Demand from owner-occupants alone is insufficient to mop up the foreclosure mess. Aided by entreprenuers providing package deals, cashflow investors will stabilize the housing market.

Irvine Home Address … 1305 SOLVAY AISLE Irvine, CA 92606

Resale Home Price …… $275,000

I need more of you,

changin' my rain into sun

More of you,

puttin' my blues on the run

I need more of you,

darling, I need more of you

More, anything less wouldn't do.

Bellamy Brothers — I Need More of You

Shadow inventory can not be absorbed by first-time buyers. There are simply not enough owner-occupants to absorb the inventory due to come to the market over the next several years. Real estate cashflow investors are needed to stabilize the housing market. These investors are the only other source of demand available.

There are investment holdings companies that buy and hold rentals, and they will be part of the solution. I have recently formed Radiant Homes for this purpose. However, due to the practical problems with managing many properties over diverse geographies, it will still fall to individual investors to buy and hold the remaining properties on the market.

I have recently made a change to the business plan of my flipping fund. I will still sell homes to owner occupants in Las Vegas, but while looking for an owner occupant to purchase a property, I am also looking for a renter. Whichever deal I find first will determine the property's fate.

Each home I rent is made available to cashflow investors i reach through this blog and the presentations I do monthly. I decided to make this change to better serve readers who have expressed interest in acquiring these properties, but didn't want to go through all the hassles of obtaining their own, fixing them up, and finding a renter. I do all of that so you don't have to.

If you want to learn more about your options for investing in Las Vegas cashflow properties, please attend the upcoming presentation at JT Schmids on October 12. Though not required, we are asking to please RSVP to sales@idealhomebrokers.com. (click on image below).

As it turns out, the business plan I am switching over to with my flipping fund is gaining popularity as other entrepreneurs are seeing the same opportunity in the wake of the housing bust.

When Investing in Foreclosures, Turn-Key Is Key

Published: Tuesday, 27 Sep 2011 | 11:16 AM ET

By: Diana Olick

CNBC Real Estate Reporter

It was just hitting 105 degrees in Dallas when Phillip Carter herded a group of Australian investors onto a bus and headed out to see some previously foreclosed properties. Cowboy to cowboy, Carter tells them the Dallas market is ripe for profit, as rental demand surges and rents head higher. The difference in his business model is that the cash is ready to flow, immediately.

“We buy foreclosures in bulk from the banks, REO's, and rehab them and sell them with property management,” says Carter, who sells his properties complete with renters. “It's a turn-key package that provides cash flow.”

I recognized the allure of this business plan not long after my parents went out to Las Vegas this spring. I have convinced them to go to Las Vegas specifically to buy cashflow properties. Since they are recently retired, this was a good time for them, and they are closer to my family here in Irvine.

When they arrived, I showed them all the rentals I had in inventory, but they were apprehensive about actually buying one of them. After about a month, I bought an occupied property, and the tenants asked to stay on. When I told my father, he became excited and asked to buy that one. It was at that point I realized what was holding him back was the lack of assurance of rent from buying an empty property. If it caused my father to be cautious, it must certainly be an objection for others.

Unfortunately, this put me in a dilemma as fund manager. Once I put a renter in a property, I can't sell it to a local owner-occupant. I am committed to selling to a caashflow investor once I rent it. It would take a leap of faith on my part to believe strongly enough in my ability to find investors through the blog to make this change.

After considering the risks and rewards, I felt it was in the best interest of my fund investors to go the rental route. Worst case scenario is the fund owns a number of rental properties I cannot sell, but then the fund would earn a nice return on the rental income. Since the worst case was profitable, I didn't feel I had much to lose.

Carter is promising 20 percent cash return on most of his investments, and his “Texas Cash Cow Investments” is just the business model his largely foreign clients want.

Travis Henley is hitting Kansas, Indianapolis, Memphis and Atlanta, ready to put the relative power of his Australian dollar to work against the still-crumbling US housing market. Carter's properties are just what he's looking for.

“We're looking for cash flow and maybe a bit of appreciation as well, but at this stage we're mainly looking at cash flow,” says Henley.

Ordinarily, real estate investors must chose between properties with good current cashflow and those with good appreciation potential. It's rare to find properties with potential for both. One of the main reasons I am excited about the Las Vegas market is because prices have crashed so much, current cashflow is great, and the prices have overshot fundamental valuations so far to the downside, i believe there is great potential for future appreciation.

Fellow Aussie, Damian Nagus, says the exchange rate alone will offer enough capital appreciation, but he's still looking to hold for a long time.

“The money is patient. I've been investing in Australia for 25 years and own a reasonable amount of property, and so we're here with a ten year horizon,” estimates Nagus.

Anyone considering investing in Las Vegas should also have at least a ten-year horizon if they want to see prices appreciate. For the next few years, prices may go down, but it isn't likely they will go up. It won't be until the foreclosure supply is absorbed that prices will appreciate strongly.

“We view that it's going to be a good five years without much happening, as America tries to get it's way out of where it is now, and in ten years time we will look at where we are and see if we need to sell or just continue to hold.”

The ability to be patient is one of the great features to holding cashlfow properties. If you are obtaining a 8% return for holding, your pressure to sell is nil.

Nagus and Henley think there may be better cash flow in the Atlanta market, but Carter claims Dallas is the best bet now.

Dallas was not a boom-to-bust market, like Phoenix or Las Vegas, and home prices are down just 3 percent annually, according to the S&P Case Shiller home price index released today. That's better than the top 10 and top 20-city composites.

“Dallas is the first market to take off because we're having the largest population increase in history here,” notes Carter. “It's increasing the market in that the inventory is going down very quickly and prices are going up. Rents are going up and appreciation is going up.”

Texas and Georgia have historically been good cashflow investment markets. The problem with Texas is the onerous property taxes, and neither Texas or Georgia have strong potential for future appreciation. Good job growth will translate to good sales absorption, but not necessarily to higher prices and rapid appreciation. The high property taxes and state laws against mortgage equity withdrawal cause Texans not to bid up their property values like we do here in California.

Carter would like to see the federal government help investors like himself by loosening up some of the financing guidelines at mortgage giants Fannie Mae and Freddie Mac.

So would I. Actually, I would prefer the government to get completely out of the property finance market, but if they are going to be involved, they should encourage cashflow investors to absorb the inventory owner occupants cannot.

His track record and relationships with the big banks have allowed him to make bulk purchases of 30-40 properties at a time, but he'd clearly like to do more.

“The biggest challenge for us right now, honestly, when investors see this opportunity, they think it's too good to be true,” admits Carter, a self-proclaimed “opportunist.” But he's doing a brisk business, with clients from China, India, Canada and a surprising demand from U.S. baby boomers, wary of the stock market. Carter claims he's the largest company doing this kind of turn-key business.

I run into the same problem here in Orange County. People can't believe they can get double the rent for the same investment in Las Vegas. For example, I recently bought a home for some local investors who also own investment property here in Orange County. If I buy them a second property in Las Vegas with the same financial performance as the first, they will have $200,000 tied up in properties which together rent for $2,400. Their $400,000+ OC property rents for $2,400. Same rental income with half the investment. Las Vegas deals really are that much better.

“I guess it's a cowboy business, kind of like commodities,” Carter says as he leads Outback entrepreneurs around his properties. “Instead of doing cattle, we're doing houses.”

Obviously, I like this guy's business model, although I don't think I will comment on men in the Outback “doing cattle.”

IHB night of presentations

We will be gathering at JT Schmids at 5:00 on Wednesday, October 12, 2011, for a happy hour followed by two presentations: The OC Housing Market monthly update, and Cashflow Investing In Las Vegas. We will be giving these presentations on the second Wednesday of every month.

Our first big night of presentations last month was a tremendous success. We had 68 people sign at the door for the first presentation on the OC housing market, and 80 people signed up for the Las Vegas cashflow investment presentation. Everyone enjoyed drinks and appetizers, and a good time was had by all.

We are committed to a philosophy of constant improvement at the IHB, We read through all the presentation feedback, and we have decided on a few changes and enhancements. The most notable of these changes is to get Shevy more involved in the OC housing market presentation. The presentation on October 12th will not have the city-by-city breakdown I did for the first presentation. Instead Shevy will discuss several properties from surrounding communities. Some of these properties will be IHB deals, and some will be properties currently available in the market. Each property has been selected to illustrate a key feature of the current market.

Based on the feedback, we are also going to be adding a new presentation to our monthly list. On the third Wednesday of each month, we will do an advanced workshop on buying REO and short-sale properties. Shevy will conduct most of the presentation as we take a detailed look at several IHB deals with the focus on the specific techniques Shevy used to identify and obtain great deals for IHB clients. This will be a small group workshop intended for more interaction. It is limited to 30 attendees (unless you don't mind standing in the back). RSVPs are preferred.

On the fourth Wedneday of each month, we will be giving our basic first-time homebuyers presentation, and I will be presenting a small group workshop on Las Vegas cashflow properties.

The ongoing collapse of Brio pricing

Does anyone remember OC Fliptrack? It's a private blog now, and I don't know if the author still updates it. That blogger was an inspiration to me. He opened my eyes to how much fun blogging could be, and he helped me break the chains of conformity which dooms so many bloggers and reporters.

OC Fliptrack lived in Brio for a time, and he liked to write about the insane prices there. The one-bedroom condos apartments peaked at over $400,000. Now, these units are being fire-sold for $275,000.

Properties like this were most often bought with Option ARMs by people who had no hope of affording a fully ammortized payment. In fact, most of these buyers made the minimum payment which was often less expensive than a competing rental. With the promise of ever-increasing prices, serial refinancing, and unlimited HELOC riches, buyers put nothing down and took a free ride. Five years later, and the banks are still cleaning up the mess.

——————————————————————————————————————————————-

This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707

949.769.1599

sales@idealhomebrokers.com

Irvine House Address … 1305 SOLVAY AISLE Irvine, CA 92606

Resale House Price …… $275,000

Beds: 1

Baths: 1

Sq. Ft.: –

-/SF

Style: One Level

View: Pool

Year Built: 1996

Community: Westpark

County: Orange

MLS#: C11127019

Source: CRMLS

Status: Active

On Redfin: 3 days

——————————————————————————

Spacious 1 bedroom, 1 bathroom condo in great condition located in the beautiful Brio neighborhood. Attached garage. Pool view from the front patio and just steps away from the pool entry gate. Must see!

——————————————————————————————————————————————-

Proprietary IHB commentary and analysis

Resale Home Price …… $275,000

House Purchase Price … $182,000

House Purchase Date …. 5/1/2001

Net Gain (Loss) ………. $76,500

Percent Change ………. 42.0%

Annual Appreciation … 4.0%

Cost of Home Ownership

————————————————-

$275,000 ………. Asking Price

$9,625 ………. 3.5% Down FHA Financing

4.00% …………… Mortgage Interest Rate

$265,375 ………. 30-Year Mortgage

$80,816 ………. Income Requirement

$1,267 ………. Monthly Mortgage Payment

$238 ………. Property Tax (@1.04%)

$0 ………. Special Taxes and Levies (Mello Roos)

$57 ………. Homeowners Insurance (@ 0.25%)

$305 ………. Private Mortgage Insurance

$220 ………. Homeowners Association Fees

============================================

$2,088 ………. Monthly Cash Outlays

-$197 ………. Tax Savings (% of Interest and Property Tax)

-$382 ………. Equity Hidden in Payment (Amortization)

$13 ………. Lost Income to Down Payment (net of taxes)

$54 ………. Maintenance and Replacement Reserves

============================================

$1,577 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$2,750 ………. Furnishing and Move In @1%

$2,750 ………. Closing Costs @1%

$2,654 ………… Interest Points @1% of Loan

$9,625 ………. Down Payment

============================================

$17,779 ………. Total Cash Costs

$24,100 ………… Emergency Cash Reserves

============================================

$41,879 ………. Total Savings Needed

——————————————————————————————————————————————————-

Borrowers today feel entitled to a loan modification, and they complain when they don't get the loan modification they believe they deserve.

Irvine Home Address … 11 COLDHARBOR Irvine, CA 92620

Resale Home Price …… $540,000

But be aware,

I always get what I deserve

Keep your focus,

keep your nerve

Ready, set, go

Pick up the pace and step on it

Rip up the place if you want it

Work, work

You know you gotta work, work

The Saturdays — Work

During the housing bubble, loan owners only had to fill out a few forms to get copious amounts of cash. Now getting free handouts from the banks requires a plethora of paperwork, and sometimes the bank says no.

Getting a mortgage workout shouldn't be this exhausting

A Downey couple who had fallen behind on mortgage payments to Wells Fargo subsequently tried to make good on the money owed. But getting their lender to work with them — that's another story.

By David Lazarus — October 4, 2011

Before we get started, I want to ask a simple question. Why should getting a loan modification be easy? Most often, this is a unilateral contract revision being forced on the lender who is under duress. The culture of borrower entitlement has forgotten this fact. If prices were not down so much, lenders would just foreclose and get their money back. The main reason a lender considers a loan modification is because they are in a weakened bargaining position due to the fact they cannot recover their capital in a foreclosure.

Some market watchers have complained strategic default is a threat to contracts, but loan modifications are far more threatening. Strategic default merely triggers a contractual contingency already spelled out in the agreement. Nothing is being changed. Loan modifications are actual changes to the contract being forced upon lenders by borrowers empowered by government programs and the state of the market. Loan modifications are a threat to contracts.

Remember, loan modifications are not entitlements, and lenders don't want it to become one. What shocks me about articles like this one is the sense of entitlement and how oblivious everyone is to it.

Jackie Durra and her husband, Pedro Balladares, have been riding out the economic downturn as best they can.

For a while they were both out of work, making it a challenge to pay the bills and feed their two kids. She eventually found a job, and then he did as well.

But over the course of what turned out to be a very difficult year, the couple fell behind on mortgage payments for their house in Downey. There were months when they simply had to choose between keeping the lights on and meeting their obligations to their lender, Wells Fargo.

“It was hard,” Durra, 49, told me. “We had no money coming in.”

That would be very hard. Having both wage earners lose their jobs really puts a family in a tough spot. It's a good thing they weren't renters…

As loan owners, this couple deserves special dispensation, right?

Make no mistake: She and her husband are at fault here. They missed four mortgage payments between October 2010 and April of this year. They shouldn't have been surprised when Wells stopped taking their payments in June and served them with a notice of default in August.

But Durra and Balladares are also typical of many other homeowners who, because of circumstances beyond their control, found themselves barely able to keep their heads above water. They aren't deadbeats. They aren't trying to cheat the bank out of its money.

Actually they are deadbeats as they were not making their payments. What he is really arguing is that it's okay to be a deadbeat if you have good intentions.

Given a chance, they're eager to make good. They want to keep their home. But getting their bank to work with them — that's another story.

If they're eager to make good, they can agree to the terms offered by the bank. Most lenders will modify the loan to add the missed payments, penalties, fees, and other charges to the balance of the loan. However, the borrower still must have the capacity to make the payment. If the loss of income which prompted the loan modification becomes permanent, then the borrower can no longer afford the property. Banks are not obligated to reduce principal and payments just because the borrower doesn't make as much as they used to. If banks did have such a requirement, I would buy the biggest home possible right before retirement.

“It's a national crisis,” said Jamie Court, president of Consumer Watchdog, a Santa Monica-based advocacy group. “Banks seem more interested in foreclosing on people than on keeping them in their homes.“

That's a stupid and emotional statement. Banks are interested in two things: return on their money, and return of their money. Banks are not interested in whether or not people stay in the home the bank bought for them with the bank's money, nor should they be. Banks exist to make money. They are not a charity.

Adding insult to injury, many of these banks (including Wells) received billions of dollars in taxpayer-funded bailouts to keep them afloat when times were tough.

“If we gave the banks a second chance,” Court said, “the least they can do is help people out who are trying to do the right thing.”

That argument has an emotional appeal, but it is completely specious. If banks bail out every borrower, they will need an even larger government bailout.

Durra bought her three-bedroom house in 2001 for $280,000. After a second mortgage was taken out several years later, the total outstanding loan balance was about $375,000.

These people took out $95,000 in free money. They added about 30% to their mortgage and got to spend the money, but we are supposed to feel sorry for them. Perhaps their mortgage payment wouldn't be quite so onerous if they had been responsible with their borrowing.

The real-estate website Zillow estimates the current value of the property at $348,300.

With the decline in values, they would still have equity if they hadn't refinanced and took out $95,000.

Durra and Balladares received a loan modification from Wells in 2009 that lowered their monthly payments. But by summer 2010, the couple were facing new difficulties.

She had lost her job handling billing for a doctor's office, and his business exporting car parts to Nicaragua fell victim to harsh global economic conditions.

With other bills mounting, they were unable to make their October mortgage payment of $1,470. Then Durra landed a job that month handling billing for USC's Department of Pathology. She immediately contacted Wells Fargo and explained their situation.

The bank, Durra said, seemed placated, especially when the November and December payments came in on time.

This is to be expected. After a financial hardship, lenders will modify a loan to cure it.

But the family was still facing hardship.

“My husband wasn't working and we just didn't have enough income,” Durra said. “We were living paycheck to paycheck.”

In January of this year, they applied for another loan modification to work out more flexible terms. Durra said Wells turned them down because they weren't making enough money.

What exactly is “more flexible terms?” Isn't that code for “they wanted a ridiculously low payment?” Wells Fargo turned them down because with the “flexible terms” the borrowers were offering, the loan would never get repaid. What was Wells Fargo supposed to do, give them a free house?

She and Balladares missed their January and February mortgage payments. They were able to send in a check for March. They missed April. They sent in a check for May.

So what? They couldn't make their payments because they couldn't afford the house. Are we supposed to cheer them on for struggle to pay for a house they cannot afford? Is Wells supposed to reduce their payments to a super low level so they can stay?

I have a better idea. Foreclose on them so a family who can afford the house can buy it.

Then, in June, Balladares finally landed a gig as an X-ray technician for a medical clinic. The couple applied once again for a loan modification. This time, Durra said, Wells turned them down because they were making too much money.

If they make enough money to afford the property, they they don't need a loan modification.

They sent in a check for their June mortgage payment. Wells sent it back and foreclosed on the property.

Durra said she tried to approach Wells to work something out, but each time was rebuffed — even though she and her husband were now setting aside thousands of dollars to cover their missed payments.

Does this story seem reasonable to you? Would a bank really not accept payment from a borrower in arrears? Has any bank ever refused to accept money from someone who owed it to them? Something doesn't smell right here.

At the beginning of September, they tried to find out how much they owed, including late fees and legal charges. Wells said it would get back to the couple in about a week.

It never did. So Durra and Balladares came to me.

I went straight to Wells with a simple question: Would the bank really rather add to the glut of foreclosed homes than work with a committed homeowner who's eager to pay her bills?

It depends on how much money the eager borrower can put toward the mortgage. If it's only a fraction of the payment needed to retire the loan, the bank is better off foreclosing.

I'm glad to report that Wells wasted no time in reaching out to Durra and trying to find some way to fix this mess.

“We're working with them to keep them in their home,” said Jennifer Langan, a Wells spokeswoman.

She said it's likely that a repayment plan will be established, and once that happens, the foreclosure proceedings will end.

“At the end of the day, no bank wants a foreclosed property,” Langan said. “It is not good for homeowners, neighborhoods or communities.”

And with the depressed prices today, foreclosures are bad for the banks as well. Banks don't want to foreclose. They would rather have borrowers make payments. However, if borrowers can't or won't make their payments, banks will foreclose in order to get their money back. They won't stay in business long giving away free houses to people who don't pay them back.

Which is why it's surprising that so few banks seem to step up, especially in times like these, to assist homeowners who are trying to act in good faith.

Consumer Watchdog's Court said many banks have one-size-fits-all policies that make it difficult to address individual problems. It can also be more labor-intensive (read: expensive) to work with homeowners on a case-by-case basis.

Langan said Wells would have probably done something for Durra and Balladares even if I hadn't taken an interest, and maybe that's true.

Yes, that is true. If the borrower can now afford the full payment and doesn't require a reduced payment through a loan modification, the bank will certainly work with them to keep that loan alive. The bank would be stupid not to.

But I hear a lot of hard-luck stories from people who say all they get from the bank is a door slammed in their face.

Most of those stories are probably bullshit.

Not everyone deserves a second chance. But banks should know from personal bailout experience that there are many who do.

And helping them out can be good business over the long run.

David Lazarus' column runs Tuesdays and Fridays. He also can be seen daily on KTLA-TV Channel 5. Send your tips or feedback to david.lazarus@latimes.com.

Many people probably don't realize that banks have always done loan modifications for troubled borrowers. It was never a formal or regulated process as it is today, but informally, on a case-by-case basis, lenders have always done this. They are in the business of making loans and collecting payments. If they can find a way to get a borrower to resume making payments, it's all good to them.

The problems with today's loan modification environment are the government tampering with these contracts and the borrower's trying to take advantage. Once the government got involved, borrowers came to believe they were entitled to a break on their mortgage.

Prudent borrowers have already obtained a benefit as they have been able to refinance at today's 4% interest rates. The couple from today's article went to the home ATM for $95,000. Should imprudent borrowers like them be given a break? If it comes from a taxpayer subsidy, I don't think so, but if it's only between the bank and the borrower, then I really don't care. It's none of my business.

Wells Fargo let this couple squat for two years

Far from being in a hurry to foreclose, Wells Fargo let the former owners of today's featured property squat for two years before foreclosing on them.

Foreclosure Record

Recording Date: 06/30/2011

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 12/21/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 09/14/2009

Document Type: Notice of Default

This property was a 100% financing deal from the peak. The made payments for about two and half years before giving up. They got to squat for two more.

——————————————————————————————————————————————-

This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707

949.769.1599

sales@idealhomebrokers.com

Irvine House Address … 11 COLDHARBOR Irvine, CA 92620

Resale House Price …… $540,000

Beds: 3

Baths: 2

Sq. Ft.: 1703

$317/SF

Property Type: Residential, Single Family

Style: Two Level, Traditional

Year Built: 1985

Community: Northwood

County: Orange

MLS#: S675297

Source: SoCalMLS

Status: Active

On Redfin: 1 day

——————————————————————————

Granite and marble countertops. Stainless steel appliances. Travertine flooring w/ insets and travertine showers w/ accents. Glazed cabinetry. Newer moldings, fixtures and hardware. Granite fireplace and mantel. 2-tone paint. Nice location, complete with 2-car garage, large patio and backyard. Association pool and much, much more. Centralized location near freeways, schools, shopping and park.

——————————————————————————————————————————————-

Proprietary IHB commentary and analysis

Resale Home Price …… $540,000

House Purchase Price … $182,000

House Purchase Date …. 5/1/2001

Net Gain (Loss) ………. $325,600

Percent Change ………. 178.9%

Annual Appreciation … 10.5%

Cost of Home Ownership

————————————————-

$540,000 ………. Asking Price

$108,000 ………. 20% Down Conventional

4.00% …………… Mortgage Interest Rate

$432,000 ………. 30-Year Mortgage

$105,017 ………. Income Requirement

$2,062 ………. Monthly Mortgage Payment

$468 ………. Property Tax (@1.04%)

$0 ………. Special Taxes and Levies (Mello Roos)

$112 ………. Homeowners Insurance (@ 0.25%)

$0 ………. Private Mortgage Insurance

$70 ………. Homeowners Association Fees

============================================

$2,713 ………. Monthly Cash Outlays

-$334 ………. Tax Savings (% of Interest and Property Tax)

-$622 ………. Equity Hidden in Payment (Amortization)

$150 ………. Lost Income to Down Payment (net of taxes)

$88 ………. Maintenance and Replacement Reserves

============================================

$1,994 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$5,400 ………. Furnishing and Move In @1%

$5,400 ………. Closing Costs @1%

$4,320 ………… Interest Points @1% of Loan

$108,000 ………. Down Payment

============================================

$123,120 ………. Total Cash Costs

$30,500 ………… Emergency Cash Reserves

============================================

$153,620 ………. Total Savings Needed

——————————————————————————————————————————————————-

A new development at the Great Park has been approved, and the developers are promising to break up the monotony of Irvine.

Irvine Home Address … 8 BATON ROUGE #19 Irvine, CA 92604

Resale Home Price …… $444,500

I'm working out most everyday

and watching what I eat

They tell me that it's good for me,

but I don't even care

I know that it's crazy

I know that it's nowhere

But there is no denying that

It's hip to be a square

it’s hip to be a square

It’s hip to be a square

So hip to be a square

Huey Lewis and the News — Hip To Be Square

Irvine is cool. Yes, I know it is hip to criticize the banality of the place, but I like the stuffy formality and the lack of spontaneity because it is uniformly beautiful. Spontaneous ugliness does nothing for me. Traffic snarls and a lack of parking is not something I cherish. I know that it's crazy, but in Irvine, it really is hip to be square.

Non-beige homes approved in Irvine

September 28, 2011 — By JEFF OVERLEY

IRVINE – As desirable as Irvine is, it's safe to say the master-planned community isn't exactly known for avant-garde architecture, something that became clear earlier this year in reader responses to stories about the launching of a city motto contest.

“Irvine: We Have 62 Different Words for Beige,” one commenter suggested.

“Where Bland is in Demand,” another offered.

“Sixteen Zip Codes, Six Floor Plans,” a third said.

“Sorry, I Thought This Was My House,” yet another reader replied.

You get the idea.

Okay IHBers, this is your chance. Let me here your suggestions for an Irvine motto in the astute observations. Here are a few of mine:

“Tract homes from the $1,000,000s.”

“Where sameness carries a premium.”

“Honey, I shrunk the lot.”

“Even the parking lots are green.”

“Enjoy cachet when you overpay.”

But 40 years into its love affair with earth tones and stucco, Irvine is about to witness a significant splash of color and mixed media.

Nearly 5,000 homes, as well as shops and offices, were approved this month for areas surrounding the Great Park, and developer FivePoint Communities is not proposing much in the way of the Mediterranean traditions that have turned Irvine into a Little Italy of sorts.

Instead, FivePoint is embracing Craftsman, Folk Victorian, Traditional Monterey, American Classic and Cottage styles in its residences, the first phase of which should hit the market in 2013.

Eric Tolles, the city's community development director, suggested Irvine's reputation for homogeneity is a stereotype, but did say FivePoint's architecture “is a departure from what we've seen in recent years.”

In fact, the company is specifically promising diversity of design, something that's especially evident in its “Main Street” commercial area. There, it plans to include contemporary and classic looks, as well as “transitional” combinations of the two, on the same blocks.

“Many town centers have one dominant architectural style, compromising the authenticity of the place,” FivePoint says in plans that were submitted to the city and vow to “avoid monotony.”

(CLICK HERE FOR MORE PHOTOS.)

This is a smart move on their part. They need to differentiate themselves from the Irvine Company to attract buyers. The last thing they want to do is be forced to compete by simply lowering their prices (we might want that, but they won't).

“Uninterrupted blank wall surfaces should be avoided along all building facades,” the plans say, and design should discourage features that “hinder pedestrian activity, such as big box retail.”

No dominant architectural style? No big box retailers? In Irvine?

It's hard to believe, and it's also a departure from a philosophy that's proven popular. The Irvine Co., which has developed the majority of the land in the city, has witnessed seemingly endless success with its products, including those in the new Woodbury communities, which from a distance resemble light-brown boxes.

Woodbury is not nearly as uniform as Westpark. If you compare the overhead below to the one of Westpark, you will see two or three more shades of brown.

Irvine Co. officials (who declined to comment) have an approach that has “been appealing to homebuyers,” Tolles noted.

The fact is, Irvine is appealing to buyers. I live in Woodbury, and I think it's beautiful. There is a place for everything, and everything is in its place. I think Woodbury is one of the finest master-planned communities I have seen, and land planning used to be my profession.

Yes, it is the same, but it is uniformly beautiful. Diversity which involves incorporating unattractive or inconvenient elements is not a plus. Laguna Beach is a beautiful eclectic mix of styles, but it has ugly buildings, inconvenient parking and circulation problems, and a host of other issues stemming from the fact it wasn't planned.

To each his own, but I will take the bland uniformity of Irvine any day.

Regardless of whether one appreciates that approach, it probably pales in importance compared with Irvine's nationally renowned schools and safety.

FivePoint will test the relevance of visual appearances with its diverse residential styles, which will variously employ stone veneers, asphalt shingles, wood shutters, lap siding, decorative columns, brick facades, wraparound porches and, notably, colors that don't resemble sand.

Renderings submitted to the city depict a wide variety of housing types, but FivePoint officials would release only one image of the homes, saying the others remain conceptual.

In its plans, the company seems to deride cookie-cutter construction, referring at one point to the 19th century Arts and Crafts movement that “rejected mass production and mediocre design in favor of the beauty and honesty of traditional hand-craftsmanship and natural materials.”

Carol Wold, a FivePoint vice president, said “there will be a variety of housing types to create distinctive neighborhoods.”

Which, given the surroundings, shouldn't be too hard to do.

Related: 40 things that define Irvine

Related: 10 things you might not know about Irvine

Contact the writer: 714-796-7952 or joverley@ocregister.com

Some of those jabs at Irvine are pretty funny.

Realistically, Irvine is the city that benefits from its surroundings. Most of Orange County is poorly planned. The traffic systems don't work well, the commercial centers are ugly, the streets are too narrow and lack sufficient landscaping. In short, Irvine looks good because most of its neighbors are ugly. Kudos to the Irvine Company for recognizing the opportunity to create value through good planning.

Option ARM Ponzi

Most people who refinanced with Option ARMs during the height of the housing bubble went Ponzi and imploded. The previous owner of today's featured property paid $445,000 on 12/10/2003 and put nothing down. When offered free money shortly thereafter, he took it. He refinanced on 12/19/2005 with a $492,000 Option ARM, and followed that up with two more HELOC withdrawals.

In short, the previous owner put nothing in to the property and got to take more than $100,000 out. It makes me feel pretty stupid for renting while this was going on.

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This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707

949.769.1599

sales@idealhomebrokers.com

Irvine House Address … 8 BATON ROUGE #19 Irvine, CA 92604

Resale House Price …… $444,500

Beds: 3

Baths: 2

Sq. Ft.: 1639

$271/SF

Property Type: Residential, Condominium

Style: Two Level, Contemporary

Year Built: 1977

Community: El Camino Real

County: Orange

MLS#: S674957

Source: SoCalMLS

Status: Active

On Redfin: 3 days

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This home is a real beauty. Light and bright with 3 large bedrooms and 2.5 baths. Close by churches and ample shopping. Many more photos to come!

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Proprietary IHB commentary and analysis

Resale Home Price …… $444,500

House Purchase Price … $445,000

House Purchase Date …. 12/10/2003

Net Gain (Loss) ………. ($27,170)

Percent Change ………. -6.1%

Annual Appreciation … 0.0%

Cost of Home Ownership

————————————————-

$444,500 ………. Asking Price

$15,558 ………. 3.5% Down FHA Financing

4.00% …………… Mortgage Interest Rate

$428,942 ………. 30-Year Mortgage

$124,218 ………. Income Requirement

$2,048 ………. Monthly Mortgage Payment

$385 ………. Property Tax (@1.04%)

$0 ………. Special Taxes and Levies (Mello Roos)

$93 ………. Homeowners Insurance (@ 0.25%)

$493 ………. Private Mortgage Insurance

$190 ………. Homeowners Association Fees

============================================

$3,209 ………. Monthly Cash Outlays

-$318 ………. Tax Savings (% of Interest and Property Tax)

-$618 ………. Equity Hidden in Payment (Amortization)

$22 ………. Lost Income to Down Payment (net of taxes)

$76 ………. Maintenance and Replacement Reserves

============================================

$2,370 ………. Monthly Cost of Ownership

Cash Acquisition Demands

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$4,445 ………. Furnishing and Move In @1%

$4,445 ………. Closing Costs @1%

$4,289 ………… Interest Points @1% of Loan

$15,558 ………. Down Payment

============================================

$28,737 ………. Total Cash Costs

$36,300 ………… Emergency Cash Reserves

============================================

$65,037 ………. Total Savings Needed

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Riverside County foreclosure investor Bruce Norris correctly called the housing bubble. In his latest interview, he discusses shadow inventory and its effect on prices.

Irvine Home Address … 3131 MICHELSON Dr #907 Irvine, CA 92612

Resale Home Price …… $400,000

I'll be alright, one way or another

So let me go, or make we want to stay

If this is it

Please let me know

Huey Lewis and the News — If This Is It

Is the decline in prices finally over? If this is it, who will tell you so?

Nobody will accurately predict the bottom in pricing. Many realtors will claim to have called the bottom. Of course, they call the bottom periodically, so like a broken clock that's right twice a day, eventually they will call it correctly.

It's entirely possible the 4% interest rates currently available will cause prices to bottom this fall and winter, but I rather doubt it. What is also possible is that payment affordability may bottom this fall and winter. That scenario is far more likely than seeing an absolute bottom in prices. A $400,000 property purchased at a 4% interest rate is less expensive to own than a $350,000 property purchased with a 6% interest rate.

We are entering a time when the window to purchase is open. There are now properties available to purchase with a cost of ownership below rental parity. Are the conditions ideal for buying? No. But conditions are never ideal, and although it may be preferable to wait for higher interest rates and lower prices, it may take 5 to 8 years to see the next peak of the interest rate cycle. How long do you want to wait?

Personally, I am buying property in Las Vegas because prices are low and interest rates are low. I am likely to burn up all my savings in the process. I will look to buy two years from now in Orange County, but I may be forced into a less than 20% down loan. For me, buying the cashflow properties is more important than buying a primary residence. I may always be Irvine Renter.

Housing crisis is not over

October 1st, 2011, 12:26 am — posted by Jon Lansner

Southern California real estate investor Bruce Norris was one of the few people who saw the housing debacle coming.

On Oct. 14th, Norris will host a panel discussion — “I Survived Real Estate 2011” –among real estate experts at the Nixon Presidential Library. The event — featuring Doug Duncan of Fannie Mae; Vicki Golder of the National Association of Realtors; Debra Still, of the Mortgage Bankers Association; Sara Stephens of The Appraisal Institute; Sean O’Toole of Foreclosure Radar; and author Eric Janszen — is a fundraiser for the Susan G. Komen breast-cancer fight. (DETAILS HERE!)

We figured we’d ask Norris for his latest view of real estate’s plight …

Us: Is it over yet in O.C. and/or SoCal?

Bruce: No, unfortunately it isn’t over. There are many property owners delinquent by over 18 months who have yet to be foreclosed on. The amount of inventory in the MLS is misleading. It looks like a much healthier market than it is. Someday soon, these delinquent properties will hit the market either as a short sale or an REO. In Riverside, about 65% of properties sold are either short sales or REOs. Former owners with a foreclosure or short sale on their record don’t re-enter the market as a buyer because they can get financing. For every 1,000 sales, Riverside needs to find 650 new buyers to replace those that are now non-buyers. For Orange County, it’s closer to 30%, or 300 new buyers. Both areas are seeing all-time record numbers when comparing percentage of distressed sales to normal sales. That ratio prevents price support partially because each sale removes a formerly capable buyer from the market.

IHB: I have mentioned in other posts that we are now entering the liquidation phase of the housing bubble. The first drop was caused by the smaller loan balances resulting from a return to sane lending standards. The second drop will be caused by the liquidation of the huge supply of homes purchased by people who either can not or chose not to support a mortgage.

Banks have been successful so far in limiting the supply on the market locally to hold up prices. The impact has been a long-term reduction in sales volumes because the price levels they are trying to sustain is not affordable with local incomes. The only way to increase sales velocity and inventory absorption is to lower prices. This isn't rocket science.

Until lenders are willing to lower their prices, sales volumes will remain low, and the inventory overhang will slowly bleed the prices out of the market. Expect to see a pattern of spring rallies — with realtors calling the bottom each time — and fall plunges that take out the lows from the previous year. Over the next 5 years, this pattern will repeat until one of the fall plunges is the last. Timing the bottom will not be critical because the ensuing appreciation will be tepid at best.

Us: How bad could it get … again?

Bruce: How bad it gets will depend on how the government decides to handle the “shadow inventory” situation. By shadow inventory, I mean anything 90 days late through bank owned property. Up until now, the priority has been to find a new owner-occupant to buy the house. Since mathematically that won’t work, the most successful plan would include selling local investors properties able to be rented by the former owners. If investors aren’t invited to the party, then you could have a second dip in prices.

IHB: All GSE, HUD, and FHA liquidations have been geared to sell to owner occupants. Since the stated policy goals of the government are to maximize home ownership, it should be expected that government-controlled entities would show a preference for owner occupant sales. However, as Bruce Morris points out, the pool of buyers simply isn't large enough to absorb the inventory. Despite government resistance to the idea, cashflow investors will be the buyers who ultimately put a floor under house prices.

Us: Do you think the presidential political discourse will be a factor in the 2012 housing market?

Bruce: Unfortunately, yes. When political agendas trump common sense, distortions occur.

IHB: I am concerned will will see more lunacy out of Washington, particularly from the Obama administration who must pander to the extreme left. We might see principal reduction, underwater refinancing, loan modification squatting, government insured zero-down loans or any of a number of bad ideas which will simply prolong the process or encourage the worst in borrower behavior.

Us: Do any political proposals being floated right now stand out as extremely helpful or harmful to real estate?

Bruce: There’s one proposal that’s especially harmful. There is a belief that when a buyer puts up a down payment of 20%, the likelihood of them making their payment increases dramatically. This line of thinking was included in a new risk-retention proposal introduced as part of the Dodd-Frank financial reforms. In the proposal, financial institutions retain capital reserves of 5% of all but the safest mortgages, also known as the Qualified Residential Mortgages (QRMs).

Many of the details of this proposal are still in the works but the problem is the assumptions underpinning this proposal are wrong. A larger down payment does not significantly decrease the losses experienced by the lender. As a matter of fact, looking at a chart from 1980 to 2000, there is little difference between the performance and the losses from a 20% down program and a zero-down VA loan program.

IHB: Bruce Norris is wrong. I think he has been reading the propaganda from the lending lobby. The accurately presented data clearly shows a large increase in defaults when the down payment is less than 20%; in fact, it more than doubles.

We may soon get the most stringent loan guidelines to “protect” us against something that history proves doesn’t exist. As I said, when political agendas trump common sense, distortions occur.

IHB: Common sense says less than 20% down should have higher default rates. It was a lobby of lenders who put together a study to distort this truth, and Mr. Norris has fallen victim to this false information presented for political reasons. Be careful what you read. The proposed guidelines will protect us from something history has shown does exist and is very costly.

Regulators are now overreacting to the damage stated-income and subprime did to the market. However, now we’re at historically high affordability levels, historically low interest rates, and a market that is already struggling to find the next pile of first time homebuyers.

IHB: Regulators are not overreacting. In fact, they are not going far enough. We don't need more housing bubbles. Regulators should not be concerned with maintaining current pricing, they should be concerned with preventing loan terms from propagating in the market which do not sustain ownership. Stated-income, interest-only, negative amortization, 100% financing, and a plethora of other terms have proven fatal to home ownership. Regulators should be working to craft policies which prevent these Ponzi loans from proliferating. So far, I haven't seen anything substantive that will prevent the next housing bubble.

Us: If you had a magic wand and could do one thing overnight to help the housing market … what would it be?

Bruce: We recently responded to HUD’s request for information seeking input on how they might handle their portfolio of foreclosures. I suggested a three-pronged solution that: helps three underserved markets; could be implemented quickly using strategies FHA has used in the past; and utilizes current infrastructure already in place.

1. No-down program. Launch a new no-down loan program that mirrors the qualification guidelines set forth by the no-down VA program. This serves a younger market that wasn’t involved in the boom; they still have intact credit but lack the down payment requirement. Think of this as a varied version of the $8,000 tax credit we tried in 2008/2009 which, in many areas, created a no-down situation.

He is joking, right? Zero-down loan programs are a Ponzi virus. They create the worst possible incentives to gamble with the banks — or in this case the taxpayers — money. The solution to a diminished buyer pool is not to bring back failed loan programs to find more owner-occupants. There are only so many owner-occupants who can sustain ownership, and those without at least a 3.5% down payment have proven too irresponsible to sustain home ownership. If we implemented this idea, we would merely repeat a mistake of the housing bubble and create a fresh wave of delinquencies in defaults.

2. Bring back simple assumptions. For this program only, bring back the simple assumption policy FHA had in the 1980s. Should the buyer in part one of this solution default, the loan could be made current by an individual or family that may not have perfect credit due to a past foreclosure or short sale. An investor might also participate. In either case, the new buyer would make the loan current and send in a check to take over the loan. This saves the credit of buyer one and also opens up the market to two underserved markets.

This would effectively open up the market for hard-money second loans at onerous interest rates which would greatly benefit investors at the expense of the poor. This would be a ripoff like most lending programs to the poor are.

3. Trustee sale back payments only. Should buyer two fail, at the trust sale, instead of the opening bid being the full amount owed on the property, make the opening bid for this program the back payments and fees to make the loan current. Investors would gladly take over low interest rate financing and most likely create an overbid situation. The surplus funds could go to insure and pay for the administration of the entire program.

This solution only works if the first is not underwater and the current interest rate is lower than the interest rate on the first mortgage. Those conditions don't exist today, put if he is looking to kick the can down the road, making the first mortgage into an assumable loan and the late payment and fees into a second might have some value to the banks.

Not only does this three-part solution help three underserved markets, it also puts the real estate industry (Realtors, appraisers, title, escrow, construction, etc.) back to work. Having clarity on how the inventory will be handled and clarity on financing will also make buyers, investors, and lenders more comfortable and willing to participate. Also, the backlog of inventory could finally clear — and maybe builders could get back to work in the foreseeable future.

IHB: He is correct. If we implement some of these foolish ideas, would would inflate a mini-bubble which would extend the pain of the housing market another decade but create some short-term benefit to the real estate industry.

Most of the policies proposed to solve the non-problem we have with foreclosures involve re-inflating the bubble in one form or another. IMO, we would be far better off letting the market correct itself and regain the firm footing of fundamental values supported by stable debt and real incomes.

More than 50% off in the North Korea towers

By far the worst investments of the housing bubble were the condos apartments in the Marquee at Park Place. It was so bad, I feel sorry for all the people who believed the hype and lost everything they invested.

From my way of looking at the value of real estate, this was the most obvious sign of the real estate bubble. With an HOA of about $1,000 a month, these properties were worth about $250,000 back in 2006 when interest rates were 6.5%. With the cheap units selling for over $600,000, there was no explanation for the pricing other than mass insanity.

Today's featured property was not one of the cheap ones on the lower floors. This ninth floor unit sold for $843,000. Today, the bank is hoping for $400,000. That is more than 50% off.

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This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707

949.769.1599

sales@idealhomebrokers.com

Irvine House Address … 3131 MICHELSON Dr #907 Irvine, CA 92612

Resale House Price …… $400,000

Beds: 2

Baths: 2

Sq. Ft.: 1492

$268/SF

Property Type: Residential, Condominium

Style: One Level, Modern

View: City Lights, Panoramic, Yes

Year Built: 2006

Community: University Park

County: Orange

MLS#: S675239

Source: SoCalMLS

On Redfin: 1 day

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This unit is a 2 bedroom 2 bath condo, all on one level, located in Marquee at Park Place in beautiful Irvine. Living at its finest. City lights and panoramic views! Desirable location for shopping, dining, parks, churches, access to freeways and public transportation. Easy, short drive to the beach areas.

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Proprietary IHB commentary and analysis

Resale Home Price …… $400,000

House Purchase Price … $843,000

House Purchase Date …. 2/2/2006

Net Gain (Loss) ………. ($467,000)

Percent Change ………. -55.4%

Annual Appreciation … -12.8%

Cost of Home Ownership

————————————————-

$400,000 ………. Asking Price

$14,000 ………. 3.5% Down FHA Financing

4.00% …………… Mortgage Interest Rate

$386,000 ………. 30-Year Mortgage

$148,712 ………. Income Requirement

$1,843 ………. Monthly Mortgage Payment

$347 ………. Property Tax (@1.04%)

$0 ………. Special Taxes and Levies (Mello Roos)

$83 ………. Homeowners Insurance (@ 0.25%)

$444 ………. Private Mortgage Insurance

$1125 ………. Homeowners Association Fees

============================================

$3,842 ………. Monthly Cash Outlays

-$408 ………. Tax Savings (% of Interest and Property Tax)

-$556 ………. Equity Hidden in Payment (Amortization)

$19 ………. Lost Income to Down Payment (net of taxes)

$70 ………. Maintenance and Replacement Reserves

============================================

$2,967 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$4,000 ………. Furnishing and Move In @1%

$4,000 ………. Closing Costs @1%

$3,860 ………… Interest Points @1% of Loan

$14,000 ………. Down Payment

============================================

$25,860 ………. Total Cash Costs

$45,400 ………… Emergency Cash Reserves

============================================

$71,260 ………. Total Savings Needed

——————————————————————————————————————————————————-

In a sign of extreme desparation, mortgage insurers and lenders are signing up for a new program that pays borrowers to keep paying their mortgage.

Irvine Home Address … 28 GREENFIELD Irvine, CA 92614

Resale Home Price …… $335,000

Pay me my money down

Oh pay me, oh pay me,

Pay me my money down,

Pay me or go to jail,

Pay me my money down

Bruce Springsteen — Pay Me My Money Down

I have long contended that people who are underwater and paying more than the cost of a comparable rental should strategically default. They are pouring their money down a black hole never to be seen again.

Lenders have tried appealing to morality, but unfortunately for them, strategic default has become common and accepted. Their efforts at appealing to morality have failed.

As families strategically default get out from under their crushing mortgage payments and get to keep living in their houses for two years or more, their friends and acquaintances take notice. As others observe the benefits people obtain from strategic default, they consider it themselves. Once people see someone they know and respect strategically default, all moral compunction vanishes.

Lenders have tried incentivizing loan owners to continue to pay by modifying the terms of the loan to make payments more affordable. Most of these programs provide a temporary benefit and increase the balance owed. Their only measure of success is how many additional payments they can squeeze out of a borrower before they strategically default.

The latest effort to keep loan owners from doing what is in their financial best interest is to dangle a carrot in front of the borrower by offering them direct cash rewards if they continue to pay their loan. This has the same desperate quality as car rebates when the automakers pay people to buy their cars. Perhaps in recognition of how bad things have become that crazy ideas like this are actually being implemented, the American Banker magazine is exploring the ramifications of this loan program.

Pay for Performance

By Laura Thompson Osuri — OCT 1, 2011 12:00am EDT

With nearly one-fourth of Americans underwater on their mortgages and home prices still on the decline, homeowners who resist the temptation to strategically default and make efforts at meeting their obligations should be applauded. But should they be paid for it?

Only a banker would think loan owners should be applauded for pouring money down a rat hole.

Loan Value Group, a firm in Rumson, N.J., has been experimenting with the idea. It has a program, called RH Rewards, through which banks, mortgage servicers, hedge funds, insurers—pretty much any institution that carries mortgage risk—can offer a financial incentive to their underwater customers, mainly targeting those who remain current on their mortgage.

Once a customer accepts the invitation to the program, every time an on-time mortgage payment is made, the reward grows, up to a predetermined maximum, typically no more than $20,000. When the loan is paid off, either through refinancing or a sale, the homeowner gets the reward.

The dangling carrot approach. The lender makes a phantom payment to an account the borrower only gets if they pay on the loan until the loan is paid off by sale, refinance or full amortization. For an underwater loan owner, they can't sell, and they can't refinance, so they only way they see this pittance is to keep paying their mortgage for a decade or more until they have enough equity to get out of their property.

Rewarding people just for doing the bare minimum, for following through on promises made of their own volition, feels unsettlingly un-American somehow.

No, abdicating lender responsibility and unleashing a Ponzi scheme which dramatically inflated house prices feels unsettingly un-American. Making the bankers eat their losses and bear the consequences of their foolishness feels settlingly just.

I am amazed at the mindset of these bankers. This article was written for their consumption. They really believe that debt is as American as apple pie, and the terms of a promissory note are moral obligations. Perhaps widespread strategic default will get them to reconsider their attitudes and actions, but I doubt it.

But RH Rewards also borrows from that most American of ideas—using financial incentives to drive desired behavior. That's a concept that has been used in programs to encourage everything from good grades to healthier lifestyles.

Bribery is a very old concept, but I hardly consider it American or desirable.

In the case of underwater homeowners, establishing rewards for on-time payments is a way to replace incentives for a group whose original payment motivation has been lost.

A group whose original payment motivations has been lost? LOL! That is the best euphemism I have read in ages. The group they are talking about was motivated to pay as long as prices were going up and they were given more Ponzi debt to make their payments. Once the HELOC money was not forthcoming, they lost their motivation. ~~ giggles to self ~~

“It's a clever way to create a mutual benefit between all parties involved,” says Sayta Thallam, director of the financial markets group at the free markets-leaning Mercatus Center at George Mason University. “It's essentially changing the terms of the mortgage, and people do that and refinance all the time. You can't begrudge your neighbor because he refinanced and got a better deal.“

Yes, you can. In fact, it's relatively easy to begrudge your spendthrift neighbor who got this deal because they borrowed themselves into oblivion with reckless HELOC abuse. The prudent get screwed while the imprudent get rewarded.

While the reward will not be enough to make up for the negative equity a homeowner has, Frank Pallotta, a managing partner of Loan Value Group, is confident that that the program, particularly the extra $100 or so up for grabs each month, is enough to make someone rethink a strategic default. “The reward is not intended to put someone 'in the money,' but is more of a 10-year light at the end of tunnel,” Pallotta says.

The incentive is too small and too far off in the future to have much effect. Ask any employer who has put together an employee benefit program. If the incentives are not tangible and obtainable in a reasonable period of time, employees do not respond, neither will borrowers.

While Loan Value Group operates all aspects the program, it does not provide the cash incentive. That's where partner companies come in. There are eight so far, with the latest one, PMI Group, signing up in early July. The Walnut Creek, Calif.-based insurer says it will role out the RH Rewards program to customers in the Florida and Arizona first, and will decide from these results whether to offer the program on a larger scale.

Mortgage insurers are the ones with the most to gain by buying time. A mortgage insurer is on the hook for the losses from strategic default. As the party assuming this risk, they have the most incentive to pay people to keep paying their mortgages.

Loan Value Group touts that RH Rewards is used in 40 states, offering more than $113 million in rewards covering $1 billion of mortgages. Pallotta says that partner mortgage holders have been able to reduce defaults rate by 50 percent through RH Rewards, with nearly all the invited homeowners agreeing to participate in the program. The default rate among those in the program is “under 5 percent,” he says.

This program hasn't been going long enough to know if it really cuts down on strategic default. Further, a 5% default rate is still atrocious. Most borrowers who sign up for this program have likely already decided not to strategically default for whatever reason, so for them, this is just free money for doing what they would have done anyway. Why not sign up?

Still, this is a very small piece of the $14 trillion mortgage pie. And it provides rewards to only a select group of underwater homeowners, leaving millions of others dutifully paying their mortgages with no cash incentive.

Yes, one billion out of a 14 trillion dollar market is very small. Also, it would be interesting to know the criteria they used to select their borrowers. I doubt they were picking Las Vegas borrowers who owe $300,000 on their $120,000 homes.

But Alex Edmans, the Wharton finance professor who developed RH Rewards, hopes the program will gain traction with some of the larger banks and mortgage servicers, and that the most distressed homeowners will be moved to the head of the line.

“With anything, you first offer the program to those who have the greatest need for it,” Edmans says.

In his paper last summer outlining the RH Rewards concept, Edmans referenced a statistic from the National Bureau of Economic Research showing that 31 percent of foreclosures in March 2010 were strategic, up from 22 percent a year earlier. More recently, a report from Moody's in July noted that the risk of strategic default is rising among performing mortgages as loans-to-value ratios, a strong predictor of future default, “are now approaching the LTV of loans that have defaulted since 2009.”

Dean Karlan, an economics professor at Yale University, says that with such unusually high rates of strategic defaults, banks are acting like any other troubled retail business, scrambling to find a way to keep some wayward consumers (homeowners) interested in their product (mortgages). “They are just tinkering with price to find the profit maximizing point,” Karlan says.

That is exactly what they are doing. If they pay out a few incentives but keep a few extra borrowers paying, they will make more than what they pay out.

“Consumer firms do that all the time with coupon and sales,” Karlan notes. “We do not live in a world in which everyone pays the same price for the same service.”

There is no justice in finance, and finance professionals are okay with that.

California Housing Finance Agency gets stiffed

The California Housing Finance Agency has been featured on the IHB twice before. The first was when they implemented their $2 billion loan owner welfare California initiative. The second was when they announced they wanted to give money to HELOC abusers. Today we are going to look at one of their bad deals here in Irvine.

This property was purchased on 6/21/2007 for $469,500. The owners used a $455,657 first mortgage and a $14,085 second mortgage to cover the down payment. The buyers put nothing down. The borrowers defaulted, and the California Housing Finance Agency bought paid off the first lender with a $478,584 payment. They are now looking to lose about $150,000 on the liquidation.

Idiots.

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This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707

949.769.1599

sales@idealhomebrokers.com

Irvine House Address … 28 GREENFIELD Irvine, CA 92614

Resale House Price …… $335,000

Beds: 3

Baths: 2

Sq. Ft.: 1267

$264/SF

Property Type: Residential, Condominium

Style: One Level, Contemporary

Year Built: 1982

Community: Woodbridge

County: Orange

MLS#: P797311

Source: SoCalMLS

Status: Active

On Redfin: 1 day

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SPACIOUS FLOOR PLAN WITH BRIGHT LIVING ROOM, COZY FIREPLACE, OPEN KITCHEN, 3 GREAT SIZE BEDROOMS WITH LOTS OF CLOSET SPACE, 2 FULL BATHS, NEW CARPET IN BEDROOMS, NEW INTERIOR PAINT AND MUCH MORE. ASSOCIATION AMENITIES HAS POOL, TENNIS COURT, AND BBQ, GREAT FOR A STARTER FAMILY.

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Proprietary IHB commentary and analysis

What exactly is a starter family? So now we have starter homes for starter families?

Resale Home Price …… $335,000

House Purchase Price … $469,500

House Purchase Date …. 6/21/2007

Net Gain (Loss) ………. ($154,600)

Percent Change ………. -32.9%

Annual Appreciation … -7.8%

Cost of Home Ownership

————————————————-

$335,000 ………. Asking Price

$11,725 ………. 3.5% Down FHA Financing

4.10% …………… Mortgage Interest Rate

$323,275 ………. 30-Year Mortgage

$104,824 ………. Income Requirement

$1,562 ………. Monthly Mortgage Payment

$290 ………. Property Tax (@1.04%)

$0 ………. Special Taxes and Levies (Mello Roos)

$70 ………. Homeowners Insurance (@ 0.25%)

$372 ………. Private Mortgage Insurance

$414 ………. Homeowners Association Fees

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$2,708 ………. Monthly Cash Outlays

-$244 ………. Tax Savings (% of Interest and Property Tax)

-$458 ………. Equity Hidden in Payment (Amortization)

$17 ………. Lost Income to Down Payment (net of taxes)

$62 ………. Maintenance and Replacement Reserves

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$2,085 ………. Monthly Cost of Ownership

Cash Acquisition Demands

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$3,350 ………. Furnishing and Move In @1%

$3,350 ………. Closing Costs @1%

$3,233 ………… Interest Points @1% of Loan

$11,725 ………. Down Payment

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$21,658 ………. Total Cash Costs

$31,900 ………… Emergency Cash Reserves

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$53,558 ………. Total Savings Needed

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