The bailouts never seem to end, and neither does the flow of irresponsible debtors in need of a bailout.
Irvine Home Address … 10 MOZZONI AISLE Irvine, CA 92606
Resale Home Price …… $294,000
{book1}
Oh, who can take tomorrow, dip it in a dream
Separate the sorrow and collect up all the cream
The Candy Man, oh the Candy Man can
The Candy Man can 'cause he mixes it with love and makes the world taste good
Sammy Davis Jr. — The Candy Man
At the core of every con is a dream. A con artist tempts a victim with dreams of riches or power to come in order to get them to do something today. It wasn't long ago it was only realtors and mortgage brokers who sold the dream. Now, our own government is joining the choir.
Over two years ago, I expressed by deep cynicism over the endless parade of Bailouts and False Hopes. As the bailouts continued, grew in number, and failed miserably, others have come to share my view.
The Permanent Mortgage Crisis
One more housing bailout to prolong the market agony.
Last Friday the White House announced its latest plan to prevent mortgage foreclosures, and earlier this week the famous Case-Shiller index found mostly flat home prices in January with analysts warning about a new wave of foreclosures to come. You can't blame the latest proposal for that outcome, but what about the previous 10 or 20 federal housing rescue plans?
We're supposed to believe that this latest effort to build an artificial floor under home prices will perform better than the Hope Now Alliance announced by President Bush in October 2007;
- better than the revised Hope Now program announced two months later;
- better than Hope for Homeowners, which was passed by Congress and signed by Mr. Bush in 2008;
- better than the foreclosure moratoriums promoted by Fannie Mae, Freddie Mac and Representative Barney Frank into early 2009;
- better than the $127 billion that taxpayers have thus far poured into Fan and Fred, much of it for foreclosure relief;
- better than the Federal Reserve's purchase of $1.25 trillion in mortgage-backed securities;
- better than last year's expansion of the 2008 First-Time Home Buyer Tax Credit to up to $8,000;
- better than the billions in stimulus dollars that have been spent "to restore neighborhoods hardest hit by concentrated foreclosures," according to the White House;
- better than the $1.5 billion announced earlier this year to state housing finance agencies in the electorally hard-hit areas of Arizona, California, Florida, Michigan and Nevada, and $600 million more this week for other states certified as political disaster areas;
- and certainly better than Mr. Obama's year-old Home Affordable Modification Program to offer mortgage modifications to troubled borrowers or his companion program to offer generous refinancing. We could go on, but you get the joke, even if the housing market hasn't.
Here's a heretical thought: What if Washington had simply let housing prices fall on their own to find their natural bottom? The pain would have been more severe more quickly for some owners who bought more expensive homes than they could afford. But the pain might also be over by now as housing markets cleared faster, and housing might be contributing to a healthier economic expansion.
Heresy! Sacrilege!
Instead we are heading toward year five of the housing recession, with Washington proposing even more ideas to prolong the agony. One senior banking regulator we talk to calls it "extending and pretending."
But how long can troubled borrowers even pretend? The latest Mortgage Metrics report from the Comptroller of the Currency shows that most of the loans modified in the first quarter of 2009 had gone bad again within nine months—52% were more than 60 days delinquent.
Nothing has changed. We were talking about the horrendous recidivism rates years ago, and the performance has not improved.
Watching its previous failures, Team Obama will now emphasize reducing principal instead of merely lowering monthly mortgage payments for some years. The White House no doubt noticed that many of the loans modified outside of the various government programs—with aggressive principal reductions—had better re-default rates.
But this doesn't mean that such reductions are always a good idea. Many of these private reductions were the result of legal settlements, not business decisions. Obviously if taxpayers chip in to provide equity to millions of underwater borrowers, the borrowers will have less incentive to default. But how many more borrowers will be motivated to seek assistance when the subsidies become more generous?
A lower mortgage bill is surely a relief to an unemployed worker, but what he really needs is a job, and we see nothing in this plan (or any other Washington scheme) to encourage job creation. To the extent that these payments are merely unemployment benefits laundered through the mortgage system and thus reduce incentives to find work, the jobless rate will stay higher for longer and the entire economy will be worse off.
Think about the new unemployment subsidy we are giving only to loan owners. Why aren't we subsidizing the rent payments of the unemployed? I imagine the apartment owners association would get behind that idea. Renting a lot of money to occupy a home really does put people in a privileged class.
Potentially the most expensive part of this plan for taxpayers is the new Federal Housing Administration refinancing option. (Yes, that is the same FHA that is already struggling under mortgage losses and announced last year that its capital had fallen below the level required by law.) Taxpayers will be required to stand behind a "homeowner" who owes mortgage debt equal to 115% of the value of the home and whose monthly mortgage bill is up to 31% of total income. Message to owners who borrowed responsibly: Next time, don't be such a sap.
You'll also be pleased to know the Administration says the price tag on this latest housing plan won't exceed the $50 billion already earmarked for mortgage relief in the Troubled Asset Relief Program. Just don't expect it to end the mortgage crisis.
These hopeless programs exist only to provide false hope to debtors. To the degree that they are successful is the degree to which we create moral hazard. Who wants to be the responsible one paying the bills next time around? If lenders and borrowers do not experience the consequences of their actions, they will repeat them.
People get caught up in misguided compassion and think that these poor suffering souls need a bailout. They don't. Any bailout is paid for by those not receiving the benefits. It is a direct transfer of wealth from one household to another — state sanctioned theft.
It was bad enough during the bubble to watch the entitled class and their conspicuous consumption, but now we have to pay for it as well.
Subsized Financial Irresponsibility
We have all seen those people who manage their finances by falling short every month and waiting for either a bonus or a tax refund or some other timely windfall to keep them afloat. In the HELOC Abuse Grading System, these people earn a C:
HELOC Abuse Grade C
I hate to give borrowers in this category a "passing" grade, but this is the reality for most Americans. Growing credit card or mortgage debt slowly generally can be compensated for through home price appreciation, and although I consider this a bad idea, I can't really call it HELOC abuse, just foolish HELOC use. Is there a distinction there? I will let you decide.
Financial planners will tell you that most people fail to budget properly for unexpected expenses (they don't save), so when they fall behind a little each month, they put the balance on a credit card and hope they can pay it back with a tax return — or during the bubble with a visit to the housing ATM.
People are still going to manage their bills this way going forward, and there will be pressures to "liberate" this equity to pay for these expenses. The money changers will continue to peddle this nonsense as sophisticated financial management. It is a stupid way to manage debt, and I give it a C.
Years ago people that lived this way were finally chewed up by high interest fees on their credit cards. They survive by finding a point of buoyancy well underwater only coming up near the surface briefly before going on a spending spree and resubmerging themselves.
Once widespread HELOC abuse became the preferred method of financial management, borrowers developed equity surfing techniques to consistently extract equity as it became available and spend it. The owner of today's featured property illustrates how this was done.
- The property was purchased on 8/26/2003 for $270,000… That is $270,000 for a 1,000 SF 1 bedroom condo. It isn't clear from my records what the original financing was. Assume it was 100% because it probably was.
- On 4/15/2004 the owner refinanced a first mortgage for $288,000. She had to live in this dump for a little over 6 months before she could get a loan for $18,000 more than she paid. This little condo made her about $3,000 per month.
- On 12/7/2004 she was able to get a first mortgage for $341,000. She pulled out $71,000 in a little over 1 year.
- On 5/24/2005 her lender gave her another $49,500 in a HELOC.
- On 3/22/2006 she refinanced again with a $345,000 first mortgage and a $63,000 HELOC
-
Total property debt is $408,000.
- Total mortgage equity withdrawal is $138,000… from a tiny condo in under two years.
Foreclosure Record
Recording Date: 02/09/2010
Document Type: Notice of Sale
Foreclosure Record
Recording Date: 06/08/2009
Document Type: Notice of Default
Don't you feel kind of stupid for not doing this? Back in 2002-2005, you could have bought something — anything — and been given access to hundreds of thousands of dollars in free money. And you know what? Nothing has changed!
If prices start going up, people will demand HELOCs to spend the appreciation. Lenders know they are backstopped by the US taxpayer, so they will gladly make the loans. And borrowers know if the Ponzi Scheme collapses again, they will be given a host of bailouts to choose from to make their lives easier. Even our government, which is supposed to look out for us, is happy to re-inflate the housing bubble because it boosts the economy even if that means more bailouts.
Assuming our leaders continue to fail us — and there is no reason to think they will suddenly change course — there is no downside to buying real estate for those with no assets and a strong desire to spend money. In other words, the more irresponsible you are, the more desirable real estate is. Great system we have, isn't it?
Irvine Home Address … 10 MOZZONI AISLE Irvine, CA 92606 
Resale Home Price … $294,000
Home Purchase Price … $270,000
Home Purchase Date …. 8/26/2003
Net Gain (Loss) ………. $6,360
Percent Change ………. 8.9%
Annual Appreciation … 1.2%
Cost of Ownership
————————————————-
$294,000 ………. Asking Price
$10,290 ………. 3.5% Down FHA Financing
5.24% …………… Mortgage Interest Rate
$283,710 ………. 30-Year Mortgage
$62,550 ………. Income Requirement
$1,565 ………. Monthly Mortgage Payment
$255 ………. Property Tax
$50 ………. Special Taxes and Levies (Mello Roos)
$25 ………. Homeowners Insurance
$290 ………. Homeowners Association Fees
============================================
$2,184 ………. Monthly Cash Outlays
-$149 ………. Tax Savings (% of Interest and Property Tax)
-$326 ………. Equity Hidden in Payment
$21 ………. Lost Income to Down Payment (net of taxes)
$37 ………. Maintenance and Replacement Reserves
============================================
$1,767 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$2,940 ………. Furnishing and Move In @1%
$2,940 ………. Closing Costs @1%
$2,837 ………… Interest Points @1% of Loan
$10,290 ………. Down Payment
============================================
$19,007 ………. Total Cash Costs
$27,000 ………… Emergency Cash Reserves
============================================
$46,007 ………. Total Savings Needed
Property Details for 10 MOZZONI AISLE Irvine, CA 92606
——————————————————————————
Beds: 1
Baths: 1 full 1 part baths
Home size: 1,022 sq ft
($288 / sq ft)
Lot Size: n/a
Year Built: 1990
Days on Market: 375
MLS Number: S569378
Property Type: Condominium, Residential
Community: Westpark
Tract: Cb
——————————————————————————
According to the listing agent, this listing may be a pre-foreclosure or short sale.
This property is in backup or contingent offer status.
Back on Market. Rare 1 bedroom + Den or 2 bedroom condo. Cozy corner unit with lots of privacy. Only 1 common wall! Efficient floor plan feels a lot larger than actual square footage. Romantic fireplace in living Room. Private patio, upgraded carpet throughout & Large Master Suite. Great Location in Beautiful Gated Community of Corte Bella. Enjoy entertaining your guests in the relaxing court yard, take a dip in one of the many association pool, roast marsh mellows in the fire pit and end the evening soaking in the association spa. Serene, Private Setting with Mediterranean Architecture, Fountains and Courtyards. Convenient walking distance of shopping, recreation & parks. This home is convenient to guest parking and is the easiest for guests to locate within the development.Recent distressed sales have artificially depressed the value of these units. This is a great opportunity for a first time buyer or investor. Seller Needs OUT, let's make a deal.
Recently distressed sales have not artificially depressed values. These sales have driven prices back down toward affordability.
I find it amusing that the realtor is throwing this owner under the bus; after all, this is a distressed sale. You know, like those others that have artificially depressed prices. And like the many more to come….
Told ya so.
The latest principal reductions while being trumpeted as a continuation of help for the homeowner are not and not really intended as such. Government subsidized principal reductions are a bailout of bank held CDOs and other MBS, just like every other government bailout so far. Bailouts will not stop as long as the member banks are insolvent.
Think about it. Who do these bailouts benefit? Are ya starting to get it?
I have yet to see any plan to give house debtors a full fledged principal reduction.
The latest scam is just lipstick on pig dressed up as a principal reduction. If you read the rules, it’s just a shell game of deferred interest. You owe 100K on a house worth 50K so they let you pay interest on a 50K balance – you still owe the 100K. They are simply playing games with the interest that you are paying. They then call it a principal reduction because they will write off a portion of it over X number of years. The debtor is still paying interest to the banks and they will still have to pay the majority of it all back. It’s nothing more than another lame gimmick to engineer some more monthly payment voodoo. The “principal reduction” amounts to nothing more than an “interest deduction”. By the time the house is paid off the debtor will have paid 3x the original sales price rather than 4x Whoopty Doo big time principal reduction you have there.
Yep. The name of the game should be called “feeding the zombies”. Most of large money center banks are insolvent and have been turned into zombies by repeated rescues (courtesy of public funds) and change in accounting rules. To keep these zombies “alive” our gov’t and Federal Reserve set up various forms of feeding traps to provide endless quantity of flesh and blood:
1. Feeding on savers/renters thru zero rates policy. Banks pay virtually nothing on deposits and turn around making risk free money by buying treasury or gov’t guaranteed agency debt.
2. Feeding on underwater house debtors by escalating foreclosure prevention plans aimed at squeezing out a steady stream of payments.
The whole objective from day one has always been keeping this feeding frenzy going under the false pretense of helping “people”. But zombies will remain zombies no matter how much you feed them. Look at Japan – after 20 years of non-stop feeding you can still hear that giant slurping sound everywhere.
Most politicians we voted into the office (including Obama) have chosen to sleep with zombies and perpetuate this feeding process. But you have to admire their ingenuity in coming up with ever more elaborate feeding plans to control the pace and make sure no one gets sucked dry overnight. But give it 10 – 15 years it will become obvious what this will do to the collective financial health of American middle class.
Wow, that “cozy” picture makes me clausterphobic just to look at it. Worse than Larry the Lamprey.
The listing has a dozen pictures of the complex (the sign, the pool, etc.), but no pictures of the actual condo for sale. Lovely.
It’s a very rare apartment I mean condo. The last time one was available to be photographed was 1983.
I love the candy man image. Dare I ask: “What’s behind door #1?”
Seller Needs OUT, let’s make a deal.
http://www.crackthecode.us/images/DealOrNoDealLoL.jpg
So recent distressed sales have artificially depressed the value of these units…..
This is how the realtor ( little ‘r’ ) mind doublethinks. They absolutely refuse to publicly admit that a housing bubble existed LONG after it has become commonly accepted knowledge.
Instead, we get this nonsense about an ‘artificial’ price depression on the downswing but these Jackals were not peppering their 2005 ads with stuff like:
“Recent downgrades to lending prudence and monetary policy combined with housing pornography and irrational exhuberance have artificially inflated the values of these units”
No sir, don’t want to present any information to the patsy that could cost you a commission. Sleaze.
I wasn’t interested in this place… at first. But I’ve gotta admit that the groovy day described in the description sold me. Where else could you hang in the courtyard, hit the pool, toast some s’mores and then chill in the spa? Monaco? …. maybe. Any of you lovely IHB ladies interested? We could hit Target afterwards.
Thanks for the invite Serenity Now 😉
But, the next time I move it will be OUT of Irvine.
zip code 98011
IR,
Quick question off topic – have you ever written a post about how lease-to-own process works? I’ve thought you have, but can’t find the article in the library. If you have, can you direct me to the link?
I have not taken on that subject. Are you specifically thinking about land installment contracts? There is a great deal of complexity in the law regarding these things, particularly concerning equity build-up in a long-term contract that is broken.
Here is a brief overview
These arrangements are not very common. Lenders generally will not permit them, so it is usually a property owned free-and-clear being sold to a tenant with no downpayment. There is much opportunity for abuse which is why the case law is complex.
In order or keep alive a mortgage investment market, cram-downs can not be forced down an investor’s throat. If I had $100K to loan out to somebody to buy a home, would I loan it if I knew or thought that it can be reduced in half or whatever with the stroke of a pin?
The big difference is that banks do not lend out their own money like you or I would have to do. Government allows them to counterfeit the money that enters circulation and collect interest on it by people who actually produce things for society.
The banks don’t have to worry about your scenario because the money they “loaned” was never theirs in the first place – eneter Too Big To Fail where the government chooses which institutions shall stay and which shall go rather than the free market.
The game is rigged.
Hi, Irvine Renter,
Please help me to understand this investor (below). I makes no sense to me.
An investor just bought 5 Cipriani, irvine, ca 92606 (Westpark II) at 995K dollars. And immediately put it on market for lease for only $3600/month. Thanks.
Duh.
“An investor just bought 5 Cipriani, irvine, ca 92606 (Westpark II) at 995K dollars. And immediately put it on market for lease for only $3600/month. Thanks.”
I would have to do a study to be sure, but it sounds like a cashflow-negative investment. In other words, it is a foolish speculator hoping to get lucky when prices go up.
Or just a really stupid person who was convinced by NAR it was “a great time to buy.” LOL.
With that rent they should have paid 648k at the most.
if the guy paid all cash that would be a 3% capitalization rate assume 30% expenses.
Tack on 2% long term appreciation (a conservative estimate).
What are you getting for your money in the bank? Getting raped by bernanke, that’s what.
don’t know if buyer was all cash but that is what money is doing right now.
Just a question for you.. Exactly how high do you think your 2% conservative appreciation will lead us if wages appreciate at 0%?
Or do you expect housing to always grow faster than wages, with 10 people packing themselves in one house so they can afford it while there’s vast tracts of empty land right outside their door?
I’d really like to know if you have a genuine answer.
Housing will never outpace wages long term.
Short term, wages will decrease. Looong term, wages will increase. I am not arguing in real v nominal terms. Wages will eventually increase. If inflation is running at 10% and wages go up 2%, we are getting poorer no doubt. Deflationists, please refrain from posting gov/t concocted CPI banter.
I don’t completely understand the connection between rising cost of goods and rising wages, and I guess it is possible that wages could never rise for the next 30 years while everything else inflates; but standard of living can only be reduced so far. Eventually you pay me so little I just work somewhere else or grow vegetables and not work. There is a free market mechanism to wages embedded in unfree markets.
Economies (if i remember correctly it was argentina) that suffer hyperinflation create work contracts with pay increases (which actually perpetuate inflation and make the snowball harder for the government to stop once it comes to its senses)
And RE has appreciated at 4% since the 50s, so I figure 1/2 that is fairly conservative. That’s where I pulled the 2% number out of.
And I am not arguing this is a great investment, just that buyers feel it is a better place to put money than in the bank – and I agree.
You better get Planet Reality on the horn regarding this one. He is the rental partiy expert around here.
I won’t even waste my time running the numbers on this. Purchase for 1M and only get $3600/month rent = FAIL. There seems to be this perpetual belief that you simply can’t lose with Irvine RE. This buyer might think otherwise in a few years.
I’m no expert, but you would probably want a GRM of something like 100. That is, for every dollar you get in monthly rent, you only paid 100 times that. So, for a $1 million house, you would want to be able to rent it for around $10,000 a month, not a little more than a third of that. Definitely a boatload of fail.
Right now rental parity would be around $800k so they are cash flow negative with a loan.
If they paid cash then they are making around a 4% dividend plus any appreciation or depreciation that may occur. It’s like buying a million dollars of stock with a 4% dividend. I took out 0.35% for yearly ownership fees.
“It’s like buying a million dollars of stock with a 4% dividend”
…that costs 3.5% buy in, and a 3.5% exit cost. And it’s not guaranteed (months vacant, renovation costs, etc)
Shouldn’t you take off 1% for property taxes?
Planet Reality: Is my calculator broken?
$3600 * 12 = $43200 GROSS INCOME
$43200 * (1-.35)= $28080 NET INCOME
$28080 / $995000 = 2.82% CAPITALIZATION RATE
2.82% would be the return (pretax) to an all cash buyer assuming 35% expenses. 4%? Does that include the realtor roundup?
Correct. Banks don’t loan anything. Banks have absolutely no skin in the game. Loans are just a PROMISE the borrower is making to pay the bank within a given time period, …with interest ofcourse.
The more interest a bank collects, the more promises they can “loan out”.
The only rub is when the items people borrow money for start deflating. A natural symptom that happens when people realize they actually can’t afford it.
The system is not rigged, it just has a limit like everything else in life. Trying to extend and pretend the limit is when it feels like the game is rigged.
California personal income down 3.5% since January ’09
Thanks. That will be an upcoming post.
You forgot the * pointing out “except in irvine”
https://www.youtube.com/watch?v=A2_Hmt-MKLA
how does one stop the realtor propaganda?
Match the above made cycle with that of the economic cycle and you will get the answer of why this is repeating again and again. (where are the jobs from which consumers will earn to pay back)
I apoligize for changing the subject. I just wanted to let you know what is happening in our neck of the woods. I’m sure it is happening in other places as well.
My husband and I have paid off our home, saved a bunch of money and are looking for a larger home now. This home will probably be the last home we ever buy. So, I have picked out approximately 12 homes here in Lake Elsinore we would like to buy. Recently, one of those homes came on the market so I called the realtor to schedule an appointment to see the home. I was told it is a drive by examination only. The people living in the home are refusing to let the realtor show the home and the only time the buyer can examine the home is just before escrow closes. How are buyers like myself suppose to examine floor plans to see if we want to purchase the last home we will ever buy? Hmm. Because this house is a short sale all we can do is make a bid.
I asked the realtor what her current highest and best bid is on the home and she replied $270,000. I would gladly pay $300,000 for this 3,300 sq. ft. home Built in 2009 on 1.25 acres if it has a floor plan I can live with but I will never know if it does. The conversation continued and I found out there are 3 cash bids from investors on the home. So, if the investors are buying up the houses that move up buyers are trying to buy how are we ever going to get a home we really want to purchase without giving all our money to the flippers.
The realtor told me to hold on because she did not think the flippers would get this house. The owners-squatters are using this as a staling tactic. She informed me she has tried to short sale 8 houses this year and what the squatters have done upon the closing of escrow is demand the bank pay them $10,000 to move out of the home. The banks refuse to do this so the deals fall apart and it takes another year to a year and a half to get the squatters out of the house via foreclosure proceedings.
After talking to this realtor my husband and I are trying to decide do we try to buy our house now and drive ourselves crazy with this pretend and extend tactic by the squatters or do we sit back and what for the investors to buy the homes we would consider purchasing and pay them double the price down the road. What do you think we should do in this situation? I’m sure there are dozen more people like us trying to buy a home and encountering the same discouraging experience.
I have been watching our area and San Diego county and the flippers are creating another “Housing Bubble”. When you look at median incomes and the prices of homes I can not understand how people can still be buying these over priced homes especially in San Diego county. It is very discouraging to be a person trying to do the right thing, namely be financially responsible.
What do you folks think?
Sad Buyer
You relate: “Once widespread HELOC abuse became the preferred method of financial management, borrowers developed equity surfing techniques to consistently extract equity as it became available and spend it.”
Only now, have I become aware of this; it’s ok, you can call me nieve and simple too.
But the Czar of Subsized Financial Irresponsibility, Alan Greenspan, was aware of this long, long ago.
Fred Sheehan provides Alan Greenspan’s position on lending and mortgage equity withdrawl, in Safehaven.com article …. The Best And Brightest Protect Greenspan And Betray The American People … http://tinyurl.com/y4xu552 … where Alan Greenspan addressed The Brookings Institute and on March 19, 2010 presenting the 48-page paper entitled “The Crisis” — the title was one of the few honest statements of the day.