The shift to short sales is increasing shadow inventory. Will the liquidation be any quicker or more orderly under a short sale process? We will see.

Irvine Home Address … 2422 SCHOLARSHIP Irvine, CA 92612

Resale Home Price …… $409,000

Let's dance

Let's dance

Let's dance, put on your red shoes and dance the blues

Let's dance, to the song they're playin' on the radio

Let's sway, while colour lights up your face

Let's sway, sway through the crowd to an empty space

If you say run, I'll run with you

And if you say hide, we'll hide

David Bowie — Let's Dance

The result of the amend-extend-pretend dance is shadow inventory. Lenders cannot waive a magic wand or bury their heads in the sand and make delinquent loans disappear. People are not paying their mortgages; in fact, more people are not paying their mortgages every day. Delinquency rates are still rising with no end in site. Unemployment is often blamed, and it certainly plays a role, but astronomical delinquency rates was predicted by everyone who saw the housing bubble for what it was. People took on debt they could not afford, and with or without unemployment, delinquency rates were going to be very high.

Lenders have been playing games with foreclosure filings since 2008 when the subprime foreclosures wiped out the housing markets wherever these loans were concentrated. Once the rate of delinquency began to exceed the rate of foreclosure, we began creating shadow inventory. At first many pundits thought we could amend our way out of the problem. As I pointed out, this is merely a game of Bailouts and False Hopes. The dismal failure of the various loan modification programs surprised no one who understood the housing bubble.

The growth of shadow inventory has been steady and consistent since 2008. The current foreclosure inventory is huge, but shadow inventory is at least four-times larger. There are 3,600+ Distressed Properties in Irvine, and There are 36,000+ Distressed Properties in Orange County. As lenders shift their focus from foreclosure to short sale, shadow inventory will continue to grow unless they can pick up the pace of sales though the short-sale process.

As I pointed out in Banks Cancel Foreclosures in Shift to Short Sales… For Now:

The HAFA program pays the second mortgage holder $1,500 to go away. Most aren't taking it. Since many Orange County borrowers have assets, these second mortgage holders are demanding the sellers liquidate and pay them off before they approve the sale. In typical OC fashion, most of these sellers are unwilling to pay up. Perhaps at the lower rungs of the housing market where the borrowers have no assets, more short sales will go through, but in more affluent areas, the HAFA program is doing nothing to facilitate short sales.

Lenders and services will try to force more short sales, but their efforts will ultimately fail in the more affluent areas. Then they will need to go back to the foreclosure process to clean up this mess once and for all.

Lenders Slow Foreclosures By 5% in 2010, Boosting Shadow Inventory: RealtyTrac

Foreclosure filings dropped 5% over the first half of 2010 as lenders continue to delay proceedings to focus on short sale and loan modification efforts, according to RealtyTrac, an online foreclosure marketplace.

More than 1.6m homes received at least one filing, including default notices, auction sale notices and bank repossessions over the last six months, according to the report. That translates to one in 78 homes. Foreclosure filings remain 8% above the amount issued in the first half of last year.

James Saccacio, CEO of RealtyTrac, said at the current pace, more than 3m properties will receive a foreclosure filing by the end of the year, and lenders will repossess more than 1m of them. According to a report from the Toronto-based Capital Economics, the weight of the shadow inventory may contribute to a double dip in the housing market. The report found that for every home currently on the market, two homes are waiting to be sold.

The math is inescapable. Prime loan delinquencies have increased for 37th straight months. If foreclosures and foreclosures filings have actually decreased, that means lenders are falling farther and farther behind. That is shadow inventory: houses where the owners are delinquent but no filings have been made.

“The roller coaster pattern of foreclosure activity over the past 12 months demonstrates that while the foreclosure problem is being managed on the surface, a massive number of distressed properties and underwater loans continues to sit just below the surface, threatening the fragile stability of the housing market,” Saccacio said.

Foreclosure filings decreased 3% in June after another 3% drop in April. It’s the third straight month of declines. Foreclosure filings were down 7% from June 2009. Despite the recent downward swing, June marked the 16th straight month of more than 300,000 filings.

For the second quarter of 2010, foreclosures dropped 4% from Q110 and remained 1% above Q209. As default and auction notices fell, REOs increased 5% from the last quarter and 38% from Q209. It’s the most REOs measured in a quarter since RealtyTrac began publishing the reports in January 2005.

“The second quarter was a tale of two trends,” Saccacio said. “The pace of properties entering foreclosure slowed as lenders pre-empted or delayed foreclosure proceedings on delinquent properties with more aggressive short sale and loan modification initiatives. Meanwhile the pace of properties completing the foreclosure process through bank repossession quickened as lenders cleared out a backlog of distressed inventory delayed by foreclosure prevention efforts in 2009.”

Nevada continued to hold the highest foreclosure rate in the country. Nearly 6% of all Nevada properties, which equals one in 17 homes, received at least one filing in the first half of 2010.

Arizona holds the second highest. There, 3.36% of its units received a filing, equaling one in 30 homes. Florida was third with 3.15%.

More than 340,000 properties in California received a filing in the first half of 2010, the state holds the highest foreclosure volume. Florida was second with more than 277,000 properties.

I recently spoke with a VP at a major title company who told me that the FDIC is pressuring servicers to shift from foreclosure to short sales. Those servicers who want to dispose of FDIC properties need to have a ratio of foreclosures to short sales that strongly favors short sales. Since a short sale requires a cooperative owner, loan servicers are working on their outreach programs to get more owners vested in the process. The properties that are abandoned for various reasons will end up as foreclosures, but lenders and servicers are now doing all they can to increase the number of short sales.

The argument in favor of short sales is simple: the asset recovery is better. If a property goes to auction, it needs to be discounted by 20% to attract all-cash buyers. If the property can be sold at short sale, this 20% is recovered by the bank — at least in theory. In reality, if the loan sits on the lender's books for another six months of missed payments while the parties bicker and the borrower hides assets, the amount recovered isn't any larger than if foreclosure had occurred in a timely fashion. However, since the FDIC is not accounting for the lost payments, and since they don't want to expedite the liquidation and lower home prices, opting for the longer short-sale process makes perfect sense — to them.

A crushing lender loss

Today's featured property was purchased by the original owner on 2/23/2006 for 623,000. The owner used a $497,600 first mortgage, a $62,200 second mortgage, and a $63,200 down payment. My data service does not have the information on when this owner when delinquent. The property was purchased at auction on 6/17/2010 for $321,000. The opening bid was only $225,500, but the property was bid up from there. The auction price is nearly 50% off the original purchase price. The second mortgage holder was wiped out along with the owner's down payment.

The flipper will make a substantial profit if he can get asking price. It isn't likely much was spent on renovation as these are new stacked-flats in a large condo building. A nearly 20% profit turned over in less than 60 days makes for a great annualized return.

If you would like to learn how you can get involved with trustee sales, please contact me at sales@idealhomebrokers.com.

Irvine Home Address … 2422 SCHOLARSHIP Irvine, CA 92612

Resale Home Price … $409,000

Home Purchase Price … $321,000

Home Purchase Date …. 6/17/2010

Net Gain (Loss) ………. $63,460

Percent Change ………. 19.8%

Annual Appreciation … 329.0%

Cost of Ownership

————————————————-

$409,000 ………. Asking Price

$14,315 ………. 3.5% Down FHA Financing

4.59% …………… Mortgage Interest Rate

$394,685 ………. 30-Year Mortgage

$80,779 ………. Income Requirement

$2,021 ………. Monthly Mortgage Payment

$354 ………. Property Tax

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

$34 ………. Homeowners Insurance

$451 ………. Homeowners Association Fees

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

$2,861 ………. Monthly Cash Outlays

-$326 ………. Tax Savings (% of Interest and Property Tax)

-$511 ………. Equity Hidden in Payment

$25 ………. Lost Income to Down Payment (net of taxes)

$51 ………. Maintenance and Replacement Reserves

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

$2,099 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$4,090 ………. Furnishing and Move In @1%

$4,090 ………. Closing Costs @1%

$3,947 ………… Interest Points @1% of Loan

$14,315 ………. Down Payment

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

$26,442 ………. Total Cash Costs

$32,100 ………… Emergency Cash Reserves

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

$58,542 ………. Total Savings Needed

Property Details for 2422 SCHOLARSHIP Irvine, CA 92612

——————————————————————————

Beds: 2

Baths: 2 baths

Home size: 1,260 sq ft

($325 / sq ft)

Lot Size: n/a

Year Built: 2005

Days on Market: 16

Listing Updated: 40367

MLS Number: S623000

Property Type: Condominium, Residential

Community: Airport Area

Tract: Ave1

——————————————————————————

A gorgeous top floor (4th) unit in the exclusive Avenue One Community !!! 2 bedrooms, 2 baths with a loft Open to Living Area Below. High Ceiling in the living room. No one above. Open and functional floorplan. Grourment Kitchen with granite countertops stainless steel appliances. Elegant Clubhouse and superb onsite amenities including a comfortable lounge w/plasma TV , fitness center, pool tables, indoor basketball court, pool and Jacuzzi. Located at the heart of commerce and entertainment in Irvine. Close to shopping, museums, theaters. Easy access to 405. A truly exclusive home!

Grourment?

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

House prices have crashed in many markets but banks have barely begun the process of writing down their bad loans.

Irvine Home Address … 6 INDIANA Irvine, CA 92606

Resale Home Price …… $999,000

Celebrate the day you've waited for

Party like you're ready for so much more

Do it like you know it's never been done

Go a little crazy, have too much fun

Today's the day, come on everyone

The party's just begun

The Cheetah Girls — The Party's Just Begun

The big mortgage write down party has just begun. Banks have barely scratched the surface on the total dollar value of loans they will need to write off.

The housing bubble was really a credit bubble. Lenders extended far too much credit to people who had no ability to repay it. When the housing market crashed, lenders were in no rush to write their loans down to market value. The result is a huge remaining bubble in home mortgages.

Many lenders honestly believe house prices will rise back to levels that will eliminate the negative equity problem. This is wishful thinking on a grand scale. In reality, the overhang of distressed properties will keep price appreciation in check for quite some time. The mortgage bubble will be deflated by a combination of short sales and foreclosures — many facilitated by accelerated default — causing lenders to write down the mortgage debt to reach market values.

Mortgage Bubble Haunts Housing Recovery

By Lita Epstein Jul 20th 2010

You may not realize it, but there's another major financial bubble ready to burst. Few are talking about it, but Michael David White, a mortgage and real estate professional has graphed the mortgage bubble due to burst.

When the housing bubble burst, it left many with underwater mortgages. Yet nothing was done to deal with the debt levels on these homes. The mortgage values shown on the banks' books are still elevated beyond their true worth.

Right now we're seeing more and more people walk away from this debt. While property values fell from $20 trillion to $13 trillion when the housing bubble burst. Mortgages fell from $11.95 trillion to $11.68 trillion.

John Lounsbury, a financial and investment adviser, says home equity is now over 90 percent mortgaged. Historically our mortgage levels were 50 to 60 percent. He agrees with White that we're in a mortgage bubble that is ready to burst. In order to get back to the normal historic relationship, Lounsbury says "outstanding mortgage values would need to be about $7 trillion, which is $5 trillion below the latest level."

He says, "Banks are looking to resolve this bubble by waiting for mortgage repayment and for house prices to rise." He calls this the "extend and pretend" mode. The big question is: Will people continue to pay these mortgages as they wait for homes to rise enough in price to get back above water. In some of the hardest-hit areas that could take 10 to 20 years or longer.

There is no way borrowers are going to wait that long. Most can't. Do you think people will remain immobilized through 2025 for a decision they made in 2005? No way. When it becomes apparent house prices are not coming back, people will give up hope and walk away. Look for the double dip to crush the feeble hopes of those who haven't accelerated their inevitable defaults.

The Business Insider focused on the 15 hardest hit areas, with Nevada leading the pack. In Nevada, 69.9 percent of mortgages are underwater. Arizona comes in second with 51.3 percent of mortgages underwater, and Florida is third with 47.8 percent.

Based on mortgage debt, we're becoming a country of haves and have-nots. Those stuck in homes underwater cannot move to find work in another location, even if there's no work where their home is located. Without jobs, they may have no choice but to walk away or work with their bank for a deed-in-lieu of foreclosure. In many cases, these homes are so far underwater that banks won't agree to short sales.

As more and more people realize that they have no choice but to give up their homes, the mortgage bubble will deflate. The only question left is whether the bubble will burst rapidly or continue to deflate slowly as foreclosures are resolved.

I do think the mortgage bubble will deflate slowly. Lenders are being allowed to use mark-to-fantasy accounting, so there is no regulator pressure to write down the loan balances. Also, denial is a basic human reaction to catastrophe, and borrowers will surrender and capitulate at different rates. The brief bear rally we just witnessed will give false hope to many who will hang on for a few more payments.

But Lounsbury thinks that some areas of the country that have not yet been hard hit by the housing meltdown are ripe for problems. For example, he thinks the New York area is a bubble waiting to happen. In fact, Keith Jurow of the Real Estate Channel thinks a housing collapse in Queens is almost certain.

IMO, you can add coastal California to that list. I still believe the high end is going to be wiped out. There are no government supports for the jumbo loan market, and very few people can afford the large number of homes priced in that range.

As the housing bubble continues to deflate in areas that right now are not among the hardest hit, will that finally cause the mortgage bubble to burst? Will the banks be able to withstand these shocks or are we looking at another bank bailout?

Based on some reports, the banks may have pushed the worst of these mortgages onto Fannie Mae and Freddie Mac, leaving the taxpayers holding the bag for this next bubble burst. So the big question is not whether there's a mortgage bubble, but who will be left holding the bag when it bursts.

There is no question that we will engineer another bailout for the banks if the mortgage bubble deflates too quickly. Whatever losses cannot be pushed off to the taxpayer through the GSEs will become part of another massive bailout. Either that, or we will print money until the problem goes away.

The $4 Trillion Dollar Question

By Barry Ritholtz – July 15th, 2010

The US has built far too many houses

Perhaps homeowners suffering negative equity are patiently expecting house prices to rise again. But they may be in for a long wait. Prices are likely to be weighed down by a massive oversupply of homes relative to underlying demographic demand.

Between 2002 and 2006, US homebuilders went on a construction binge, building 12 million new homes while the number of households went up by just 7 million. The painful legacy is a massive oversupply of houses relative to the number of households.

The oversupply will take years to clear

With household formation running at just 0.9 million while the US is still building 0.6 million new homes annually, only 0.3 million of the oversupply will be absorbed per year. As there are currently 4 million too many homes, it may take years to mop up the huge oversupply of houses.

The negative equity problem and excess inventory will put pressure on the government to continue to subsidize mortgage interest rates. If interest rates rise and prices resume their downward slide, more people will opt for accelerated default causing the mortgage bubble to finally deflate.

Like foolish buyers during the housing bubble, banks really have no plan B. They are in amend-extend-pretend mode for the long haul. They can't afford to lose $4,000,000,000,000, yet that is what they must do. Perhaps they can extend it long enough to only lose $2,000,000,000,000? The banks have much pain ahead.

Peak buyer walks away

This property was purchased on 10/4/2006 for $1,150,000 the owner used a $805,000 first mortgage, a $115,000 stand-alone second, and a $230,000 down payment which was lost at auction. This property was pushed through the foreclosure process in about a year, so this owner did not get as much squatting time as others.

Foreclosure Record

Recording Date: 11/12/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 07/22/2009

Document Type: Notice of Default

In a last minute attempt to record an interest in the property, there was a loan for $10,500 recorded three days before the trustee sale. I don't know what they were hoping to accomplish as the first lien holder blew them out at trustee sale. This property, like many other trustee sale flips I profile, was purchased by Palladio Properties LLC, a fund very active in the Irvine market.

The property was auctioned on 4/5/2010 for $814,000. The opening bid was $751,500. After sales commissions and preparation for sale, Palladio Properties LLC will probably make about a 12% profit on this deal.

If you would like to learn how you can get involved with trustee sales, please contact me at sales@idealhomebrokers.com.

Irvine Home Address … 6 INDIANA Irvine, CA 92606

Resale Home Price … $999,000

Home Purchase Price … $814,000

Home Purchase Date …. 4/5/2010

Net Gain (Loss) ………. $125,060

Percent Change ………. 15.4%

Annual Appreciation … 63.0%

Cost of Ownership

————————————————-

$999,000 ………. Asking Price

$199,800 ………. 20% Down Conventional

4.59% …………… Mortgage Interest Rate

$799,200 ………. 30-Year Mortgage

$197,306 ………. Income Requirement

$4,092 ………. Monthly Mortgage Payment

$866 ………. Property Tax

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

$83 ………. Homeowners Insurance

$116 ………. Homeowners Association Fees

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

$5,157 ………. Monthly Cash Outlays

-$981 ………. Tax Savings (% of Interest and Property Tax)

-$1035 ………. Equity Hidden in Payment

$343 ………. Lost Income to Down Payment (net of taxes)

$125 ………. Maintenance and Replacement Reserves

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

$3,609 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$9,990 ………. Furnishing and Move In @1%

$9,990 ………. Closing Costs @1%

$7,992 ………… Interest Points @1% of Loan

$199,800 ………. Down Payment

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

$227,772 ………. Total Cash Costs

$55,300 ………… Emergency Cash Reserves

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

$283,072 ………. Total Savings Needed

Property Details for 6 INDIANA Irvine, CA 92606

——————————————————————————

Beds: 5

Baths: 2 full 1 part baths

Home size: 3,471 sq ft

($288 / sq ft)

Lot Size: 8,100 sq ft

Year Built: 1998

Days on Market: 82

Listing Updated: 40355

MLS Number: S614610

Property Type: Single Family, Residential

Community: Walnut

Tract: Camb

——————————————————————————

Large Beautiful Home in Harvard Square Gated Community. 5BR & 3BA with Large Bonus Room. 3 Fireplaces decorated with Marble. Plantation Shutters, Crown Moldings & Recessed Lights Through out. Upgraded Porcelain Tile & Hardwood Flooring. Granite Countertop & Walk-in Pantry in Kitchen. New Stainless Steel Appliances Installed.