Loan owners have come to believe they are entitled to loan modifications. They aren't, and banks don't want to change the terms of the loan, so they make the process as difficult as possible.
How did we stay so long together? When everybody, everybody said we never would
Sugarland -- Stuck Like Glue
Lenders and borrowers are stuck with each other. Lenders know everything about their borrowers, and most lenders believe their borrowers are capable to making their mortgage payments. Unfortunately, when they are severely underwater and paying more than a comparable rental, borrowers don't want to make their payments. A poor compromise is a loan modification. They haven't worked out very well.
CHICAGO — Ron and Cheryl Schmalz think they know one reason the U.S. housing market is stuck. They just spent more than two years and created about 50 pounds' worth of paper trying to get a $300-per-month modification to their mortgage.
Whoa! Wait a minute. What is the connection between the housing market being "stuck" and people having difficulty getting a loan modification? If everyone who wanted one were given a loan modification would the market suddenly get unstuck? Of course not. The banks are still in denial that they gave out a bunch of free money. If they have to write off the debt in loan modifications, they truly would be giving out free money. They won't do that.
Nearly every month for the past two years, the Schmalzes received a warning from their mortgage holder, JP Morgan Chase, that the bank was about to foreclose on their home and that late fees were mercilessly piling up. Nearly every two months, the couple would dutifully fax in a pile of paperwork reminding the firm that they were participating in its loan modification program and making trial payments prescribed by the bank.
"We had 17 different relationship managers," said Ron Schmalz. "They just make you file the same papers again and again and again. And each time you get a new manager, you have to start over. The last time we thought we had a permanent modification, we got another call that said, 'Hi, I'm your new representative.' It makes you crazy."
At some point, perhaps after the 10th different "relationship manager" doesn't it dawn on people that their lender doesn't want to give them a loan modification?
It reminds me of the Publishers Clearinghouse Sweepstakes. You can enter the contest without buying their magazines, but they will resend you the paperwork with another query to buy a magazine. After about a dozen mail ins, if you still haven't bought a magazine, they will begrudgingly enter you in the sweepstakes. They make people fill out endless paperwork over and over again because they don't want to enter people into the sweepstakes who don't buy magazines.
The same is true for loan modifications. They make people fill out endless paperwork because banks don't want to give the loan modification. Why would they? Particularly if they can get borrowers to keep making partial payments, they will shine those people on as long as possible. As far as the bank is concerned, these borrowers are the living dead, so squeezing a few extra payments out of debt zombies is gravy to them.
Further, if lenders did start giving out loan modifications, everyone would want one. Who wants to pay back their full mortgage balance under onerous terms when banks are giving borrowers better deals?
There are many troubling clogs in the mortgage pipeline that are keeping the housing market stuck — lenders aren't lending; there are too many homes for sale; there's a lack of buyers because of poor employment prospects.
I have read the statement that lenders aren't lending many times. It isn't true. This is a sensationalist claim that implies lenders are capriciously hurting the economy and the housing market.
It is true that lenders are no longer giving unlimited amounts of free money to anyone with a pulse. Hopefully, we will never return to the complete lack of standards and accountability of the housing bubble. However, lenders stand ready to loan money to anyone who meets appropriate lending guidelines. There just aren't that many of those people available.
But one critical clog is the limbo faced by homeowners who can't afford their full mortgage payments any longer but who could survive if their loans were refinanced or modified. In 2009, the Obama administration launched its Home Affordable Modification Program (HAMP), estimating it would help keep 5 million families in their home — and keep 4 million empty houses off the market, critical to the health of the housing market.
Did anyone who wasn't engaging in wishful thinking really believe the government would be able to execute 5 million loan modifications? The announcement had all the features of symbolic politics, with perhaps the exception of the appointment of a foreclosure czar.
Also, I dislike the pandering in this article when he says the program would keep "families in their home." It isn't their home, it never was. They borrowed a huge amount of money, often with nothing down, to occupy real estate. Underwater loan owners have the same claim to real estate a renter does: none. They have no equity. The only thing they own is their loan.
At the same time, banks committed to continuing their similar, parallel proprietary modification processes.
The Schmalzes' odyssey is a window into the challenges faced by homeowners looking for help, by government regulators trying to prop up the failing market and by banks trying to pick the right bets among mortgage holders who might be able to pay some, but not all, of their monthly payments.
The Schmalz family has a happy ending. After two years of effort, the monthly payment on their Chicago-area home was reduced from about $1,175 a month to $861. It's not a free ride: Their original $90,000 mortgage is now a $98,000 mortgage, and the couple will make up for the lowered payments with additional payments on the end of the loan.
In other words, these borrowers converted their fixed-rate mortgage to an Option ARM. Do you remember the terms on Option ARMs? Temporary payments less than the fully-amortized amount with the principal being added on to the mortgage balance, and increasing payments in the future: those terms are a proven disaster, but they make up the core of loan modifications.
Still, the break the couple got in April represents the end of a nightmare that began in September 2008, when Ron lost his job in telecommunications and the couple told the bank it needed help. It's a Red Tape wrestling match that Ron Schmalz says can break the spirit of homeowners who might otherwise be able to ride out the rough employment market.
"You keep going and you keep giving and you keep doing and you keep faxing and you keep calling to no avail. And you just feel like you're a gerbil," said Ron. "You're sitting in a wheel going nowhere."
That's because they are gerbils, or sheeple if you prefer. If they were trying to give lenders more money or new business, do you think the process would have been so difficult?
Right after losing his job, Ron Schmalz began working with Washington Mutual, the original mortgage holder, on the modification paperwork. By early 2009, it was clear the application was in trouble, as Chase's acquisition of Washington Mutual had thrown things into disarray. After a few rounds of resubmitting required tax forms, income statements and monthly budgets, the Schmalzes were denied.
Ron Schmalz had found a new job by then, albeit at a lower salary, and for a few months in 2009, the couple tried to keep up with their $1,100 payments. But then Cheryl lost her job, they missed a payment, and they resubmitted their application. Working with Chase's proprietary modification program, rather than the government's HAMP program, they were given a temporary modified payment around $800 per month. The couple says they dutifully made the new payments beginning in January 2010 and were told that within three months that Chase would decide whether the adjustment would be made permanent or rescinded, so either way, they could move on with their lives.
Then, 14 months passed.
What is the bank's urgency to do anything? The took a loan in default and got the people to make $800 per month payments, and they didn't have to agree to anything. The bank is going to allow that situation to go on indefinitely. They have bigger problems with other loans to deal with.
Letters saying "We are prepared to start foreclosure proceedings" arrived every month. Ironically, they all included instructions on how to enter a loan modification program.
Almost as frequently, the Schmalz family says, they were told they'd forgotten to submit a tax form or an income form, or that their file was incomplete, so no decision could be made. With nearly every conversation, there was a new "relationship manager."
"It's about obstacles. It's about what they placed in front of us to make this modification a reality. It made things very difficult," Ron said.
Of course they did. They don't want to make the process easy because they don't want to give out loan modifications. This isn't a story about a bad program that needs to be streamlined. The banks have no desire to streamline this process or make it any easier. They want to get whatever they can out of borrowers, and if providing a dangling carrot leads borrowers to make at least partial payments, banks will do that.
There's no way to know who's to blame for paperwork mishaps, but the Schmalzes brought quite an organized pile of documents and file folders with them to show a reporter.
"Things got so tense that we were at each other's throat, saying: 'Did you file this? Didn't you file that?' You know, sometimes blaming each other," said Cheryl. By that point, they'd fallen behind by $10,000, and "the tune of our conversations with Chase got nasty."
They were $10,000 behind on their mortgage payments. What did they expect, invitations to the Chase Christmas party?
In the middle of 2010, the couple turned to Illinois Attorney General Lisa Madigan looking for help.
After a flurry of complaints dogged the various loan modification programs, Madigan's office had created a special division to deal with consumers facing the Schmalzes' plight. The agency gets about 200 calls per week to its mortgage help hotline, said Christine Nielsen, who heads the division. It brought on two full-time housing counselors to help homeowners submit loan modification requests to banks; still, she's seen the difficulty consumers have when working with banks. Despite a flurry of complaints about modification applications in late 2010, homeowners are still being left in the lurch.
Loan modifications are not an entitlement. As I noted last year, Loan Modifications Succeed by Increasing Borrower Entitlements. "If people are not forced to cut back discretionary spending before they obtain a government bailout, taxpayers are subsidizing their discretionary spending. The standards of what constitutes discretionary spending from essential spending depends greatly on the the spender's sense of entitlement."
How many of the people calling the hotline looking for the loan modification they deserved were unwilling to cut back on their lifestyle extravagances? Remember Calculated Risk's post HAMP applicants tanned and juiced?
"Consumers are still having a fair amount of difficulty getting answers from banks about their loan modification applications," she said. She said the Schmalz case was typical of the problems consumers are encountering, but some are much worse. One recent applicant was turned down for a modification by another bank (not Chase) because of a difference of $20 per month, she said.
Banks have to draw a line somewhere, and no matter where that line is drawn, someone will just miss it.
Chase wouldn't discuss the specifics of the Schmalz case, other than to say the firm provided the family with a "special forbearance" in 2010 and a modification in 2011.
"In general, we need complete and current information from a customer to make a modification decision," a Chase spokesman said.
Timely processing of modification applications is essential to the housing market recovery, said Madigan.
"Our nation continues to be in the grips of a home foreclosure crisis of unprecedented proportions. Meaningful loan modifications — ones that truly reduce a homeowner's payments to affordable levels — can save homes, yet people often face serious obstacles attempting to navigate the loan modification process on their own," Madigan said. "Resources provided by my office and other HUD-certified housing counselors can help people received a modification by ensuring banks comply with federal modification guidelines."
Reducing payments to affordable levels after the fact does not save homes. By converting these loans to Option ARMs, they merely delay the inevitable foreclosure. These homes should never have been imperiled in the first place through foolish lending. Making sure lending does not get stupid again is the only thing that can save homes and sustain ownership.
As the modification process drags out over months, or even years, it's easy to understand the problem facing both banks and consumers. Generally, banks are working off an affordability formula based on income. Financial circumstances change; applicants can and do lose or recover income after they submit an application, which requires a recalculation. That explains part of the delay faced by the Schmalz family.
In the real world when someone gets laid off or can no longer afford their house -- they have to sell it and move. Now, once you have obtained a certain level of housing entitlement, apparently you get to keep it forever even if you can't afford it any more.
Here's my new retirement plan. In my late 50s, I will borrow the maximum I can at the peak of my salary. Then a couple of years later, I will retire and demand a loan modification based on my social security income. Since I am entitled to a loan modification, they should reduce my payments to what I can now afford. That way I get to keep a McMansion on a retiree's income.
Excessive delays, however, lead inevitably to such changes. A family that applies for help because of a loss of income will be working immediately to replace that income. That places them squarely in a catch-22 — success finding a job could lead to failure in a loan modification application or, more specifically, in the conversion of a temporary to a permanent modification.
Duh! If someone finds a better paying job, they no longer need the loan modification, do they?
The delays leave the family in a perpetual state of uncertainty, with a pile of threatening bank letters rising. It also leaves the housing market in uncertainty — no one knows how many trial modifications will ultimately be rejected, with the likely outcome that the owners will lose their home and the house will be thrust onto the already-saturated housing market.
I'll give you a hint. Over time, they all will fail. Even in the early stages, the failure rate is 75%. Why would that number improve?
The most recent data on the administration's HAMP modifications show that only about one-third of 2 million modifications have been made permanent. Millions of other homeowners are engaged in proprietary bank modifications.
Even as the bills and foreclosure notices piled up last year, Nielsen's office told the Schmalzes to keep making their trial modification payment in order to demonstrate their ability to satisfy the lowered obligation. Finally, in April, the Schmalzes got the good news they'd been dreaming about.
"Essentially, we got a refinance," Ron Schmalz said. "But they could have done this at Day 1 for us. We're not upset with the result; we're happy with it. We're just upset with the process. We just don't understand why it took this long."
That's the question nearly every observer of the housing market is asking about a potential recovery.
Yes, the lender could have given these borrowers and the millions of others loan modifications on day 1, but that would cost them billions more than they are already losing. Once the word gets out that loan modifications are easy to get, everyone will want one. Foreclosure Is a Superior Form of Principal Reduction.
“They must know something that I don’t know,” said David Lykken, president of Mortgage Banking Solutions, an Austin, Texas-based consulting firm. “They’re too smart to be heading into an area that’s disastrous.”
A lender that is too smart to make a bad loan? LOL!
I don't know what MetLife is up to, but the reverse mortgage industry is theirs for the taking. Based on loans like the big loser they made on this property, they can have it.
Today's featured property was purchased for $125,000 on 8/24/1990. There is a $112,921 first mortgage recorded in 1999, but no other refinance or HELOC activity. In other words, this was a responsible borrower.
Then on 1/28/2010, MetLife gave her a $367,500 reverse mortgage. Apparently, she took the money and ran.
Foreclosure Record Recording Date: 03/03/2011 Document Type: Notice of Sale
Foreclosure Record Recording Date: 11/30/2010 Document Type: Notice of Default
MetLife bought the property for $184,759. Perhaps that is all they gave her of the $367,500 they approved her for. Either way, this doesn't look like the kind of business a "too smart" lender would want to engage in.
-$104 .......... Tax Savings (% of Interest and Property Tax) -$296 .......... Equity Hidden in Payment (Amortization) $14 .......... Lost Income to Down Payment (net of taxes) $49 .......... Maintenance and Replacement Reserves ============================================ $1,550 .......... Monthly Cost of Ownership
Cash Acquisition Demands ------------------------------------------------------------------------------ $2,329 .......... Furnishing and Move In @1% $2,329 .......... Closing Costs @1% $2,247 ............ Interest Points @1% of Loan $8,152 .......... Down Payment ============================================ $15,057 .......... Total Cash Costs $23,700 ............ Emergency Cash Reserves ============================================ $38,757 .......... Total Savings Needed
Property Details for 314 STREAMWOOD Irvine, CA 92620 ------------------------------------------------------------------------------ Beds: 2 Baths: 1 Sq. Ft.: 889 $262/SF Property Type: Residential, Condominium Style: One Level, Traditional View: Ocean Year Built: 1977 Community: Northwood County: Orange MLS#: S664087 Source: SoCalMLS Status: Active ------------------------------------------------------------------------------ Welcome to the wonderful Springs area in Irvine. This lovely lower level condo features 2 beds and 1 bath, kitchen with dining area and open livingroom. Super clean and ready to move in. A must see!!!
BTW, rumor has it that OCAr is meeting today to discuss a settlement offer. I will update everyone soon.
A contemporary sustainable house design has been built in The Cleveland Museum of Natural History’s area, designed by Doty & Miller Architects who usually designs several sustainable buildings. It is opened to public, and becomes the only public Passive House in the country. It will provide new sustainable design outlook for those who care to the green environment.
The eco friendly house building provides the future view of energy-efficient house. It will show how humans can make responses of the needs of having energy-efficient facilities, to protect the environment from energy drought. The eco construction was design by applying passive house idea. It is hoped to save at least 90% of heating and cooling costs, compared to ordinary traditional houses.
The eco friendly construction is supported by SIP wall system. It was designed to work without a furnace. To achieve high sustainability, this house is built by utilizing eco friendly building materials and furnishings, and also the application of advanced storm water management. Healthy home environment also becomes an important consideration. The house also provides good connection of the inhabitants and the nature surrounded.
The passive house structure is provided by good insulation in walls, sealed building envelope, efficient heat-recovery ventilation, and ultra high-performance windows. The storm water management provides water sources for the house. The house uses pavement systems that were made from concrete, asphalt, unit pavers and recycled glass. These pavement systems allow water to directly drain through the pavement into a stone base reservoir below, which will reduce the sewer systems’ burden and increase the ground water’s quality.
This eco friendly building is also completed by a rain garden which utilizes the water collected from the south storm water systems. The landscape is completed by Ohio and the Great Lakes region’s native plants.
The eco building is powered by sustainable energy provided by the sun. The energy is collected by 4-panel, pole-mounted solar array, located on the south lawn area. An energy tracking system is also available. Of course the use of sustainable LED lightings, etc are also provided.
The two story sustainable construction is completed with three bedrooms and 2 1/2 bathrooms, plus a full basement. It will be displayed from June to September 2011, and will be moved to a nearby lot on Wade Park Avenue in University Circle. After that, it will be available to be purchased.
The GSEs are picking up the pace of liquidations by offering incentives and lowering prices. The banking cartel who is still withholding inventory will be left with devalued REO.
Last September I noted the GSEs were expediting their foreclosures and REO sales and this behavior was going to threaten the banking cartel. The GSEs are still at it, and they are undercutting bank REO pricing to sell their inventory. Take the property as is, or take nothing at all.
Looking for a deal where the home seller pledges in advance to contribute potentially thousands of dollars to your closing costs? If so, check out the summer sale terms available from two of the largest and most motivated sellers of foreclosed homes in the country: Fannie Mae and Freddie Mac.
You may know the companies for their troubled mortgage businesses or the financial foibles that pushed them into the control of federal conservators in 2008. But the flip side of those problems is that they now have massive numbers of properties taken back through foreclosures.
Fannie Mae had 153,549 of them at the end of the first quarter. Freddie Mac owned 65,174. That’s nearly 220,000 houses for which they need to quickly find new owners, or they’ll rack up even bigger losses for taxpayers.
The GSEs are not engaging in amend-extend-pretend. They don't have to. Since they are now under government conservatorship, they don't have to worry about maintaining financial ratios or preserving capital. They are already broke, and the losses already absorbed are more than double the accumulated profit they earned in the years prior to the government takeover. The GSEs still have a huge shadow inventory, but once they decide to foreclose, they take the property back and sell it immediately. They are the most active market sellers pushing prices lower across America.
The mandate of the GSEs was to provide affordable housing to lower and middle income Americans. They are succeeding brilliantly. By liquidating their REO, they are doing more to make housing affordable than any stupid loan program they attempted over the last forty years.
To move that bulging inventory, both companies have begun time-limited sales campaigns with significant incentives for new owner-occupant purchasers — no investors allowed — and even extra cash for the real estate agents who bring buyers to the table.
Fannie and Freddie both are offering to pay up to 3.5 percent of the price of the house toward buyers’ closing costs, plus they’ll hand over a bonus of $1,200 to participating real estate agents. Fannie’s program covers properties on which contracts are accepted and close no later than Oct. 31. Freddie’s sale requires contracts no later than July 31 and closings by Sept. 30.
Many buyers of GSE properties use FHA loans requiring only 3.5% down. Fannie Mae even has it's own low-money-down program. With the GSEs covering all other closing costs, they are getting those buyers with only the absolute minimum down payment.
Fannie’s program even offers mortgage money to help finance these purchases, sometimes with as little as a 3 percent down payment. The company also has what it calls a “renovation mortgage” option that provides additional mortgage amounts to cover fix-ups.
Freddie does not offer special mortgage financing for buyers during the sale period, but has other inducements, including two-year home warranties and 30 percent discounts on appliances.
All the foreclosed properties are listed with photos and descriptions at either HomePath.com (Fannie) or HomeSteps.com (Freddie). On those sites, you can search by price, local markets, Zip codes and entire states. Featured offerings on HomePath recently included:
• A six-bedroom, five-bath house in Littleton, Colo., with 4,990 square feet of space. Asking price: $424,900.
• A two-bedroom apartment with 1,164 square feet in Las Vegas for $43,999.
• A $184,900 two-bedroom, one-bath home in Long Beach, Calif.
• A four-bedroom, two-bath house in Brentwood, Md. Asking price: $65,000.
The following are HomePath.com properties in Irvine:
The summer clearance sales are part of rapidly accelerating efforts by both companies to get ahead of the tidal waves of foreclosures flowing into their portfolios in recent months. During the first quarter, Fannie Mae acquired 53,549 properties. However, during the same period, it managed to sell 62,814 houses — a record number that produced a net outflow.
Freddie Mac also sold more foreclosures than it took in during the first quarter, acquiring 24,709 homes while selling 31,628. In some parts of the country, Freddie’s offerings are even generating multiple bids on houses, said Brad German, the company’s spokesman.
Both companies are targeting only buyers who plan to live in the homes — rather than non-occupant investors who want to flip them or rent them out — as part of a larger neighborhood real estate stabilization effort.
If the GSEs were to open bidding to investors, they would undoubtedly get lambasted for not encouraging owner occupancy. The cost of that government policy is enormous because on many of the properties in their portfolio, there aren't many owners who want to occupy them. As a result, the GSEs discount their properties far more than they should, and they end up pushing home values much lower.
I don't oppose their policy. There are plenty of non GSE properties to invest in, but if the GSEs were truly concerned with getting the best price for their REO, they wouldn't be excluding anyone from the buyer pool. The recovery they are not obtaining is being covered by taxpayers. As a result, we are all contributing to the good deals obtained by the few owner occupants buying today.
The contribution of up to 3.5 percent of the sale price toward the buyers’ closing costs can be substantial. On a $200,000 house, the buyers could receive $7,000 toward their closing expenses, which might determine whether they can afford to buy.
Combine that with additional incentives, such as favorable financing or warranties, and the total package can look extremely attractive to first-time and moderate-income purchasers.
Are there downsides or restrictions for would-be buyers on either HomePath or HomeSteps? Absolutely. Top of the list: Keep in mind that these are foreclosed properties, and some of them have been abused by previous occupants. Fannie and Freddie both do repairs to bring houses up to what they believe are marketable standards, but don’t be surprised to find that they are not in pristine condition.
Second, though foreclosures do generally sell for less than non-distressed houses, you need to understand that both Fannie and Freddie are in the business of maximizing returns on assets. Do not assume that the listing prices are deep-discount giveaways. Be diligent in comparing prices and values before bidding, and negotiate just as you would with any other real estate purchase.
From what I have observed pulling comps on closed sales, the GSEs are making deep-discount giveaways. Anyone looking to be an owner-occupant on a lower cost property should look at the GSE portfolio. These must-sell properties are the best deals in the market today. And given the huge shadow inventory the GSEs have not begun to process, the deals will only get better.
Federally-backed loans already make up a majority of the mortgages classified as ‘seriously delinquent’ in the US financial system. In other words, there are more soured loans held or backed by the US’s giant GSEs — Fannie Mae and Freddie Mac — plus the Federal Housing Administration (FHA), than those held by banks and in private-label securitisations.
But when it comes to Real Estate Owned (REO) property, some reckon the federal share of so-called shadow housing inventory (foreclosed properties) looks set to surpass the private sector’s too.
Here’s Goldman Sachs, including economists Alec Phillips and Jan Hatzius:
The federal share of REO property is also rising. For 1Q, RealtyTrac estimates that total REO property held by lenders totaled 872,000. Of this, we know from monthly or quarterly financial statements that Fannie Mae, Freddie Mac, and the FHA hold roughly 300,000 of these properties on their books, and that this inventory has been rising by more than total REO inventories over the last year. Over the next few quarters, the federally backed entities are likely to see their inventories of REO property become a larger share of the total. The chart below shows the accumulation of REO property by the GSEs and FHA, which was on a trend to overtake private sector activity until it declined in 4Q, most likely due to legal irregularities in foreclosure processing (the chart relies on filings from the federal entities and assuming that the difference between this number and total REO filings reported by RealtyTrac are related to private label securities or bank portfolios).
Now, Goldman reckons the government could use its newly-acquired shadow inventory in a couple ways — one of which, notably, is to help prop up house prices by not doing anything with it, really.
So far, the GSEs are not withholding inventory from the market. If prices continue to crater, they may change their minds, but for now, REO is being cleared out as fast as it comes in.
Here’s Goldman again:
As the GSEs and FHA begin to take on a larger and larger share of seriously delinquent loans and, ultimately, foreclosed properties, how policymakers approach the operations of these entities could become an important factor for home prices, since these entities could in theory be used to hold supply off of the market in an effort to support prices. As shown in the chart below, distressed property sales appear to be weighing on home prices, with solid gains over the last couple of months in the CoreLogic HPI that excludes distressed sales, compared with weakness in the index that includes them.
However, the federally backed entities have not shown much sign of trying to hold properties back from the market. The FHA may be particularly constrained by costs, since it has been trying to raise its capital level after concerns last year that it would fall below required minimums. But the Treasury is providing temporarily open-ended financial support to the GSEs, so they do not have the same constraint. (though the administration would probably prefer to avoid further losses at the GSEs if possible). Despite federal support, the GSEs have not made any significant new attempts to hold supply off the market.
Indeed, Goldman says the first quarter of this year was the first since 2009 that the GSEs and FHA acted as a combined net supplier of foreclosed properties to the market. They expect the agencies to assume ownership of as many as 180,000 properties per quarter, or 700,000 over the next year.
Which would mean — if the federal entities decide to keep selling as they’ve been doing so far — there would be a whopping 30 per cent increase in the number of properties feeding into the market.
Ever since the housing bust became headline news, housing bears have been predicting a flood of inventory that would push prices lower. Lenders successfully withheld product from many markets, and the GSEs were not foreclosing in earnest for several years as they attempted various loan modification programs. With the complete and utter failure of all loan modification programs, the GSEs are now shifting toward foreclosure processing. The lenders who are attempting to withhold product are going to sit and watch as the GSEs devalue the holdings of lenders and make them wish they hadn't waited.
Irvine is an unusual market. Relatively little of our inventory was financed by the GSEs because our price points were generally above the conforming limit during the bubble. Some will take that to mean that Irvine will escape the problems of GSE liquidation. Not true. As the GSEs liquidate their properties in nearby communities and lower prices there, the substitution effect will steal buyers away from Irvine. That will lower sales rates even more, and the few must-sell properties that come to market will push prices lower. In other words, the GSEs will cut the Irvine market down at the knees. The price correction will take longer, but it will still occur, just as we are seeing now.
One of the more annoying lies to come from the housing bubble is the revisionist history the conservatives in the Republican party have been peddling concerning the role of the GSEs. The GSEs did not inflate the housing bubble:
The worst junk mortgages that inflated the housing bubble to extraordinary levels were not bought and securitized by Fannie and Freddie, they were securitized by Citigroup, Merrill Lynch, Goldman Sachs, Lehman and the other private investment banks. These investment banks gobbled up the worst subprime and Alt-A garbage that sleaze operations like Ameriquest and Countrywide pushed on homebuyers.
The trillions of dollars that the geniuses at the private investment banks funneled into the housing market were the force that inflated the bubble to its 2006 peaks. Fannie and Freddie were followers in this story, jumping into the subprime and Alt-A market in 2005 to try to maintain market share. They were not the leaders.
Conservatives are peddling the lie about the GSEs because they want to see them dismantled. I agree with their policy ideas. The GSEs should be dismantled, but not because they inflated the housing bubble. The GSEs are no longer necessary. We have a robust secondary market for securitized loans without the GSEs. At this point, the GSEs are being used to keep mortgage interest rates low through their explicit government guarantee. The government has no place assuming the risk of private enterprise -- and pay the billions in losses -- and for that reason, the GSEs should be eliminated.
The folly of the GSEs is apparent in properties like today's featured property. The GSEs came in at the end of a long series of Ponzi borrowing and bought an Option ARM the former owners took out. As Dean Baker noted in the quote above, they were followers in the story, and they bought loans like this one in 2005 to maintain market share. In other words, they gambled with money they didn't have and now you and I are paying for it.
Regular housing ATM users (HELOC addicts)
The owner of today's featured property paid $171,500 on 2/4/2000. They used a $162,925 first mortgage and a $8,575 down payment.
On 12/5/2000, less than a year after buying the property, they pulled out their first $35,000+ in mortgage equity withdrawal with a new $199,138 first mortgage. They went Ponzi.
On 10/15/2001, less than a year after their first big payday, they pulled out another $15,000+ with a $215,847 first mortgage.
On 6/7/2002, less than 9 months later, they refinanced with a $209,600 first mortgage and a $52,400 second mortgage which gave them another $35,000+ cash infusion.
On 7/10/2003 they were back for $25,000+ more obtaining a $275,500 first mortgage.
On 6/18/20004 they refinanced with a $290,500 first mortgage. They only got $15,000+ on that year's trip to the housing ATM. I imagine they were disappointed.
On 7/27/2005 they obtained an Option ARM with a 1.37% teaser rate for $337,500. The $45,000+ they got in 2005 must have made them feel better after the poor take from 2004. This was the loan Fannie Mae bought.
On 12/6/2007 they went back for one final trip to the ATM and obtained a $37,187 HELOC.
Total property debt was $374,687 plus negative amortization.
Total mortgage equity withdrawal was $211,762.
We joke about the housing ATM, but it was very real for loan owners during the housing bubble. These people went back for income supplementation every year. They would still be doing it today if it weren't for the collapse of the housing bubble.
How many people in California want to buy a house because they think they will be able to do what these people did? With the government now insuring nearly the entire housing market, if we allow this behavior to resurface, all taxpayers will be subsidizing this theft.
-$284 .......... Tax Savings (% of Interest and Property Tax) -$461 .......... Equity Hidden in Payment (Amortization) $21 .......... Lost Income to Down Payment (net of taxes) $65 .......... Maintenance and Replacement Reserves ============================================ $2,210 .......... Monthly Cost of Ownership
Cash Acquisition Demands ------------------------------------------------------------------------------ $3,619 .......... Furnishing and Move In @1% $3,619 .......... Closing Costs @1% $3,492 ............ Interest Points @1% of Loan $12,667 .......... Down Payment ============================================ $23,397 .......... Total Cash Costs $33,800 ............ Emergency Cash Reserves ============================================ $57,197 .......... Total Savings Needed Property Details for 30 SPARROWHAWK Irvine, CA 92604 ------------------------------------------------------------------------------ Beds: 3 Baths: 2 Sq. Ft.: 1240 $292/SF Property Type: Residential, Condominium Style: Two Level Year Built: 1900 Community: 0 County: Orange MLS#: F11061161 Source: CRISNet Status: Active ------------------------------------------------------------------------------ End unit condo in excellent community. This 3 bedroom + 1.5 bathroom home occupies approx. 1220 sq. ft. and includes kitchen with appliances. Outside brick patio with cover. Tile downstairs with carpet upstairs. Upstairs bedrooms include mirrored closets. Community includes tennis court, green belts with pool/spa and playground for kids.
