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Irvine Housing Blog

Irvine Housing Blog

Link to Irvine Housing Blog

Foreclosures are essential to the economic recovery

Posted: 30 Nov 2010 02:30 AM PST

Some housing advocates claime that foreclosures are a problem. In reality, they are essential to the economic recovery.

Irvine Home Address ... 13 SPRING BUCK Irvine, CA 92614
Resale Home Price ...... $749,000

I ain't got a fever got a permanent disease
It'll take more than a doctor to prescribe a remedy
I got lots of money but it isn't what I need
Gonna take more than a shot to get this poison out of me

Bon Jovi -- Bad Medicine

Well meaning people are often wrong. The foreclosure process -- essential to the cleansing of consumer debt and the recovery of the housing market -- is very painful for the families that must endure it. Many on the left of the political spectrum are pandering to the masses facing foreclosure and proposing policies that would remove the negative consequence of foreclosure for those who over borrowed. Unfortunately, removing these consequences is the essence of moral hazard: if people don't experience consequences of their foolish actions, they tend to repeat the mistake.

John Taylor: Foreclosures Are the Mortal Enemy to Economic Recovery

Lori Ann LaRocco -- Monday, 29 Nov 2010 -- (edited for brevity)

The foreclosure crisis still divides us into two camps. There are those who believe that foreclosing rapidly on homes subject to defaulted mortgages is vital to clearing the market. Others believe we should do everything we can to keep people in their homes, urging loan modifications to forestall foreclosures. 

Obviously, I am in the group that favors rapidly clearing the market. As long as the debt on real estate is excessive and capital is tied up in non-performing assets, the economy will suffer. It's really that simple. The solution is equally simple: foreclose on delinquent borrowers wiping out the debt and extract the remaining capital value. With the excess debt removed, borrowers can use their wage income to buy goods and services rather than giving it to the bank. When the mis-allocated capital is returned to the market, new investment will be spurred in areas where capital is most needed. Right now, we don't need more real estate.

John Taylor, President and CEO of the National Community Reinvestment Coalition, falls solidly in the latter camp. Taylor would like to see widespread mortgage modifications that would allow homeowners in danger of defaulting to keep their homes. Taylor is on the board of directors of the Rainbow/PUSH Coalition and the Leadership Conference for Civil Rights. He has also served on the Consumer Advisory Council of the Federal Reserve Bank Board, The Fannie Mae Housing Impact Division as well as The Freddie Mac Housing Advisory Board. He is extremely passionate on why his idea is the right choice to help turn around the real estate market.

Despite the repeated failure of every loan modification program, people continue to advocate them. These programs are a complete failure. Even the worst government programs are usually touted as a qualified success among its advocates. Nobody thinks loan modification programs have been a success, yet we still have people clamoring for them. I suppose if it is the only solution available that suits an agenda, people will support it even when it is a proven failure.

LL: There has been so much overleveraging in the real estate industry and lower interest rates can only help so much, what needs to get done with this new Congress looking at Financial Reform with Fannie and Freddie because they have not been address yet.

JT: You are absolutely right. It's kind of like pumping plasma into a patient while the patient is still bleeding. We need to stanch the foreclosure crisis first.

How is the government supposed to solve the foreclosure crisis without injecting more money?

So the government has to get serious about this problem. The Administration’s voluntary approach to foreclosure prevention has probably done as much as it can possibly do, and even by their standards has not done enough.

They have to step up the pressure now to achieve better results. The Federal Housing Administration (FHA) and Fannie and Freddie are the only securitizers in town now until the private market comes back; , they ought to be able to get banks and servicers willing to cooperate and modify these loans heading to foreclosure.

It must be done. Because it is absolutely going to slow down any type of economic recovery if we have the eleven million more foreclosures projected by Wall Street analysts; if they go through, it’s going to triple the number of foreclosures we’ve experienced. How is that going to help the economy?

It will help the recovery because it will eliminate the excessive property debt of millions of over-extended borrowers. When borrowers have excessive home debt, the excess comes directly out of disposable income. Since consumer spending is such an important component of the economy, the excess interest payments are a direct financial drain.

This is the key point advocates of loan modifications fail to recognize. The banks don't want to see it because purging debt costs them money. Advocates on the left don't want to see it because purging debt requires foreclosure.

So you have to put on the table the idea of taking as many of these troubled loans as possible and putting the homeowners in sustainable, modified loans, that are based on their ability to pay. Banks should have made these kinds of loans, which the homeowner could actually pay back, in the first place.

Yes, banks shouldn't have made stupid loans to begin with. Foreclosure and its associated losses are essential to provide consequences to the banks for their foolishness to ensure this doesn't happen again.

LL: But what about the millions of people who purchased homes they could afford? Why should people be allowed to stay in homes they had no business buying in the first place, because they were way out of their price tag?

JT: Was it a massive, malfeasant, greedy, lending industry that caused the problem or was it stupid consumers who should have known better? I think the evidence overwhelmingly supports the former conclusion.

Yes, Lenders Are More Culpable than Borrowers, but so what? Both parties need to endure the consequences of their decisions. Just because one party is more to blame than another doesn't mean the less blameworthy participant gets a pass.

But that doesn't matter anymore; we don’t have time for that debate.

WFT? We have plenty of time for a debate. It isn't a debate this fool wants to have because he knows his position is weak and he doesn't want to face the stronger arguments on the other side. Interesting debating technique; win by claiming there is not time for debate.

The question now is what do we do to stop the foreclosures that are killing our economy by a thousand cuts, a hundred fold, every month.

Foreclosures are the mortal enemy to economic recovery. We can keep on pumping money into the system to create liquidity for banks and in the market, but it’s simply not going to succeed until they plug the hole at the bottom of the well!

Each word above is complete nonsense. First, foreclosures are not killing our economy, they are curing it. Second, foreclosures are not a hole at the bottom of the well. We are not leaking liquidity. Money is flowing in to the housing market at very low interest rates in an attempt to limit losses on the oversized loans of the bubble.

So what has the Administration done to stem foreclosures? They have put in place a voluntary program, which has done roughly half a million permanent modifications since the program began, but there's been three and a half million foreclosures during the same time period and seven million foreclosure filings.

That kind of performance earns merits a failing grade by any one's standards.

Since the program had no chance of success when it was initiated, and since its real purpose was to create a false hope among borrowers to induce them into making a few more payments, many banking and government interests consider this program a success.

So what do federal officials need to do? They need to stop carrying their hat in hand when dealing with Wall Street; The government can pound these guys, and they have all the leverage they need by merit of the fact that the banks can't do business without them. I hear people critical about the government’s role in the private lending sector; but without the government we don't have a housing market right now. Without the government there is no Fed window and bond issuance and the liquidity they create. Without the government there is no securitization. Wall Street isn't doing these things; there is almost no private label securitization happening.

You know, all these banks are sitting on loans heading into foreclosure because the banks that hold the second liens are refusing to modify; the banks that hold the second liens are expecting the first lien holders will take the entire hit, and they’ll get paid out at 100%. Well these banks holding the second liens need to be taken to task, because they are holding up a lot of modifications.

Despite the exaggeration about the 100% payout, his observation is correct; second mortgage holders are holding up both loan modifications and short sales. The second has no value. The only strength they have in the negotiation for short sale or loan modification is the ability to say no. Therefore, they say no quite often. The cramdown of second mortgages this gentleman advocates is why we have foreclosure. Second mortgages are converted from debt secured by real estate to unsecured debt similar to a credit card in a foreclosure.

Also, what are Fannie and Freddie waiting for? The government holds tremendous regulatory authority over them; but government officials says they can’t tell them what to do, even though the government says no not really, Fannie and Freddie that they are just in conservatorship. and we can’t tell them what to do. That's just not true. The government is in the position to tell Fannie and Freddie to refinance hundreds of thousands of loans tomorrow, but Fannie and Freddie and the administration are looking at their bottom line so they are charging extra fees above the private market on anything that has any type of risk in it. Fannie and Freddie have not reduced the principal on one single mortgage.

Halleluia! Not one penny of my tax dollars should go toward paying down the mortgage of a HELOC abuser.

They have done half of what the banks are doing. We said from the beginning, to Secretary Paulson and then Geithner, that the foreclosure crisis can’t be resolved by the voluntary participation of the banks.

You can't keep on sweetening the pie and expect them to do the right thing. The truth of the matter is that when push comes to shove the banks have no choice because the government has the ability to say to banks that if they want to do business with the government, including the Federal Reserve, FHA and the GSEs, they must cooperate and restructure these loans. If that had been done, some investors would have had to take some losses; but they are losing now at a very slow rate, prolonging the problem.

Yes, we should have nationalized the banks back in 2008, wiped out the shareholders, given haircuts to the bondholders, and started over. If we had done that, we would be past this crisis today.

The government should use the money they earned from TARP and purchase hundreds of thousands of loans at a discount—at a discount because they are not worth what they once were—and then recycle them into good, permanent, sustainable loans. Where people lost their jobs and can't afford their homes, other solutions are necessary. And abandoned properties should be foreclosed on and the properties should be put back on the market.

But we’re not seeing practical solutions to the foreclosure crisis pursued. It seems to me people are just throwing up their arms, letting everything go down and saying if we don't get through all these foreclosures we will never see a bottom. I think its a terrible way to get through all this, and it will undermine our economy for years to come.

Wrong! The people he characterizes as "throwing up their arms" are really sitting on their hands and doing the right thing. Fix the Housing Market: Let Home Prices Fall

LL: What you are proposing is extremely unpopular. How do you convince Americans this is the way to go to help the industry heal?

JT: People have a right to be mad, but they shouldn’t be mad at 17 million plus homeowners that have either gone into foreclosure or are heading there. Seventeen million homeowners can’t all be stupid and greedy and wrong.

No, they can't all be stupid and greedy, but as I have pointed out day after day, many of them were stupid and greedy, and you can't bail out anyone without significant moral hazards. Why is it necessary for 100% of the people facing foreclosure to be stupid and greedy in order to resist loan modifications and principal reduction? If 50% were stupid and greedy, do we want to reward that 50%?

The behavior of the industry is what changed; the financial services sector tricked and trapped these people, without the proper oversight to rein in their irresponsible lending practices.

The old predatory lending justification: people were tricked and trapped. If they were, they were tricked and trapped by their greed and stupidity.

Should people have known better? Yes. But the industry was rigged to push through these loans and convince people they could afford to do it. But again, it’s too late to rehash these tired debates.

No, it is not too late to rehash a debate in which the author is clearly wrong. The reason we have those debates is because policy advocates like this guy push for the wrong solutions. People should have known better than to take out Option ARMs, and they bear some responsibility for their actions.

If we do not respond to the foreclosure crisis now, we can guarantee the pain that will be felt by most of the people in this country. Families facing foreclosure don’t want a handout, they just want reasonable help.

Bullshit, they want a handout. They want principal reduction to get through the crisis, and when house prices start going back up, they want the free money of mortgage equity withdrawal.

In fact, most of the people that got bad loans, perhaps 90 percent of them, are still paying on that sub-prime loan. Some of them have just simply fallen behind.

If we don't do restructure their loans and keep people in their homes, property values will drop and everyone will be impacted who owns a home. We need to share the pain now, because otherwise it will affect us more broadly.

Why do homeowner losses need to be shared with the rest of us? As a renter who chose not to participate in the madness, I don't want to share in paying the bills of HELOC abusing Ponzis.

Many people might think well, gee, if these homeowners had been smart they should have gotten the loan I got.

Yes, Responsible Homeowners are NOT Losing Their Homes.

Well that loan was not available to them because the system was rigged to push people into higher cost loans. Why? Because brokers and lenders got their fees and earnings that were connected to convincing people to take out more expensive mortgages with predatory terms and conditions. That's what was wrong.

You can sit there and say the people should have known better, and call that the moral hazard. Or, you can recognize the real moral hazard here was allowing an industry to prepay upon a substantial portion of the home-owning public, to give them loans with terms and conditions the lenders knew were not sustainable.

Why does it have to be either one position or the other? People should have known better, and if we bail them out, it does create moral hazard. This is the same for the individual or for the lending industry as a whole. Both parties need to feel the pain of their collective bad decisions.

The moral dilemma then is do you put the burden on the people affected, while the banks are allowed to continue with their business? With the exception of investment products, when other other consumer product goes bad, the burden is put on the manufacturer, not the consumer.

Giving borrowers a pass is not the answer. No matter how you cloak it, any bailout that does not have the borrower endure the consequences of their mistakes is going to result in moral hazard and continued bad behavior among borrowers and bankers.

A bountiful harvest

Many people go to the home equity piggy bank each year. Some do this because they can't control their spending, so they must borrow more each year to pay off their credit cards. Some add to their mortgage debt because they believe it is free money they won't have to repay. A few likely knew it was a Ponzi Scheme and gamed the system because the banks were stupid enough to let them.

The owner of today's featured property went to the ATM machine periodically. I have no way of knowing what they did with the money, but it certainly appears as if this money was used to supplement their lifestyle spending. I wonder how well they are adjusting to a life without their own ATM machine?

  • The owners paid $179,000 on 4/28/1998. Their original mortgage information is not available.
  • On 6/23/1997 they refinanced with a $192,000 first mortgage. Even during the last bust these owners managed to increase their mortgage and extract some spending money.
  • On 2/25/1998 they refinanced with a $217,000 first mortgage.
  • On 7/31/2001 they refinanced with a $220,000 first mortgage.
  • On 5/15/2002 they refinanced with a $234,000 first mortgage.
  • On 11/5/2002 they refinanced with a $247,000 first mortgage.
  • On 1/31/2003 they refinanced with a $270,000 first mortgage.
  • On 6/1/2004 they obtained a $65,000 HELOC.
  • On 2/8/2006 they refinanced with a $410,000 first mortgage.
  • Total mortgage equity withdrawal is at least $232,000.

Irvine Home Address ... 13 SPRING BUCK Irvine, CA 92614  

Resale Home Price ... $749,000

Home Purchase Price … $179,000
Home Purchase Date .... 4/28/1988

Net Gain (Loss) .......... $525,060
Percent Change .......... 293.3%
Annual Appreciation … 6.4%

Cost of Ownership
$749,000 .......... Asking Price
$149,800 .......... 20% Down Conventional
4.55% ............... Mortgage Interest Rate
$599,200 .......... 30-Year Mortgage
$147,241 .......... Income Requirement

$3,054 .......... Monthly Mortgage Payment

$649 .......... Property Tax
$0 .......... Special Taxes and Levies (Mello Roos)
$125 .......... Homeowners Insurance
$135 .......... Homeowners Association Fees
$3,963 .......... Monthly Cash Outlays

-$730 .......... Tax Savings (% of Interest and Property Tax)
-$782 .......... Equity Hidden in Payment
$254 .......... Lost Income to Down Payment (net of taxes)
$94 .......... Maintenance and Replacement Reserves
$2,798 .......... Monthly Cost of Ownership

Cash Acquisition Demands
$7,490 .......... Furnishing and Move In @1%
$7,490 .......... Closing Costs @1%
$5,992 ............ Interest Points @1% of Loan
$149,800 .......... Down Payment
$170,772 .......... Total Cash Costs
$42,800 ............ Emergency Cash Reserves
$213,572 .......... Total Savings Needed

Property Details for 13 SPRING BUCK Irvine, CA 92614
Beds: 4
Baths: 3 full 1 part baths
Home size: 2,451 sq ft
($306 / sq ft)
Lot Size: 3,024 sq ft
Year Built: 1980
Days on Market: 76
Listing Updated: 40455
MLS Number: S632378
Property Type: Single Family, Residential
Community: Woodbridge
Tract: Ch
This is a One of a Kind Custom Home in Woodbridge Cottages - Totally remodeled in 1995. 2 Master Bedrooms, one upstairs and the other downstairs and very private. Chef's Kitchen with Granite Counters and Stainless Steel Appliances. Great Room set up includes Family Room, Dining Room and Kitchen all open to each other. Walk In Closet in Upstairs MBR and Recessed Lighting Throughout. Dual Zone A/C and Ceiling Fans Create a Comfortable, Energy Efficient Home. Extra Large Upstairs Laundry Room has Additional Storage. Large Patio with a Built In BBQ on One Side of Home - Storage or a Dog Run on the Other. Walking distance to Shopping, Parks & Award Winning Irvine Schools. No Mello Roos. Standard Sale. This is a Must See!

Totally remodeled in 1995? That was 15 years ago. It probably needs updating again.

real estate home sales

Foreclosure Investing Philippines - PNB foreclosed properties auction for South Luzon slated on December 21, 2010

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Foreclosure Investing Philippines - PNB foreclosed properties auction for South Luzon slated on December 21, 2010

PNB foreclosed properties auction for South Luzon slated on December 21, 2010

Another property auction that includes PNB foreclosed properties in South Luzon shall be held on December 21, 2010, Tuesday, 2:00pm, at the Monte Vista Conference Resort, National Highway, Pansol, Calamba City, Laguna Philippines. This auction covers foreclosed properties located in Batangas, Cavite, Laguna, and Quezon.

According to the auction flyer, which you may download below, bidders can enjoy  up to 35% discount*, as low as 8% Interest rate*, and payment terms of up to 10...

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This Photographer's Life

This Photographer's Life

I'm Speaking at Lavish! (and I need your help)

Posted: 29 Nov 2010 10:43 AM PST

So, I have agreed to speak at Lavish! on December 12th.  I have my friend Ginny Branch Stelling to thank for that! Ginny writes the wonderful blog My Favorite Color is Shiny, and we have also been...

This Photographers Life -- redesigned!

Irvine Housing Blog

Irvine Housing Blog

Link to Irvine Housing Blog

Government lacks the will to further manipulate the housing market

Posted: 29 Nov 2010 02:30 AM PST

One benefit of gridlock in Washington is that our government will be hampered in its ability to meddle in the housing market.

Irvine Home Address ... 63 DARTMOUTH 62 Irvine, CA 92612
Resale Home Price ...... $430,000

When you try your best, but you don't succeed
When you get what you want, but not what you need
When you feel so tired, but you can't sleep
Stuck in reverse

And the tears come streaming down your face
When you lose something you can't replace
When you love someone, but it goes to waste
Could it be worse?

Lights will guide you home
And ignite your bones
And I will try to fix you

Coldplay -- Fix You

Many in Washington believe they can cure the ills in housing if they manipulate conditions enough. The government can pass some law or fail to enforce another to accomplish their ends. Unfortunately, the meddling cures nothing and the crisis drags on while the bureaucrats lament their lack of control over the housing market and push for more. If prices were allowed to crash everywhere like they have in Las Vegas, the groundwork for recovery would be in place. As it stands, we have too much overhanging debt that isn't going to get repaid draining our resources and weakening our economy. When those in Washington think they can fix a problem, their solutions are generally worse than doing nothing at all. Perhaps gridlock will be a good thing?

Morgan Stanley views political will to fix housing as scarce

by JASON PHILYAW -- Tuesday, November 23rd, 2010, 4:05 pm

Housing and housing finance present the largest risk to the overall economy, according to Morgan Stanley analysts, who said they were too optimistic last year when they predicted "only a modest recovery in housing" for 2010.

Analysts said there are many options available to fix the nation's "dysfunctional housing and mortgage markets, but the political will to deploy them is scarce."

The analysts suggest additional loan modifications or refinancings, or principal writedowns may help ease the problems facing the industry.

If that is the best that "analysts" can come up with, then I am thrilled that the political will to screw our country up further does not exist.

First, loan modifications are a proven failure. No loan modification program can or will be successful. The problem is not that borrowers cannot make the payments, it is that borrowers have too much debt. Modifying the terms of that debt does not make the real problem go away.

Second, principal writedowns are part of the answer, but this must be done through a foreclosure to avoid moral hazard. Remember, Foreclosure Is a Superior Form of Principal Reduction. If we start writing down principal through debt forgiveness, then borrowers will be strongly incentivized to over-borrow next time because they know that if they get in too much trouble either the bank or the government will bail them out.

Banks have tightened lending standards and there's a shadow inventory of some 8 million units that create a vicious circle, according to Morgan Stanley. And without substantial policy reform, the imbalance won't correct itself for years and home prices may fall another 10% before reaching bottom in 2012, the analysts said.

Most of the people who wrote about the housing bubble before it became commonly accepted fact pointed out the vicious circle of tightening credit and lower prices would go unabated until prices fell below rental parity and buyers had a new reason to participate in the market. Only the amend-extend-pretend policy of the banks coupled with widespread squatting has prevented this inevitable cycle from cleansing the market of its excess debt. The Morgan Stanley analyst is raising this specter as a bogeyman, when in reality, it is exactly what the market needs to correct itself.

Morgan Stanley also said the risk of mortgage putbacks is restricting the supply of credit, as banks are only lending to borrowers with pristine credit and proper housing equity.

If banks want to make money, they should only rent to borrowers with good credit and proper reserves. To suggest otherwise shows how totally clueless our lending industry has become. They are so conditioned to passing the risk off to others that they see any barrier to origination as being an impediment to progress and profit. Our lenders are truly lost.

Still, the analysts expect loan originators to see losses of $85 billion to $165 billion from the putbacks with large-cap banks bearing the burnt of the losses.

Analysts said policymakers should first focus on repairing housing by reducing the supply and demand imbalances and restore market functioning. Then reforms can be implemented "to assure longer-term financial and economic stability."

These "analysts" are complete idiots. They are putting the cart before the horse. For the market to reduce any imbalances between supply and demand, it must be restored to its natural functioning. It doesn't work the other way around. The whole reason we have such imbalances today is because the government is manipulating the market in many ways with the primary goal being to preserve excessive debt and keep prices unnaffordable to a new generation of buyers.

Washington is making the housing crisis even worse

Bad policy and a bad economy make it a terrible time to buy. Instead of pushing cheap credit, Uncle Sam must let the market lower prices.

By Patrick Killelea -- November 18, 2010

Our long national bender of house price inflation has finally ended. Now all that remains is for the government to get out of the way and let the housing market sober up completely. Unfortunately, Washington is still tempting Americans to have one more drink – "on the house."

Real value of a house

As I explain on my website,, the value of a house depends entirely on what it would rent for. It doesn't depend on what you paid for it, or on how much you spent to build it. If you can save money every month by renting the same quality house in a nearby location, then it is foolish to buy at that asking price. The price is just too high.

Rents, in turn, depend on salaries. Try walking into a bank and asking for a loan to pay your rent. You know what the answer will be. So why is it that the bank will lend us vast amounts of money to take out a mortgage and take on expenses that will be much higher than rent for the same place?

Because banks are stupid. If banks were smart, they would never loan money under terms where the payment exceeds the potential rental income. Why is that? Because if they did that, they would have no risk of a loss of cashflow in the event of a foreclosure.

Think about it: if lenders would not have made loans were the payments greatly exceeded potential rental income, then even if 10% or more of borrowers decided to default, the bank could take the property back and rent it out for enough to cover the payment.

In fact, the whole amend-extend-pretend policy would be effective if the banks had kept their loan payment below rental parity. They would have foreclosed on the deadbeats and replaced them with renters who could make the "payments" while the bank searched for a new owner-occupant to buy the house and liberate their tied-up capital.

Because it is profitable to get people into debt. Those profits result in political pressure to pass laws encouraging mortgage debt. For everyone above the buyer on the food chain – from seller to real estate agent to bank to Congress, the White House, and the Federal Reserve – there is a strong interest in getting young and inexperienced families deeply into debt. Once in debt, new buyers, too, become part of the game – they need to find new housing victims if they want to eventually sell at a profit.

Thus we have the mortgage interest deduction, Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA), and other harmful government programs, all of which serve primarily to increase the amount of mortgage debt. Since most people don't do math very well and will take on as much mortgage debt as they can, this government facilitation simply results in higher house prices.

Higher prices negate any benefit to the buyer – but they do benefit people higher up the food chain. Those profits at the expense of the buyer get funneled into campaign contributions that keep the system in place, or make it even more pernicious.

It sounds like a hokey conspiracy theory, but Patrick's description of the mass collusion among the participants in the housing market is essentially correct.

At some point, the cost of owning shot right past the cost of renting. Owners were losing money, month after month, on a real cash flow basis relative to renting. But they didn't care because they felt rich from the implied increase in their house's value. They could even refinance at the greater valuation implied by "comps" – appraisals or sale prices of similar properties nearby – and pull money out to cover their monthly shortfall.

That worked until it didn't, and America woke up with a dreadful hangover, still ongoing. What's worse is that many powerful financial interests are determined to make sure that we never sober up.

Special interests working against us

Older sellers depend on young families’ getting themselves into debt. Less debt for the young means lower selling prices for the old.

Real estate agents, after years of blathering about how house prices only go up, are finally faced with the incontrovertible reality that house prices also go down. Sales volumes also go down when prices are finally recognized as being too high. The lack of turnover and lower prices directly hurt their commissions.

Banks blew all their depositors’ money on bad mortgage lending, amounts way out of line with salaries. This was fine for them as long as they could get mortgage-backed bond buyers to take the risk off their hands, but the bond buyers got wise, and they don’t want any more of that bad debt. In fact, they want to make the banks buy it back.

The Federal Reserve exists to protect the banks from responsibility for their own bad decisions, at the expense of everyone else, in the name of “financial stability.” So we have the Fed printing cash to buy up those bad mortgage bonds – which weakens everyone’s wealth by inflating the currency – to get the banks off the hook.

Ways to make it better

What should we do?

First, the press should stop characterizing higher house prices as better. Higher house prices are not an "improvement" and lower prices are not a "worsening" of the housing market. Higher house prices are simply inflation, and inflation is bad for buyers.

The president should say that lower housing prices are a wonderful thing for buyers, especially young families. He should point out that lower housing prices are true affordability. Increased mortgage debt is not affordability, just a trap for the unwary.

Why does this issue have no champion? Someone in government will stand up for nearly anything -- even stupid ideas have advocates. Why is a government policy that rips off an entire generation of home buyers getting no attention?

Lending regulations should eliminate comps as meaningless. All lending should be based by law on what it would cost to rent the equivalent house. Fannie, Freddie, and FHA lending programs should be stopped immediately, not gradually. It is the hope of lower prices that causes people to delay purchasing. We want to get prices back down below the cost of renting as quickly as possible for the maximum buyer benefit.

People in the Midwest and South should not be forced via their tax dollars to guarantee $729,750 jumbo Fannie and Freddie mortgages for Californians when they cannot get such a guarantee for themselves. The injustice is galling.

Why do we have an increased subsidy in areas with high prices? Isn't the subsidy actually inflating prices? Why do Nebraska taxpayers subsidize California HELOC abusers?

Banks should be heavily fined for leaving foreclosed property empty and deteriorating. Foreclosures don't ruin neighborhoods – empty houses do. If the banks won't take care of their houses quickly, the title should be auctioned off to people who will occupy and take care of them. Yes, even if the auction lowers comps or forces the bank to take a loss.

No mortgage interest deduction

There should be no mortgage interest deduction. Encouraging debt has resulted in disaster. Instead, we should promote savings, and outright ownership without any debt at all, in every generation.

Current owners usually misunderstand their own interests. If they ever want to upgrade, they will benefit more from the falling price on a bigger place than they lose from the falling price on their current place. Owners who want to upgrade should be firmly on the side of lower prices.

There is a feeling of terror that if house prices were allowed to be set by the unmanipulated free market, all consumer spending would stop and a permanent deflation would take hold. That just wouldn't happen. Consumers will always spend on things they need, and deflation will naturally stop at the point where a house is once again cheaper to own than to rent.

The nonsense and fear about lower prices is crazy. Fix the Housing Market: Let Home Prices Fall.

Another pseudo-cashflow property

If you count the appreciation as earned income, Orange County has some great cashflow properties during price rallies. Of course, you can't count appreciation as cashflow because it isn't sustainable, and it takes debt to access it, but many came to believe that appreciation converted to income through mortgage equity withdrawal was a wise way to manage their properties. That's why they are losing them now.

  • The owner of this property paid $243,000 on 12/18/1998. Their mortgage information is not available.
  • On 11/20/1999 this owner got a HELOC for $36,000 and extracted his first positive cashflow... kind of.
  • On 5/31/2001 he refinanced with a $231,000 first mortgage.
  • On 4/16/2002 he obtained a $68,000 HELOC.
  • On 1/23/2004 the got a HELOC for $100,000.
  • On 2/6/2004 he refinanced with a $235,638 first mortgage.
  • On 10/15/2004 he obtained a $150,00 HELOC.
  • On 11/1/2006 he opened a $250,000 HELOC.
  • On 3/12/2007 he refinanced with a $387,800 first mortgage.
  • On 10/10/2007 he obtained a $250,000 HELOC. If he withdrew this money, the property will be a short sale.

With the prospect of future ATM payments being slim, this owner defaulted on his first mortgage.

Foreclosure Record
Recording Date: 10/12/2010
Document Type: Notice of Sale

Foreclosure Record
Recording Date: 06/30/2010
Document Type: Notice of Default

Irvine Home Address ... 63 DARTMOUTH 62 Irvine, CA 92612   

Resale Home Price ... $430,000

Home Purchase Price … $243,000
Home Purchase Date .... 12/18/1998

Net Gain (Loss) .......... $161,200
Percent Change .......... 66.3%
Annual Appreciation … 4.8%

Cost of Ownership
$430,000 .......... Asking Price
$15,050 .......... 3.5% Down FHA Financing
4.55% ............... Mortgage Interest Rate
$414,950 .......... 30-Year Mortgage
$84,531 .......... Income Requirement

$2,115 .......... Monthly Mortgage Payment

$373 .......... Property Tax
$0 .......... Special Taxes and Levies (Mello Roos)
$72 .......... Homeowners Insurance
$295 .......... Homeowners Association Fees
$2,854 .......... Monthly Cash Outlays

-$341 .......... Tax Savings (% of Interest and Property Tax)
-$541 .......... Equity Hidden in Payment
$26 .......... Lost Income to Down Payment (net of taxes)
$54 .......... Maintenance and Replacement Reserves
$2,051 .......... Monthly Cost of Ownership

Cash Acquisition Demands
$4,300 .......... Furnishing and Move In @1%
$4,300 .......... Closing Costs @1%
$4,150 ............ Interest Points @1% of Loan
$15,050 .......... Down Payment
$27,800 .......... Total Cash Costs
$31,400 ............ Emergency Cash Reserves
$59,200 .......... Total Savings Needed

Property Details for 63 DARTMOUTH 62 Irvine, CA 92612
Beds: 3
Baths: 1 full 2 part baths
Home size: 1,524 sq ft
($282 / sq ft)
Lot Size: n/a
Year Built: 1981
Days on Market: 83
Listing Updated: 40507
MLS Number: P751647
Property Type: Condominium, Residential
Community: University Town Center
Tract: Cc
According to the listing agent, this listing may be a pre-foreclosure or short sale.

This home is bright & cheerful and has many upgrades. The home offers 3 beds, 3 baths, vaulted ceilings, formal living room, fireplace, wooden floors, upgraded kitchen & baths and much more. Location offers the finest schools and shopping and easy access to freeways.

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