Foreclosures are still not keeping pace with delinquencies as shadow inventory continues to grow.

Irvine Home Address … 26 RUSTLING WIND Irvine, CA 92612

Resale Home Price …… $689,000

Where, oh where, are you tonight?

Why did you leave me here all alone?

I searched the world over, and I thought I'd found true love,

You met another, and PFFT! You was gone!

Hee Haw — PFFT! You Was Gone!

Decline in foreclosures likely to be temporary

By Frank Ahrens

Washington Post Staff Writer

Friday, August 27, 2010

Foreclosures and late payments on home mortgages dropped slightly in the second quarter of this year, but sustained high unemployment and a stalled economic recovery could make the improvement short-lived.

This news story misses the broader point. The foreclosures are not primarily a result of unemployment. Sure, unemployment has pushed many loan owners over the edge, but huge distress in the mortgage markets was going to create a huge number of delinquencies and foreclosures regardless of what happened with the economy or employment. We are witnessing the collapse of a massive Ponzi Scheme, and as long as the toxic debt remains, any decline in foreclosures is likely to be temporary.

US real estate foreclosures fall marginally but mortgage delinquencies increase to bring more gloom

Monday, 30 August 2010

As financial experts warn that falling property prices in the US could affect economic output and create a double dip recession there is more mixed news for the country’s real estate sector.

Although figures shows that the number of foreclosures decreased nationally in the second quarter of 2010 compared to the first three months, mortgage delinquencies increased, suggesting that foreclosures could rise again by the next quarter.

A key point buried and lost in the article above is that delinquencies are back on the rise.

The delinquency rate for a prime adjustable rate mortgage (ARM) increased 47 basis points to 9.3% while the rate for a fixed rate mortgage (FRM) increased 8bps to 4.75%, according to the latest figures from the Mortgage Bankers Association.

This can no longer be spun as a subprime problem. Almost 10% of prime ARMs are delinqent. That is an astonishingly high number. And 4.75% of fixed-rate mortgages are delinquent, another very high number, unprecedented by historic measures.

Foreclosures for both types of mortgage loans remained relatively flat quarter on quarter, ARMs dropping only 4 basis points to 3.92% and FRMs increasing 1 basis point to 1.11%.

But for subprime mortgages, ARM delinquency rates jumped 114bps points to 30.9% and foreclosures fell 113bps to 10.6%. Subprime FRMs followed a similar, less drastic, trend, with delinquencies climbing 56bps to 22.5% and foreclosures falling 24bps to 4.8%.

Those subprime numbers are horrendous. Of course, we are used to that, and they will likely get worse. Very few subprime borrowers will sustain ownership before this mess is cleaned up.

Mississippi had the highest delinquency rate at 13.7% and Nevada had the highest foreclosure rate at 2.9%.

And the latest figures from the Lender Processing Services index shows that almost 900,000 loans that were current at the beginning of the year were at least 60 days delinquent or in foreclosure as of July.

Almost a million loan owners gave up this year. We haven't foreclosed on that many homes. Not just haven't we tackled the backlog, we haven't been keeping up with the new additions to shadow inventory. Anyone who thinks this problem is near resolution is really deluding themselves.

Although delinquency volume fell 2.3% month on month in July to 9.3%, it remains near historically elevated levels and record high numbers of delinquent loans are still entering the system, according to LPS. The volume of delinquencies increased 1.4% year on year, the report also shows.

The length of time these loans are staying in the foreclosure process is increasing as well. The average number of days a loan spends delinquent before it is finally forecloses reached 469 days in July, about a year and three months. In July of last year, the average was 351, more than three months shorter.

The total amount of loans in the foreclosure inventory passed 2 million in July, a 3.5% increase from a year ago, and 2.1% more than the previous month. The amount of foreclosures making it to REO status is picking up after diving earlier in the year. LPS reported nearly 100,000 REO properties in July.

The foreclosure inventory described above as 2 million homes is the visible inventory, loan owners that have received a foreclosure notice. The shadow inventory is several million more.

The bottom line is that delinquencies are far exceeding foreclosures. At some point, foreclosures must exceed delinquencies, and the foreclosures must be pushed through the system. We have many, many more foreclosures to come.

Put your cash in, take your cash out

The owners of today's featured property win the hokey-pokey award. They put in a large down payment, then proceeded to withdraw all of it and then some. I hope the huge down payment was not a gift from parents. If it was, I can't imagine the parents are too thrilled to see how this couple wasted all that money.

• The property was purchased on 7/22/2002 for $540,000. The owners used a $270,000 first mortgage and a $270,000 down payment. They put 50% down.
• On 5/11/2004 they refinanced with a $333,700 first mortgage.
• On 6/29/2004 they obtained a $230,000 HELOC.
• On 5/3/2007 they refinanced with a $700,000 first mortgage.
• Total property debt is $700,000.
• Total mortgage equity withdrawal is $430,000 including their down payment.
• Total squatting time is only about 7 months so far.

Foreclosure Record

Recording Date: 08/11/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 05/10/2010

Document Type: Notice of Default

How do you put $270,000 down then go on a massive MEW binge? At first, they looked very prudent, but then they behaved like the worst of HELOC abusers. Very strange.

Irvine Home Address … 26 RUSTLING WIND Irvine, CA 92612

Resale Home Price … $689,000

Home Purchase Price … $540,000

Home Purchase Date …. 7/22/2002

Net Gain (Loss) ………. $107,660

Percent Change ………. 19.9%

Annual Appreciation … 2.7%

Cost of Ownership

————————————————-

$689,000 ………. Asking Price

$137,800 ………. 20% Down Conventional

4.50% …………… Mortgage Interest Rate

$551,200 ………. 30-Year Mortgage

$134,655 ………. Income Requirement

$2,793 ………. Monthly Mortgage Payment

$597 ………. Property Tax

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

$57 ………. Homeowners Insurance

$400 ………. Homeowners Association Fees

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

$3,847 ………. Monthly Cash Outlays

-$466 ………. Tax Savings (% of Interest and Property Tax)

-$726 ………. Equity Hidden in Payment

$230 ………. Lost Income to Down Payment (net of taxes)

$86 ………. Maintenance and Replacement Reserves

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

$2,971 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$6,890 ………. Furnishing and Move In @1%

$6,890 ………. Closing Costs @1%

$5,512 ………… Interest Points @1% of Loan

$137,800 ………. Down Payment

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

$157,092 ………. Total Cash Costs

$45,500 ………… Emergency Cash Reserves

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

$202,592 ………. Total Savings Needed

Property Details for 26 RUSTLING WIND Irvine, CA 92612

——————————————————————————

Beds: 4

Baths: 2 full 1 part baths

Home size: 2,550 sq ft

($270 / sq ft)

Lot Size: n/a

Year Built: 1978

Days on Market: 15

Listing Updated: 40416

MLS Number: F1853776

Property Type: Condominium, Residential

Community: Turtle Rock

Tract: Vt

——————————————————————————

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

Beautifully decorated sweet home in famous Turtle Rock Hills Community. Travertine Floors & Fireplace, Plantation Shutters, Crown Molding, Plastered Ceilings, Custom Built-ins, Recessed Lighting and Casablanca Ceiling Fans. Spacious living room with panoramic views. Walk to award-wining schools including University high, Turtle Rock elementary. Close to Newport Coast, Fashion Island, UCI, and easy access to freeway. Enjoy association pool, spa and Tennis.

I hope you have enjoyed this week, and thank you for reading the Irvine Housing Blog: astutely observing the Irvine home market and combating California Kool-Aid since 2006.

Have a great weekend,

Irvine Renter

Assaulted by bad news, a home debtor has launched a public relations campaign to keep the kool aid flowing.

Irvine Home Address … 13 WINDJAMMER 2 Irvine, CA 92614

Resale Home Price …… $299,000

Some things in life are bad,

They can really make you mad.

Other things just make you swear and curse.

When you're chewing on life's gristle,

Don't grumble, give a wistle!

And this'll help things turn out for the best…

And… always look on the bright side of life!

Monty Python — Always Look on the Bright Side of Life

Defending Home Ownership

By Barry Ritholtz – August 28th, 2010, 10:42AM

Jonathan Miller and I have been kicking around an idea for a “Home ownership is a good thing” OpEd.

Apparently, we aren’t the only ones:

• Five Reasons to Stop Worrying About Your Home’s Value (Moneywatch)

• In Defense of Home Ownership (NYT)

None of these hit the issues and topics that we want to cover — but it is interesting that other folks are thinking along the same lines.

Now, if only I could figure out whether these articles are 1) Contrarian pushback against the dominant RE meme; or b) proof that the bottom is not yet here, as people cling to the hope of a RE recovery.

I'll answer that one for you Barry: it is a sign that people are clinging to the hope of a real estate recovery. We are not yet at the bottom.

Why is sentiment so important?

Why are market collapses signified by changes in consumer sentiment? First, we need to distinguish between deflating market bubbles and market swings causing temporarily low prices. The housing bubble was a bubble; prices became elevated from fundamental values, and they are in the process of correcting back to true value. Prices were not temporarily depressed, they were temporarily elevated. In a bubble scenario, prices do not recover.

When market sentiment is still in denial — like most of California's coastal markets are — people cling to the hope of a recovery that is not going to happen. Stories about the double dip may push the market into fear, but it is nowhere near capitulation and despair like the subprime markets are today. As long as there is the delusion that prime markets are somehow going to avoid the deflation of the bubble, there will be an overhanging supply of sellers waiting for a slight improvement to sell their properties, and the distressed debt in the market remains. As long as there is overhead supply and people holding distressed debt, the market will not recover because each attempt simply brings out more sellers and prices get pushed downward.

An understanding of this market dynamic is the primary concept separating traders from academics. Traders understand this. Academics don't. Since the banks get most of their advice from academics, they will consistently make the wrong decisions, the market will not clear, and prices will grind lower until they capitulate and the inventory is finally gone. As we are witnessing today in Las Vegas, everyone must sell, abandon hope, and feel widespread despair before the market bottoms.

In Defense of Home Ownership

By RON LIEBER

Published: August 27, 2010

It’s hard to read the headlines and not conclude that becoming a homeowner is a terrible idea.

This week, the National Association of Realtors announced that existing-home sales in July had fallen an astounding 25.5 percent from the previous year. Sure, there was a federal tax credit in place last summer. But with single-family home sales at their lowest level since 1995 and unemployment still stubbornly high, home prices may fall further.

In the meantime, millions of homeowners are still far underwater, and government programs to help them have fallen well short of their goals. More foreclosures are coming, casting a deeper shadow over home prices. So it’s hardly surprising that the conventional wisdom says that home values will never again rise faster than inflation.

The truth is that home prices cannot rise faster than inflation unless we are inflating a bubble. The only thing surprising is that reasonable people who understand this are being heard right now. Usually, the bullshit from the NAr and the general level of kool aid intoxication in the media makes more noise.

But as with stocks and the weather, it is dangerous to assume any certainty in the housing market. And by wallowing too much in the misery of others, people looking for a new place to live run the risk of thinking every home purchase will end in regret, at least financially.

Many still could, if they buy in hard-hit areas where prices could fall further.

The problem is that people don't know where prices could fall further. The markets commonly labeled as safe havens are the most at risk whereas the markets labeled as hopeless are at or near the bottom.

But a mortgage is still a form of long-term forced savings, after all. This is more important than ever, since fewer people have access to generous pensions than they did during the last big housing slump. A 401(k) or similar plan is no bargain, either, with its erratic returns and employer matches that come and go as the economic winds shift. Social Security is also likely to be less generous, and Medicare will probably cost more.

Besides, owning a home isn’t just about what shows up on a net worth statement — something that bears repeating after all the “investing” that people thought they were doing when buying homes over the last 10 or 15 years. Many of these more qualitative factors, from living free of a landlord’s whim to having access to a good school district or retirement community, haven’t changed and probably never will.

It is possible, as a homeowner, to make very little money but still buy plenty of happiness. So before you swear off real estate, reconsider a few of the basics.

WORST CASES Some buyers may rue the day in 2010 they bought their homes. They may end up like those who bought in 2006 and have lost their jobs. Now those people face the difficulty of moving to pursue employment elsewhere because they owe much more than their homes are worth.

Marke Hallowell and Allison Firmat, who are getting married next month, are well aware of the history. Yet they plan to put 5 percent or less down, using a fixed-rate mortgage backed by the Federal Housing Administration, once they find a condominium in southern Orange County, Calif. (They’ve already been outbid a few times.)

Ms. Firmat is not working, and Mr. Hallowell is a Web developer. Does he worry about mobility problems or making the payments in the event of a job loss, given that he’s the sole breadwinner? “We’re getting such a good deal on interest rates that we could rent our place out,” he said.

Mr. Hallowell and Ms. Firmat say they believe their approach is conservative, at least compared to what they might have done five years ago.

“Nothing is going to change the rate we will have,” Mr. Hallowell said. “Condos like the ones we’re looking at now were unobtainable in the past, unless we went into something with a total balloon payment. There were times I was tempted, but never seriously.”

Indeed, many people who are buying at the moment are locking in mortgage rates of about 4.5 percent. A year ago, they might have paid 5.25 percent on a $300,000 loan for a monthly payment of about $1,657. Today, you could lock in a lower monthly payment of around $1,520 on a mortgage that size, or you might not need to borrow that much, given that prices have fallen in many areas.

FORCED SAVINGS You may make nothing at all beyond inflation over time on a home, but the part of your mortgage payment that goes toward principal is a form of forced savings.

Sure, you might do better by renting and investing the difference between the rent and the total costs of ownership. But at least three things need to go right.

First, you need to actually save the money. Americans have trouble with that sort of plan. Then, you need an after-tax return that’s better than whatever a home would deliver. That’s a task that might not have gone so well over the last 10 or 12 years, and it involves its own future risk, given how little safer investments are returning now. Finally, you must not raid the savings along the way.

LOL! No HELOC abuse? The problem with the whole forced-savings argument is that it is not forced anymore. Unless you live in Texas where they restrict HELOC use — which is why Texas avoided the bubble — then forced savings requires self discipline. In our Ponzi culture here in Southern California, self-discipline is in short supply.

DIFFICULT LANDLORDS A bank can kick you out only if you don’t pay your mortgage. But landlords can drive you away in any number of ways.

Laura Mapp and her husband, Carl Berg, rented from a relative, but it didn’t go particularly well. They found another landlord they liked, but came back from a holiday trip one year to a note saying he wanted to move in himself. They had a month to scram. (The note came with a bottle of wine, at least.)

In yet another rental, they let their landlord know they were looking to buy and inquired about a month-to-month lease. No problem, their landlord said, as long as they used his boyfriend as their real estate agent.

Earlier this year, the couple gave up on landlords and bought a house in the Highland Park neighborhood in Seattle.

This is another specious argument. Landlords rarely if ever throw out a good tenant. In fact, landlords often won't raise rents for fear of losing a good tenant. This article makes it sound like landlords are a capricious lot that likes to exercise their power to make people move. That idea is rather silly.

Look at it another way: how many people have been evicted by their lendinglords over the last 3 years as compared to the number of capricious landlord evictions? Avoiding a landlord is a great idea, but substituting a landlord for a lendinglord isn't much of an improvement. What people should strive for is to pay off a mortgage so they don't need to worry about a landlord or a lendinglord. Of course, that requires sacrifice, so most people opt to service debt, abuse their HELOCs, and take their chances.

THE NICE PART OF TOWN No matter how pretty the neighborhood, prices may still fall further in places like greater Detroit, Cleveland and Las Vegas; outlying areas of Los Angeles, San Francisco and Phoenix; and much of Florida.

This writer is a safe-haven fool. Detroit and Cleveland won't come back because their economies are a shambles. However, Las Vegas, Phoenix, Riverside County, most of Florida, and the San Francisco suburbs are going to recover, and the low prices there represent buying opportunities. The "nice part of town" hasn't endured its price correction yet, so those markets are in danger.

If you’re looking elsewhere, consult The Times’s rent-versus-buy calculator, halfway down the page at nytimes.com/yourmoney.

Their rent-versus-buy calculator is crap compared to the IHB calculator. Theirs was likely produced by the NAr.

But if you want to live in the Fox Hill Farm development in Glen Mills, Pa., you’ll have to buy because renters are not allowed, said Bob Kuhn, who lives there. The same may be true of other communities for older people.

And there may not be many family-size rentals — or at least any financial edge to be gained by renting — in suburbs or urban neighborhoods with excellent public schools.

This is nonsense and scare tactics. You can rent beautiful properties in the best neighborhoods in Irvine, and right now, those rents are below the cost of ownership. (High-end rental deal of the day: 31 Plumeria)

After many years of building their down-payment fund and a couple of years of watching the listings in the Eagle Rock and Mount Washington areas of Los Angeles, Garret and Alison Williams realized that prices simply were not falling much there.

That is the worst reason to buy.

By the time they were ready to pounce this year, they had a big enough down payment and interest rates had fallen so far that renting didn’t make much financial sense, even if they could have found a rental big enough for them and their two small children.

“Had we rented, we would be paying more than we’re paying for a mortgage,” said Ms. Williams, who had lived in the same two-bedroom rental for 12 years before she and her family moved into their new house in Eagle Rock earlier this month. “I don’t see how we could really regret having made the move when it’s so much better for us on so many levels.”

I question whether or not this family was getting a house equivilent to a rental if prices had not corrected yet. Perhaps their new mortgage payment is lower than rent, but they are moving into an inferior property.

I am bullish on ownership under certain conditions, and first among those is acquiring the property for a price below rental parity. In fact, I can flip from bearish to bullish quickly if prices fall below rental parity. We should start seeing more properties like that soon. I would prefer to purchase at the top of the interest rate cycle and refi on the way down, but that may be years from now, and if prices are below rental parity, I probably will not wait until 2015 for interest rates to hit 7%.

The bottom line is this: absent appreciation in excess of inflation, home ownership is a financial burden. There are emotional benefits to owning, but obtaining these benefits comes at a price. If the price is right, home ownership is wonderful, and if the price is wrong, home ownership can be a crushing weight or ball and chain.

It's worth noting that not everyone thinks our obsession with home ownership is a good thing:

Promoting Homeownership Is Not Only Un-American: It Contributed to the Housing Bubble

Posted on 08/29/10 at 2:53pm by Professor Mark J. Perry

From the Forbes.com article "The Un-American Dream":

"For nearly a century it has been the policy of the U.S. government to increase American homeownership. Its efforts include (but aren't limited to) bouts of easy money from the Fed, the mortgage-interest deduction, the exclusion of capital gains on primary residence sales, direct and indirect subsidies from the Department of Housing and Urban Development, and artificial liquidity pumped into the mortgage market via government sponsored entities Fannie and Freddie.

Policymakers assure us that the next generation of government housing programs will be "carefully designed" (bring on the next five-year plan, Comrade!). But the real question is why the government should be doing anything to promote homeownership.

"I do believe in the American Dream," said President Bush in 2002. "Owning a home is a part of that dream, it just is. Right here in America, if you own your own home, you're realizing the American dream." Bush was echoing a theme that reaches back at least to Herbert Hoover: When the government encourages homeownership, the story goes, it strengthens individuals and communities and thereby fosters the American Dream. They're wrong. A government crusade to promote homeownership is un-American.

America's distinction is that it was the first nation founded on the principle that you have a right to pursue your own happiness without government interference. But the government's homeownership crusade means it gets to decide how you should live, and stick-and-carrot you into living that way.

Here's the real lesson: The American Dream is not some government-subsidized house foisted on you by George W. Bush or Barney Frank. It's the undiluted freedom to decide how you want to live–and, if you want to own a home, it's the freedom to work, save, establish credit, and earn one. In America, the government's job is to protect our freedom to pursue our values, not to dictate what our values are. Its homeownership policy should be the same as its toaster oven policy: laissez-faire.

Government intervention in housing runs deep, and it can't be eliminated overnight. But the government should make its long-term goal to fully extricate itself from the housing market. It can then start gradually dismantling Fannie, Freddie, tax preferences for homeowners, and every other government housing program."

MP: You can add the government's role in promoting fixed-rate 30-year mortgages, and subsidizing FHA mortgages that only require a 3.5% down payment to the list of policies that the government has used to increase homeownership.

The chart above shows how the political promotion of homeownership in the U.S. may have contributed to the housing bubble. The blue line is the quarterly homeownership rate from the Census Bureau (data here) going back to 1991, which went from 64% in the early 1990s to a record high of more than 69% in 2004. During that same time period, the Federal Housing Finance Agency's (FHFA) Home Price Index (data here) doubled from 100 in 1991 to 200 in 2005, before reaching a peak of more than 222 at the height of the real estate bubble in 2007.

In the aftermath of the real estate bubble's crash, the homeownership rate has fallen to a 10-year low of 66.9% (QII 2010) and the FHFA home price has fallen back to 2004 levels. Promoting homeownerhip is not only un-American, but it helped create an unsustainable real estates bubble, which turned the "American dream" into an "American nightmare" for millions of Americans by turning "good renters into terrible homeowners."

Another hard-working condo

Day after day when I look at how much money people took out of their properties, I am astounded. I get the sense these houses worked harder than the people did. It certainly provided many with a substantial side income.

• Today's featured property was purchased on 10/26/1998 for $169,500. The owner used a $161,025 first mortgage and a $8,475 down payment.
• On 8/8/2000 he obtained a stand-alone second for $21,800.
• On 11/13/2001 he refinanced the first mortgage for $210,937, and he got a $33,750 HELOC.
• On 1/14/2003 he refinanced with a $191,250 first mortgage.
• On 9/24/2003 he obtained a $279,000 first mortgage.
• On 11/15/2004 he got a HELOC for $83,000.
• On 1/12/2006 he refinanced the first mortgage for $372,000.
• On 3/8/2006 he obtained a $53,000 HELOC.
• On 6/20/2006 he got a Option ARM for $425,000.
• On 4/2/2007 he refinanced with another Option ARM for $412,000 and obtained a $35,000 HELOC.
• Total property debt is $447,000.
• Total mortgage equity withdrawal is $285,975.
• Total squatting time is 8 months so far, but the NOT has not been filed yet. He has more time coming.

Foreclosure Record

Recording Date: 04/26/2010

Document Type: Notice of Default

Interesting fact: The resale price of this house may end up being less than the previous owner's mortgage equity withdrawal.

Irvine Home Address … 13 WINDJAMMER 2 Irvine, CA 92614

Resale Home Price … $299,000

Home Purchase Price … $169,500

Home Purchase Date …. 10/26/1998

Net Gain (Loss) ………. $111,560

Percent Change ………. 65.8%

Annual Appreciation … 4.8%

Cost of Ownership

————————————————-

$299,000 ………. Asking Price

$10,465 ………. 3.5% Down FHA Financing

4.50% …………… Mortgage Interest Rate

$288,535 ………. 30-Year Mortgage

$58,435 ………. Income Requirement

$1,462 ………. Monthly Mortgage Payment

$259 ………. Property Tax

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

$25 ………. Homeowners Insurance

$316 ………. Homeowners Association Fees

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

$2,062 ………. Monthly Cash Outlays

-$134 ………. Tax Savings (% of Interest and Property Tax)

-$380 ………. Equity Hidden in Payment

$17 ………. Lost Income to Down Payment (net of taxes)

$37 ………. Maintenance and Replacement Reserves

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

$1,603 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$2,990 ………. Furnishing and Move In @1%

$2,990 ………. Closing Costs @1%

$2,885 ………… Interest Points @1% of Loan

$10,465 ………. Down Payment

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

$19,330 ………. Total Cash Costs

$24,500 ………… Emergency Cash Reserves

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

$43,830 ………. Total Savings Needed

Property Details for 13 WINDJAMMER 2 Irvine, CA 92614

——————————————————————————

Beds: 2

Baths: 1 full 1 part baths

Home size: 1,125 sq ft

($266 / sq ft)

Lot Size: n/a

Year Built: 1980

Days on Market: 114

Listing Updated: 40417

MLS Number: S617532

Property Type: Condominium, Townhouse, Residential

Community: Woodbridge

Tract: St

——————————————————————————

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

APPROVED SHORT SALE! Charming 2 bed, 1.5 bathroom home in Irvine Somerset tract. Ideal quiet location adjacent to greenbelt and amenities. Tremendous value!

The general public is waking up to the reality that the artificial bottom the government produced is not curing the housing market's ills. It's time to let house prices fall.

Irvine Home Address … 86 EAGLE Pt 45 Irvine, CA 92604

Resale Home Price …… $250,000

And just…

Let her cry..if the tears fall down like rain

Let her sing…if it eases all her pain

Let her go…let her walk right out on me

And if the sun comes up tomorrow

Let her be…let her be.

Hootie & The Blowfish — Let Her Cry

I was sitting in a meeting not long ago with a group of homebuilding industry insiders. During our discussions, the topic of future home prices came up, and I was astounded to hear the assembled group say they wanted to see the market props removed so that house prices could fall to a level that clears the market. The people who make a living from real estate are finally waking up to the idea that artificially high house prices is hindering sales, making acquisition decisions problematic, and ultimately delaying the recovery of the homebuilding industry. My only comment was "Halleluia." I preached that gospel for 3 years to no avail, and suddenly people came to the same conclusion on their own.

There comes a point when you have to give up resisting and let nature take its course. Like physicians in an emergency room that try every procedure and stimulant, there comes a time when you just stop because you have done all you can and nothing more is going to make a difference.

Time to let home prices fall?

Many expect another wave of foreclosures to further deflate prices. The government could offer new incentives — or let market forces rule.

By Tom Petruno Market Beat

August 28, 2010

You can't force someone to buy a house.

But as a society we've long tried to make homeownership an offer you couldn't refuse.

The crazy part is that the market has its own mechanism to incentivize ownership: a price disparity between ownership and rental. The reason I am so bullish on Las Vegas is because prices have fallen so low that the cost of ownership is a small fraction of rents. You can find properties there that rent for $1,000 a month that cost about $600 a month to own with conventional financing. As the cost of ownership falls relative to rents, the incentive to own increases. The market will correct its own imbalances through price if given the chance.

And since the real estate mega-bubble burst three years ago, the government has tried even more tricks to get people to sign home purchase contracts.

Now, a grim reality has set in: Despite the still-rich basket of tax breaks for residential property owners, and the lowest mortgage rates in a generation, the pool of willing or able buyers is dwindling.

The housing market's new woes expose the limits of government's ability to end the real estate bust, while also raising the odds that policymakers could resort to more dramatic moves to try to support the market.

This is my greatest fear: the government may do something really stupid that totally screws me in favor of equity-stripping squatters who borrowed imprudently to obtain real estate they could not afford and crowded me out in the process. If past borrower behavior is rewarded with continued government bailouts, we will se much more of it, and the housing market will become a massive government Ponzi scheme.

Reports this week on home purchases in July were beyond dismal. Sales of existing homes tumbled 27% from June and 25% from a year earlier. New-home sales slumped to an annualized rate of just 276,000 units, down 32% from July 2009 and the lowest since at least the early 1960s.

Some of the fall-off undoubtedly reflected the spring expiration of the latest federal housing gimmick — tax credits of $8,000 for first-time buyers who met certain income requirements, and $6,500 for repeat buyers.

But it can't be a coincidence that the summer plunge in housing demand occurred as faith in the year-old economic recovery continued to wane.

"It's not a housing issue anymore — it's an overall economic issue," said David Crowe, chief economist for the National Assn. of Home Builders.

Historically, housing has led the way in recoveries. "But this is a case where housing is going to follow the economy, not lead it," Crowe said.

Mr. Crowe is right on both counts. The lending cartel doesn't foreclose on the squatters because they know that while the economy is in recession, there are no buyers for their product, and liquidation would crush prices. Ordinarily, housing would lead out of a recession because as employment picks up, so does the demand for houses. Unfortunately, housing was the cause of this recession, and the demand for housing will be limited by the fact that so many former homeowners do not have the credit to buy. Plus, we have too much inventory to reabsorb. Unemployment in the housing sector will also be a long-term drag on the economy.

You need a job to afford a home, unless you're rolling in cash, and everyone knows that the U.S. has created precious few net new jobs since April — just 80,000 over the last three months in a nation of 310 million people.

The national unemployment rate remains stuck at 9.5%, and even among workers who have jobs more than one-quarter live in fear of being laid off, according to a Gallup poll this month.

How do you stoke housing demand given that backdrop?

The question is not how do you do it, the question really is "why should we stoke housing demand?" What is the benefit versus the cost?

Congress figured the tax-credit giveaway would encourage buyers, and it did to an extent. The credit helped boost sales of existing homes to an annualized rate of 5.79 million units in April, up from about 5 million in January and February.

But the risk of offering any giveaway with a deadline (in this case, April 30) is that it will artificially inflate activity for a limited period and simply steal from future sales.

"We conferred an $8,000 benefit on people who were going to buy a house anyway," asserts David Resler, chief economist at Nomura Securities in New York.

Though government intervention may be well-meaning, each new effort "completely clouds whether there has been any fundamental improvement in the housing market," he said.

Far from being clouded, the message is clear: the fact that sales fell off a cliff after the expiration of the credit reveals that there was no fundamental improvement in the housing market.

And if you didn't buy in time to get the credit, you may well figure that if you wait long enough Congress will bring it back. So why rush to buy now? The 2010 credit, after all, was an extension of one that expired last November.

What do we gain by pulling demand forward? The tax credit did not get more people to buy, it just created the incentive to buy earlier. Do we really want to produce another spike and bust with an enormous cost and no benefit?

Over the last two years, federal attempts to help brake the housing market's plunge have been monumental, of course.

The U.S. has nationalized the biggest sources of mortgage credit ( Fannie Mae and Freddie Mac), pushed home loan rates sharply lower via Federal Reserve purchases of mortgage-backed bonds, and offered to pay banks to get them to agree to loan modifications for struggling borrowers.

A new program will offer no-interest loans of up to $50,000 for unemployed homeowners to help them make their mortgage payments until they find work.

The Obama administration "has taken a broad set of actions to help stabilize the housing market and help American homeowners," Treasury spokesman Mark Paustenbach said.

Help American homeowners? Liar. The measures were taken to help American banks. It's impact on homeowners has been negative. First, we have put a large number of people into homes at inflated prices, and now many of them will fall underwater. Second, those that were being "saved" are merely being sentenced to increased debt servitude in order to keep our banking system solvent. So neither previous owners or new buyers have benefited from this program. The banks are obtaining a huge benefit at the expense of the government and homeowners.

Those programs surely get some credit for the uptick in home prices over the last year. The S&P/Case-Shiller index of home prices in 20 U.S. cities bottomed in April 2009 after plunging 33% from its peak in July 2006. The most recent report, for May, showed the index up 4.7% from a year earlier.

Government policy has been aimed at slowing or stopping the decline in prices, for obvious reasons: A further drop in home values would push more owners underwater, meaning their homes would be worth less than their mortgage balance. An estimated 21.5% of single-family homes with mortgages were underwater in the second quarter, down from 23% a year earlier, according to Zillow Real Estate Market Reports.

Why is that reason obvious? A further drop in prices would create more strategic default which would cause the banks more pain, but it doesn't impact homeowners, except perhaps those who are counting on HELOCs to support their lifestyles.

Our policy makers are basing their decisions on faulty assumptions. They all assume lower house prices are bad, and they aren't. Affordable housing that permits mobility of the population is a great societal benefit. Bloated house prices that drain the population of its resources and limits mobility is a curse, not a blessing.

A continuing rise in house prices would mean that more homeowners who can no longer afford their mortgages might be able to sell for enough to cover their loans, thus avoiding adding to the mountain of homes already in foreclosure. About 4.6% of all loans outstanding were in the foreclosure process at the end of June, according to the Mortgage Bankers Assn.

Yet the collapse in home sales in July suggests that prices overall are likely to begin sliding again. Despite average 30-year mortgage rates under 4.4%, many would-be buyers who can get financing must not believe that prices are attractive enough to justify taking the plunge.

Given the 4 million existing homes on the market – an inventory that could double based on the number of homes in foreclosure – buyers clearly have the upper hand now.

Dean Baker, co-director of the Center for Economic Policy and Research in Washington, believes home prices still are overvalued by 15% to 20% in many areas.

For government to stand in the way of a further price decline is unfair to the next generation of buyers, he said. "The people who get hurt the most are those who are overpaying for houses today," he said.

Is it really fair for Baby Boomers to ask the generations that follow to pay for their mistakes? Isn't that what is really happening here? The boomers bought houses, spent the appreciation, and now they are asking us to buy their overpriced homes and pay off their debts. And the buyers today will get none of the appreciation benefits that boomers enjoyed during the bubble.

Robert Shiller, co-creator of the S&P/Case-Shiller price indexes, said that although he doesn't forecast prices, "I think the scenario of declining home prices for years to come is underemphasized by people."

The NAr certainly is underemphasizing the deflation scenario. Now is a great time to buy, right?

That's an argument for allowing the housing market to hit bottom sooner, so that a genuine recovery also can begin sooner.

The risk is that another downward spiral in home prices would feed a deflationary mind-set, meaning the sense that prices for all sorts of goods, services and assets can only go lower. That could cause many consumers to severely rein in spending, leading to another recession, or worse.

That idea is rather silly. Lower house prices will result in a disparity between the cost of rents and the cost of ownership that will create an incentive for renters to buy. Deflation is only a cycle until prices drop to cashflow levels where people have a new reason to buy.

But a new decline in home values also could force the banking system, and the government, to finally deal realistically with a root cause of the economy's woes: the gigantic debt load consumers took on over the last two decades.

The Obama administration's program to persuade banks to modify troubled home loans has met with relatively little success. And few banks over the last year have been willing to take the step of permanently reducing struggling borrowers' mortgage debt to keep them in their homes.

Banks are not going to reduce principal. Once they start giving away free money, the entire banking system becomes a welfare system, and everyone will sign up for as much free money as they can get.

The initial wave of subprime mortgage foreclosures caused a torrent of losses for the financial system. Writing down millions more mortgages could cause another wave of red ink.

Christian Weller, an economist at the Center for American Progress in Washington, argues that debt reduction on a huge scale is inevitable. "Right now the pain is with the consumer," he said. "We should force the banks to take some of that pain."

Another idea, endorsed by Pimco bond guru Bill Gross, is for Fannie Mae and Freddie Mac to allow even underwater homeowners to refinance their mortgages at current low rates, reducing their monthly payments. No bank on its own would refi a home with negative equity. But the government already bears the risk of default by these borrowers on their Fannie and Freddie loans. Refinancing wouldn't raise that risk.

I may address Bill Gross's idea at length in an upcoming post. I think the idea is foolish. First, it only benefits a segment of homeowners who are locked in at higher mortgage interest rates. This idea does nothing for renters, for owners who were able to refinance because they wisely managed their debts, or for owners who purchased with low rates. Second, the cost will be paid by US taxpayers through increasing losses at the GSEs. The GSEs bought and insured these loans with expectation of a certain income stream. This money is needed to offset losses in its portfolio. If you reduce their income, you merely increase the impact of their losses. In short, it benefits a few people, many of which don't deserve it, and it costs taxpayers plenty.

Richard Green, director of USC's Lusk Center for Real Estate, suggests that lenders and the government should embrace the idea of converting troubled loans into shared-equity mortgages, which forgive a portion of a borrower's principal in return for a stake in any future equity gain when the home is sold.

Do we really want the government or banks on title with us as owners? Do you think owners are willing to split the profits in this way? Would the government have to approve any future refinancing or HELOCs to protect its interest? It think the idea is half-baked, and not very likely to produce a positive result.

All of these ideas, however, are bailouts of one sort or another. "There is no 'fair' answer here," Green concedes.

Well, there is one: Leave housing to market forces, let prices fall until buyers are motivated to come in, and hope that the economy can stand one final cathartic wave to clear the excesses of the bubble.

tom.petruno@latimes.com

Allowing house prices to fall to levels that clear the market is the only solution. Further, the government must phase itself out of the mortgage market and allow private lending to take over. Allowing house prices to fall is the easy part. Getting off the government subsidies will be much harder. In the short term, allowing house prices to fall is all we have. This fall and winter may get ugly.

Cashflow investment of a different kind

I am being facetious in my description. The owner of today's featured property regularly went to the housing ATM for withdrawals, and he withdrew much more than any true cashflow property would have provided him in rent. It is amazing that lenders allowed that, and it is even more amazing that current buyers and borrowers think lenders will do it again. In the end, this owner obtained far more money from the property than he would have obtained as a rental, but now he is losing it. Perhaps the short-term gain was worth it to him.

• This property was purchased on 10/15/1998 for $112,000. The owner used a $78,400 first mortgage, a $28,000 HELOC, and a $5,600 down payment.
• On 2/25/1999 the he refinanced with a $111,000 first mortgage and withdrew most of his down payment.
• On 8/31/1999 he obtained a stand-alone second for $15,600.
• On 11/27/1999 he refinanced the second mortgage for $40,000.
• On 5/25/2004 he refinanced with a $269,165 first mortgage.
• On 12/8/2005 he obtained a $55,000 HELOC.
• On 12/19/2006 he took out an Option ARM for $333,750 and obtained a $66,750 HELOC.
• Total property debt was $400,500. Can you believe this once appraised for that?
• Total mortgage equity withdrawal was $294,100.

Here is where the story gets strange. The owner went into default in late 2007.

Foreclosure Record

Recording Date: 05/09/2008

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 01/29/2008

Document Type: Notice of Default

According to the property records, Aurora Loan Services foreclosed on the property on 10/7/2008 for $295,680. However, later the former owner is back on title and it appears he was given a loan modification which failed.

Foreclosure Record

Recording Date: 10/23/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 07/20/2009

Document Type: Notice of Default

Foreclosure Record

Recording Date: 02/25/2009

Document Type: Notice of Rescission

It's looks like the lender worked a deal with this owner to keep him in the property and may have rescinded the trustee sale. Within months, the owner was back in default, and the property was again scheduled for foreclosure.

On 12/11/2009 the previous owner comes back on title, but then he lapses right back into default.

Foreclosure Record

Recording Date: 04/20/2010

Document Type: Notice of Sale

It looks as if the owner has been in default for the better part of 3 years. He may or may not be squatting. I don't know if the unit is still occupied, but the owner has no other address in the records which suggests he is still in there.

This guy put $5,600 into the property. He pulled out $294,100, and he has been living there without making payments for about 3 years.

When he gets his next property, how do you think he will behave?

Irvine Home Address … 86 EAGLE Pt 45 Irvine, CA 92604

Resale Home Price … $250,000

Home Purchase Price … $112,000

Home Purchase Date …. 10/15/1998

Net Gain (Loss) ………. $123,000

Percent Change ………. 109.8%

Annual Appreciation … 6.9%

Cost of Ownership

————————————————-

$250,000 ………. Asking Price

$8,750 ………. 3.5% Down FHA Financing

4.50% …………… Mortgage Interest Rate

$241,250 ………. 30-Year Mortgage

$48,859 ………. Income Requirement

$1,222 ………. Monthly Mortgage Payment

$217 ………. Property Tax

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

$21 ………. Homeowners Insurance

$350 ………. Homeowners Association Fees

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

$1,810 ………. Monthly Cash Outlays

-$112 ………. Tax Savings (% of Interest and Property Tax)

-$318 ………. Equity Hidden in Payment

$15 ………. Lost Income to Down Payment (net of taxes)

$31 ………. Maintenance and Replacement Reserves

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

$1,426 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$2,500 ………. Furnishing and Move In @1%

$2,500 ………. Closing Costs @1%

$2,413 ………… Interest Points @1% of Loan

$8,750 ………. Down Payment

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

$16,163 ………. Total Cash Costs

$21,800 ………… Emergency Cash Reserves

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

$37,963 ………. Total Savings Needed

Property Details for 86 EAGLE Pt 45 Irvine, CA 92604

——————————————————————————

Beds: 3

Baths: 2 baths

Home size: 1,088 sq ft

($230 / sq ft)

Lot Size: n/a

Year Built: 1978

Days on Market: 74

Listing Updated: 40415

MLS Number: S622690

Property Type: Condominium, Residential

Community: Woodbridge

Tract: Othr

——————————————————————————

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

great property . great location

That is a textbook example of an "I don't give a crap" description.