The latest tactic in the never-ending battle against foreclosure is “Produce the Note.” Borrowers are hoping to delay foreclosure or perhaps get a free house. What do you think about that?
Today’s featured property is being offered 20% off its 2004 purchase price. That is quite a discount from peak valuations in 2006.
Everyone is out to screw the lenders these days. I suppose they deserve it for their gross negligence in allowing a massive housing bubble to inflate, but there are some things happening to lenders that do not seem quite right. People are trying to avoid foreclosure by demanding that the foreclosing party produce the note. Since the mortgage paperwork has been transferred so many times to so many parties, it can be difficult for loan servicers to find the paperwork when challenged.
People are using this technique to buy time, and some even believe they can get out of paying back the mortgage and keep the house (when will the fantasies ever end?) Because this technique has the fantasy appeal of hitting the lottery, everyone facing foreclosure is trying it. Why not? If they can’t find the note, you get more free rent in your foreclosed house, and who knows maybe you will be able to keep it.
How do you feel about this practice? Are the lenders getting their comeuppance? Are homedebtors finding one more way to game the system?
IMO, this is just a technicality. Borrowers still borrowed money, and lenders are still owed money. Nothing has changed. I actually find it rather amusing that the lenders are getting burned this way, but only if it drags on for a few months. It is the homedebtors who believe this will get them a free house that rather annoys me. Money for nothing is what these homedebtors thought they had when prices were going up. If they actually get to keep the home, they really have gotten free money from the lender. I guess when money is free, there is a lot of demand.
Yeah, we’re laughing all the way to the bank ‘Cause it all just seems so funny A bunch of guys like us In a big tour bus Making that easy money
One thing you can be sure will come out of this phenomena: better
filing and paperwork standards.
BEAT THE Bank! Your last chance to buy this Home in very Desirable
University Park 4 Bedrooms 2.5 Baths 2 Car Garage , Double entry doors,
Limestone flooring Marble Tile, Balconies off the Bedrooms with
incredible Sunset Views, Two Fireplaces; one in Master and one in
Living Room, Assc Tennis Court, Pool and Spa, No Mello Roos, Low Assoc
Fees, A Lorge Lot! Talking about opportunity !
BEAT THE Bank! Yes, there is a huge sense of urgency here… not.
Your last chance to buy this Home? Bull$hit. This will be REO soon enough.
incredible Sunset Views? Over a parking lot.
A Lorge Lot! Gotta have that…
The owner of this property paid $575,000 on 5/18/2004. He used a $460,000 first mortgage and a $115,000 downpayment.
On 5/9/2005 he refinanced with a $513,750 Option ARM with a 1% teaser rate. Interesting that he did not cash out.
Total property debt is $513,750 plus negative amortization.
Total mortgage equity withdrawal is $53,750 which doesn’t even recover his downpayment.
This borrower was relatively conservative, and he is losing a great deal of his own money. If this place sells for its asking price, and if a 6% commission is paid, the total loss on the property will be $133,200. This is not a huge sum by Irvine standards, but this was a spring 2004 purchase, and I doubt this guy or anyone else buying then thought they could possibly lose anything. Well, if the stock markets can roll back to 1996 prices, how far can real estate prices roll back?
{book6}
I remember working on a rooftop In the hot summer sun all day Now I work two hours a night It feels a lot more like play
‘Fore Kenny joined the band He used to hang dry wall Ben worked down at Valentino’s So when you see us up here and think Man they’re lucky You don’t have to tell us ’cause we know
[Chorus] Yeah, we’re laughing all the way to the bank ‘Cause it all just seems so funny A bunch of guys like us In a big tour bus Making that easy money
Desperado hauled cattle Grady drove trucks Justin had a hot dog stand Kevin sold records
I wasn’t sure how to title this post. It could have been “Why You Don’t Want to Catch a Falling Knife” or “10% Off a 2003 Price.” There are many stories to tell.
Today’s property is below its 2003 purchase price hovering at 2002 price levels.
But wait, are we not civilized gentlemen here? I challenge you to a battle of knifes!
If this property looks familiar, it is because I have profiled it before in the post Option ARM Hell. In that post from July of 2008, this property was a short sale asking $389,900. How would you have liked to have been the knife catcher that paid that much? If you would have, you would be $90,000 underwater right now. My equity burn calculation said this property would only lose $3,241 a month in value. The asking price has declined $90,000 in 9 months for an equity burn of nearly $10,000 a month.
Price declines like this on low-end properties are nearing their conclusion. Price declines like this on mid- to high-end properties are yet to come. All those high end short sales I have been profiling lately will be REOs sporting 20%-30% reductions 9 months from now.
REMODELED 3 BEDROOM , 2 BATH CONDO, BANK OWNED, in WOODBRIDGE WITH GRANITE COUNTERS AND UPGRADED FLOORING.
That description is ALL CAPS except the word “in.” Why?
Check out this listing and sales price history. The asking price is 10% below its 2003 purchase price. I think we could call it 2002 prices.
Feb 27, 2009
Listed
$299,900
Apr 26, 2006
Sold
$443,000
Oct 25, 2005
Sold
$425,000
Dec 02, 2003
Sold
$337,000
This property is really causing some pain to a young family (I think). This property was purchased on 5/19/2006 for $443,000. The owners used a $354,400 Option ARM with a 1% teaser rate for a first mortgage, and a $88,600 downpayment. Looking at this place, it doesn’t seem like a move-up where this $88,600 was equity from a previous sale. I am guessing this was either savings or a gift from relatives. In either case, it is gone now.
If this property sells for its asking price, and if a 6% commission is paid, the total loss on the property will be $161,094. The owners are covering half, and the lenders are eating the rest. Neither party is going to be happy about it, but I feel worse for the borrower. Not just did they lose their substantial downpayment, they have ruined their credit: very sad.
{book1}
I tire of your mind games. I’m sick of playing Don’t Wake Daddy. Good sir, no more Rock, Paper, Scissors for me. But wait, are we not civilized gentlemen here? I challenge you to a battle of knifes!
KNIFE FIGHT, You’re gonna fight for your life! KNIFE FIGHT, You’re gonna fight with a knife! KNIFE FIGHT, A really really really sharp knife! YEAH, KNIFE FIGHT!
I’m a crazy (crazy) son of a *****! I’ma cut you! (Cut you!) Swish swish! In a knife fight! (Knife fight.) Knife fight! (Knife fight.) Knife fight! KNIFE FIGHT!
If people took responsibility for themselves, we would not need paternalistic rules and regulations. Unfortunately, they do not. Now that we are all paying for the foolish risk taking of the past decade, it is time to access what risks people should be allowed to take.
Our property today is an REO rolled back to 2002 pricing.
I will never be as cute as you, according to the board of human relations I will never fly as high as you, according to the board of public citations
Flying high is dangerous; just ask Icarus. Everybody was flying high on free money but they got too close to the sun and got burnt. When they fell back to earth, their impact created a debt crater that the rest of us are being asked to fill in.
Borrowers took on enormous risks during The Great Housing Bubble. If this were not the case, we would not now be facing a foreclosure crisis that eclipses the magnitude of the Great Depression. As a society we need to accurately identify the risks assumed by borrowers that caused them to lose their homes. We must enact legislation that limits or reduces these risks in the future. We need to do this for one simple reason: those of us who did not take on these risks are being asked to pay the price. The benefits of these risks are privatized while the losses incurred from these risks are being socialized. This is not just.
I first wrote about this issue in the post Bring Back Paternalism in The Mortgage Market. In that post I suggested limitations to mortgage equity withdrawal through home equity lines of credit. This post I’m going to go even farther and suggest that mortgage options should be limited to fixed-rate financing with reasonable debt to income ratios and high down payment requirements. In my book, The Great Housing Bubble, I provide detail and nuance to these legislative mandates, but I will discuss the basics here.
{book2}
The foreclosure crisis of the Great Depression was caused by a number of related factors. First, there was systemic mortgage related risk. At the time almost all mortgages were interest-only loans with very high equity requirements (50% down was the norm). Loans were interest-only because banks wanted to pass interest rate risk on to the borrower, and equity requirements were very high to insulate the banks from risk of loss if people defaulted. Despite the lenders low risk tolerance, many banks failed during the Great Depression.
The foreclosure crisis of the Great Depression was triggered by mass unemployment causing borrowers to default. As these defaults caused banks to lose money, it imperiled our entire financial system. It caused a contraction in lending and created an economic contraction that resulted in even more unemployment; a downward spiral ensued. It is the same phenomena that we are witnessing today.
The Great Depression exposed the risks of the debt-service mentality. Since the primary loan program of the Great Depression was the interest only loan, most people did nothing to retire their debt. If people are not retiring their debt, lenders have an ongoing problem with risk. This lending risk is so great that even the high equity requirements of the pre-depression era were not sufficient to save the banking industry. Everyone who analyzed this problem realized that a new loan program that retired debt was needed.
After World War II lenders embraced a new loan program, the fixed-rate conventionally-amortized 30-year mortgage. This loan program had a mechanism to pay back the principal and retire the debt. This retirement of debt compensated the banks for the interest rate risk they were taking on. Also this allowed banks to lower their loan-to-value ratios because over time their risk was being reduced. The lower loan-to-value ratios opened the housing market to many new people and contributed to the housing boom immediately following World War II.
Our foreclosure crisis, the one resulting from The Great Housing Bubble, is caused by a failure of finance. Numerous unstable loan programs were introduced that inflated house prices to unprecedented levels. These loan programs encouraged people to take on numerous risks that most people were either ignorant of or did not believe would become a problem. Of course they were wrong. Removing these loan programs is what is causing the house price collapse. Part of these unstable loan programs is the mindset that debt can be endlessly serviced. It is the same problem that plagued the Great Depression. The unstable loan programs and the debt-service mindset prompted copious borrowing. People were allowed to take on risks that cost them their homes.
The risks borrowers took on are easily identified. These risks include:
interest-rate risk,
mortgage-availability risk, and
increasing-payment risk.
Interest-rate risk is caused by the use of adjustable-rate mortgages. I have written many times about the ARM Problem. The Federal Reserve is working hard to artificially manipulate mortgage interest rates to deal with this problem. Lowering interest rates may help if the payment is simply resetting but it does nothing for those facing a recast of their loan from an interest-only to a fully-amortized payment. This loan recast is the root of the problem.
It is amazing to me that former Fed Chairman Alan Greenspan actually suggested people take on interest rate risk and use adjustable-rate mortgages. It is debatable whether or not he was a great central banker, but it is clear that he was a very poor financial advisor. People are not capable of managing their own interest rate risks as Mr. Greenspan had suggested. In reality everyone is merely betting on lower interest rates. If this bet moves against them, the government or the Federal Reserve is asked to step in and bail everyone out. Again, the rewards are privatized and the risks are socialized.
{book3}
Mortgage-availability risk is the problem being faced by those who assume they can serial refinance from one teaser-rate mortgage to another. Everyone who has a mortgage that is going to require refinancing before it is paid-in-full has assumed mortgage-availability risk. Of course most people simply presuppose that favorable loan terms will be available forever and they will always have access to capital. Our recent credit crunch has shown how serious this risk really is.
Increasing-payment risk is caused by loan terms where the borrowers payment may go up over time. Loan terms that have increasing payments have high default rates; people cannot afford the increased debt-service burden. This commonsense fact seems to have eluded lenders as they developed these unstable loan programs. This increasing payment forces people to refinance which in turn exacerbates the mortgage availability risk when people find their ability to refinance curtailed.
Borrowers should simply not be allowed to take on these risks. Once the downside of these risks comes to be, it leads to a foreclosure crisis. This leads to government bailouts which in turn leads to the prudent paying for the sins of the irresponsible. The borrower risks described above can be eliminated.
We can require high down payments. Initial equity in the form of a down payment provides a buffer in case house prices fall so homeowners do not go underwater. We can limit the debt-to-income ratios of borrowers. If people are not over extended under mortgage debt they are far less likely to default. Statistics bear this out. And we can limit lending options to the fixed-rate conventionally-amortized mortgage. It is the only product that pays down debt and does not face an escalating payment.
There was a 30-year era were borrowers were not permitted to take on these risks. From 1948 to 1978, we experienced price stability (after the brief price recovery following the Great Depression and WWII). House prices were relatively stable even when the economy was not. The era ended with the hyperinflation of the late 70s and the first California housing bubble which coincided. This ushered in an era of price instability and experimentation with affordability products (See Robert Shiller’s chart above).
Our modern era of experimenting with affordability products has been a dismal failure. The Great Housing Bubble is a direct result of this failure. We must return to the lending practices of the 1948 to 1978 era. Many will view this as a big step backward. However, when lending steps off a cliff, perhaps a step backward is a good thing.
Maybe that cartoon should read, “What Lender’s Believe?”
Today’s featured property is one of those undesirable condos that is likely to crash in price down to cashflow investor levels. It is probably already at rental parity, but would you want to live there for the next 10 years?
Light and bright with nice wood laminate floors throughout first level.
Beautiful slate and cherry-wood fireplace in living room. Needs carpet
and paint. Great potential!
As you can see, this is quickly approaching its 2002 purchase price.
Listing and Sales History
Feb 25, 2009
Listed
$299,900
Jan 22, 2009
Sold
$373,000
Jul 03, 2002
Sold
$280,000
Jul 17, 1998
Sold
$151,000
So what would this place be worth with 4% appreciation since 1998?
1998
$151,000
1999
$157,040
2000
$163,322
2001
$169,854
2002
$176,649
2003
$183,715
2004
$191,063
2005
$198,706
2006
$206,654
2007
$214,920
2008
$223,517
2009
$232,458
Somewhere around $232,000 is a reasonable bottoming figure, perhaps a bit higher if interest rates remain artificially low. Just think, the peak appraised value for this property was around $450,000…
This property was purchased on 7/3/2002 for $280,000. The owner used a $280,000 first mortgage, and a $42,000 second… Wait a minute. How is that possible? I suspect the purchase price as reported is incorrect. This most likely sold for $322,000. If so, then this asking price is a 2002 rollback.
On 10/13/2005 they refinanced with a $330,000 Option ARM.
On 5/31/2006 they opened a HELOC for $100,000. It does not look as if this money was taken out.
On 4/28/2008 they took out a stand-alone second for $28,579.
Total property debt is $358,579 plus negative amortization.
Total mortgage equity withdrawal is approximately $50,000. It is impossible to be accurate with the data I have.
These were actually somewhat conservative borrowers. They were not going back to the housing ATM every year, and when they refinanced in 2005, they did not take out all their equity. The bank foreclosed and bought the property for $379,000 which was probably the balance of the first mortgage (with negative amortization) and the small second they took out. It looks as if these are people who were simply in over their heads. They tried to be responsible, but they could not afford their home.
Perhaps they should not have been loaned more money than they could pay back…
{book4}
I will never be as cute as you, according to the board of human relations I will never fly as high as you, according to the board of public citations These are just the rules and regulations Of the birds, and the bees The earth, and the trees, Not to mention the gods, not to mention the gods
All my little life I’ve wanted to roam Even if it was just inside my own home Then one little day I chanced to look back Saw you sittin’ there, being a sad culprit
These are just the rules and regulations Of the birds, and the bees The earth, and the trees, Not to mention the gods, not to mention the gods
These are just the rules and regulations Yeah, these are just the rules and regulations And I like every one, yes I like every one Must follow them
This recession is wearing on people. We are in the depth of winter in our economic cycle. It is cold out there. I hope you have a stable job and an affordable housing payment to shelter you from the storm…
I am pleased to announce that we are scheduled to have another IHB Block Party on Monday, March 9, 2009, at J.T. Schmids at the District.
I’m coming out of my cage And I’ve been doing just fine Gotta gotta be down Because I want it all
I received the following email that I thought everyone might find interesting:
Having served on the board of my master HOA in Fountain Valley for
longer than I care to admit, and having worked in the HOA management
industry, one of the questions that comes up with almost every one of
these Irvine listings is the question of how much additional debt each
one of these properties may be carrying as a function of their local
and master HOA’s.
Many associations ( if not most ) have board members who
consistently vote against raising assessments on their members, and the
area that is easiest to cut is funding of capital reserves, State law
requires that every association report on their reserves and disclose
the information, but they don’t actually have to fund them.
Properly funded reserves will isolate each component and add a
yearly fraction of the replacement cost to the reserves so that there
is money to slurry seal the roads, replaster the pool, inspect the
sprinkler systems in attached units, paint fences and buildings,
replace roofs, and do major required maintenance.
If the maintenance is deferred, the long term costs soar
exponentially, since the money you saved by deferring painting and deck
coverings means that you have dry-rotted staircases and decks to
replace. The money saved on deferred roofing maintenance translates
into leaks and mold clean-up, et cetera. An unpainted wrought iron
fence rusts, and replacing sections is expensive. Crappy vendors with
poor inspection by management frequently do poor work, with ensuing
problems.
Poorly managed associations may have thousands, or tens of
thousands of dollars per unit worth of underlying deferred maintenance,
and capital reserves funded at 10% to 20% of ideal balance. Catching up
when you are behind is a vicious circle of special assessments, sharp
increases in monthly assessments, and recalls of elected board members.
For associations with high rates of defaults, past due assessments
are wiped out on foreclosure, with the bank responsible for payments
only after the foreclosure, so a poorly managed HOA stuck in a downward
spiral can take even more hits.
Nobody should ever, ever buy an Irvine home without looking at the
reserve study and annual budget of the local and master HOA’s, and
understanding the implications, but in the real estate sales process,
these items are typically not available until you are sitting at a
closing with a mountain of paper and people urging you to sign, sign,
sign.
Gus Ayer, former Fountain Valley Council Member, and one of the three folks behind Orange County Progressive
When I first got this email, I thought to paraphrase it and add to it, but it is great just as it is. I would note that trying to figure out your HOAs potential liabilities is no easy task. I don’t know that I could examine the balance sheet of an HOA and recognize if a $25,000 assessment was coming. These issues are a big deal. As a potential homeowner, you could be buying in to a significant liability without knowing about it. Buyer beware.
Today’s featured property is another frugal homeowner who spent all their equity and has to move into a rental. You know, if enough of these people become renters, it will give renters a bad name…
bright and airy! this is a must see home in irvine. upstairs loft can
be converted into a bedroom. kitchen has large center island with
granite counter top. master bathroom has tub and european bidet.
I guess we solved the ALL CAPS problem by eliminating capitalization altogether.
I have to get one of those “european bidets.” According to the Poop Report, they are Not Just for Hairy European Women Anymore. It isn’t quite as cool as the washlet, but it does have its own charm, wouldn’t you say?
This property was purchased on 6/28/2002 for $499,000. The owners used a $399,000 first mortgage, and a $100,000 downpayment. So far so good.
On 5/20/2003 they opened a HELOC for $82,000.
On 10/4/2004 they opened a HELOC for $248,000.
On 4/18/2006 they refinanced with a $650,000 1 year ARM.
On 6/13/2006 they opened a HELOC for $160,000.
Total property debt is $810,000.
Total mortgage equity withdrawal is $411,000 including their $100,000 downpayment.
If this property sells for its asking price, and if a 6% commission is paid (not going to happen), the total loss to the lender will be $180,200 assuming this borrower fully tapped the HELOC.
There is an open house on this property on Saturday, February 28, 2009 12:00 PM – 4:00 PM. Everyone is encouraged to stop by and ask the owners what they spent $411,000 on. If you get an answer, post it to the weekend open thread. I know I would like to know where the money went.
Choking on your alibis But it’s just the price I pay Destiny is calling me Open up my eager eyes ‘Cause I’m Mr Brightside
I hope you have enjoyed this week at the Irvine Housing Blog. Come back next week as we
continue chronicling ‘the seventh circle of real estate hell.’ Have a great weekend.
🙂
{book6}
I’m coming out of my cage And I’ve been doing just fine Gotta gotta be down Because I want it all It started out with a kiss How did it end up like this? It was only a kiss, it was only a kiss Now I’m falling asleep And she’s calling a cab While he’s having a smoke And she’s taking a drag Now they’re going to bed And my stomach is sick And it’s all in my head But she’s touching his chest Now, he takes off her dress Now, letting me go
And I just can’t look – it’s killing me And taking control Jealousy, turning saints into the sea Turning through sick lullabies Choking on your alibis But it’s just the price I pay Destiny is calling me Open up my eager eyes ‘Cause I’m Mr Brightside
New Listing (24 hours)
Light and bright with nice wood laminate floors throughout first level.
bright and airy! this is a must see home in irvine. upstairs loft can