Reconveyance Fee Rights: Long-Term Equity Theft by Real Estate Developers

Developers are embracing a new reconveyance fee designed to strip sellers of their equity for the next 100 years.

Today's featured property has fully recovered to peak pricing… NOT!

Irvine Home Address … 79 EDGEWOOD Irvine, CA 92618

Resale Home Price …… $699,000

{book1}

I want your ugly

I want your disease

I want your everything

As long as it’s free

I want your horror

I want your design

‘Cause you’re a criminal

Lady Gaga — Bad Romance

It is human nature to want everything, and if you can get it for free, that makes it even better. There is a program where developers extract free money from houses they build over the next 100 years. Well, it isn't exactly free: it comes out of seller's equity. It is a great deal for developers. For sellers, not so much.

Most of my professional life, I have worked with real estate developers. I spent almost 20 years acting as a project manager, developer representative, and most recently as a land planner. I have worked closely with brilliant and very wealthy individuals. I am fortunate to work with men I admire; although, I have witnessed the actions of many I do not.

Developers are primarily motivated by money, and if there is a method for squeezing a few extra dollars out of real estate, most developers will embrace it. In fact, my livelihood depends on my ability to help developers create, find, and obtain the value in their land. Adding and extracting value has societal benefit, but not every tool available to developers benefits society, and some exist only to enrich developers. Mello Roos is a classic example in California of a financing racket that enriches developers. The latest scam in the development world is called Reconveyance Fee Rights.

Community Facilities District Act enriches developers

According to Wikipedia:

A Mello-Roos District is an area where a special property tax on real estate, in addition to the normal property tax, is imposed on those real property owners within a Community Facilities District. These districts seek public financing through the sale of bonds for the purpose of financing public improvements and services.[2] These services may include streets, water, sewage and drainage, electricity, infrastructure, schools, parks and police protection to newly developing areas. The tax paid is used to make the payments of principal and interest on the bonds.

When a homebuyer in California purchases a property, most believe they have completely paid for the house. Not so. Instead of building subdivisions with their own money, real estate developers float bonds to pay for the improvements, and buyers pay for these improvements through their tax bills as a special levy. What should be an expense of doing business borne by the developer instead gets passed on to the consumer.

Imagine you purchased a new Ford. After you buy you find out the tires were not paid for as part of the car, and you will have an additional payment for the tires separate from any payments you may have for the car. That is what happens to homebuyers when they purchase in a neighborhood with Mello Roos — and nearly every neighborhood built since 1982 either has or had Mello Roos fees attached to them.

Revenues from Community Facility District bonds serve to make marginal project feasible, and as long as owners realize they have a large tax liability, then I see no real harm in the legislation. It is a big bonus to developers, but there are so many special tax breaks given out for dubious reasons that this one sinks into the morass and generates little outrage.

Reconveyance Fee Rights

A group of entrepreneurs has put together a gross ripoff of future homeowners by leaching seller equity. From the Freehold Capital Partners' website:

Simply put, a Reconveyance Fee Instrument represents the right to receive 1% of the gross sales price each time a particular piece of real estate property sells. These rights represent a valuable, fully collateralized long-term income stream with no risk of default.

realtor commissions are too high, but at least realtors participate in the transaction and provide some justification for the piece of seller equity they get at closing. No such justification exists for what Freehold Capital Partners is proposing. It is simply theft.

A new real estate cost to watch for: Developer's private transfer fee

Kenneth R. Harney

Saturday, March 6, 2010

How about this for a new and ingenious real estate money machine? Every time a house sells during the next 99 years, 1 percent of the price goes back to the original developer or is shared among investor partners. Ka-ching!

The levy won't be subject to haggling between future buyers and sellers, either. That's because it's a covenanted mandate — a novel type of lien on the underlying real estate — called a private transfer fee. It's not a government transfer tax. Nor is it a homeowner association or environmental protection covenant. It's purely a private requirement that runs with the land. If a seller refuses to pay it to a third-party trustee at closing, the sale won't proceed.

It isn't something a seller can fight because no party at the closing table can negotiate. The seller's choices are (1) pay the fee, or (2) don't sell the house. I suppose they could try to sue some asset-backed security holder somewhere, but how far do you think that will get?

Guess who doesn't like this idea?

The National Association of Realtors and the American Land Title Association, for example, are asking their members to persuade legislators to prohibit or limit the use of investor-oriented private-transfer-fee programs. Even the National Association of Home Builders, some of whose members reportedly have signed up to participate in the transfer fee program, isn't convinced that the idea is sound.

"It's a very creative concept," said David Ledford, the builder association's senior vice president for housing finance, "but it's largely untested and controversial politically."

realtors hate the idea for obvious reasons: they don't want anyone else in the seller's wallet at closing because it draws undo attention to how much they are getting. The National Association of Home Builders doesn't like the idea, partly because they see it for the fraud it is, and partly because they know the inevitable lawsuits will mostly be directed toward its members.

For its part, Freehold maintains that its transfer-fee covenants are good for consumers and good for cash-strapped builders. Curtis Campbell, a spokesman for the firm, said in an e-mail that "private transfer fees represent an adaptation in how to pay for development costs" incurred by builders "at a time when funding is not available" to them on "reasonable terms."

Did you giggle when you read that? I did. I can tell you from personal observation that builders have no shortage of capital available to them right now. Most builders have restructured their debt, and they have plenty of cash on hand which they are currently using to buy up land.

By creating future revenue streams — which builders can monetize upfront by selling to investors — the plan allows developers to sell houses for lower prices than they otherwise could, Campbell said.

OK, that one isn't funny, that lie is so offensive it makes me angry. Mr. Campbell is insinuating that customers may actually benefit from this practice with lower prices. No way. The builder is going to sell the house at market, and a transfer fee is not going to create conditions where buyers get bargains from builders.

There is no rational justification for this fee. It is only being charged because they think they can get away with it. The facts are obvious, and the feeble rationalizations are laughably stupid.

Developers Embrace New 'Flip Tax'

By Charles Feldman

And as if we haven't learned a lesson about slice-and-dice packaging of mortgages, Freehold Capital apparently wants to "securitize" pools of transfer fees that can then be spun off and sold to investors.

Yes, let's bring in all the complicated issues of securitization. That way, when this all blows up, the syndicators will already have their money and the government can step in and bail everyone out.

Will cooler heads prevail? Will the legislatures around the country strike this one down?

Now this is, as you might imagine, controversial. So much so, some states have apparently either limited or banned these "private transfer fees." OK, I should have known you'd want to know which ones: Kansas, Oregon, Florida and Missouri, just plain ban the practice, according to the paper, while Texas and California have some restrictions on it.

But most states do not address the issue of these fees at all, so it is something you the potential home buyer should look for before signing a contract for a new home. That's vital because the fees (which are paid by the seller) are not subject to negotiation. If you end up selling a house one day that has one of these private transfer fee deals attached to it, you either pay a trustee at closing or, sorry, no sale!

Developers think this is a swell concept because they can, over years, get back some of the initial upfront costs of the project without having to have the first buyer of the property cough up the entire amount. However, others argue that, in the long run, homes with transfer fees attached will actually become more difficult to sell, which, if you happen to be the current homeowner, is not such a good thing!

If you think you may be able to fight this in court someday, think again. Not so easy, apparently.

On the PR Newswire this past weekend, one expert on private transfer fees delivered a commentary of sorts. Says attorney RJon Robins, a member of the Florida Bar's Real Property, Probate & Trust Law Section, "…absent a specific statutory prohibition, a well-crafted private transfer fee covenant will likely be enforceable, particularly when undertaken in connection with a real estate development project."

So how long before the Irvine Company does this on the Ranch? Should you buy now before they figure out they can get a piece of your equity as well? Perhaps the California restrictions prevent them, or perhaps they recognize this fee for the theft it is and don't want to participate. I hope it's the latter.

Irvine Home Address … 79 EDGEWOOD Irvine, CA 92618

Resale Home Price … $699,000

Home Purchase Price … $650,000

Home Purchase Date …. 6/7/2006

Net Gain (Loss) ………. $7,060

Percent Change ………. 7.5%

Annual Appreciation … 1.8%

Cost of Ownership

————————————————-

$699,000 ………. Asking Price

$139,800 ………. 20% Down Conventional

5.00% …………… Mortgage Interest Rate

$559,200 ………. 30-Year Mortgage

$144,735 ………. Income Requirement

$3,002 ………. Monthly Mortgage Payment

$606 ………. Property Tax

$225 ………. Special Taxes and Levies (Mello Roos)

$58 ………. Homeowners Insurance

$139 ………. Homeowners Association Fees

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

$4,030 ………. Monthly Cash Outlays

-$734 ………. Tax Savings (% of Interest and Property Tax)

-$672 ………. Equity Hidden in Payment

$272 ………. Lost Income to Down Payment (net of taxes)

$87 ………. Maintenance and Replacement Reserves

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

$2,983 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$6,990 ………. Furnishing and Move In @1%

$6,990 ………. Closing Costs @1%

$5,592 ………… Interest Points @1% of Loan

$139,800 ………. Down Payment

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

$159,372 ………. Total Cash Costs

$45,700 ………… Emergency Cash Reserves

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

$205,072 ………. Total Savings Needed

Property Details for 79 EDGEWOOD Irvine, CA 92618

——————————————————————————

3 Beds

2 full 1 part baths Baths

1,650 sq ft Home size

($424 / sq ft)

4,444 sq ft Lot Size

Year Built 2000

2 Days on Market

MLS Number S608565

Single Family, Residential Property Type

Oak Creek Community

Tract Kell

——————————————————————————

Darling home located in desirable Oakcreek in the gated community of Kelsey Lane*3 spacious bedrooms, 2.5 baths*Popular style great room w/open living, dining & kitchen*Living/family room has upgraded brick fireplace w/battenboard detail & white mantel & is wired for surround sound*Dining room is large w/plenty of space for a computer niche*Spacious white on white kitchen has thermafoil cabinets w/high-end knobs, tile countertops, large pantry, center island, new faucet & dishwasher*Lovely master bedroom w/distrelled wood floor & bath w/tub & stall shower, double sinks, walk-in closet*Large secondary bedrooms*Features include Pergo-style pine flooring, newer high quality Berber carpet, white plantation shutters, crown molding, designer paint*Beautiful backyard w/large outdoor entertaining area w/bbq, large bar w/seating, firepit, raised beds, & extra-large grassy sideyard perfect for a swingset*Garage has lots of cabinets & epoxy floor*Walk to pool,spa,tennis & school too

Another writer who confuses asterisks for periods. This punctuation is working its way into realtorspeak.

Past the bubble peak?

This owner has priced this property to get out at breakeven — a property purchased at the peak of the bubble. WTF? Have we so restricted inventory and pimped interest rates that sellers can get prices higher than 2006?

What do you see?

This owner likes the color green and working out.

Is it creepy to have pictures of sexy dead people over a headboard (the image is Marilyn Monroe)? When would you look at this picture and under what circumstances?

Is this place small, or is the furniture too large?

Can anyone identify what is in the washer?

Is that like Jesus Toast or Virgin Mary Grilled Cheese?

The Housing Bubble – Part 2

The Housing Bubble

Affordability Limits

Affordability is a measure of people’s ability to raise money to obtain real estate. It is often represented as an index that compares the cost to finance a median house price to the percentage of the general population with the income to support this house price. For instance, in Orange County, California, in 2006, only 2.4% of the population earned enough money to afford a median priced home. When affordability drops below 50%, there is a problem in housing; when it drops to 2.4% there is either a severe shortage of housing, or a housing price bubble. Most often, it is the latter.

Figure 23: Affordability / Demand

One way to envision affordability is through supply and demand diagrams like those found in introductory economics textbooks. Affordability is the demand curve. There are a small number of buyers who can afford very high prices, and many buyers who can afford very low prices. There is a limit to how high buyers can push prices. This limit is usually determined by lenders who provide the bulk of the money for real estate transactions. During the Great Housing Bubble, these limits were nearly eliminated. In terms of the demand curve, the loose credit standards and low interest rates shifted the demand curve dramatically to the right. Thus many more people were enabled to buy and they were able to do so at much higher prices. In bubble markets, once prices started to rise, they were bid up to levels where affordability was at record lows by historical measures. In a number of other markets, 2005 and 2006 were not the least affordable years in recent history. Markets not historically prone to bubble behavior might have a population which is decreasing (like Detroit,) steady (like Chicago,) or increasing rapidly (like Dallas). In fact, changes in population has very little to do with housing affordability in a particular city.

The expansion of credit took four forms: lower interest rates, lowering or eliminating qualification requirements, different amortization methods, and higher allowable debt-to-income ratios. Lower interest rates expand credit by allowing larger sums to be borrowed with the same payment amount. In 2000, the interest rate on a 30-year mortgage was 8.05%, and in 2003, it was 5.83%. This reduction in interest rates accounts for 20% to 50% of the increase in house prices experienced during the bubble. Subprime lending is an oft-cited example of lowering qualification requirements, but many loan programs included limited documentation that also allowed people with good credit to purchase multiple properties with little or no money down and no real ability to make the payments. Credit was also expanded by borrowers utilizing risky financing options including interest-only and negative amortization. Interest-only loans artificially “add” affordability to the market because it allows for larger sums of money to be borrowed with lower payments. The final component of credit expansion was a willingness of borrowers to take on larger debt-service payments as evidenced by increasing debt-to-income ratios. All of these factors also helped speculators. The acquisition and carrying costs of a speculative flip was greatly reduced. More people were eligible to speculate, and with rapidly rising prices, more people wanted to do so.

Table 7: Interest Rates and House Values

$ 244,900

National Median Home Price

$ 47,423

National Median Income

$ 3,952

National Monthly Median Income

28.0%

Debt-To-Income Ratio

$ 1,106.54

Monthly Payment

Interest Rate

Loan Amount

Value

Value Change

4.5%

$ 218,387

$ 272,984

145%

5.0%

$ 206,127

$ 257,659

137%

5.5%

$ 194,885

$ 243,606

129%

6.0%

$ 184,561

$ 230,701

122%

6.4%

$ 177,046

$ 221,307

117%

7.0%

$ 166,321

$ 207,901

110%

7.5%

$ 158,254

$ 197,818

105%

8.0%

$ 150,803

$ 188,503

100%

8.5%

$ 143,909

$ 179,886

95%

9.0%

$ 137,522

$ 171,903

91%

9.5%

$ 131,597

$ 164,496

87%

10.0%

$ 126,091

$ 157,613

84%

Note: The decline in interest rates from 8.05% to 5.83% explains about half of the national bubble.

Nationally, prices during the bubble rally increased by 45%. About half of this increase was due to lower interest rates. However, in the markets most prone to irrational exuberance, prices increased much more than the change in interest rates can explain. These markets also saw a large increase in the use of exotic financing and major increases in debt-to-income ratios utilized by many borrowers. For example, the median household income in Irvine in 2006 was $83,891. Applying a 28% DTI leaves a payment of $1,957. Interest rates at the time were about 6.5%; a payment of $1,957 on a fixed-rate 30-year mortgage at 6.5% would finance $309,691. Short-term adjustable rate mortgages carry lower interest rates than long-term fixed rate mortgages because the lenders have less interest rate risk exposure. The same $1,957 payment on a 5-year ARM at 5.5% would finance $427,081. The interest-only loan terms allows borrowers to increase their loans by 25% thus artificially increasing prices by 25%.

Table 8: Financing Terms and Conditions in Irvine, CA, 2006

$ 722,928

Irvine Median Home Price

$ 83,891

Irvine Median Income

$ 6,991

Monthly Median Income

6.5%

Interest Rate on 30-Year Fixed-Rate Mortgage

5.5%

Interest Rate on 5-Year ARM

3.8%

Payment Rate on Option ARM

Payment

DTI Ratio

30-Year Fixed

Interest Only

Negative Am.*

$ 1,678

24.0%

$ 265,449

$ 366,070

$ 529,838

$ 1,957

28.0%

$ 309,691

$ 427,081

$ 618,144

$ 2,237

32.0%

$ 353,932

$ 488,093

$ 706,451

$ 2,517

36.0%

$ 398,174

$ 549,105

$ 794,757

$ 2,796

40.0%

$ 442,415

$ 610,116

$ 883,063

$ 3,076

44.0%

$ 486,657

$ 671,128

$ 971,369

$ 3,356

48.0%

$ 530,899

$ 732,140

$ 1,059,676

$ 3,635

52.0%

$ 575,140

$ 793,151

$ 1,147,982

$ 3,915

56.0%

$ 619,382

$ 854,163

$ 1,236,288

$ 4,195

60.0%

$ 663,623

$ 915,175

$ 1,324,595

$ 4,474

64.0%

$ 707,865

$ 976,186

$ 1,412,901

* Negative Amortization loans (AKA Option ARM)

The most important single factor in the expansion of credit was the negative amortization loan, also known as the Option ARM. The payment rates on Option ARMs differ widely, but for the sake of this calculation, assume a 3.8% teaser rate (they were as low as 1 %). The $1,957 payment finances $309,691 with a Conventional mortgage, $427,081 with an Interest-Only mortgage, and a whopping $618,144 with Negative Amortization. Stop for a moment and ponder the math: the same payment now finances 100% more money. Is it any wonder the real estate in bubble markets like Irvine, California, were 100% overvalued at the top? People purchasing with Option ARMs were buying at the rental equivalent monthly cashflow–at least for a while. From a financing perspective, the market was not overvalued. People were paying exactly what they should have been paying. They were just doing it with loan terms which were going to destroy them–hence the terms “toxic financing” and “suicide loan.” This point cannot be overemphasized–Negative Amortization loans inflated the Great Housing Bubble. If this loan product had not been offered and aggressively pushed by lenders, the bubble would not have inflated to the degree that it did.

Figure 24: Market Rally Supply and Demand

The supply curve is the opposite of the demand curve: sellers will make very few units available at low prices, and sellers will make a great many available at higher prices. Wherever these two curves meet is where supply and demand are in balance and market transactions are taking place. In the initial stages of a market rally both transaction volumes and prices are increasing rapidly. In states with a cumbersome entitlement process like California or in the Northeastern part of the country, delays in bringing supply to the market exacerbates the initial price increase and ignites the speculative frenzy. During the Great Housing Bubble, an increase in demand was caused by a dramatic expansion of lending and credit. As a price rally matures sellers become reluctant to sell because the asset they own is appreciating rapidly, and they do not want to miss the opportunity to profit further. This limits the supply on the market. In terms of the supply and demand diagram, this shifts the supply curve to the left which pushes the balance between supply and demand to a higher price point. The demand curve shifts to the right from the increased liquidity of the lending environment and the supply curve shifts to the left because of seller reluctance; the intersection of these two lines moves prices markedly higher. However, once these two forces come into balance, their intersection is at a point of low transaction volume. There are fewer buyers who can afford the higher prices, so transaction volumes fall. [1]

The first sign of a troubled real estate market is a dramatic reduction in volume known as buyer exhaustion. There are simply not enough buyers able or willing to push prices any higher even at the lower transaction volumes. In a residential real estate market, this phenomenon is particularly pronounced at the entry level. The imbalance between supply and demand first becomes apparent at the bottom of the affordability scale with entry-level buyers because these buyers are not bringing the profits from a previous sale with them to the next property. Affordability is less of a problem for existing homeowners in the move-up market due to this equity transfer.

Figure 25: The Housing Market Pyramid

The real estate market can be visualized as a massive pyramid. There are very few multi-million dollar properties at the top of the pyramid, and a large number of relatively inexpensive entry-level properties forming the base. Like any structure, if the foundation is weakened, the structure may collapse. In the same way, housing markets collapse from the bottom up due to problems with affordability. The foundation of a residential real estate market is the entry-level buyer. Entry-level buyers are generally young people starting to form new households. When homeowners want to sell their house and move up to a nicer one, someone needs to buy their house. If you follow this chain of move-ups backward, eventually you come to an entry level buyer. If there are no entry level buyers pushing the sequence of move ups, the entire real estate market ceases to function. The entry level market was initially boosted the moment 100% financing became available because many more people were enabled to purchase; however, it was imperiled at the same time because of the change in savings incentives. This market was subsequently destroyed the moment 100% financing was eliminated because few entry-level buyers had a downpayment and very few people were in the process of saving to get one. In the past, people would rent and save money until they had the requisite downpayment to acquire a house. The barrier to home ownership was not the ability to make payments; it was having the necessary downpayment money. When downpayment requirements go up, the number of people capable of buying a house declines considerably, particularly for entry-level buyers who must save this money rather than transfer it from a previous sale. Since few potential entry-level buyers were saving money during the rally, sales volumes suffered dramatically in the wake of the bursting real estate bubble.

Figure 26: Affordability Limit

Affordability is the ultimate limit of any asset bubble. If prices are so high that no buyer can afford them, there are no transactions and thereby no market. The fear of many buyers in a financial mania is that prices will remain elevated to the absolute limit of affordability permanently. People who have this fear will put every available resource into getting a house before this happens. This becomes a self-fulfilling prophecy as prices get bid higher and higher by fearful buyers. If prices were to remain at the upper limit of affordability for a long period of time, the rate of price increase would slow dramatically until it only matched the rate of wage growth and inflation because prices could only rise if people had income gains they could use to bid prices up further. If the rate of house appreciation slows down to where it only matches inflation, it fails to have significant investment value. Money would generate much greater returns if invested in other asset classes. During the Great Housing Bubble, certain of the most inflated markets saw prices more than double their rental equivalent value. This significant additional monthly cost provides an economic return while prices are increasing rapidly, but once the rate of price increase slows, the additional “investment” is not providing sufficient returns to justify the use of capital. If price increases do not provide an investment return, many who bought in anticipation of that investment return will decide to sell the asset in order to put their money toward more productive uses. This selling slows the rate of appreciation even further. Also, if prices are not rising in excess of inflation, there is little financial incentive to buy because when affordability is very low, it is much less expensive to rent. If there is no financial incentive to pay more than the cost of rent, people stop buying. The additional selling pressure from those no longer obtaining a return on their investment combined with the diminished buying enthusiasm for the same reason plus the presence of a low-cost substitute (rental,) stops prices from rising and eventually causes a price decline. Once prices start declining, the incentives are even more negative, and prices fall back to levels where they are affordable again.

As prices begin to fall, lenders become more conservative. They do not loan large percentages of the value on a depreciating asset because they do not want to have the loan balance exceed the resale value of the house since the only assurance banks have for getting their money back is the collateral value. Prior to the Great Housing Bubble, lenders demanded 20% down payments to give them a cushion if values declined and they limited debt-to-income ratios to 28% to make sure the borrowers could afford to pay them back. When house values start declining, lenders require more cushion to protect their investments. The demand from lenders for larger downpayments to protect themselves reduces the number of buyers in the market because less people meet the more stringent requirement. Fewer buyers causes even lower prices and a downward spiral of tightening credit. This continues unabated until 20% down payments are the norm, and debt-to-income ratios fall back to their historically “safe” levels for banks (28%).

[1] Praveen Kujal and Vernon L. Smith noted in The Endowment Effect (Kujal & Smith, The Endowment Effect, 1991) that even small changes in the bid/ask spread results in a large decline in transaction volume.

IHB News 3-13-2010

Is the number 8 so lucky that you would overpay just to spend $888,888?

Irvine Home Address … 1 RAMADA Irvine, CA 92620

Resale Home Price …… $888,888

{book1}

Hold me, love me, hold me, love me.

I ain't got nothin' but love babe,

Eight days a week,

Eight days a week,

Eight days a week.

The Beatles — Eight Days a Week

IHB News

Shevy's brother, Shayden Akason, and Shayden's team from the Oak Grove Lutheran School is playing for the North Dakota Class B State High School Basketball Championship this week. Their team is 23-0 and favored to win the championship. I want to wish them continued success as reward for their hard work and dedication. Some white men can jump.

Housing Bubble News from Patrick.net

FHA, Fannie, Freddie, etc, all make housing LESS affordable (gregfielding.housingstorm.com)

Why California Is Doomed (Charles Hugh Smith)

Fed sees 'little change' in West's housing (lansner.freedomblogging.com)

Are we facing a second house price crash? (money.uk.msn.com)

Most Americans still unprepared for retirement (money.cnn.com)

Public Pensions Are Adding Risk to Raise Returns (nytimes.com)

The Magic Disappearing Act of American Jobs (theatlantic.com)

Developers New Scam: transfer tax paid to developers, forever (housingwatch.com)

San Diego real estate has a California problem (signonsandiego.com)

Do-it-yourselfers can shell out for a real estate 'bargain' (washingtonpost.com)

Strategic defaults on houses on the rise (sfgate.com)

Short-Sale Program Will Pay "Owners" to Sell at a Loss (savers and taxpayers lose) (nytimes.com)

Freddie Mac Will Buy Out 120-Day Delinquent Mortgages (savers and taxpayers lose) (housingwire.com)

Using the American Middle Class as a Credit Card for Wall Street Excess (mybudget360.com)

Billionaire: America's housing crisis getting more severe (bubblemeter.blogspot.com)

States Payrolls Lag as U.S. Austerity Sets In (bloomberg.com)

Underwater borrowers: To walk away or not when you owe more than house is worth (sun-sentinel.com)

Moreno Valley is prime example of housing boon and a bust (pe.com)

'Shadow inventory' may prolong housing slump (pressdemocrat.com)

The high cost of quake insurance in CA will rock your bank account (articles.latimes.com)

Condo towers sell for two-thirds off original value (lansner.freedomblogging.com)

Jobs: Short-term hope, long-term despair (money.cnn.com)

Rethinking the Government's Role in Housing Finance (nytimes.com)

Rep. Barney Frank warns of Fannie, Freddie risks (washingtonpost.com)

Fannie, Freddie Ask Banks to Eat Soured Mortgages (bloomberg.com)

Money and Politics: Are they somehow connected? (theonion.com)

Irvine Home Address … 1 RAMADA Irvine, CA 92620

Resale Home Price … $888,888

Home Purchase Price … $258,000

Home Purchase Date …. 7/12/1995

Net Gain (Loss) ………. $577,555

Percent Change ………. 244.5%

Annual Appreciation … 8.6%

Cost of Ownership

————————————————-

$888,888 ………. Asking Price

$177,778 ………. 20% Down Conventional

5.01% …………… Mortgage Interest Rate

$711,110 ………. 30-Year Mortgage

$184,263 ………. Income Requirement

$3,822 ………. Monthly Mortgage Payment

$770 ………. Property Tax

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

$74 ………. Homeowners Insurance

$147 ………. Homeowners Association Fees

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

$4,813 ………. Monthly Cash Outlays

-$935 ………. Tax Savings (% of Interest and Property Tax)

-$853 ………. Equity Hidden in Payment

$347 ………. Lost Income to Down Payment (net of taxes)

$111 ………. Maintenance and Replacement Reserves

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

$3,483 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$8,889 ………. Furnishing and Move In @1%

$8,889 ………. Closing Costs @1%

$7,111 ………… Interest Points @1% of Loan

$177,778 ………. Down Payment

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

$202,666 ………. Total Cash Costs

$53,300 ………… Emergency Cash Reserves

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

$255,966 ………. Total Savings Needed

Property Details for 1 RAMADA Irvine, CA 92620

——————————————————————————

4 Beds

3 baths Baths

2,852 sq ft Home size

($312 / sq ft)

7,020 sq ft Lot Size

Year Built 1979

5 Days on Market

MLS Number S607557

Single Family, Residential Property Type

Northwood Community

Tract Cc

——————————————————————————

Beautifully remodeled & expanded luxury home in gated community priced to sell now*Regular sale-not short sale*Entertainer's backyard w/pool, spa w/flagstone hardscape & waterfall*Expanded & totally remodeled kitchen (maple cabinets, granite countertops, tumbed marble backsplash, center island, corner lazy Susan, breakfast bar, Subzero refrigerator w/maple door fronts, stainless steel appliances including Viking 6 burner stove)is open to breakfast room & family room w/fireplace*Travertine floor downstairs, reshaped curving staircase, two-tone paint, plantation shutters, crown molding, newer double paned widnows, concrete tile roof, & the list goes on*Luxurious master suite w/retreat has fireplace, 3 closets, bath w/double sinks, separate tub & shower*One bedroom downstairs has remodeled bath w/shower w/tumbled marble surround, frameless door, newer vanity with maple cabinet*Walk to award-winning schools including Northwood High*No Mello-Roos*Great association w/pool,spa, tennis, gates*

The writer seems to have mistaken an asterisk for a period.

My taste is as bad as the owners; I like that carpet under the table and the decor in the bedroom.

The Swiss Central Bank Openly Discourages Mortgage Lending Due to Housing Bubble Fears

Other governments around the world take steps to curb lending and warn citizens of the perils of excessive mortgage debt. Why don't we?

Someone should have warned the owner of today's featured property that smaller mortgages and lower prices were going to make resale challenging… and painful.

Irvine Home Address … 28 WILLOWHURST Irvine, CA 92602

Resale Home Price …… $825,000

{book1}

My friends feel it's their appointed duty

They keep trying to tell me all you want to do is use me

But my answer yeah to all that use me stuff

Is I wanna spread the news that if it feels this good getting used

Oh you just keep on using me until you use me up

Bill Withers — Use Me

Lenders with encouragement from the US Government want to use you to pay for their mistakes; they want to use you, and they want you to feel good about it. Buy now, it doesn't matter if you go underwater; lenders don't care as long as you make your rent payments on the money.

Recently, I wrote about Canadian finance minister Jim Flaherty preventing further inflation of Canadian housing bubble.

Allow me to recap and interpret:

(1) He is forcing qualification at a higher payment rate. If he had stated 30-year fixed rather than a 5-year fixed, It would be better, but it is a step toward stable financing. I wish the statement clarified whether or not interest-only ARMs are permitted there. I believe the qualification standard he is imposing is based on a 30-year amortizing mortgage with only a 5 year fixed rate.

(2) Twenty percent down payments? I would like to see this on all property, but common sense says investment properties and second homes should require a significant down payment — people don't hesitate to walk away from investment properties.

(3) And limiting cash-out refinancing to 90% LTV is identical to the proposal I made. I like this requirement because it provides an equity cushion that stabilizes markets and prevents walkaways.

"We do want to discourage the tendency by some to use their home as an ATM machine, the tendency by some to buy three or four condominiums by way of speculation," Flaherty said. "This will discourage the kind of mortgage refinancing that can create unsustainable debt levels as interest rates go up."

Our government actively encouraged us to borrow, spend and be happy while Canadians are being warned about excessive debt and spending their equity foolishly. The contrast is conspicuous.

It isn't just the Canadians who exercise better control over lending and warn their citizens of the perils of buying and borrowing today. The Swiss, long known for their banking prowess, do not cave in to banking interests.

The Swiss Central Bank sends warning on excessive mortgage borrowing

ZURICH, March 11 (Reuters) –

The Swiss National Bank warned banks and borrowers on Thursday about taking on too much debt while interest rates were still very low, indicating it is concerned about a possible housing bubble.

…"The SNB is warning banks and borrowers to be extremely cautious," the central bank said in its quarterly policy statement. "The fact that interest rates are exceptionally low by historical standards must be taken into account."

…"What they wanted to avoid is house prices going up too much in response to a slightly brighter economic outlook. That would mean another bubble," said Henrik Gullberg of Deutsche Bank. "One way of doing that is to keep sending these verbal warning shots while policy is still very expansive."

The Swiss government is openly concerned about its citizens financial well being, and they post warnings about mortgage borrowing to help people. Why is it only bloggers like me who issue these warnings here in the US?

The US Government wants its citizens to borrow as much as possible to help out ailing banks even if that destroys the borrower. Shameful.

Some analysts have argued that the central bank may raise borrowing costs earlier than the market currently predicts, and despite the strong Swiss franc, due to the housing concerns.

The SNB said it was conducting an in-depth investigation into banks' mortgage-granting practices and that it would work with regulators to see if any corrective steps were needed.

SNB statistics show that prices for single family homes in Switzerland rose by some 4 percent last year.

SNB vice-chairman Thomas Jordan warned as early as autumn last year of a possible bubble in the private housing market.

Why is the US Government out to screw us?

Hasn't it become obvious that our government does not care about the people? As a citizen of this country, you should be outraged by the way your government puts your interests last. Our government openly advocates destructive policies that transfer wealth from you to the lenders. The US Government as ruled today is completely captured by money interests; they feed us a steady stream of bullshit bailouts and false hopes to convince us to take on more debt and keep the Ponzi Scheme alive.

It wasn't always that way.

Andrew Jackson and the Second Bank of the United States

AIG was not the first institution that was too big to fail. Andrew Jackson waged a personal war against the banking behemoth of his era, and as a former general, he knew how to win a battle. From Wikipedia:

The Second Bank of the United States was authorized for a twenty year period during James Madison's tenure in 1816. As President, Jackson worked to rescind the bank's federal charter. In Jackson's veto message (written by George Bancroft), the bank needed to be abolished because:

  • It concentrated the nation's financial strength in a single institution.

  • It exposed the government to control by foreign interests.

  • It served mainly to make the rich richer.

  • It exercised too much control over members of Congress.

  • It favored northeastern states over southern and western states.

Following Jefferson, Jackson supported an "agricultural republic" and felt the Bank improved the fortunes of an "elite circle" of commercial and industrial entrepreneurs at the expense of farmers and laborers. After a titanic struggle, Jackson succeeded in destroying the Bank by vetoing its 1832 re-charter by Congress and by withdrawing U.S. funds in 1833.

“Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves.” — Andrew Jackson

Does Jackson's reasoning sound familiar to you? Isn't most of what he identified as problems exactly what we have with too-big-to-fail institutions? Who will be our modern Andrew Jackson who will crush our banking cartel? Our current crop of politicians are hopeless or worthless completely captured by banking interests and too fearful to do anything to help the people. We are lost, and we need a real leader like Andrew Jackson to help us find our way.

Irvine Home Address … 28 WILLOWHURST Irvine, CA 92602

Resale Home Price … $825,000

Home Purchase Price … $888,000

Home Purchase Date …. 7/20/2007

Net Gain (Loss) ………. $(112,500)

Percent Change ………. -7.1%

Annual Appreciation … -2.7%

Cost of Ownership

————————————————-

$825,000 ………. Asking Price

$165,000 ………. 20% Down Conventional

5.01% …………… Mortgage Interest Rate

$660,000 ………. 30-Year Mortgage

$171,019 ………. Income Requirement

$3,547 ………. Monthly Mortgage Payment

$715 ………. Property Tax

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

$69 ………. Homeowners Insurance

$55 ………. Homeowners Association Fees

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

$4,536 ………. Monthly Cash Outlays

-$868 ………. Tax Savings (% of Interest and Property Tax)

-$792 ………. Equity Hidden in Payment

$322 ………. Lost Income to Down Payment (net of taxes)

$103 ………. Maintenance and Replacement Reserves

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

$3,302 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$8,250 ………. Furnishing and Move In @1%

$8,250 ………. Closing Costs @1%

$6,600 ………… Interest Points @1% of Loan

$165,000 ………. Down Payment

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

$188,100 ………. Total Cash Costs

$50,600 ………… Emergency Cash Reserves

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

$238,700 ………. Total Savings Needed

Property Details for 28 WILLOWHURST Irvine, CA 92602

——————————————————————————

5 Beds

2 full 1 part baths Baths

2,558 sq ft Home size

($323 / sq ft)

3,429 sq ft Lot Size

Year Built 2000

2 Days on Market

MLS Number P724538

Single Family, Residential Property Type

West Irvine Community

Tract Ivyw

——————————————————————————

Spectacular cul de sac 5 bedroom, 3 story dream home. Gleaming granite kitchen center island, distressed hardwood flooring, and tons of extra space. Wonderful family room with gorgeous fireplace. Breakfast area leads to large, fully-fenced rear yard and calming retreat. Open, bright floorplan with formal dining room, large secondary bedrooms and walk-in closets. Third-floor space and views are breathtaking. Don't forget the nationally recognized schools – Myford, Pioneer, and Beckman. Act now!

The slow grind of lower prices

When the current owners bought back in 2007, they probably never considered the possibility that prices might be lower when they sold. They put $200,000 of their own money into the deal, and they will be lucky to escape with any of it.

Everyone thinks they are either buying into an appreciating market, or that they are buying at the bottom. If a buyer steps up to pay this ridiculous price, they will be the ones selling for a $100K+ loss in 2013.

The scenario this owner faces is what I keep warning people about. Nobody wants to be in the same circumstances as this seller, but all who buy today risk it.

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

Housing Subsidies, Debt Expansion, and the Death of American Liberty

Today we examine housing subsidies and how they contribute to the growth of debt and the slow erosion of liberty in America.

Irvine Home Address … 11 SUNSET Riv Irvine, CA 92604

Resale Home Price …… $739,000

{book1}

And I don't think it'll be so bad

And I know it won't be so bad

'Cause the man said "that's the way it is"

And the man said "it don't get better than this" no no no

Sell out, with me oh yeah,

Sell out, with me tonight,

Reel Big Fish — Sell Out

Properties are encumbered with too much debt, and buyers in markets where prices have not crashed are being asked to pay much higher prices as a percentage of their incomes than generations past. Today's buyers are being asked to pay for the excesses of those that came before them and sell out to the money changers.

Mom, Apple Pie and Mortgages

By ROBERT J. SHILLER

Published: March 5, 2010

FOR decades, the federal government has subsidized housing — particularly owner-occupied housing. This has been especially true during the continuing financial crisis, with Fannie Mae, Freddie Mac and the Federal Housing Administration propping up the housing market by issuing guarantees for investors on most new mortgages.

But what is the long-term justification for putting taxpayers on the line to subsidize homeownership? Is this nothing more than a sacred cow in American society — a political necessity because so many voters own homes and are mindful of their resale value?

How much of our government's response is tyranny of the majority? Are the owning taxpayers paying this subsidy comfortable with the face of housing entitlement today?

This time, the best answer isn’t found in traditional economics but rather in American culture: a long-standing feeling that owning homes in healthy communities is connected to individual liberties that embody our national identity. Historically, homeownership has been associated with freedom, while renting — often in tenements or mill villages — has been linked to the oppression of a landlord.

In his classic 1985 book, “Crabgrass Frontier,” Kenneth T. Jackson of Columbia University delineated the complex train of thought that over the last two centuries has produced the American belief that homeownership encourages pride and good citizenship and, ultimately, preservation of liberty. These attitudes are enduring.

The middle road is often a path between two evils. In the left ditch is the weakness of landlord dependency, rent controls, and other government subsidies of transitory housing. In the right ditch is an array of market subsidies to encourage home ownership, even if that form of home ownership is really money rentership — and, pardon my cynicism, our lending overlords want it that way. Wouldn't you want to have 40% of society's earnings if you could get it?

People forget they are merely substituting one form or weakness for another; landlord oppression is one evil, and lender oppression is another. Somewhere along the way, we lost ourselves. We escaped one form of bondage and fell into another. Why did we do it?

Back in 1899, in “The Theory of the Leisure Class,” Thorstein Veblen described homeownership, particularly of large and expensive dwellings, as “conspicuous consumption.” By that, he meant that it was undertaken substantially for the purpose of impressing others by showing the amount of money one can afford to waste on space one doesn’t need.

What is specifically American here — though it’s increasingly seen in other countries, too — may be the modern sense of equal citizenship, engendered by the illusion that we can sustain conspicuous housing consumption even among a majority of the people.

In short, this all has a great deal to do with culture, and little to do with financial wisdom. After all, financial theory suggests that people should not own their own homes, at least not in the way that many do today.

We are witnessing the final stages of a societal change. We have embraced debt as if it is capital or wealth; the change has been gradual, and the individual steps toward this end seemed natural and necessary; however, a significant number of people no longer distinguish between debt and wealth and truly believe obtaining debt bestows wealth and power.

"Twelve voices were shouting in anger, and they were all alike. No question, now, what had happened to the faces of the pigs. The creatures outside looked from pig to man, and from man to pig, and from pig to man again; but already it was impossible to say which was which." — George Orwell, Animal Farm.

We are generation pwned. Lenders seek the maximum debt-to-income ratio people are willing and able to support. The lure of appreciation and HELOC spending increases borrower willingness far beyond borrower ability and this willingness (or kool aid intoxication) helps keep prices inflated and debt loads large. Lenders and realtors exploit our modern American delusions, and everyone pays higher housing costs as a result. What good is a large income if so much is spent on housing? Aren't the lenders the real beneficiaries?

It’s time to take back The American Dream

By Greg Fielding:

On home prices, Shiller writes:

If many of these homes needed to be converted to rental units, home prices might well drop.

The Emperor’s clothes are beautiful indeed.

Though the policies are economically insane, they are worth the cost in order to perpetuate “a long-standing feeling that owning homes in healthy communities is connected to individual liberties that embody our national identity.”

In other words, the concept of “The American Dream of Homeownership” is worth spending trillions to uphold because it is a central to our culture.

Really?

Is our National Identity really defined by lust for a material good?

Consider the alternatives…

Americans: Smart and Hard-Working

Americans: Gracious and Strong

Americans: Helping Each Other

Americans: Character and Perserverance

No, we’re Americans: People who want to Buy Houses

How twisted and materialistic have we become as a culture to openly define ourselves by something we own?

As a renter, I am offended. As a citizen and a taxpayer, I am outraged.

Shiller suggests that The American Dream is too sacred…that our fragile national ego would collapse if its credibility were threatened. But, he’s wrong. The jig is up and the public knows it. In fact, they are asking for it, desperately wanting to find some financial purity after a decade of decadence. Social mood is shifting.

Shiller mistakenly suggests that home prices are worth propping up. But the problem isn’t that home prices are falling, it’s that home prices are still too high. Falling prices and foreclosures aren’t the problems, but the solutions, not the illness, but the cure.

The time has come to shout out that the Emperor has no clothes: The American Dream is simply a marketing campaign, a gimmick, perpetuated by industry groups and their lobbyists. That a home can define one’s success or national identity is simply a symbollic, mutually-shared illusion.

Well said.

Low-cost housing has benefits

The economy in Riverside County is dismal. Nearly 20% of Riverside County employment was in the building industry, and since about 40-60% of workers in homebuilding are unemployed (that is my anecdotal estimate), there is significant distress in both the employment and the housing markets. But that sorry state of affairs is ripe for recovery. Expanding or forming businesses in Riverside County currently enjoy inexpensive labor and they can attract more with inexpensive housing. Orange County and Irvine do not have those advantages.

Many are focused on maintaining inflated home values without considering the broader societal impact. We may be forced to choose between our house values and our jobs if the economy remains soft because house prices are such a deterrent to business expansion. Also, if all future generations really are priced out forever, is that an accomplishment bubble buyers will look back on with pride? The parties to the bubble have reduced future generations to debt slavery. I see little benefit in that.

Irvine Home Address … 11 SUNSET Riv Irvine, CA 92604

Resale Home Price … $739,000

Home Purchase Price … $350,000

Home Purchase Date …. 5/22/1991

Net Gain (Loss) ………. $344,660

Percent Change ………. 111.1%

Annual Appreciation … 4.0%

Cost of Ownership

————————————————-

$739,000 ………. Asking Price

$147,800 ………. 20% Down Conventional

5.01% …………… Mortgage Interest Rate

$591,200 ………. 30-Year Mortgage

$153,191 ………. Income Requirement

$3,177 ………. Monthly Mortgage Payment

$640 ………. Property Tax

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

$62 ………. Homeowners Insurance

$147 ………. Homeowners Association Fees

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

$4,026 ………. Monthly Cash Outlays

-$777 ………. Tax Savings (% of Interest and Property Tax)

-$709 ………. Equity Hidden in Payment

$288 ………. Lost Income to Down Payment (net of taxes)

$92 ………. Maintenance and Replacement Reserves

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

$2,921 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$7,390 ………. Furnishing and Move In @1%

$7,390 ………. Closing Costs @1%

$5,912 ………… Interest Points @1% of Loan

$147,800 ………. Down Payment

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

$168,492 ………. Total Cash Costs

$44,700 ………… Emergency Cash Reserves

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

$213,192 ………. Total Savings Needed

Property Details for 11 SUNSET Riv Irvine, CA 92604

——————————————————————————

4 Beds

3 baths Baths

2,544 sq ft Home size

($290 / sq ft)

5,700 sq ft Lot Size

Year Built 1975

21 Days on Market

MLS Number S605701

Single Family, Residential Property Type

El Camino Real Community

Tract Dc

——————————————————————————

PRICE REDUCED…MOTIVATED…This handsome home has three large Bedrooms and two Baths up, and one Bedroom and a full bath down-Outstanding curb appeal with manicured landscaping,a newer concrete tile roof,roll-up Garage Door & A DOUBLE PANELED, LEADED AND BEVELED GLASS FRONT DOOR-There is a formal Entry-The lower level has dramatic vaulted ceilings and a split-level floor plan-The home is VERY LIGHT AND OPEN IN FEELING!-Located on a quiet inside cul de sac- There is a formal Dining Room and separate eating area in the Kitchen-The Master Suite is larger than most you will see and has a Sitting Room/Office area/Dressing room/Walk-in Closet and Bath-The Air Conditioning/Furnace and Water Heater are 18 months new-Children can walk to school crossing only one residential street – The Kitchen is large and sunny with a wall of pantry storage. The large back yard is perfect for a childrens' play yard. There are no homes overlooking the back of the house. Standard sale.

The writer mentioned the plan is light, open, large and sunny without saying "light and bright." Thank you. It can be said without tired cliches.

I like playing golf, but I prefer to leave the greens on the golf course.