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Irvine Housing Blog

Irvine Housing Blog

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Foreclosure Delays May Catalyze Downward Spiral in House Prices

Posted: 28 Oct 2010 03:30 AM PDT

Lenders are in a no-win situation with regards to future house prices.

Irvine Home Address ... 10 BLUE Riv Irvine, CA 92604
Resale Home Price ...... $779,000

I've come to help you
With your problems
So we can be free

I'm not a Hero
I'm not a Savior
Forget what you know

I'm just a man who's
Circumstances went beyond his control
Beyond my control,
We all need control

The problem's plain to see
Too much technology
Machines to save our lives
Machines de-humanize

Styx -- Mr. Roboto

In our quest for efficiency, we have eliminated much of the human element from our mortgage finance system. With automated models for loan qualification, payment processing, and now foreclosure, we have turned the system over to machines and computer algorithms. Most of what we have done in this area has been an improvement, but have we gone too far?

The Housing Bust Lobby

Obama is right to resist the foreclosure wails from the political left.

OCTOBER 19, 2010 -- WSJ Opinion

More than three years into the housing bust, the foreclosure mitigation lobby apparently wants to keep the fun going. That will surely be the result if the political uproar over bank "robo-signers" becomes a moratorium on foreclosures.

So far the Obama Administration, to our surprise and perhaps its own, has behaved with admirable sobriety despite the wailing from the political left. Housing Secretary Shaun Donovan indulged in some familiar bank-bashing in an op-ed on the weekend, but he also says a moratorium would be a mistake. Perhaps this is because he knows something about mortgage contracts, including that bank process errors don't add up to an injustice to homeowners who haven't been paying their mortgages for months or years. He also notes that stopping a foreclosure creates unintended victims—such as the potential new buyer.

That is one of the first acknowledgments of the plight of new buyers I have seen in the media. Everyone is so focused on helping out the deadbeats being foreclosed on that we forget that a new buyer -- a buyer willing to pay the mortgage -- is waiting to move in to their new home. The idea that delinquent borrowers should have their debts forgiven because of a procedural error is ridiculous.

The alleged scandal here is that "robo-signers" for mortgage servicing companies have been signing foreclosure authorizations based on assurances from colleagues, rather than reviewing the files themselves. Some banks and mortgage servicing companies were also sloppy in maintaining records on the ownership of loans. This supposedly leads to horrible consequences for borrowers, though the evidence remains elusive.

The New York Times appeared to have produced a front-page victim on Friday—a woman fighting eviction from her $75,000 home at the hands of lender GMAC. The woman has not paid her mortgage in two years while remaining in the house. Some may view this as a case of rough treatment, but we doubt New York Times subscribers can receive the paper for two years after they stop paying for it.

All the squatters should move out first, then they can sue the lender for whatever they want. If they have a legitimate claim, they will be compensated, and if they don't have a legitimate claim -- and we all know none of them do -- then they can pound sand.

One left-wing financial blog has compiled news accounts that as many as seven people have unfairly suffered a foreclosure, despite making all payments. That's right, seven in a nation of more than 310 million. Our Journal colleagues also found a borrower who apparently paid her bills but was still charged additional fees by Senator Chris Dodd's favorite mortgage company, Countrywide Financial. As we said last week, whether the number of legitimate victims is seven or eight or more, anyone who paid on time and still suffered at the hands of a bank should be made whole. But on the record so far this is not a case of widespread fraud or injustice.

On the issue of maintaining the documents to establish ownership of a mortgage debt, it's not surprising that the process is messy, given that Fannie Mae and Freddie Mac helped design it. But securitization errors are also process flaws, and they do not entitle everyone to a free house.

Joseph Mason, a Wharton fellow and finance professor at Louisiana State University, states it plainly: "There is no question whether the contracts each party signed were valid. The Borrower owes the money they used to buy the property. The Lender has a claim to that money. Mere delays in providing the right documentation of a perfected collateral claim will not change the situation."

Part of me feels sad for the millions of distressed borrowers who are clinging to yet another false hope for debtor salvation. How many people are lapsing back into denial of their current circumstances because of stories like these? There is no hope that this pre-election emotional nonsense will result in delinquent borrowers getting debt relief. If this story gets people to make three or four more payments, does that benefit anyone other than the banks?

Sloppiness in some financial back offices does not come close to justifying a national foreclosure moratorium. By some estimates such a freeze could cost more than $2 billion per month, and given how involved the unwilling taxpayer has become in mortgage finance, this damage won't necessarily be limited to bank shareholders. This is a nightmare for anyone who wants a healing housing market and investors willing to lend to the next generation of homeowners. It also raises false hopes among delinquent borrowers.

More losses absorbed by taxpayers, more delays in reaching the bottom in prices, and more false hopes that will be dashed later: what a mess.

Backers of a moratorium claim they are upholding the rule of law, while we have allegedly abandoned it in opposing a freeze. This argument has it backwards. We say that disputes over private contracts should be decided on an individual basis under the law. The moratorium crowd wants to use the individual cases as a political lever to enact policies that effectively change the terms of existing contracts—e.g., more loan modifications, reductions in loan principal via bankruptcy court, or a moratorium.

As for the state Attorneys General who are promoting this foreclosure fracas, watch how few of them merely seek to force banks to document ownership, and how many try to muscle banks into settlements with unrelated benefits for the AGs' favored constituencies.

The moratorium lobby also argues that keeping people in homes they can't afford will somehow help the economy. This is of a piece with more than three years of failed policies intended to prevent housing markets from finding a bottom. These policies—begun under George W. Bush and continued under President Obama—have succeeded mainly in prolonging the agony and delaying a recovery.

In a slow-growth, high-unemployment economy still mending from a financial crisis, there are only so many trillion-dollar markets the politicians can destroy without sending America back into recession. Mr. Obama has often seemed indifferent to the economic consequences of political decisions, but on this issue he has correctly perceived the horrendous cost of blowing up the mortgage market again.

The ramifications of this policy go even deeper. The basic conundrum facing the banks is to foreclose or not to foreclose. If they foreclose, and if they process the sales, prices will crash. If they don't foreclose, more borrowers will quit paying, and prices will remain high, but few people will actually be paying them as squatting becomes the norm (Squatting Becoming a Way of Life for Many Delinquent Borrowers).

How The Foreclosure Mess Could Create a Downward Spiral for Housing

Monday, 25 Oct 2010 -- John Carney

The mortgage mess that lead to foreclosure freezes by several large banks across much of the country may slow down the ability of banks to issue new mortgages, which could push the housing market into a sharp downward spiral.

Even as banks begin to lift their voluntary moratoriums on foreclosures, the paperwork problems—banks discovering that they often were not producing valid proof of ownership in foreclosure proceedings—that led to the freezes have the potential to stymie new lending.

The paperwork problem is curable. Banks can go back through the chain of ownership of loans and liens to correct lapses.

But this process is time consuming and costly, especially when some of the original mortgage lenders or intermediary owners of the mortgages have gone bankrupt or been merged into other banks.

In the meantime, borrowers who have defaulted on their loans will likely be able to keep their homes for longer than they otherwise could. (Thinking About Accelerated Default? The Average Squatting Time Is Up to 449 Days) What’s more, banks are likely to find that more foreclosure actions are contested by borrowers as the public and attorneys eager to collect legal fees by fighting foreclosures become more aware of the documentation problems.

I wonder how many people will give their last dollars to attorneys to fight for hopeless dream of regaining their lost property?

All this means that banks will find themselves with more bad loans on their books. The normal pace of run-off of bad loans—delinquency to default, default to foreclosure, foreclosure to sale—has meant banks have not been able to recover revenue on non-performing loans for upwards of a year and a half in much of the country. The new pace of run-off will likely mean that banks are stuck with the non-performing loans for far longer.

The longer it takes for banks to exit bad loans and recover cash, the higher the level of bad loans on the books of banks will get. As the non-performing loan portfolio grows, banks will need to set aside an increasing amount of capital to balance. This will, in turn, mean banks will make fewer home loans until the backlog of bad loans can be cleared up.

In short, the foreclosure crisis has the potential of creating a liquidity crisis for home loans. The actual number of defaults is not necessarily increasing—it’s just taking longer than usual to clear the old non-performing loans. But this means that banks aren’t generating revenue from the foreclosures. It also means that the loan portfolios will appear to be worsening as the percentages of non-performing loans grow.

This process of a liquidity crunch for the mortgage market could be short-circuited if both investors and regulators are willing to provide some relief to banks. Regulators at the FDIC and the Fed could grant dispensation to banks to keep making new loans despite spiking non-performance rates in the home loan portfolio.

We have already granted banks dispensation by allowing amend-extend-pretend. What more do we need to do? Perhaps we should just let them loan out money to anyone with a pulse to fill the buyer pool. Oh, wait, we tried that once, didn't we?

Investors too could look beyond the temporary drop in recovery rates and rising default levels—although this is far from guaranteed. Investors could also panic at the bad numbers and sharply sell-off bank stocks. Bank executives are likely to fear the latter—which would mean that even if regulators grant relief, banks could still hold back when it comes to extending new home loans.

The only reason banks hold back on writing new loans is because there aren't enough creditworthy borrowers available. Anyone who is not already over-indebted, has a job, and has good credit can borrow plenty.

A liquidity crunch in the mortgage market would hit home sales hard. Buyers would discover credit harder to come by and more expensive, which would push down the price of homes even further. Coming after a summer with particularly brutal home sales numbers, this could set the stage for a sharp decline in home prices across much of the country.

This is, in fact, what is happening today. As I noted Monday, the Home Price Drop was Sudden and Dramatic.

And that’s when things will get really scary. A sharp decline in home prices would put even more borrowers underwater. Many buyers who are already underwater but hoping for a home price recovery might lose that hope. Default rates would grow, putting even more pressure on the banks to slow down lending. The further slowdown on lending would put more downward pressure on home prices. Rinse. Repeat.

In short, we could be looking at a downward spiral on home loan lending and home prices, thanks to sloppy paperwork by the banks that, in the rush to make new loans during the housing bubble, failed to make sure they were meeting legal requirements for perfecting and transferring mortgage interests in homes. It’s a mess the banks made—but the price of which may be visited upon many homeowners.

The downward spiral is what took out the subprime areas. Will the alt-a and prime be next? It's starting to look that way.

Tale of Two Borrowers

IT WAS the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way.

The period of the housing bubble was a time of contrasts. The belief was that prices were normal and that they would rise forever; the reality was that prices were inflated and rising based on foolish emotion and greed.

Today's featured property is the tale of two successive HELOC abusing owners. The first spent $100,000 of his equity but still found the greater fool to give him even more. The second owners spent $120,000 of their equity only to go into default as their imagined equity evaporated.

  • Owner number one purchased this property on 11/28/2000 for $425,000. He used a $297,500 first mortgage and a $127,500 down payment.
  • On 7/15/2002 he refinanced with a $350,000 first mortgage.
  • On 4/14/2003 he refinanced with a $397,500 first mortgage.
  • Mortgage equity withdrawal was $100,000 which was most of his down payment.

The property records are unclear, but based on the HELOC information of the next owners, it looks like the property was sold on 7/19/2004 for $655,000. Despite the first owner withdrawing and spending his down payment, he still walked away with double what he put into the property. I think that kind of borrower behavior is foolish, but when people were rewarded for it during the bubble, I can see why everyone started doing it.

The next owners pick up with a $131,000 HELOC on 7/19/2004. Assuming this was a purchase money mortgage that represented a 20% of the purchase price, this property sold for $655,000. This couple increased their HELOC to $250,000 on 11/16/2005 and withdrew $129,000. They imploded in spring of 2009, and two loan modifications later, they are trying to sell.

Foreclosure Record
Recording Date: 07/09/2010
Document Type: Notice of Rescission

Foreclosure Record
Recording Date: 06/28/2010
Document Type: Notice of Default

Foreclosure Record
Recording Date: 09/18/2009
Document Type: Notice of Rescission

Foreclosure Record
Recording Date: 08/18/2009
Document Type: Notice of Default

Loan owners in California have become accustomed to spending their equity. In their minds this is now an entitlement. It's one of the perks for living in California and taking on those oversized mortgages. As long as this belief persists, and as long as lenders enable this foolishness, we will continue to have cycles of booms and busts that periodically enriches everyone and imperils the banks.

Irvine Home Address ... 10 BLUE Riv Irvine, CA 92604

Resale Home Price ... $779,000

Home Purchase Price … $425,000
Home Purchase Date .... 10/28/2000

Net Gain (Loss) .......... $307,260
Percent Change .......... 72.3%
Annual Appreciation … 6.2%

Cost of Ownership
$779,000 .......... Asking Price
$155,800 .......... 20% Down Conventional
4.23% ............... Mortgage Interest Rate
$623,200 .......... 30-Year Mortgage
$147,462 .......... Income Requirement

$3,058 .......... Monthly Mortgage Payment

$675 .......... Property Tax
$0 .......... Special Taxes and Levies (Mello Roos)
$65 .......... Homeowners Insurance
$38 .......... Homeowners Association Fees
$3,837 .......... Monthly Cash Outlays

-$718 .......... Tax Savings (% of Interest and Property Tax)
-$862 .......... Equity Hidden in Payment
$236 .......... Lost Income to Down Payment (net of taxes)
$97 .......... Maintenance and Replacement Reserves
$2,591 .......... Monthly Cost of Ownership

Cash Acquisition Demands
$7,790 .......... Furnishing and Move In @1%
$7,790 .......... Closing Costs @1%
$6,232 ............ Interest Points @1% of Loan
$155,800 .......... Down Payment
$177,612 .......... Total Cash Costs
$39,700 ............ Emergency Cash Reserves
$217,312 .......... Total Savings Needed

Property Details for 10 BLUE Riv Irvine, CA 92604
Beds: 4
Baths: 3 baths
Home size: 2,900 sq ft
($269 / sq ft)
Lot Size: 5,400 sq ft
Year Built: 1975
Days on Market: 70
Listing Updated: 40457
MLS Number: U10003725
Property Type: Single Family, Residential
Community: El Camino Real
Tract: Dc
According to the listing agent, this listing may be a pre-foreclosure or short sale.

Beautiful expanded and remodeled Plan 5. Downstairs Bedroom expanded with private entrance. Kitchen fully upgraded with granite counter tops, butcher block center island, stainless steel double dishwasher, new micro/convect oven, and stainless range. All new windows and upgraded base and crown. Recessed lighting, laminate wood floors and slate floors and granite counter in guest bath.

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