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Irvine Housing Blog

Irvine Housing Blog

Irvine Housing Blog

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Large Banks Survive on Government Largess

Posted: 27 Oct 2010 03:30 AM PDT

Major US Banks are distressed and closer to collapse than most realize.

Irvine Home Address ... 3 RAINBOW Fls #53 Irvine, CA 92603
Resale Home Price ...... $613,750

Look into my eyes
Now you're getting sleepy
Are you hypnotized
By secrets that you're keeping?
I know what you're keeping
I know what you're keeping

Got a secret
Can you keep it?
Swear this one you'll save
Better lock it, in your pocket
Taking this one to the grave
If I show you then I know you
Won't tell what I said
Cause two can keep a secret
If one of the m is dead…

The Pierces -- Secret

The banks, the federal reserve and our government have been trying to conceal the true level of distress with out banking system. The policies being put forth in Washington only serve to extend this crisis and inhibit economic growth. First, let's take a look at how much REO the banks already have.

JPMorgan, Wells Fargo and BofA each hold more than $20 billion in foreclosures

by KERRY CURRY -- Friday, October 22nd, 2010, 4:05 pm

JPMorgan Chase, Wells Fargo Bank and Bank of America each reported more than $20 billion in single-family mortgages currently foreclosed or in the process of foreclosure as of midyear, according to Weiss Ratings.

In addition, for each dollar these banks held of mortgages in 
foreclosure, they had additional exposure to more than $2 in mortgages that are 30 days or more past due.

"Although only some portion of the past-due loans will ultimately go into foreclosure, these figures tell us that the biggest players are not only in deep, but could sink even deeper into the mortgage mayhem," said Martin D. Weiss, chairman of Weiss Ratings.

As readers here know, part of the reason for the banks having so much REO is because Banks are being Forced to Repurchase Bad Bubble Loans.

Among all U.S. banks, JPMorgan Chase has the largest volume of mortgages in foreclosure or foreclosed with $21.7 billion. It has $43.4 billion in mortgages past due.

Bank of America has a somewhat smaller volume of foreclosures ($20.3 billion), but it has a larger pipeline of past-due mortgages — $54.6 billion. Thus, overall, including all foreclosed and delinquent categories, Bank of America has the largest volume of bad mortgages among U.S. banks, with $74.9 billion, while Wells Fargo has the second largest with $68.6 billion.

Other banks, despite their large size, are less heavily exposed. Citibank has $6.3 billion in foreclosures and $19.2 billion in past-due mortgages, or a total of $25.6 billion. The volume held by other large banks, such as U.S. Bank, PNC Bank, and SunTrust is smaller.

"In addition to the volume of bad mortgages, the vulnerability of each bank to the foreclosure crisis depends on the capital and loan-loss reserves it has set aside to cover losses and other factors such as its earnings, liquidity, reliance on less-stable deposits, and the quality of its overall loan portfolio," Weiss said.

Among banks with $1 billion or more of mortgages already foreclosed or in process of foreclosure, Wells Fargo has the greatest exposure to bad mortgages in proportion to its capital. For each dollar of Tier 1 capital, the bank has 75.4 cents in bad mortgages, or a ratio of 75.4%. The equivalent ratios for JPMorgan Chase, Bank of America and SunTrust are 66.8%, 66% and 57.6%, respectively.

The issue of bank REO is critical to the housing market because How The Lending Cartel Disposes Their REO Will Determine the Market’s Fate. What's worse is that bank REOs are not the only problem as GSE Foreclosures Shatter Record Highs, Keep Climbing.

Also, for every home in REO, there are four that are delinquent on their mortgage and tied up in shadow inventory (Shadow Inventory Signals Three Years of Falling Prices).

Triple Down: Fannie, Freddie, and the Triumph of the Corporate State

October 27, 2010 -- The Institutional Risk Analyst

"JOHN BULL can stand many things but he cannot stand two per cent." That aphorism, quoted by Walter Bagehot, a 19th-century editor of The Economist, expressed savers' traditional distaste for very low interest rates. For the first three centuries of the Bank of England's existence, 2% was indeed as low as the central bank was willing to let interest rates fall. Not even the Depression, nor the long Victorian period of stable prices, induced the bank to go any further. Some minimum return on capital was deemed to be required.

The Economist
September 16, 2010

... Because President Barack Obama and the leaders of both political parties are unwilling to address the housing crisis and the wasting effects on the largest banks, there will be no growth and no net job creation in the U.S. for the next several years. And because the Obama White House is content to ignore the crisis facing millions of American homeowners, who are deep underwater and will eventually default on their loans, the efforts by the Fed to reflate the U.S. economy and particularly consumer spending will be futile. As Alan Meltzer noted to Tom Keene on Bloomberg Radio earlier this year: "This is not a monetary problem."

Government Props Weakened the Housing Market and Delayed the Recovery

Indeed, the public embrace by the Federal Open Market Committee of further quantitative easing or "QE", instead of calling for the immediate restructuring of the largest zombie banks, actually threatens to push the U.S. into a deeper and far more dangerous economic path. According to the Q2 2010 Bank Stress Index survey conducted by IRA and our review of the Q3 2010 earnings results, the financial condition of smaller lenders is actually improving. While the FDIC now has over 800 banks on its troubled list, the righteous banks for which we currently have "positive" outlooks in The IRA Advisory Service are showing better earnings and less credit stress.

Part of the reason for the improvement is that the FDIC and state regulators have taken a very hard line with smaller banks, pushing many into resolutions and distressed asset sales. But for the healthy lenders that survive and investors that buy failed banks, there will be a lot of money left on the table -- profits that will come back into earnings via recoveries and other windfalls and help to boost the private economy. Resolution and liquidation is how a free market economy regenerates. The trouble is, the approach taken with the large banks and the GSEs is precisely the opposite of that applied to smaller lenders. The policy of the Fed and Treasury with respect to the large banks is state socialism write large, without even the pretense of a greater public good.

Forget Treasury Secretary Tim Geithner lying about the relatively small losses at American International Group (AIG), the fraud and obfuscation now underway in Washinton to protect the TBTF banks and GSEs totals into the trillions of dollars and rises to the level of treason. And the sad part is that all of the temporizing and excuses by the Fed and the White House will be for naught. The zombie banks and GSEs alike will muddle along until the operational cost of servicing bad loans engulfs them. Then they will be bailed out -- again -- or restructured. ...

Living in a Post Bubble World: What's Next?

Pictures of Deflation

Comments by Christopher Whalen American Enterprise Institute October 6, 2010

Is the Subprime Crisis Over?

  • No. The improvement in bank loan default rates is a mirage. The use of loan modification to make bad credits appear “current” is an economic fraud perpetrated by Washington that is already becoming apparent via foreclosure moratoria.
  • Mounting cash flow stress on all lenders is reaching crisis levels. Non-payment by borrowers and mounting foreclosure backlogs are creating the conditions for the collapse of some of the largest U.S. banks in 2011.

Chart 1: Efficiency

  • First stage of the banking crisis involved stress on liquidity due to market contagion. TARP, the Fed, FDIC responded with liquidity and debt guarantees.
  • The second stage involved stress on capital via charge- offs and loan loss reserves, both of which drove banks into record levels of loss.
  • The third stage of the banking crisis involves degradation of bank operating efficiency as restructuring accelerates, expenses rise and lenders involuntarily become non-operating REITs.

Lenders are becoming non-operating REITs. In the first story, we documented that the banks now own billions in non-performing real estate. At some point, banks no longer operate by making loans and collecting interest, they operate by buying property at foreclosure and collecting rent just like a REIT. When you buy bank stocks, are you really buying a disguised REIT? I think you are, except that REITs are generally well managed, and bank portfolios are not.

Chart 2: Net Interest Income

  • Many on Wall Street believe that net interest margin or NIM among U.S. banks is at record levels. They are right, but not in the way that many investors and analysts expect.
  • Unfortunately, measured in dollars, the NIM of the banking industry has been cut by a third over the past three years due to the Fed’s zero interest rate policy. Banks are literally dying from lack of yield on assets due to the Fed’s ZIRP.

The long-term problem with lowering interest rates to boost bank profits is that the yield curve flattens and the banks margins get squeezed. When banks could borrow at 0% and loan money for mortgages at 6%, the margins were helpful, and the banks had opportunity to recover; however, over time, competition drives down long term rates and flattens the yield curve. Banks are still borrowing at 0%, but now they can only loan at about 4.25%, a significant decline in margin.

Chart 3: Non-Interest Income

  • In 2005-2007 period when the subprime frenzy peaked, non-interest revenue for U.S. banks reached a record $80 billion. Expenses, conversely, were muted as defaults disappeared, but are now growing rapidly.
  • Since 2007, the non-interest revenue of all U.S. banks has fallen by over $10 billion. Non-interest expenses at U.S. banks will continue to increase due to residential and commercial foreclosures.

If bank portfolios weren't so poor operated, the non-interest income would be rising and non-performing loans would be converted to performing rentals.

For example, right now in Las Vegas, I can buy properties and obtain a 9% return based on rental cashflow, so I know the banks can too. If they began renting out their REO, they can obtain income superior to the loan interest they would obtain on a 4.25% note. In fact, I think they are rather foolish for not renting out more of their REO in beaten down markets like Las Vegas.

Chart 4: Exposure at Default (EAD)

  • U.S. banks continue to shrink their unused credit lines to limit exposure to default. The shrinkage in EAD is also a function of slack demand for credit in a deflating economy.
  • The combinations of still-record default rates and rising servicing costs related to foreclosures is making banks hyper-cautious about credit. The muddle along policy of Obama and Geithner = no net credit growth.
  • Chart on the following page shows unused credit lines for BAC, C. JPM and the large-bank peer group created by The IRA Bank Monitor. Note all have greatly reduced EAD.


  • The U.S. banking industry is entering a new period of crisis where operating costs are rising dramatically due to foreclosures and defaults. We are less than 1⁄4 of the way through the foreclosure process. Laurie Goodman of Amherst Securities predicts that 1 in 5 mortgages could go into foreclosure without radical action.
  • Rising operating costs in banks will be more significant than in past recessions and could force the U.S. government to restructure some large lenders as expenses overwhelm revenue. BAC, JPM, GMAC foreclosure moratoriums only the start of the crisis that threatens the financial foundations of the entire U.S. political economy.
  • The largest U.S. banks remain insolvent and must continue to shrink. Failure by the Obama Administration to restructure the largest banks during 2007-2009 period only means that this process is going to occur over next three to five years – whether we like it or not. The issue is recognizing existing losses -- not if a loss occurred.
  • Impending operational collapse of some of the largest U.S. banks will serve as the catalyst for re-creation of RFC-type liquidation vehicle(s) to handle the operational task of finally deflating the subprime bubble. End of the liquidation cycle of the deflating bubble will arrive in another four to five years.

I guess that means I will have plenty of properties to recycle over the next several years.

Live the Irvine HELOC abuse lifestyle

Let's be real honest about Californian's love affair with real estate: everyone here wants to spend the free money that comes out of the walls. People here believe house prices go up by magic, so all they have to do is buy and they get rich. Of course, if that believe is widely held, it is self-fulfilling -- to a point. Trees cannot grow to the sky.

The owner of today's featured property regularly went to the housing ATM to spend the deposits left by the appreciation gods. in the process, he borrowed himself into oblivion, and now he is selling short after 14 years of loan ownership. He is probably pissed because no greater fool was willing to step forward and overpay for his run down property.

  • This property was purchased on 5/3/1996 for $360,000. The owner used a $207,000 first mortgage and a $153,000 down payment.
  • On 4/4/2002 he refinanced the first mortgage for $202,000. For the first six years of ownership, he had the mortgage going in the right direction.
  • On 10/7/2003 he obtained a new first mortgage for $251,000. That $49,000 was his first taste of kool aid, and it changed his financial life.
  • On 6/24/2005 he refinanced with a $338,000 first mortgage.
  • On 4/25/2006 he got a $432,000 first mortgage.
  • On 6/14/2007 he refinanced with an Option ARM for $595,000.
  • Total mortgage equity withdrawal is $388,000 plus negative amortization.
  • Total squatting time is about a year so far.

Foreclosure Record
Recording Date: 02/01/2010
Document Type: Notice of Default

Realistically, they will put off foreclosing on this guy as long as they can. The banks are praying prices will come back with sufficient volume to clear out guys like this. That isn't happening, and it isn't going to happen.

Irvine Home Address ... 3 RAINBOW Fls #53 Irvine, CA 92603

Resale Home Price ... $613,750

Home Purchase Price … $360,000
Home Purchase Date .... 5/3/1996

Net Gain (Loss) .......... $216,925
Percent Change .......... 60.3%
Annual Appreciation … 3.6%

Cost of Ownership
$613,750 .......... Asking Price
$122,750 .......... 20% Down Conventional
4.23% ............... Mortgage Interest Rate
$491,000 .......... 30-Year Mortgage
$116,181 .......... Income Requirement

$2,410 .......... Monthly Mortgage Payment

$532 .......... Property Tax
$0 .......... Special Taxes and Levies (Mello Roos)
$51 .......... Homeowners Insurance
$490 .......... Homeowners Association Fees
$3,483 .......... Monthly Cash Outlays

-$396 .......... Tax Savings (% of Interest and Property Tax)
-$679 .......... Equity Hidden in Payment
$186 .......... Lost Income to Down Payment (net of taxes)
$77 .......... Maintenance and Replacement Reserves
$2,671 .......... Monthly Cost of Ownership

Cash Acquisition Demands
$6,138 .......... Furnishing and Move In @1%
$6,138 .......... Closing Costs @1%
$4,910 ............ Interest Points @1% of Loan
$122,750 .......... Down Payment
$139,935 .......... Total Cash Costs
$40,900 ............ Emergency Cash Reserves
$180,835 .......... Total Savings Needed

Property Details for 3 RAINBOW Fls #53 Irvine, CA 92603
Beds: 3
Baths: 2 full 1 part baths
Home size: 2,246 sq ft
($273 / sq ft)
Lot Size: n/a
Year Built: 1976
Days on Market: 96
Listing Updated: 40459
MLS Number: S625787
Property Type: Condominium, Residential
Community: Turtle Rock
Tract: Gh
Based on our analysis of the description, this listing may be a short sale or in a stage of pre-foreclosure.

Rare Below Market Opportunity in Prestigious Turtle Rock / Irvine This is a pre-approved short sale that can close quickly. The approval includes a significant credit repairs, new paint, flooring and fixtures. A great opportunity for the buyer looking for a home in the prestigious Turtle Rock community of Irvine. The home has 2,246 Sq Ft of living space, plenty of closet space and storage, crown molding throughout and need only misc. repairs, new paint, flooring and court yard landscaping. Make an offer now and select the paint colors, new flooring and fixture styles. Enjoy the walking paths, great schools and excellent location while buying a home with immediate equity.

The approval includes a significant credit repairs? I would think a short sale would include significant credit destruction....

real estate home sales


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