 30 to 90 days. If the MERS approach doesn’t survive, I’d be gravely concerned for the near-term stabilization of the housing market and for the long-term viability of mortgage securitization.

I agree with him on his conclusions. There will be a short-term slowdown in foreclosures that will hardly be noticed. Right now, at every auction site in the country, 80% to 90% of currently scheduled foreclosures are postponed or canceled. We are only processing a tiny fraction of the foreclosure backlog on any given day. When the floodwaters are washing away everything in site, a few days without rain do not make the raging floodwaters recede significantly. Even after the delinquencies and foreclosure proceedings stop being initiated, it will take years to work through the backlog.

Is MERS really a problem, or is this whole exercise a witch hunt?

I watched the flow of properties through the Las Vegas auction site last week. Monday was slow due to the holiday, but the Tuesday through Friday showed no difference in the number of properties that were auctioned. Any Bank of America foreclosures that were postponed were made up for by the other banks who ordinarily would have postponed their sales.

The hot potato

The Ponzi Scheme that is the California housing market is a giant game of hot potato. Each participant in the Ponzi Scheme runs up a huge mortgage and tries to pass it to someone else before the market crashes and they get their hands burned by the hot potato. The story of today's featured property begins with the previous owners. They managed to buy the property, extract significant equity through periodic, foolish borrowing and pass that debt on to the current owner who has to deal with a huge loss.

• The house was purchased by the previous owners on 3/23/2004 for $550,000. They used a $440,000 first mortgage, a $82,500 second mortgage, and a $27,500 down payment.
• On 3/14/2005 they refinanced their first mortgage with a $492,000 Option ARM with a 1% teaser rate, and they obtained a $46,000 HELOC.
• On 6/6/2005 they enlarged their HELOC to $91,000.
• Total property debt was $583,000 plus negative amortization.

Of course, they were the lucky ones because the current owner bought it from them for $639,000 by taking out a $639,000 first mortgage and putting $0 down. It looks like the knife catcher tried for a while, but he finally gave up in the spring, probably after realizing he was $150,000 underwater on a property he put nothing into. No sense sending good money after bad.

Foreclosure Record

Recording Date: 06/21/2010

Document Type: Notice of Default

Irvine Home Address … 174 HAYWARD Irvine, CA 92602

Resale Home Price … $480,000

Home Purchase Price … $639,000

Home Purchase Date …. 4/18/2007

Net Gain (Loss) ………. $(187,800)

Percent Change ………. -29.4%

Annual Appreciation … -8.1%

Cost of Ownership

————————————————-

$480,000 ………. Asking Price

$16,800 ………. 3.5% Down FHA Financing

4.25% …………… Mortgage Interest Rate

$463,200 ………. 30-Year Mortgage

$91,079 ………. Income Requirement

$2,279 ………. Monthly Mortgage Payment

$416 ………. Property Tax

$100 ………. Special Taxes and Levies (Mello Roos)

$40 ………. Homeowners Insurance

$306 ………. Homeowners Association Fees

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

$3,141 ………. Monthly Cash Outlays

-$360 ………. Tax Savings (% of Interest and Property Tax)

-$638 ………. Equity Hidden in Payment

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

$60 ………. Maintenance and Replacement Reserves

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

$2,228 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$4,800 ………. Furnishing and Move In @1%

$4,800 ………. Closing Costs @1%

$4,632 ………… Interest Points @1% of Loan

$16,800 ………. Down Payment

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

$31,032 ………. Total Cash Costs

$34,100 ………… Emergency Cash Reserves

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

$65,132 ………. Total Savings Needed

Property Details for 174 HAYWARD Irvine, CA 92602

——————————————————————————

Beds: 3

Baths: 2 baths

Home size: 1,752 sq ft

($274 / sq ft)

Lot Size: n/a

Year Built: 2002

Days on Market: 163

Listing Updated: 40457

MLS Number: S616203

Property Type: Condominium, Residential

Community: Northpark

Tract: Aubr

——————————————————————————

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

SHORT ESCROW OK!! Excellent private location, all living space on one floor, high ceiling entry, rotundra extends to expansive great room w/custom paint, neutral carpet, shutters, fireplace, versatile media niche, lighted ceiling fan, kitchen w/granite, upgraded cabinetry, walk-in pantry, recessed lighting, dining area leads to large balcony, lovely master suite w/retreat, separate shower, deep oval soaking tub, dual sinks, oversize walk-in closet, French door opens to balcony, attached side/side garage with vertical storage cabinetry, resort association amenities: pools, parks, spas, meandering greenbelts, gazebos w/fountains, sports courts, clubhouse, walk to Hicks Canyon Elementary/Beckman High Schools, close to freeways, toll-roads, and Tustin/Irvine entertainment complex

rotundra?