realtors acting as agents to lenders are profiting from fraud by submitting bogus opinions of value to induce the lender to sell property below fair market value to straw buyers.

Irvine Home Address … 41 GOLDEN STAR Irvine, CA 92604

Resale Home Price …… $729,000

I want a house with a white picket fence

Don't look at me like I make no sense

He says I'm dumb

She says I'm scum

Dirty Rotten Imbeciles – You Say I'm Scum

There is a new scam in real estate that can only be accomplished by an agent, most often a realtor because most real estate agents are realtors, but there are likely some independent brokers caught up in this as well. The realtor must shirk their fiduciary responsibility to their client and knowingly tell lies to that client, usually a lender but sometimes a short-seller, to get them to sell property for less than it's really worth in the market in order to get some form of kick-back from the buyer. The following article details how this is done.

Real-estate scam that’s devastating prices

Lew Sichelman — June 10, 2011

WASHINGTON (MarketWatch) — Question: My neighbor in Palm Springs, Calif., who claims to have millions or more in the bank, let his home with a $1 million mortgage go into foreclosure. A real-estate friend of his bought it from the bank and is renting it back to him. After one year, my neighbor plans to buy it back. It affects me as a homeowner because now we have a home in our community that shows a sale price for $600,000, instead of the current market of $725,000. How do I report such activities? —J. McK.

Answer: This type of thing is more prevalent than most people realize. According to CoreLogic, a real-estate and mortgage data firm headquartered in Santa Ana, Calif., lenders will lose more than $375 million this year alone when they sell undervalued houses based on the price opinions funneled to them by unscrupulous real-estate agents.

Aren't you shocked? Isn't there a realtor code of ethics against stuff like this?

Lenders who are foolish enough to take realtors at their word are asking for trouble. Those that fail to verify values through other brokers or automated valuation models are not doing enough to protect themselves.

The scam is called “flopping,” and you are correct, it can have a devastating impact on property values because now, the “sale” becomes a comparable for all future appraisals of matching neighborhood properties.

Like flipping, flopping is the intentional misrepresentation of house prices. But whereas flipping usually takes place when housing prices are rising, flopping occurs when values are depressed.

When a house is flipped illegally, it is “sold” for a greatly inflated value in order to obtain a mortgage that is far greater than the place is really worth. When the seller, who is often in on the scheme, is paid at closing, the difference between the actual selling price and the loan amount is split between the perps, who are usually industry insiders who know how to scam the system.

What? There is another scam realtors engage in to profit from fraud?

Flipping for fraud was rampant during the housing bubble because lenders were giving out 100% financing loans, and it was relatively easy for appraisers and realtors to conspire with straw buyers to defraud lenders of hundreds of thousands of dollars. If loans were capped at 80% of value, it would be much harder to obtain an appraisal inflated enough to make the deal profitable. And now with appraisers being assigned randomly, it makes flipping fraud nearly impossible.

When a house is flopped, it is usually owned by a underwater borrower who has asked the lender to approve a short-sale at a price that’s less what is owed. Unbeknownst to the owner or the lender, the real-estate agent supplies one or more opinions of valuation that show the house to be worth one amount when it is really worth much more on the open market.

When the lender agrees to take the lower price, the agent purchases the property in his name or that of a straw buyer and immediately flips the property to an honest-to-goodness buyer-in-waiting at a higher price than the one negotiated with the lender, with the difference split between the participants.

A classic example of flopping comes from the recent post I did on How lender liquidations lower home prices and bring affordability:

I discovered this neighborhood while looking at another auction property nearby. The property of interest is in a cluster product neighborhood in a nice part of Henderson, Nevada. All the properties were built in 2005 and sold new in the mid 200s.

We all know prices are falling throughout Las Vegas, but when I saw the comps for this property, I couldn't believe my eyes.

The list of comparables below are all in the cluster neighborhood, and they are arranged in descending order of closing dates. Take a careful look at the sales price in the column second from the right.

If I had looked at these comps last November, I would have estimated the resale value at between $105,000 and $110,000. Further, I would have likely set an initial asking prices of about $114,000 without much fear of a low appraisal forcing me to lower my price to an FHA buyer.

What would possess an asset manager at a bank to let properties go in the mid 60s? There are limited possibilities:

Capitulation may be motivating asset managers to take any deal presented to them. If they have a caseload of thousands, they care less about maximizing recovery and more about processing files. The asset manager could also be incompetent.

Fannie Mae has the Homepath program where they allow owner occupants to bid on properties and sell them at a reduced price. I understand their desire to put owner-occupants back into homes, but when they let them go for 40% under comps, they merely take down the values throughout the neighborhood and dramatically increase the pain for other owners and sellers in the area.

Another possibility is fraud. The listing agent could have submitted comps from properties in another neighborhood to the lender to justify a $65,000 selling price. The lender may have approved this sale without realizing there were model-match properties in the same neighborhood selling for much, much more.

The property at 556 Albacate was immediately put on the market. It was withdrawn a short time later. Lenders are wise to the flopping problem, and to combat this issue, most lenders will not underwrite a loan on any property sold twice in the last year. When the lender buys the property at auction is considered sale number one, and the fraudulent sale to the flopper is sale number two. By preventing sale number three from occurring within a year of sale number one, lenders can at least force the floppers to wait a while to get their ill-gotten gains.

Back to the article:

Appraisal and valuation misrepresentation continue to be a big bugaboo in the mortgage sector, even in a weak housing market. And flopping is one of the biggest issues because lenders tend to take agents at their word. But when they do check, they are shocked at what they find.

Should they be shocked? They trusted a realtor, and they were deceived? Lenders need to file a couple of lawsuits against a few realtors to frighten the others. If you don't go after a few of the offenders, they will multiply like a virus.

Some real-estate agents are “clever, even more so than criminals,” says Michael Richardson of BrokerPriceOpinion.com, a firm which assists lenders in obtaining accurate valuations. “I’ve seen them change [comparables] to fit the scenarios they are trying to get away with. I’ve seen it where they enter fictitious listings and then remove them later. And I’ve seen it where they’ve recruited other agents” to participate in their schemes.

There must be a provision in the realtor code of ethics to address criminality, right? Will OCAr go after Mr. Richardson for his observations?

Flopping costs lenders tens or sometimes hundreds of thousands of dollars per transaction because the house could have been sold for more than they accepted. But it costs sellers big money, too. How? Because if you are a seller and your state allows your lender to pursue a deficiency judgment against you, you could end up owing more than had the realty agent not taken advantage of the lender’s ignorance — or trust — of your home’s actual value on the open market.

Think about that one. Borrowers are still liable for the shortfall on the mortgage after a short sale or foreclosure under most circumstances. So far lenders haven't come after them, but they will in time. If the seller gets flopped by the listing realtor, the lender will come back after the seller for an even larger shortfall. It may look like banks are eating the losses, but they will seek to push those losses back onto the borrowers if they can.

To avoid becoming a flopping victim, sellers would do well to pay $95 to $100 for a separate broker price opinion from a disinterested party to make sure the value set by their agent is at least in the ballpark. Richardson says he’d do this before even hiring an agent to put together a short sale.

Sellers should also perform the usual due diligence — with your local realty association, better business bureau, consumer affairs agency and the state real-estate commission — to make sure their agent hasn’t been caught pulling a fast one on others.

Does anyone really think the local association of realtors is going to tell you if one of their agents did anything wrong? First, they probably wouldn't care, and second, the association would be sued by the member realtor for loss of income. The state Department of Real Estate would be the best resource.

If they try it once and are successful, chances are they’ll try it again — and again.

You think?

In your case, reporting these miscreants is easier said than done because what has taken place is not yet a crime, only an immoral act, and a pending one at that.

The realtors engaged in flopping aren't much concerned with the morality of what they do. The don't see immorality in manipulating their buyer clients through bogus claims of boundless appreciation, and they embrace bullshit as a standard sales technique. If that behavior is okay, why would they have any compunction about manipulating sellers with questionable comparables?

I don’t even think the lender can do any more than make sure it never deals again with the real-estate agent — or your neighbor, for that matter.

Nevertheless, you should report the agent to your local realty association as well as his broker.

Reporting to the realtor association will generally be wasted effort. If the broker has ethics, perhaps he or she will do something about it. One can only hope.

And you should also report what has transpired to the lender which originally foreclosed on the property. It is the one which is out big bucks here.

Perhaps the lender might be able to seek a deficiency judgment against your neighbor to recover its loss once the place is resold at a much higher price. California is one of those states where deficiency judgments are not permitted. But perhaps the lender can persuade a judge to rule otherwise in this obvious case of fraud.

A difficult to prosecute case at a time when there are thousands of questionable transactions isn't going to get much traction at the District Attorney's office.

Realistically, there isn't much anyone can do. That's why realtors feel emboldened to do it.

It didn't go up in value, and they couldn't afford it

Today's featured property was purchased just as the housing bust began in earnest. The buyers probably thought they were getting a good deal at the time, but it didn't work out that way.

They paid $815,000 on 9/4/2007 using a $417,000 first mortgage, a $316,500 HELOC, and an $81,500 down payment. This is listed as a short sale, so the HELOC was used to buy the property. The debt load must be difficult for them as evidenced by their default.

Foreclosure Record

Recording Date: 09/07/2010

Document Type: Notice of Rescission

Foreclosure Record

Recording Date: 07/21/2010

Document Type: Notice of Default

Perhaps these owners have unemployment problems or some other reason they are selling now, walking away from their down payment, and dealing with trashed credit. Many in these circumstances simply paid too much for the house because they expected the value to go up and provide them an endless fountain of HELOC money from which they could make their payments. It didn't work out that way.

Irvine House Address … 41 GOLDEN STAR Irvine, CA 92604

Resale House Price …… $729,000

House Purchase Price … $815,000

House Purchase Date …. 9/4/2007

Net Gain (Loss) ………. ($129,740)

Percent Change ………. -15.9%

Annual Appreciation … -2.9%

Cost of House Ownership

————————————————-

$729,000 ………. Asking Price

$145,800 ………. 20% Down Conventional

4.49% …………… Mortgage Interest Rate

$583,200 ………. 30-Year Mortgage

$126,494 ………. Income Requirement

$2,952 ………. Monthly Mortgage Payment

$632 ………. Property Tax (@1.04%)

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

$152 ………. Homeowners Insurance (@ 0.25%)

$0 ………. Private Mortgage Insurance

$50 ………. Homeowners Association Fees

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

$3,785 ………. Monthly Cash Outlays

-$492 ………. Tax Savings (% of Interest and Property Tax)

-$769 ………. Equity Hidden in Payment (Amortization)

$242 ………. Lost Income to Down Payment (net of taxes)

$202 ………. Maintenance and Replacement Reserves

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

$2,877 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$7,290 ………. Furnishing and Move In @1%

$7,290 ………. Closing Costs @1%

$5,832 ………… Interest Points @1% of Loan

$145,800 ………. Down Payment

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

$166,212 ………. Total Cash Costs

$44,700 ………… Emergency Cash Reserves

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

$210,912 ………. Total Savings Needed

Property Details for 41 GOLDEN STAR Irvine, CA 92604

——————————————————————————

Beds: 4

Baths: 2

Sq. Ft.: 2580

$283/SF

Property Type: Residential, Single Family

Style: Two Level, Cape Cod

Year Built: 1976

Community: 0

County: Orange

MLS#: S661938

Source: SoCalMLS

Status: Active

——————————————————————————

A Must See Perfect Family Home in the Heart of Irvine. Excellent opportunity on this Short Sale. This four bedroom home is located on a very quiet loop street next to Deerfield Community Park, Just half a block walk to the community pool and spa, park, playground and Tennis Courts. Walk to the award winning Deerfield Elementary and Venado Middle School- both without crossing a single street. Home has recently been completely upgraded with tile floors throughout the main level, ceiling fans everywhere, new kitchen with granite countertop, new bathrooms, 3 fire places all tiled in the living room family room and the master bedroom. Large specious back yard beautifully landscaped, with retractable motorized awnings. Energy efficient with 3 zones A/C, Whole house fan/blower and individual laundry room. It s perfect interior location, LOW Association Dues, and NO MELLO ROOS makes this one a Must See Turn Key Home!

Another realtor demands silence!

Since the topic of the day is the bad behavior of realtors, I thought I would conclude on Friday with the amusing story from the OC Register.

The name has been deleted because I don't want to further humiliate this lady, but if you want to know who she is, you can find out on your own.

Police: Realtor fired gun to scare away people being loud

By KRISTY CHU — THE ORANGE COUNTY REGISTER

June 16, 2011

MISSION VIEJO – A 65-year-old realtor has been arrested on suspicion of discharging a firearm in a negligent manner after police say she fired a gunshot to scare people talking loudly near her home.

A group of eight people in their early 20s were hanging out at Lake Mission Viejo near the 22000 block of Formentor around 11:45 p.m. on Tuesday, police said. A woman who lives near the lake went out onto her balcony and yelled at them to be quiet.

I don't know why she yelled at them. She should have lodged a complaint with the ethics board at OCAr, and they could have demanded the rowdy 20-somethings appear in front of OCAr's kangaroo court to be found guilty of exercising their right of free speech. Since it doesn't matter to OCAr whether or not the people they accuse are in their organization, this woman could have lodged her complaint and made these young people shut up without resorting to shooting a gun.

Police said the group saw the woman return to her balcony a short time later with an object. They then heard what sounded like a gunshot and saw a flash from the gun's muzzle as it was discharged from the balcony. According to police, an individual in the group shouted up to the woman's balcony to ask if she had a gun, to which the woman responded that she did.

The group left the lake and called police to report the incident. The woman also had called police to report people being loud near the lake.

Deputies were sent to the woman's home to respond to the noise complaint and discovered she was intoxicated. The woman first told deputies she had only fired a flare gun, but later admitted to firing a gun up into the air. Deputies located a 38-caliber pistol with one spent round.

So a drunk realtor shoots a gun to stop people from talking, and then she lies to the police about it. Wow! BTW, what is it about realtors that makes them think they can force people to be silent?

I hope she isn't the one behind the complaint against me. Will she show up to the hearing with a firearm? Is OCAr going to install metal detectors at its doors to keep guns out of the proceedings?

Deputies arrested Dirty Harriet, 65, on suspicion of discharging a firearm in a negligent manner. Dirty Harriet, whose occupation is listed as a realtor on arrest records, is being held in lieu of $25,000 bail.

State Department of Real Estate records show a Dirty Harriet realtor employed by Rainbow Realty Corp. Century 21 Rainbow Realty's website lists a Dirty Harriet realtor as a realtor with the company, which specializes in “working with seniors in listing and selling homes.“

Contact the writer: 949-454-7343 or kchu@ocregister.com

realtors are complaining that I am making them look bad. I don't make this stuff up people. Based on recent news events, I think it's fair to say realtors are doing that all on their own.

The UCLA Anderson Forecast predicts housing demand will be weak until at least 2013, and as a result, the economy will continue to languish.

Irvine Home Address … 39 SMOKESTONE #36 Irvine, CA 92614

Resale Home Price …… $280,000

Today you're laughing, pretty baby,

tomorrow you could be crying

They say every dog has its day

The good dogs win and the bad fade away

Peter Green — It Takes Time

When I first started writing about the housing bust back in 2006 and 2007, I believed that prices would bottom in 2011. When the government embarked on its campaign of market intervention, they managed to engineer a two-year bear rally which has finally run it's course. What they managed to accomplish — other than shifting much of the losses from lenders to the US taxpayer — is to delay the bottom by two years. I wish my crystal ball were accurate enough to say exactly when, but now others are starting to accept the idea that we won't see a sustained recovery until 2013.

California to suffer housing shift, UCLA forecasters say

Demand will grow for urban rental units by the coast and shrink for single-family homes inland, resulting in fewer construction jobs and no boom for some areas hit hard by the housing bust.

By Alana Semuels, Los Angeles Times — June 15, 2011

UCLA forecasters have seen the future of California's housing market, and it looks like this: more apartments near the coast, fewer McMansions in the desert.

Since housing is still grossly overpriced near the coast, and since people with jobs need a place to sleep, rental demand will pick up. Further, since people can no longer afford the extra square footage of a McMansion, builders are being forced to make houses smaller to achieve lower price points. Those are the real reasons why UCLA's predictions will be correct. The reasons that follow are somewhere between weak and bogus.

That prediction is based on several factors, including expectations that rising fuel prices will encourage people to live closer to jobs along the Southland coast and in the San Francisco Bay Area.

The state's population is also skewing younger, meaning there will be more demand for urban rental units and less demand for suburban cul-de-sacs, according to the quarterly economic forecast released Wednesday by UCLA's Anderson School of Business.

People don't base housing decisions on gas prices. They may choose to buy a car that guzzles less gas while prices are high, but the moment gas prices go back down, demand for SUVs goes right back up. Gas prices may influence how much of a discount is required to get someone to move inland, but even that is less of an issue than how much traffic they will have to deal with and how long the commute time will be.

The idea that a “skewing younger” population will shift demand doesn't seem likely either. Demographic shifts doesn't determine buyer behavior. People will want what they want, and they will substitute as necessary. Academics have written papers predicting housing crashes from the changing housing needs of baby boomers, and those predictions have consistently proven wrong.

“The incremental demand for housing is moving more into multifamily housing,” said Jerry Nickelsburg, senior economist with the forecast. “Many of the younger generation have been buffeted by the boom and bust in the housing market, and see value in living closer to work.”

Younger workers have been frightened by the housing bust, but home ownership hasn't lost its luster. People will demand what housing they can afford, and as long as housing is over priced, people will demand rentals as a substitute.

That's bad news for the state economy, however, for two reasons. One is that construction of multifamily homes requires less labor than construction of single-family homes. Second, areas such as the Inland Empire and Central Valley that were hit hardest by the housing bust won't get a construction boom to help pull them out of the economic doldrums.

This means “there is an even larger structural unemployment problem in California than we originally thought,” Nickelsburg wrote in the forecast. “Not only do we have excess construction, real estate and support skills, but some of those that will be demanded will be in the wrong geography.”

UCLA has been wrong in its previous estimates of the impact of the housing bubble. I'm glad they are finally correcting their mistakes. Many of the construction jobs of the bubble will not come back — it was an unsustainable bubble, and when demand finally reaches an equilibrium, it will be at a lower level of real estate related employment.

California won't start adding a significant number of building permits until 2013, forecasters say, which is one of the reasons the state's unemployment rate will stay above 10% until the middle of that year. Nonfarm employment in the state won't return to pre-recession levels until 2014, and construction employment won't reach those levels until at least 2021.

Construction starts and sales have been near their all-time lows for nearly three years now, and they will continue to drag along the bottom for another two years. As someone who works in the industry, that is not a comforting truth, but it is an accurate assessment of where we are and what we are facing.

“In a typical recovery, you get a bounce-back in housing and hiring of a lot of construction workers,” (see chart above) Nickelsburg said in an interview. “We're not seeing that this time, which definitely slows the recovery, and slows economic growth.”

Changes in the state's demographics are driving some of these shifts, forecasters say. Household formation has slowed in California as the unemployed have moved in with their family members to save money, leading to less demand for new homes.

In addition, California is one of the youngest states in the nation, according to census data, with a median age of 35.2, compared with 38.0 in New York. Although there are many Gen Xers of home-buying age in the state, many “bore the brunt of sub-prime mortgage and housing bubble crash,” Nickelsburg said, and now do not think a home is a safe investment.

The surveys on this issue simply don't back up this contention. Despite the housing bust, people still want to own homes. That's not to say buyers are not wising up to the fact that housing is not a safe investment. People shouldn't perceive housing as a safe investment. Real estate prices do not always go up. The fact that people did believe it was a safe investment contributed to the financial mania that made prices crash.

The market is already responding to this trend, according to UCLA. Building permits for single-family homes have continued to decline while permits for multifamily complexes are starting to regain strength. Permits for multifamily homes are now at 40% of the peak number, comparatively stronger than permits for single-family homes, which are at 20% of their previous peak.

Those are dismal numbers. Real estate related unemployment is also correspondingly high.

These housing issues, coupled with the financial pain experienced by state and local governments, will keep California's unemployment rate at an average of 11.7% this year and 10.9% next year.

The picture is slightly rosier on the national level. Gross domestic product will grow at an annual rate of 3% through 2013, and the unemployment rate will decline slowly, reaching 7.8% by the end of that year. This year, the U.S. unemployment rate will average 8.9%.

There has never been a robust housing recovery in the face of persistent unemployment. It takes people with jobs to buy homes.

The recovery will remain tepid because many jobs are gone for good, said Ed Leamer, director of the UCLA Anderson Forecast. Outsourcing and robots have replaced about 2.5 million manufacturing workers. About 2 million construction jobs are gone permanently because they had been created by artificial demand. Retail technology and Internet shopping, coupled with consumers' spending fatigue, have led to the displacement of 1 million retail jobs.

Those 5.5 million workers are one reason the economy won't grow as robustly as it has in past recoveries, Leamer said.

“We have been vigilant for signs of a real recovery,” Leamer wrote. “These have been hard to find.“

As reported here back in 2009, our HELOC-based economy will not recover quickly because so much of the demand was artificial. With the housing ATM shut off for the foreseeable future, and with consumer debt at very high levels, we will not be able to borrow our way to prosperity.

Minus 10% annual appreciation

Today's featured property is not for sale. It recently closed for a whopping 41% loss which represents negative 10% appreciation for the four and one half years the owner had the place — and prices are still falling.

Remember when everyone bought in 2006 because they believed prices would rise 10% a year? Gary Watts said that was “in the bag,” not that a realtor would make overly optimistic projections of appreciation….

At the $280,000 sales price, this property is likely at or below rental parity. Of course, it is a condo which should trade at a discount to rental parity, but it is certainly a good sign for the housing market. When more properties reach price levels where the cost of ownership is less than rent, a bottom will form. Until then, local prices will continue to grind lower and affordability will improve.

Irvine House Address … 39 SMOKESTONE #36 Irvine, CA 92614

Resale House Price …… $280,000

House Purchase Price … $451,500

House Purchase Date …. 12/29/2006

Net Gain (Loss) ………. ($188,300)

Percent Change ………. -41.7%

Annual Appreciation … -10.6%

Cost of House Ownership

————————————————-

$280,000 ………. Asking Price

$9,800 ………. 3.5% Down FHA Financing

4.49% …………… Mortgage Interest Rate

$270,200 ………. 30-Year Mortgage

$58,605 ………. Income Requirement

$1,367 ………. Monthly Mortgage Payment

$243 ………. Property Tax (@1.04%)

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

$58 ………. Homeowners Insurance (@ 0.25%)

$311 ………. Private Mortgage Insurance

$315 ………. Homeowners Association Fees

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

$2,294 ………. Monthly Cash Outlays

-$125 ………. Tax Savings (% of Interest and Property Tax)

-$356 ………. Equity Hidden in Payment (Amortization)

$16 ………. Lost Income to Down Payment (net of taxes)

$55 ………. Maintenance and Replacement Reserves

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

$1,884 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$2,800 ………. Furnishing and Move In @1%

$2,800 ………. Closing Costs @1%

$2,702 ………… Interest Points @1% of Loan

$9,800 ………. Down Payment

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

$18,102 ………. Total Cash Costs

$28,800 ………… Emergency Cash Reserves

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

$46,902 ………. Total Savings Needed

Property Details for 39 SMOKESTONE #36 Irvine, CA 92614

——————————————————————————

Beds: 3

Baths: 2

Sq. Ft.: 1117

$251/SF

Property Type: Residential, Condominium

Style: One Level, Contemporary

View: Park/Green Belt, Yes

Year Built: 1980

Community: Woodbridge

County: Orange

MLS#: S602164

Source: SoCalMLS

Status: Closed

——————————————————————————

WOW!! THIS IS AN OUTSTANDING VALUE FOR WOODBRIDGE! SPACIOUS THREE BEDROOM TWO BATHROOM LIGHT AND BRIGHT CONDO IN PRESTIGIOUS WOODBRIDGE COMMUNITY CLOSE TO FREEWAYS, UNIVERSITY, AWARD-WINNING SCHOOLS, MAJOR SHOPPING AREAS, AND WITH LAKE AND ASSOCIATION PRIVILEGES! CLOSE TO PARKING AND WELCOMING VIEWS OF THE GREENBELT, THIS CONDO IS AN END UNIT WITH A PRIVATE ENTRY BALCONY PORCH, VISTA OF TREES, A LARGE LIVING ROOM WITH WINDOWS ON TWO WALLS, A SEPARATE DINING ROOM, A SUNNY KITCHEN WITH UPGRADED COUNTERS, A LARGE MASTER SUITE WITH SMALL BALCONY PLUS A DRESSING AREA WITH A WASHER/DRYER CLOSET, AND A SEPARATE BATHROOM WITH SHOWER/TUB.

Commercial borrowers also enjoyed the cash-out refinance booty enjoyed by residential borrowres, only the take was much, much larger.

Irvine Home Address … 14 ROSEMARY Irvine, CA 92604

Resale Home Price …… $275,000

Winter night in Harlem

Radiator won't get hot

Well the mean old landlord, he don't care

If I freeze to death or not

Bill Withers — Harlem

I have profiled hundreds of HELOC abuse cases here in Irvine. This behavior was very widespread, and I documented, the desire for HELOC money is what inflated the housing bubble.

Lenders are largely responsible for this problem because as the party extending the loan, they should have taken more care to make sure they were going to get paid back. If our tax dollars wouldn't have been required to cover their losses, it would have been a tragic case of lender stupidity, a curiosity, but nothing more. However, once the government got involved in bailing these bozos out, then it becomes state sanctioned theft, and a matter of great public concern.

Residential real estate was not the only area where lenders lost their minds and gave out free money to anyone with a pulse proforma. Commercial real estate lending was similarly stupid, and since the dollar values of commercial properties are orders of magnitude larger, so was the lender folly.

In Harlem Buildings, Reminders of Easy Money and the Financial Crisis

By CHARLES V. BAGLI

Published: June 9, 2011

At Riverton Houses, a middle- and working-class apartment complex in Harlem, residents noticed a few changes after new owners came in. Lobbies were renovated. New elevators were installed. A decorative fence went up around the entire property.

Nearby, the new owners of another complex, Delano Village, were doing similar work with the same goal, to replace rent-stabilized tenants with ones paying market rates.

But while they were making improvements — some of which they would eventually charge to tenants — the new owners were piling on debt that their rental income could not support. Yet in each case, they have not exactly suffered: despite plunging the buildings into financial despair, each has been able to take tens of millions of dollars in cash out of the properties.

I wasn't interested in real estate finance until I went to graduate school at Texas A&M. I was fortunate to be a student there from 1992 to 1994 in the aftermath of the savings and loan debacle in which Texas was a major participant. Most of the case studies from my classes were focused on what lenders did during that time.

I was taught the importance of positive cashflow and equity requirements. I was also taught the folly of lending based on proforma projections and anticipation of rising rents or rising prices. I never forgot those lessons, so when I began observing residential real estate being purchased as investment with strongly negative cashflow, I knew it was only a matter of time before we saw rampant overbuilding and a complete collapse of prices back down to cashflow positive levels.

Commercial real estate in Texas was crushed in the early 90s, and many empty commercial centers remained empty for years. The excess supply caused declining rents and deteriorating values through the mid 90s. Prices finally stabilized when prices reached a level where 30% down equity made 12% returns and the 70% loan at 8% could be comfortably serviced. Like residential real estate across much of the country today, the price adjustment in commercial in the 90s required a 50% haircut.

What the owners did was legal, and in the microcosm of a few square blocks of Manhattan, it tells a story of the nation’s real estate bubble and collapse. As millions of homeowners did, but on a much larger scale, the owners refinanced their properties, finding lenders willing to give them far more money than the buildings turned out to be worth.

When they refinanced, the owners of Riverton took out as much as $60 million in cash, and the owners of Delano Village, which they renamed Savoy Park, initially took out as much as $105 million, according to loan documents, credit analysts and lenders.

Wow! That is a great deal of money.

In the savings and loan bubble, lenders would often loan out 100% of the value established by proforma. These loans were still cashflow positive on paper, but if a proforma backed by an appraisal justified cashing out the developer with millions of dollars, lenders completely abandoned equity requirements and gave them the money. Developers didn't need to sell the property in order to get their cash out of the deal. Plus, they shifted all the risk onto the savings and loan which in turn shifted the risk onto the US taxpayer through the FSLIC.

It is difficult to say exactly how much of that turned into profit because their books are not in the public record. James H. Simmons, a partner at AREA Property Partners, which bought Delano Village in a partnership with Vantage Properties, said they had put millions of dollars back into the property to cover shortfalls since running into financial problems at the end of 2009, although he declined to divulge any numbers.

Using debt to pay debt service is the essence of a Ponzi scheme. Many residential borrowers did the same thing. Some are still draining their pile of borrowed cash from the bubble to make debt service payments. If financial history repeats itself, prices will remain low longer than these borrowers can remain solvent.

Mr. Simmons said they were negotiating with the lenders to restructure the loans. If the talks were successful, he said, they would put a “substantial” sum of money toward retiring some of the debt.

How does this guy plan to borrow his way out of debt? In reality, he doesn't. The substantial sum toward retiring debt will be a write off at the bank.

“We are very close to a solution that works for the lenders and for us,” Mr. Simmons said. “We continue to maintain the property for the benefit of the tenants.”

A huge problem in the wake of the savings and loan collapse was ongoing operations for REO and those properties in receivership. When properties are cashflow negative, nobody wants to operate them because there is no money in it. The developer or owner has no interest because they have no equity, so lenders end up hiring management for a fee. Sometimes, the only reasonable choice for management was the borrower who was in default on the loan. Many properties remained in this zombie status for years.

Riverton’s owners, Stellar Management and Rockpoint, declined to comment. They tried to restructure their loans by reinvesting as much as $40 million, said real estate executives who work with Laurence Gluck, Stellar’s chief executive. But after one of the lenders refused to go along with the deal, the senior lenders foreclosed last year, with the property’s value estimated to be less than half the $250 million debt.

We see the same dynamic in place with residential lenders. The subordinate mortgages, seconds, HELOCs, thirds, and so on, have no value because the first loan is underwater. The only power subordinate lien holders have in the negotiation is the ability to say no. If they exercise that power and kill restructuring deals, the first lender will foreclose and blow out the subordinate lien holders who end up with nothing other than an unsecured claim against an insolvent borrower.

Harold Shultz, a senior fellow at the Citizens Housing and Planning Council and a former city housing official, said that both deals emerged in an era when investors stopped looking at complexes like Savoy Park and Riverton “as housing and started looking at them as commodities.” Mr. Shultz and others estimate that there are as many as 100,000 overleveraged apartments in the city’s working-class neighborhoods.

“They mistook Harlem for Fifth Avenue and 79th Street,” Mr. Shultz said of the banks. “The only surprise is that it took this long.”

Once a Ponzi scheme gets started, it will grow larger until lenders stop lending. It is only a matter of time before the system collapses, and the damage is directly related to how far values become detached from the cashflow basis. In the case of The Great Housing Bubble, lenders inflated house prices by trillions of dollars, and the economic fallout has been devastating. None of it would have occurred if we had not let residential lending become detached from rental cashflow.

Riverton, seven buildings with 1,232 units and a grassy courtyard, between 135th and 138th Streets, from Fifth Avenue to the Harlem River, was built in the late 1940s by Metropolitan Life Insurance as part of a “slum clearance” program led by Robert Moses. At the same time, MetLife built the larger Stuyvesant Town and Peter Cooper Village complexes north of 14th Street, but refused to rent those apartments to blacks and Hispanics. (The new owners of those complexes, Tishman Speyer Properties and BlackRock, defaulted on their loans in 2010 and relinquished control to lenders; they had not refinanced.)

Despite its bitter roots, Riverton developed a cachet within Harlem and was home to tenants like Samuel R. Pierce Jr., a former secretary of housing and urban development; the jazz pianist Billy Taylor; and former Mayor David N. Dinkins. “It was the crème de la crème,” said Nellie Hester Bailey, director of the Harlem Tenants Council.

Stellar and Rockpoint bought Riverton in 2005 for $132 million, with a $105 million mortgage. A year later, the partners refinanced Riverton, more than doubling the debt with $250 million in new loans.

Reads like an IHB post, doesn't it? They put money down when they purchased — something optional during the bubble — and then they proceeded to HELOC out a fortune.

The new financing enabled the partners to repay the original loan, recoup their investment and establish $53 million in reserve money to cover renovations and any shortfalls in revenue, leaving them with an additional $60 million. But the rental income covered less than half of the debt service, and turnover was slow. They converted 10 percent of the apartments to market rates — not the 50 percent the owners had projected in loan documents. The complex’s default served as a warning bell on Wall Street for dozens of overleveraged apartment building deals.

Ordinarily, I would wonder what the lender was thinking. Who underwrites loans where the cashflow doesn't cover the payments? Originating lenders, that's who. The lender didn't keep the loan on its books, so the fact that the borrower was certain to default didn't matter to them.

The main lender on the refinancing, Deutsche Bank, eventually packaged the loan with other mortgages as a commercial mortgage-backed security and sold it to investors. The use of mortgage-backed securities, many of them filled with bad loans, was a major contributor to the most recent financial collapse.

CW Capital, which represents investors in the Riverton debt, took control of the complex last year. The company declined to discuss Riverton’s financial history.

Delano Village, seven buildings with 1,800 apartments built in the late 1950s just to the north of Riverton, was bought by Vantage and AREA in 2006 for $175 million, including a $128.7 million mortgage. A year later, the new owners refinanced, nearly tripling the debt on the property to $367.5 million.

The new financing allowed the partners to recoup their investment, repay the original mortgage and establish $87 million in reserve funds. That left the partners with about $100 million.

They made $100,000,000 for putting the deal together and pushing paper around. Back in the day, Wall Street convinced itself this was adding value. As if pushing paper was akin to building things. Paper doesn't add value to real estate.

Vantage, with AREA and other partners, was in the midst of buying more than $2 billion worth of apartments in Harlem, Washington Heights and Queens. It set about making improvements like a new security system, a new boiler and fixed-up brick work, and won state approval to recoup some of those costs over a seven-year period by raising tenants’ rents, as Riverton’s owners also did.

Vantage, which was the operating partner at Savoy Park, also sent lease termination notices to roughly a fifth of its tenants, claiming that they were not entitled to rent-regulated apartments because it was not their primary residence, their name was not on the lease or they were in arrears on the rent.

Tenants at Savoy Park and other Vantage properties complained to the attorney general’s office that Vantage was harassing them with false eviction claims. About 115 tenants who were sent eviction notices left Savoy before the cases got to housing court. Of the 158 cases that did go to court, Vantage was successful in evicting 44 tenants. The attorney general’s office, then headed by Andrew M. Cuomo, reached a settlement in 2010 with Vantage over the 9,500 apartments controlled by the company in which Vantage promised to change its policies and pay $1 million to tenants who had suffered harassment and to finance nonprofit organizations that provide free legal advice to tenants.

I suspect there is more to this story. Vantage was well within it's rights to evict tenants who were not in fact living on the property. In rent-controlled housing, there is a large incentive for leaseholders to keep the under-market lease in place and sublease to a different tenant and pocket the difference. Rent controls were not designed to benefit people who don't live in the property.

As at Riverton and Stuyvesant Town, lenders extended large loans for Savoy Park based not on actual rental income but on income projections that turned out to be significantly overstated.

This was the primary mechanism for obtaining inflated appraisals and loans during the savings and loan crisis. Developers and owners simply made-up numbers and tried to get a loan based on them. Many lenders were in cahoots with the developers to make these loans. The lenders didn't care because they were FSLIC insured, so the US government was on the hook for all losses.

I thought we had learned the danger of explicit government guarantees of lending during that crisis, but when the government took over the residential mortgage lending market, they assumed the same risk that brought down the FSLIC fund.

According to Realpoint, a credit rating agency, the net cash flow at Savoy Park never rose much higher than $7 million, about a third of the annual loan payments. Realpoint estimates that the value of the complex has fallen to $98 million, and one executive familiar with the property suggested that it was now worth about $120 million — either way, far less than the $367.5 million in loans.

Whoever reviewed and approved these financial projections should be investigated for fraud. If it isn't fraud, it is an extraordinarily incompetent job of underwriting.

Several tenants of rent-regulated apartments interviewed at the complex last month said that the owners were slow to make repairs and that carpets laid in the hallways by the landlord were infested with bedbugs. “Things are not good here,” said Valerie M. Orridge, a retired nurse who has lived there since 1959. She pays $870 a month for her two-bedroom apartment, and will pay $910 come August. “It’s just impossible to get repairs done.”

There's a reason its impossible to get repairs done: with tenants paying $870 a month rent, there isn't any money to make repairs.

But a newcomer, Mike Brown, had a different impression of Savoy Park. He moved into a one-bedroom, 600-square-foot apartment with two roommates two months ago and is thrilled with the place, especially when compared with the dingy apartment he had in Newark. The market-rate rent is $1,500 a month, and the newly renovated apartment has a laminated parquet floor, new GE kitchen appliances and a new bathroom.

“I like the location,” Mr. Brown, 28, said. “Everything is clean. It has a nice vibe to it.”

Mr. Simmons, one of the owners, said Savoy Park would not follow Riverton into foreclosure, and Neil Rubler, his partner, said that “deregulating apartments has never been a key component of our business plan.”

But David Hershey-Webb, a lawyer who represents tenants at Savoy Park, scoffed.

“Tripling the debt and deregulating go hand in hand,” he said. “That’s what sparked the speculation.”

I used to work for a developer who purchased tax-credit apartments with rent subsidies. He stopped doing it because he was losing too much money. Any time market rents are capped, there is no opportunity to improve the property or make up for needed repairs. For example, if the property requires an unbudgeted $100,000 repair, and the owner makes that repair, he can do nothing to recapture his investment. With an infinite potential for downside and a cap on upside, these properties fall into disrepair, and nobody wants to own them. And what's worse, lenders don't want to lend on them because they don't want to step in to the owner's shoes in the event of foreclosure.

The parallels between the residential market and the commercial market are striking. The amend-extend-pretend policy has been the order of the day in commercial real estate. Several large hedge funds formed in 2008 to pick up the pieces, and many were promptly disbanded when the inventory never materialized. Lenders are holding on to their worthless mortgage notes in hopes that valuations will soon come back. Just like in residential, it isn't going to happen.

HELOC Abuse closer to home

The desire for free money for doing nothing is universal. If I didn't have to do anything, and someone were willing to give me hundreds of thousands of dollars, I would certainly be tempted. Of course, there is no free lunch, and even the free money given out during the housing bubble had strings attached. Borrowers didn't worry about it because, well… it was free money.

• The owners of today's featured property paid $207,500 back on 10/2/2001. They used a $166,000 first mortgage, a $41,500 second mortgage, and a $0 down payment. In other words, they were given the house plus all the money that followed.
• On 7/14/2003 they extracted $51,000 in a new $92,500 stand-alone second.
• On 3/3/2004 they obtained a $262,500 first mortgage, and a $42,500 HELOC.
• On 3/15/2005 they got a new $351,000 first mortgage.
• On 9/15/2005 they refinanced with a $391,500 first mortgage.
• On 6/1/2006 they got an Option ARM for $390,400 with a 1.75% teaser rate, and they got a $48,800 HELOC.
• Total property debt is $439,200 plus negative amoritization on the Option ARM.
• Total mortgage equity withdrawal was $231,700.

Do you think they will want another property like this one again? They were given the house, then they were given $231,700 to spend over the next five years for signing some papers. They extracted every penny of appreciation as it appeared through the peak, and now that prices have fallen and the home ATM is shut down, they are short selling to get out from under the debt.

Irvine House Address … 14 ROSEMARY Irvine, CA 92604

Resale House Price …… $275,000

House Purchase Price … $207,500

House Purchase Date …. 10/2/2001

Net Gain (Loss) ………. $51,000

Percent Change ………. 24.6%

Annual Appreciation … 2.9%

Cost of House Ownership

————————————————-

$275,000 ………. Asking Price

$9,625 ………. 3.5% Down FHA Financing

4.49% …………… Mortgage Interest Rate

$265,375 ………. 30-Year Mortgage

$57,559 ………. Income Requirement

$1,343 ………. Monthly Mortgage Payment

$238 ………. Property Tax (@1.04%)

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

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

$305 ………. Private Mortgage Insurance

$277 ………. Homeowners Association Fees

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

$2,221 ………. Monthly Cash Outlays

-$123 ………. Tax Savings (% of Interest and Property Tax)

-$350 ………. Equity Hidden in Payment (Amortization)

$16 ………. Lost Income to Down Payment (net of taxes)

$54 ………. Maintenance and Replacement Reserves

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

$1,818 ………. 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

$27,800 ………… Emergency Cash Reserves

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

$45,579 ………. Total Savings Needed

Property Details for 14 ROSEMARY Irvine, CA 92604

——————————————————————————

Beds: 2

Baths: 2

Sq. Ft.: 1022

$269/SF

Property Type: Residential, Condominium

Style: Two Level, Other

Year Built: 1976

Community: 0

County: Orange

MLS#: P784020

Source: SoCalMLS

Status: Active

——————————————————————————

Private & Quiet location. Large Kitchen with built in shelves. Large Laundry Room with built-ins. Both Bedrooms Upstairs Have Celing Fans and Wood Blinds.

OCAR has responded to IrvineRenter's response letter of last week. The synopsis is simple: to quote Ring Lardner, “Shut up he explained.”

Irvine Home Address … 11 FALLINGSTAR #20 Irvine, CA 92614

Resale Home Price …… $189,000

They got little hands

Little eyes

They walk around

Tellin' great big lies

Randy Newman — Short People

The little people behind the complaint against me obviously want to silence my free speech. Their latest response letter demanded my silence, and failed to explain the charges against me. Again, they seek to suppress free speech and circumvent due process like a communist regime.

Why is OCAr so insistent on silencing free speech? Do they really believe if I stop telling uncomfortable truths that people won't be wise to their games? Is my voice so powerful and my message so devastating to their goals that they believe my silence will suddenly lead to a turnaround in the real estate market and increased business for the members of OCAr? Do they believe they can return to their deplorable methods of buyer manipulation if I am not here to point out their behavior?

Whatever the reasoning behind OCAr's attempt to silence free speech, such attempts have widely reviled since the Renaissance in Europe, and it isn't casting OCAr's actions in a favorable light today.

Free Speech is a basic human right

Free speech is a fundamental American right encapsulated in the First Amendment to the US Constitution for a reason: our founding fathers recognized free expression of ideas is critical to fight oppression and injustice.

The “marketplace of ideas” is designed in part to defeat offensive speech by giving it fair play. In other words, the Founders believed that the best way to deal with stupid and offensive ideas was not to suppress them, but instead to let them be spoken and debated in public. If they were truly stupid ideas, they would be debated and discredited.

If OCAr truly believes I am wrong and my seditious ideas should be discredited, they should welcome my contribution to the debate, and they should expect me to be quickly disgraced. They should present their side of the story too, for if they are so astute and full of virtue, people should clamor to adopt their wisdom. Doesn't everyone know that real estate only goes up?

Apparently, that isn't what OCAr has in mind.

John Milton, seventeenth century English poet, polemicist, and civil servant for the Commonwealth of England, wrote, “Give me the liberty to know, to utter, and to argue freely according to conscience, above all liberties.” It's an idea that has gained popularity ever since.

According to Wikipedia:

Concepts of freedom of speech can be found in early human rights documents and the modern concept of freedom of speech emerged gradually during the European Enlightenment (Voltaire). England’s Bill of Rights 1689 granted 'freedom of speech in Parliament' and the Declaration of the Rights of Man and of the Citizen, adopted during the French Revolution in 1789, specifically affirmed freedom of speech as an inalienable right. The Declaration provides for freedom of expression in Article 11, which states that:

“The free communication of ideas and opinions is one of the most precious of the rights of man. Every citizen may, accordingly, speak, write, and print with freedom, but shall be responsible for such abuses of this freedom as shall be defined by law.”

Article 19 of the Universal Declaration of Human Rights, adopted in 1948, states that:

“Everyone has the right to freedom of opinion and expression; this right includes freedom to hold opinions without interference and to seek, receive and impart information and ideas through any media and regardless of frontiers.”

Today freedom of speech, or the freedom of expression, is recognized in international and regional human rights law. The right is enshrined in Article 19 of the International Covenant on Civil and Political Rights, Article 10 of the European Convention on Human Rights, Article 13 of the American Convention on Human Rights and Article 9 of the African Charter on Human and Peoples' Rights. Based on John Milton's arguments, freedom of speech is understood as a multi-faceted right that includes not only the right to express, or disseminate, information and ideas, but three further distinct aspects:

• the right to seek information and ideas;
• the right to receive information and ideas;
• the right to impart information and ideas.

International, regional and national standards also recognize that freedom of speech, as the freedom of expression, includes any medium, be it orally, in written, in print, through the Internet or through art forms. This means that the protection of freedom of speech as a right includes not only the content, but also the means of expression.

It isn't just OCAr's attempt to silence free speech that has many observers of this case so angry. Many are offended by the procedures adopted by OCAr that circumvent due process of law.

Due process and rules of law

Our modern system of jurisprudence functions on some basic procedural grounds:

1. The accused has the right to a clear statement of the charges brought against him.
2. The accused has the right to review the evidence and prepare a defense.
3. The accused has the right to confront his accusers.
4. The accused has the right to an unbiased judge or jury.
5. The accused has the right to trial in a public forum.

OCAr is seeking to deny all five of the enumerated rights in its grievance with me.

The early twentieth century German author, Franz Kafka, wrote a book titled, The Trial that explores the issues related to denial of due process rights. The book tells the story of a man arrested and prosecuted by a remote, inaccessible authority, with the nature of his crime revealed neither to him nor the reader. In the story (according to Wikipedia), On the last day of Josef K.'s thirtieth year, two men arrive to execute him. He offers little resistance, suggesting that he has realized this as being inevitable for some time. They lead him to a quarry where he is expected to kill himself, but he cannot. The two men then execute him. His last words describe his own death: “Like a dog!”

Do any of you remember the trial of Captain Kirk in Star Trek VI, The Undiscovered Country? Or for real Star Trek fans, did you see the Deep Space Nine episode The Tribunal? Denial of due process is an issue we don't think much about here in the United States because it happens so rarely. Our only experience of it is through popular drama or great literature. In countries with totalitarian regimes — or anywhere realtor associations operate like OCAr — denial of due process is a common injustice.

There is only one reason any powerful entity would seek to deny due process of law: the outcome has already been decided.

Attorney: Realtor group violates law on speech

June 13th, 2011, 12:00 pm — posted by Marilyn Kalfus, real estate reporter

A lawyer for an Irvine blogger who has taken on the real estate industry and accused agents of being dishonest says the Orange County Association of Realtors’ formal grievance against the writer is at odds with a California law protecting freedom of speech.

.

Scott Sims, attorney for Larry Roberts, who writes the IrvineHousingBlog.com, says in a new letter to OCAR that Roberts’ opinions constitute “free speech protected by California’s anti-SLAPP statute.

“If OCAR does not immediately serve notices of dismissal of all charges, we will take the appropriate actions to protect Roberts’ constitutionally protected rights,” states the letter by Sims, a partner at Manderson, Schafer & McKinlay of Newport Beach.

Sims also writes, “OCAR’s efforts to harm Roberts’ business and reputation, and to haul Roberts before a secret kangaroo court pre-disposed to convict him for unknown acts, have no place in American society.”

The OCAR grievance says Roberts and two other people have violated a code of ethics rule stating that “Realtors must not knowingly lie about competitors” as well as a general set of regulations governing how MLS information is used on the Internet.

The grievance doesn’t say specifically what Roberts — who is not a Realtor –or anyone else did, according to Roberts, who showed a copy of it to The Orange County Register.

An OCAR spokeswoman, Rena Budesky, declined to discuss the matter with a reporter, saying grievances are confidential.

California’s anti-SLAPP (Strategic Litigation Against Public Participation) statute provides for a special motion to strike a complaint filed against someone who is exercising free speech. The statute, enacted in 1992, is meant to prevent attempts to intimidate or censor those debating issues of public importance.

In his letter Sims also argues for transparency, stating, “As the accused, Roberts would have a right to waive any confidentiality provision … If this dispute does proceed to a public tribunal, Roberts will insist on a public hearing.” ….

OCAr is refusing to back down and says they are going to set a hearing date so they can secretly persecute me. They have not backed down from their claim that I am a liar. They still think I lied. But since I am not a member of OCAr subject to their “ethics” rules — something they only realized after my lawyer pointed it out to them — they now claim they are going to drop the lying charge and instead come after me on some bogus charge of violating their MLS rules (naturally OCAr won’t tell me how I supposedly violated MLS and has not served me with any notice that the ethics charge has actually been dropped).

Apparently OCAr wants to cut off my MLS access (and who knows what else) because they are pissed off about the content of my speech. OCAr must live by the old adage “there is more than one way to skin a cat.” Their preferred method is to claim they are going to drop one charge, not provide me with proof that actually has been done and then invent some other bogus charge to convict me of.

To top it off, now that OCAr’s frivolous complaint and communist style court have been publically exposed, they apparently want to come after me for violating their “confidentiality” rules. What nonsense.

If OCAr wants to accuse me of something they should stand behind the charges publically and should not complain that I am talking about it. George Washington once said: “If the freedom of speech is taken away then dumb and silent we may be led, like sheep to the slaughter.” I will stand with George Washington against groups like OCAr.

My attorney responded on my behalf. (PDF of full letter)

How much longer will OCAr let this go on? Nobody believes I have done anything other than state a true but unpopular truth. I will continue to be true to myself, my readers, and to my view of the market, come what may.

The Court of Public Opinion

Since it is obvious that justice is not what's on OCAr's collective mind, if I appear in front of their disciplinary panel, I will be convicted. They probably will terminate my MLS access and claim victory.

To quote John Rambo in First Blood, “In town you're the law, out here it's me.” OCAr can control the verdict in their Kangaroo Court, but in the real world where people are interested in free speech, due process, and justice, I can expose people to the truth. I'll take my chances in the court of public opinion because facts are on my side. Former US Supreme Court Justice Louis Brandeis once said “Sunlight is the best disinfectant.”

Are you ready to rumble?

So far OCAr has not scheduled a date for the disciplinary hearing. Can you imagine what will happen if they actually go through with this? The hearing would likely be at OCAr's offices at 25552 La Paz Road, Laguna Hills, CA, in the Mission Hills Plaza Shopping Center.

I could invite all supporters of the IHB to gather at the adjacent Villa Roma restaurant ahead of the meeting. I could supply generic picket signs and supporting lapel pins, and I could sponsor a contest paying $100 for the most creative picket sign criticizing OCAr's actions. I could notify all local news crews to the event and we probably would be on the nightly TV news. This media circus would be the verdict of the court of public opinion.

Stayed tuned. You may have a chance to stand up for free speech, due process, and the American way. I thank you for your support.

$375,000 for a one bedroom condo

One of the most obvious signs of the housing bubble was the prices people were willing to pay for undesirable properties. Dr. Housing Bubble did a hilarious series of posts he titled Real Homes of Genius. Most of these properties are so awful, and the price tags associated with them are so high, that they hit you on a guttural level. You just know those properties couldn't be worth that much.

None of the properties in Irvine are awful enough to make the good Doctor's list, but at the height of the housing bubble, prices for tiny one-bedroom condos exceeded $400,000 in some communities. Today's featured property sold for $375,000 on 12/2/2005.

There are only two reasons someone would pay that much money for a property like that: (1) They feared being priced out forever, so they took what was available (thanks a lot, realtors), or (2) they believed the value would continue to rise quickly, and they could extract home equity to cover their cost of ownership.

These properties still exceed the cost of a comparable rental even with a 50% cut in price and 4.5% interest rates. Condos are supposed to reflect a discount over renting to compensate the owner for taking on the responsibility and limiting their mobility. People being willing to pay nearly double the cost of ownership shows just how insane the market was at the height of the housing bubble.

Irvine House Address … 11 FALLINGSTAR #20 Irvine, CA 92614

Resale House Price …… $189,000

House Purchase Price … $375,000

House Purchase Date …. 12/2/2005

Net Gain (Loss) ………. ($197,340)

Percent Change ………. -52.6%

Annual Appreciation … -11.7%

Cost of House Ownership

————————————————-

$189,000 ………. Asking Price

$6,615 ………. 3.5% Down FHA Financing

4.49% …………… Mortgage Interest Rate

$182,385 ………. 30-Year Mortgage

$39,559 ………. Income Requirement

$0,923 ………. Monthly Mortgage Payment

$164 ………. Property Tax (@1.04%)

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

$39 ………. Homeowners Insurance (@ 0.25%)

$210 ………. Private Mortgage Insurance

$337 ………. Homeowners Association Fees

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

$1,673 ………. Monthly Cash Outlays

$0 ………. Tax Savings (% of Interest and Property Tax)

-$241 ………. Equity Hidden in Payment (Amortization)

$11 ………. Lost Income to Down Payment (net of taxes)

$44 ………. Maintenance and Replacement Reserves

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

$1,487 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$1,890 ………. Furnishing and Move In @1%

$1,890 ………. Closing Costs @1%

$1,824 ………… Interest Points @1% of Loan

$6,615 ………. Down Payment

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

$12,219 ………. Total Cash Costs

$22,700 ………… Emergency Cash Reserves

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

$34,919 ………. Total Savings Needed

Property Details for 11 FALLINGSTAR #20 Irvine, CA 92614

——————————————————————————

Beds: 1

Baths: 1

Sq. Ft.: 852

$222/SF

Property Type: Residential, Condominium

Style: Two Level, Cape Cod

Year Built: 1984

Community: 0

County: Orange

MLS#: S661352

Source: SoCalMLS

Status: Active

——————————————————————————

Chase owned property. Usually mis-labeled as a 2 bedroom unit. The loft is a size of a bedroom and most buyers use it as such. Located in the Woodbridge community – this is one of the best priced properties in the IRVINE! Unit is located above the garages like a carriage unit. It's an end unit with a lot of natural light. Property was previously upgraded with Granite surfaces in kitchen and bathroom. Nicely accented back splash surrounds kitchen – kitchen is missing all appliances. Laundry closet is located off kitchen for a stacked washer and dryer. The one car garage is located directly downstairs on the left side. Right side is neighbor s side. Woodbridge has Lakes, Lagoons, Pools, Spas, Tennis, Volley Ball, Basketball Crts, Parks, Walks, Shopping, Banks, Movies Theaters, Restaurants, and all grades of schools K-12. Irvine is one of the best places to live in the world! Property will rent for amount to make investors excited!

Pete Flint, CEO of Trulia, expects sellers to become desperate this summer and begin lowering prices to sell before prices fall further.

Irvine Home Address … 221 MANTLE Irvine, CA 92618

Resale Home Price …… $688,000

I'd pay any price just to get you

I'd work all my life and I will

To win you I'd stand naked, stoned and stabbed

I'd call that a bargain

The best I ever had

The best I ever had

The Who — Bargain

With the failure of this year's spring rally, market observers are looking to the summer for sellers to become more motivated and begin to lower their asking prices in earnest.

Home clearance sale coming ‘desperate’ sellers expected this summer

Kerry Suess — Saturday, June 11, 2011 7:27 am

Home prices are already a third off their highs, but this summer could bring the real discounts. Buyers are still cautious, and anxious sellers will have to price aggressively to get them off the fence. That could result in a “summer clearance sale,” predicts Pete Flint, CEO of Trulia, the real estate web site.

Realistically, I don't see any bargains this summer, but the continued light transaction volume will signal to motivated sellers that they will need to lower their price if they want to transact. By August and September, fear will begin to permeate the market. Then in October when the conforming limit drops from $729,750 to $625,000 and credit becomes even tighter, fear may turn to panic, and capitulation may be upon us. If we don't see more motivated sellers, transaction volumes will decline further from their already low levels. Lenders will be stuck with a huge portfolio of REO burning a 1.5% per month hole in their balance sheets.

“We don’t imagine a stampede of buyers, like outside of Macy’s on Black Friday,” he said. “We see this more akin to January sales where retailers are trying to get rid of stock before it gets stale.”

That's exactly what it will be like. Retail sales volumes in January can only be obtained by lowering prices significantly because most of buyer demand was spent in December. Similarly, most buying demand is spent in the spring and early summer, so sales late in the year usually require significant discounting as sellers compete with each other for the few buyers who remain.

Several factors, he said, will lead to blow-out prices. Accelerating price drops could be the result as home prices have already reached their lowest level since the housing bubble burst, and are now at 2002 levels.

Sellers may feel the pressure to make deals before their homes potentially lose even more value. There is a bloated inventory of homes on the market with more than eight months worth at the current rate of sales. Many are distressed properties — short sales and bank repossessions. Such homes are often selling at substantial discounts.

Prior to the expiration of the tax-credit stimulus last spring, lenders believed the delusion that market props had created positive momentum that would sustain prices and allow them greater recovery on their REO. With the expiration of the tax credits, the housing market promptly reversed, and prices resumed their declines. Lenders are now faced with the collapse of their cartel arrangement as they compete with each other to liquidate in a declining market.

Credit is still very tight and many potential homebuyers still can’t obtain a mortgage which is limiting the demand. Unemployment is still a major concern and while the job picture has supposedly brightened, unemployment is still hovering around 9 percent nationally and is higher here in California.

People without jobs don’t buy homes, obviously, but high unemployment also rattles working people. Lacking the confidence that their jobs are secure, they may not look to buy. These forces could all come to a head this summer, according to Flint, because of the cyclical nature of home buying.

Buying usually takes off in spring as many young families hope to make their moves before the new school year. “By the end of the home buying season, sellers will become increasingly desperate,” said Flint.

Discretionary sellers who merely wanted to sell their homes will withdraw them from the market, but more motivated sellers who for one reason or another feel they must sell, they will cut their prices to get out.

Adding to already swollen inventories might be a flood of new distressed properties poised to hit the market. Banks trying to foreclose on homeowners hit a roadblock, as some delinquent borrowers successfully argued that their mortgage companies can’t prove they own the loans and therefore don’t have the right to foreclose.

This year, cases in California, North Carolina, Alabama, Florida, Maine, New York, New Jersey, Texas, Massachusetts and others have raised questions about whether banks properly demonstrated ownership. Last fall, banks temporarily suspended foreclosures to address so-called robo-signing problems, where employees were approving legal documents without properly reviewing them. “By the summer, most of the ‘robo-signing’ delays will be over and more distressed properties will be on the market,” said Celia Chen of Moody’s analytics.

I don't believe we will see any large influx of REO. First, the entire robo-signer scandal was a ruse used by the banks to continue their amend-extend-pretend policy of withholding inventory from the market. Now that robo-signer is past, lenders will find a new excuse for delaying foreclosure or liquidation of their REO. Lenders will sell what they can, but many will simply add to their REO and shadow inventory to prevent a catastrophic decline in prices similar to what happened in Las Vegas.

Many banks had slowed foreclosure proceedings until they made sure that paperwork was in order. That put hundreds of thousands of homes into foreclosure limbo and borrowers were no longer making payments in many cases, but were allowed to remain living in the homes.

Shadow inventory is made up of millions of delinquent mortgage squatters, and many more will be added before lenders ramp up foreclosure efforts in earnest.

There’s little urgency for buyers to act in this stagnant market because no one expects prices to turnaround, according to Ken Johnson, a real estate professor at Florida International University and co-author of a new study on whether it’s better to buy or rent.

Realizing that home prices will likely get even better, buyers can wait for even better deals. “If people think we’re at the bottom of the market, they’ll act,” he said.

People will not necessarily act if they believe we're at the bottom. They may no longer wait out of fear of further price declines, but if people believe the bottom will be a long flattening followed by tepid appreciation — which is what will likely occur — then buyers will not feel a great sense of urgency to buy for financial reasons.

Many of the experts, however, are telling buyers that prices will continue to erode all through 2011. Even after that, no one is predicting outsized price gains.

Actually, realtors constantly call the bottom to increase buyer motivation, and they also predict outsized gains because of pent-up demand or whatever other nonsense they can think of.

“There will be a lousy housing market for another year or two,” said Michael Larson, a housing analyst for Weiss Research. Even if we’re at or near the bottom, buyers are unlikely to see prices rise much if they wait. “I myself continue to rent,” said Johnson. “I know that even if I don’t buy for a year, it’s no big deal. Who cares if I miss the bottom if prices only go up a couple of points or so?”

Ditto.

The first 95% of this article is very good, but the closing was written by a realtor. Can you smell the bullshit?

That can be a risky proposition and to many it sounds like good common sense. Why buy now if prices are going to continue to fall and maybe increase only a little if at all over the next couple of years? That is certainly the case for the cash buyer, but if you’re like me and would need to finance a home or investment you might consider that terms can sometimes be more important than just the price. If interest rates rise or loans become more difficult to obtain you can easily miss the boat. Between now and the end of the year might be the best time of our lifetime to buy a first home or investment property. Don’t be kicking yourself down the road. Talk to your local lender about pre-approval and your local Realtor about your options.

Questions or comments can be made to Kerry Suess at larpres2011@yahoo.com

Another recent buyer bails on Irvine

Anyone on The Irvine Company's mailing list has probably seen the deals closing out Woodbury East. The last few units in any project are the most difficult to sell. The builder or developer has often shut down the sales operation and moved on to other projects, and the last few units are often the least desirable, or they would have sold already. If a project has good momentum, the scarcity can work to the builder's advantage in selling the last few units. Unfortunately, with the weak sales of this spring, price reductions and incentives are the order of the day.

Since the builder is cutting price and adding incentives, any early resales face stiff competition. Why would someone pay 15% – 20% more to obtain a resale when you can get a new one directly from the builder for less?

The owner's of today's featured property paid $632,000 on 2/25/2011. They put plenty of money down, but this wasn't an all-cash purchase. It doesn't look as if the owners moved in. If these owners bought from a motivated seller who gave them a 15% discount, and prices have been declining ever since, what makes them think they can get a 20% premium?

Date	Event		Price
Jun 05, 2011	Price Changed		$688,000
May 26, 2011	Listed (Active)		$699,000
Feb 25, 2011	Sold (MLS) (Closed)		$632,000
Jan 24, 2011	Pending		—
Aug 04, 2010	Listed (Active)		$677,000

I also find it interesting that this property was listed and sold on the MLS. Builders don't typically do that. Of course, since the housing bubble popped, builders have been trying new things to generate sales. Perhaps new homes being listed on the MLS is the future of new home sales. We will see.

Irvine House Address … 221 MANTLE Irvine, CA 92618

Resale House Price …… $688,000

House Purchase Price … $632,000

House Purchase Date …. 2/25/2011

Net Gain (Loss) ………. $14,720

Percent Change ………. 2.3%

Annual Appreciation … 25.7%

Cost of House Ownership

————————————————-

$688,000 ………. Asking Price

$137,600 ………. 20% Down Conventional

4.49% …………… Mortgage Interest Rate

$550,400 ………. 30-Year Mortgage

$119,380 ………. Income Requirement

$2,786 ………. Monthly Mortgage Payment

$596 ………. Property Tax (@1.04%)

$133 ………. Special Taxes and Levies (Mello Roos)

$143 ………. Homeowners Insurance (@ 0.25%)

$0 ………. Private Mortgage Insurance

$134 ………. Homeowners Association Fees

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

$3,792 ………. Monthly Cash Outlays

-$465 ………. Tax Savings (% of Interest and Property Tax)

-$726 ………. Equity Hidden in Payment (Amortization)

$229 ………. Lost Income to Down Payment (net of taxes)

$106 ………. Maintenance and Replacement Reserves

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

$2,936 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$6,880 ………. Furnishing and Move In @1%

$6,880 ………. Closing Costs @1%

$5,504 ………… Interest Points @1% of Loan

$137,600 ………. Down Payment

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

$156,864 ………. Total Cash Costs

$45,000 ………… Emergency Cash Reserves

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

$201,864 ………. Total Savings Needed

Property Details for 221 MANTLE Irvine, CA 92618

——————————————————————————

Beds: 3

Baths: 2

Sq. Ft.: 2181

$315/SF

Property Type: Residential, Single Family

Style: Two Level, Spanish

Year Built: 2010

Community: 0

County: Orange

MLS#: S660361

Source: SoCalMLS

Status: Active

——————————————————————————

Almost brand-new detached home located at Santa Cruz in beautiful Woodbury East. This plan offers a 3 bedroom, 2.5 bath, features the Conservatory Room for additional living space next to the Great Room w/ decorative fireplace. The kitchen offers white cabinets, upgraded stainless steel appliances including a refrigerator and washer/dryer, granite kitchen counter tops with a full backsplash. . Upgraded carpeting. Upgraded flooring in bathrooms. Custom paint. Tankless waterheater. Garage floor with epoxy coating. Professional landscaping. Cozy back/side yard. Enjoy resort-style amenities, Irvine Schools, and upscale shopping in Woodbury's distinctive Town Center!

Question of the day

Will lenders succeed in withholding inventory and preventing further price declines here in Orange County?

Breaking News: Attorney: Realtor group violates law on speech. More on that tomorrow.