Category Archives: HELOC Abuse

Extreme HELOC Abuse from Extreme Makeover Home Owners

From the extremes of generosity springs the extremes of stupid borrower behavior. Several Extreme Makeover Home Edition families are facing foreclosure because of their HELOC abuse.

Irvine Home Address … 18 SUNSET Riv Irvine, CA 92604

Resale Home Price …… $669,000

{book1}

Extreme ways they help me

They help me out late at night

Extreme places I had gone

That never seen any light

Dirty basements, dirty noise

Dirty places coming through

Extreme worlds alone

Did you ever like it planned?

I would stand in line for this

There's always room in life for this

Oh baby, oh baby

Then it fell apart, it fell apart

Moby — Extreme Ways

The show Extreme Makeover Home Edition helps families coming from difficult circumstances have a new life. The extreme examples they choose make for interesting drama, and I have found myself watching this show and rejoicing with the happy families. Watching the show makes you feel good; it leaves you believing that good people can come together and make a real difference for those who would otherwise struggle mightily.

There is a fine line between extreme joy and extreme anger and sadness. When you see people who have been given so much waste it irresponsibly, the intense joy becomes something very different. I find it difficult to contain my anger when I read stories like these. How do people who were given so much do something so stupid? Like the stories of lottery winners who go bankrupt, people can experience a change in circumstances without fundamentally changing who and what they are.

A video from Wall Street Journal on today's HELOC abusers.

Extreme Stories

By DAWN WOTAPKA

Some families featured on "Extreme Makeover: Home Edition" find themselves in trouble once the cameras leave town. Some struggle to pay the upkeep on their expensive new homes while others tap the equity in their homes and end up with bigger mortgages that are hard to maintain. Some seek a quick-fix by trying to sell. But because Extreme Makeovers tend to be big, fancy residences plopped in working-class or rural communities, the houses can be a hard sell. (See related article.) "Like many homeowners in the nation, Extreme Makeover: Home Edition families aren't immune to the current state of the U.S. economy," said a spokeswoman for the show. Here are five tales:

Notice how the writer is trying to put a positive spin on the inexcusable behavior of these HELOC abusers. Is she really trying to get us to believe that higher utility bills and taxes caused these people to take out hundreds of thousands of dollars in mortgage equity withdrawal? That doesn't even pass the giggle test. If we were talking about $10,000, I might understand, but these people are losing their houses in foreclosure because they spent hundreds of thousands of dollars.

Eric Hebert and Family

Following his sister's sudden death in 2004, Eric Hebert relocated to Sandpoint to raise her young twins. In an early 2006 episode of the show, the family home, described as a basement with a roof, was replaced with a multi-story house resembling a mountain lodge. Tyson Foods Inc. threw in a $50,000 check for Mr. Hebert and his family.

"We'll definitely be able to call this our home for ever and ever and ever," Mr. Hebert said when he saw his new home for the first time.

Public records show Mr. Hebert's original mortgage was for $110,000 in September 2004. In January 2006–just before the show aired–he refinanced for $250,000. About a year later, came another refinance with Wells Fargo for $382,500. A notice of default was recorded in January 2009 and the home was foreclosed on in October—the first known foreclosure in the Extreme series' history.

Mr. Hebert did not respond to multiple requests for comment.

Some local residents are angry over what became of the community project. "It's kind of like we have egg on our face," said Sydney Icardo, a realtor with Century 21 RiverStone, who cut down aspen trees used to decorate Mr. Hebert's bedroom. "It cuts deep. We're a tight community."

After being given a new house and plenty of cash, what did these people do? They spent every penny, borrowed more, then spent every penny of that. After their spending orgy, they are destitute and homeless.

Perhaps their lender will forgive their principal balance and let them do it all over again? That would be the compassionate thing to do in this circumstance; after all, they were in a tough spot with a new home, no mortgage and money in the bank back in 2006. Anyone could have failed under those circumstances… not.

The Woffords

In September of 2004, just as the real-estate bubble was heating up, an episode featuring the Wofford family, a widowed father raising eight children, showed a roughly 1,200-square-foot home replaced with a 4,337-square-foot model in Encinitas, Calif.

Brian Wofford reportedly paid $186,700 on the home in 1989. But, after tapping the equity and two additional liens, his debt had ballooned above $700,000. In 2005, OneWest Bank originated a new loan for $735,000, according to a spokeswoman.

As he faced foreclosure late last year, Mr. Wofford entered a three-month trial modification and was recently offered a permanent modification. Mr. Wofford did not return several requests for comment.

That sounds like a California debtor, doesn't it? This family spent $548,300 after a group of well-meaning people added tremendous value to their property. Like the other HELOC abusers, they took full advantage of the charity of others. You have to wonder if the people who did this hard work for them feel good about the way this family pissed away the money. I wouldn't.

The Harpers

Later in the 2004-2005 season, the Harper family's makeover in Lake City, Ga. aired, showing a modest home with septic-tank issues replaced by a 5,300-square-footer resembling an English castle.

The makeover came with a paid mortgage and scholarship fund for the children. But the Harpers used the home as collateral to fund a construction business that failed. As foreclosure loomed last March, the family filed for bankruptcy, halting the process.

The family recently sold raffle tickets via the Internet–with the home as the prize–though it's unclear if the raffle was ever held or if anyone actually won the home. A foreclosure sale is scheduled for April 6.

Do you think they took the raffle money and spent it? It wouldn't be out of character.

Notice the half-truth about starting a construction business. It is an attempt to justify enough HELOC abuse to cause them to lose their home by making this guy look like a hard-working ordinary guy who fell on hard times. How does someone lose enough money to consume the value in a 5,300 SF McMansion? If the business was struggling, wouldn't a reasonable person pull the plug before losing everything? Let's be real. These people spent their house on consumption just like everyone else.

The Okvaths

After the Harpers' show came the Okvaths. This family–daughter Kassandra was recovering from cancer–received a 5,346-square-foot home with six bedrooms, a movie theater and carousel in the backyard.

In 2006, Nichol Okvath and her husband, who lost his job as a truck driver, took out a $200,000 home-equity loan "to survive off of," says Ms. Okvath. Next came a $400,000 loan to pay off the first one and medical bills. Ms. Okvath says she hasn't made the $3,056 monthly mortgage payment since December of 2008.

The property is on the market for $599,000, slashed from $1.3 million a year ago. But there have been no offers: The area has an 18-month supply of homes in that price range and the Okvaths' Spanish-style mansion seems out of place with its modest surroundings, said Tony Moore, the Keller Williams Realty agent who is handling the listing.

Two hundred thousand dollars to live off of? If they were accustomed to living on a truck driver's earnings, they should have survived for five years or more of unemployment. I could see $20,000, but $200,000 is ridiculous.

Of course, they resorted to the "medical bills" excuse when all else fails. Didn't they have health insurance? That must be quite a large deductible.

Irvine's extreme HELOC abuse

Not to be outdone by irresponsible loan owners from other parts, Irvine residents routinely spent their homes. Today's featured property is one of many.

  • This property was purchased on 6/14/1996 for $315,000. The owners used a $252,000 first mortgage and a $63,000 down payment.

  • On 10/15/1998 they opened a HELOC for $50,000.

  • On 7/29/1999 they refinanced their first mortgage for $300,000.

  • On 11/6/2002 they refinanced again for $300,000. So far they have been trying to manage the growth of their mortgage.

  • On 4/18/2003 they got a HELOC for $100,000.

  • On 7/23/2004 they enlarged the HELOC to $150,000.

  • On 3/28/2005 they refinanced with a $532,000 Option ARM with a 1.25% teaser rate.

  • On 4/19/2005 they obtained a $80,000 HELOC.

  • On 4/13/2007 they refinanced with a $637,000 first mortgage.

  • On 7/20/2007 they obtained a $100,000 HELOC from Bank of America.

  • Total property debt is $737,000.

  • Total mortgage equity withdrawal is $485,000.

They quit paying last year.

Foreclosure Record

Recording Date: 12/31/2009

Document Type: Notice of Default

How would you grade them?

I'll give you my opinion:

Eric Hebert and Family = F. They refinanced before the show even aired.

The Woffords = F. Over $500,000 in MEW between 2004 and 2005.

The Harpers = F. Massive HELOC abuse and raffle fraud.

The Okvaths = E. $400,000 in HELOC abuse, but I don't see evidence of gaming the system. They were merely thoughtless and stupid.

Irvine abusers = E. Once they went Ponzi in 2004, it was obvious they were going to lose the house, and their spending was clearly reckless.

Irvine Home Address … 18 SUNSET Riv Irvine, CA 92604

Resale Home Price … $669,000

Home Purchase Price … $190,000

Home Purchase Date …. 6/29/2001

Net Gain (Loss) ………. $438,860

Percent Change ………. 252.1%

Annual Appreciation … 14.2%

Cost of Ownership

————————————————-

$669,000 ………. Asking Price

$133,800 ………. 20% Down Conventional

5.24% …………… Mortgage Interest Rate

$535,200 ………. 30-Year Mortgage

$142,332 ………. Income Requirement

$2,952 ………. Monthly Mortgage Payment

$580 ………. Property Tax

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

$56 ………. Homeowners Insurance

$140 ………. Homeowners Association Fees

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

$3,728 ………. Monthly Cash Outlays

-$729 ………. Tax Savings (% of Interest and Property Tax)

-$615 ………. Equity Hidden in Payment

$278 ………. Lost Income to Down Payment (net of taxes)

$84 ………. Maintenance and Replacement Reserves

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

$2,745 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$6,690 ………. Furnishing and Move In @1%

$6,690 ………. Closing Costs @1%

$5,352 ………… Interest Points @1% of Loan

$133,800 ………. Down Payment

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

$152,532 ………. Total Cash Costs

$42,000 ………… Emergency Cash Reserves

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

$194,532 ………. Total Savings Needed

Property Details for 18 SUNSET Riv Irvine, CA 92604

——————————————————————————

Beds: 3

Baths: 3 baths

Home size: 2,580 sq ft

($259 / sq ft)

Lot Size: 7,650 sq ft

Year Built: 1976

Days on Market: 87

MLS Number: S603391

Property Type: Single Family, Residential

Community: El Camino Real

Tract: Dc

——————————————————————————

According to the listing agent, this listing may be a pre-foreclosure or short sale.

Deerfield Home in cul-de-sac. Complete with a large master bedroom and two other rooms upstairs as well as a bedroom with a full bath on the main floor. Home also has formal dining room, cathedral ceilings, and a fireplace in family room.

A second post today

This afternoon, there will be a second post. The afternoon post will be on Buying a Trustee Sale Property as a Primary Residence.

We Haven't Learned the Lessons of the Great Housing Bubble

People learned lifelong lessons about financial management from the Great Housing Bubble. Did they learn the right ones?

The owners of today's featured property learned how to squeeze every last penny from the walls, then they resorted to squatting for the last year and a half.

Irvine Home Address … 14952 GAINFORD Cir Irvine, CA 92604

Resale Home Price …… $460,000

{book1}

I’m marrying money, whose wanna say the best man?

I win on the honey moon and came home with the best tan.

There’s green all over me, in my pockets and left hand.

Green, you should know what I mean

Chamillionaire — Show Me The Money

Did those people who lost their homes during the Great Housing Bubble learn any important lessons? Did people learn that certain financial management techniques don't work very well? Or did people learn that building a Ponzi Scheme is a great way to manage their finances except during those unexpected economic downturns?

People can learn very valuable life's lessons from the mistakes of others. If I didn't believe that, I wouldn't keep writing. However, this blog is not likely to change the way millions of California borrowers live. As long as lenders enable foolishness, we will have fools who will step forward.

Best Protection Against Another Housing Bubble May be a Generation's Painful Lessons

By Robert X Cringely Mar 29th 2010 @ 2:30PM

The market value of your house is down 20 to 30 percent from its peak and could have further still to go. Jobs are scarce and the idea that home values will rise again seems remote. But this, too, shall pass (yes, your home value will eventually recover). And I can tell you exactly why — psychology.

The good news is that for all the economic pain and suffering, we've probably just bought ourselves, as a people, 50 years of immunity to economic depression. The bad news is that this immunity has nothing at all to do with house prices, public policy, Bernanke, Dodd, Geithner, or Obama, much less Paulson or Bush. It would have happened anyway.

The premise of this author's entire argument is that people endured the consequences of their decisions and they have been conditioned not to repeat the same mistakes. This is obviously wrong. The moral hazard of innumerable bailouts has insulated the population from the consequences of their mistakes.

The real lesson people have learned is that they can game the system for personal gain and pass the losses on to everyone else. Any real consequences will be avoided. We have guaranteed ourselves another housing bubble and even more massive bailout.

I'm reminded of a story about Sid Richardson. Back in the 1950s, Richardson, a Texas oilman, was arguably the richest man in the world — the bachelor uncle of today's ultra-rich Bass Brothers. (You though they made that money all by themselves?) Richardson made his fortune from West Texas crude and he owned a refinery in Midland, Texas. One day, a crane operator working on construction at the refinery swung the boom of his crane around and smashed into one of the catalytic cracking towers, knocking the tower clean over. There was a massive oil spill, the kind we'd really worry about today. But this was back in the days when DDT was good and oil spills didn't matter so much. Still, the accident did cause more than $1 million in damage, and since the refinery was self-insured, that million came straight from Sid Richardson's pocket. When the catalytic cracking tower was knocked over, everyone had to come have a look, including Richardson. And when they had all shaken their heads and pointed at the destruction, Richardson finally said it was time to get back to work and he sent the crane operator back up to the cab of his crane.

"You can't send him back to work on that crane!" the refinery manager shouted to Richardson. "The guy can't be trusted."

"Believe me," said Richardson, "he's not going to make that mistake again."

There is a lesson here for all of us, because — just like that crane operator — stressful experiences eventually teach the rest of us lessons, too. But unlike that crane operator, it usually takes us three times to figure things out.

That's what Professor Vernon L. Smith (now of George Mason University) learned decades ago in economics experiments conducted at the University of Arizona — experiments that earned him the 2006 Nobel Prize in Economics. Smith conducted real money experiments with groups of students. In their buying and selling of assets, the students inevitably created asset bubbles that eventually collapsed. Given another try, the same group created a second bubble that also collapsed. But given a third try, the same group consistently showed it had learned its lesson and no more bubbles were created.

… And so this three-strikes-and-you're-out (of danger) apparently works in real life. That explains why American savers and investors suffered through the Florida Land Bubble collapse of 1925 followed by the Wall Street stock bubble crash of 1929 and the consequent bank panic of 1933, before that same group assiduously avoided repeating any of those behaviors on a similar scale for the next 50+ years.

The cause and effect this author identifies is very weak. We have been inflating and deflating bubbles forever. You can pick any point in time and find three economic catastrophes preceding. The reason we had 50+ years of stability following the Great Depression is that we passed Glass-Steagall and other legislation to limit the ability of lenders to inflate Ponzi Schemes. It wasn't until we removed these protections in 1999 that problems began. The 50+ years of stability came from the legislation they passed not the personal lessons they learned.

In that 50 years, we had bubbles and recessions, but we had no huge bubbles and no depressions.

The Great Depression turned Americans, who had not been savers in the 1920s, into savers for the rest of their lives. But what the Depression gave us, generational transitions and Reaganomics took away. Savings rates began to drop in the late 1980s just as the Gipper was on his way back to Santa Barbara.

What does this means for today? Well, our generation has experienced the 1990s dot-com bubble and its pop, the 2000's housing bubble and its pop, and now the Great Recession. We're in our third time and likely due our own bit of subsequent wisdom as a result.

If it were only true….

The irony here, of course, is that while we credit the SEC and FDIC and maybe World War II for saving us from the Great Depression, it may have been that we were simply fed-up. Similarly, whatever Bernanke, Dodd, Geithner, and Obama finally do to reform the current U.S. financial system may matter less to our future prosperity than the painful lessons we've been learning as a people.

It's us, not them.

This is not accurate. Since people and institutions that were bailed out learned the opposite lesson. The pain was not deep enough to create lifelong changes in patterns of behavior. Once the Siren's Song of unlimited consumption tempts a recession weary population, "Don't wait and save when you can have it now…." Have we really endured such hardship that a broad cross-section of society will say no?

Worse, people-learned-their-lesson is the kind of argument lobbyists for lenders will use to convince legislators not to regulate the industry. After all, we don't need legislative reform if people suddenly got smart and stop demanding unstable loan products. Don't hinder commerce.

We'll make the pols look good for a few decades until enough time passes and the cycle of boom and bust starts all over again, as it inevitably will.

But until then, like Sid Richardson's crane operator, our generation — and only our generation — has probably learned our lesson: we aren't going to do that again.

I would be both thrilled and amazed if Californian's choose to behave like Texan's and reject bidding up house prices to obtain mortgage equity withdrawal. I believe we haven't learned a thing. In fact, the more people know, the more foolish they feel for failing to join the party last time.

Show me the money!

The owner of today's featured property had to look no further than the walls of his house to find plenty of money. It is a judgement call between a D and an E for this owner. The periodic use of the housing ATM shows this was part of routine financial planning. The only real debate is whether or not this represents thoughtless spending, or if the owners maintained self delusion about spending their house faster than it could go up in value. In either case, it is foolish because now they are losing their house.

  • The property was purchased on 9/22/2000 for $265,000. The owner used a $251,750 first mortgage and a $13,250 downpayment.

  • On 4/12/2004 he becomes they, and they refinanced with a $315,000 first mortgage.

  • On 9/16/2004 they refinanced with a $381,500 first mortgage.

  • On 3/30/2005 they obtained a $50,000 stand-alone second.

  • On 1/5/2006 they refinanced the second and added a $20,000 HELOC.

  • On 8/2/2006 they refinanced with a $119,100 stand-alone second.

  • Total property debt is $500,600.

  • Total mortgage equity withdrawal is $248,850.

Foreclosure Record

Recording Date: 06/25/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 03/20/2009

Document Type: Notice of Default

They got 18 months or more of squatting out of the deal too. They are likely still there.

Irvine Home Address … 14952 GAINFORD Cir Irvine, CA 92604

Resale Home Price … $460,000

Home Purchase Price … $265,000

Home Purchase Date …. 9/22/2000

Net Gain (Loss) ………. $167,400

Percent Change ………. 73.6%

Annual Appreciation … 5.7%

Cost of Ownership

————————————————-

$460,000 ………. Asking Price

$16,100 ………. 3.5% Down FHA Financing

5.24% …………… Mortgage Interest Rate

$443,900 ………. 30-Year Mortgage

$97,867 ………. Income Requirement

$2,448 ………. Monthly Mortgage Payment

$399 ………. Property Tax

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

$38 ………. Homeowners Insurance

$0 ………. Homeowners Association Fees

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

$2,885 ………. Monthly Cash Outlays

-$409 ………. Tax Savings (% of Interest and Property Tax)

-$510 ………. Equity Hidden in Payment

$33 ………. Lost Income to Down Payment (net of taxes)

$58 ………. Maintenance and Replacement Reserves

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

$2,057 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$4,600 ………. Furnishing and Move In @1%

$4,600 ………. Closing Costs @1%

$4,439 ………… Interest Points @1% of Loan

$16,100 ………. Down Payment

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

$29,739 ………. Total Cash Costs

$31,500 ………… Emergency Cash Reserves

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

$61,239 ………. Total Savings Needed

Property Details for 14952 GAINFORD Cir Irvine, CA 92604

——————————————————————————

Beds: 3

Baths: 2 baths

Home size: 1,116 sq ft

($412 / sq ft)

Lot Size: 5,096 sq ft

Year Built: 1971

Days on Market: 186

MLS Number: S592003

Property Type: Single Family, Residential

Community: El Camino Real

Tract: Wl

——————————————————————————

According to the listing agent, this listing may be a pre-foreclosure or short sale.

This property is in backup or contingent offer status.

Beautiful single story detached home. Remodeled Kitchen with large dining area with breakfast counter and bar with granite. Bathrooms were also remodeled in 2005 with new cabinets with granite counters. Laminate flooring in front room with tile in kitchen. All ceilings are scraped and textured. Vaulted ceiling in the living room with a nice cozy fireplace. Crown molding in master bedroom. Garage attic storage w/hide a ladder. Over 5000 sq ft large lot with newer fence. Gas built in range. Newer roof. No Mello Roos or HOA's. Close to Heritage Park Library and community center.

Failed Bailouts and the Neverending Mortgage Crisis

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….

Housing Bubble as Political Rugby

Keeping the truth straight is difficult with good information, but once policitians and political operatives get involved with the flow of data, truth can be obscured and elusive.

Today's featured property belongs to a family that skimmed the appreciation and sold just in time to avoid a short sale.

Irvine Home Address … 34 CAPOBELLA Irvine, CA 92614

Resale Home Price …… $745,000

{book1}

Wouldn't it be nice if we were older

Then we wouldn't have to wait so long

And wouldn't it be nice to live together

In the kind of world where we belong

Maybe if we think and wish and hope and pray it might come true (run, run, run)

Baby then there wouldn't be a single thing we couldn't do

Beach Boys — Wouldn't It Be Nice

Wouldn't it be nice if houses really could provide lifelong income? California is truly a remarkable place. People here actually believe permanent, life-sustaining home-price appreciation happens. It does occasionally, and people build a life around it.

Wouldn't it be nice if politicians used real information to make substantive decisions? Instead we get and endless barrage of lies and manipulations. Politicians make realtors look honest.

Housing Bubble as Political Rugby

The housing bubble was a bipartisan failure. Both sides of the political spectrum have tried to blame the other for the housing bubble. It is all nonsense.

The political Right has touted the "Barney Frank inflated the housing bubble" about as far as it can go. The Right likes to forget that Barney Frank was in the impotent minority in the House from 1994-2006. He was a loudmouth who wasn't responsible for anything; although, he was effective as an annoying loudmouth. Personally, I think Barney Frank is a tool, and I wished he were not as powerful as he is today, but the characterizations from the Right about his involvement in the bubble are silly.

The latest evolving narrative on the Left is a populist appeal to blame the evil banks and get that bailout money back home to Main Street where we can bail out some victimized homeowners. That is nonsense too.

Resident Evil: Are Struggling Homeowners as Immoral as the Big Banks?

Richard (RJ) Eskow, a consultant and writer, is a Senior Fellow with the Campaign for America's Future. This post was produced as part of the Curbing Wall Street project. Richard blogs at:

Do homeowners who are underwater on their mortgages deserve to lose their homes? That's what finance commentator Barry Ritholtz says, in a post called "More Foreclosures, Please." Ritholtz must have been channeling his inner Rick Santelli when he wrote that "the boom and bust saw irresponsible and reckless behavior by lenders and home buyers alike," adding that mortgage relief programs for homeowners reward those who were "reckless, speculative, and foolish" while punishing those who are not.

It's not reasonable to put Barry Ritholtz in the same category as Santelli, of course. Ritholtz is a highly informative, widely quoted writer on economic issues. Santelli's the frat-boy trader turned CNBC host whose rant about "rewarding the losers" got a cheer out of some morons on the Chicago Mercantile Exchange (and started the Tea Party movement). But Ritholtz puts financially beleaguered homeowners in the same "moral hazard" dumping ground as the banks who wrote their mortgages, suggesting that both of them "overused leverage, disregarded risk, (and) ignored history." Is that really fair?

Yes, It is.

After all, what kind of information was available to the average home buyer during the last decade? How would the average reasonable person have decided whether to buy a home or what kind of mortgage to use — in, say, 2004?

They probably read articles like the one published in February of 2004 in USA Today ("America's newspaper") with the headline "Greenspan says ARMs might be better deal." "Overall, the household sector seems to be in good shape," said Greenspan, who added that adjustable-rate mortgages might be the right choice for many homeowners. Greenspan enthusiastically promoted the new-style mortgages that later played a big role in the meltdown: "American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage," he said.

Greenspan wasn't just Chairman of the Federal Reserve at the time. He was the man the press kept touting as a genius, the one they called "Maestro." Were homeowners guilty of a "moral hazard" for listening to him? Should they face foreclosure because they weren't reading Nouriel Roubini or Paul Krugman or Joseph Stieglitz?

This just underscores the depth of Greenspan's failure. He was market cheerleader and irresponsible Federal Reserve chairperson largely responsible for unregulated derivatives that inflated the housing bubble. This guy's argument also ignores the more important role of the National Association of realtors. Nobody buying a house during the bubble paid any attention to Alan Greenspan; they were paying careful attention to their realtor telling them house prices were going up. They were also paying attention to their mortgage broker who was telling them they could borrow and spend that money as soon as it appeared from thin air.

Ignorance of the law is no defense, but ignorance of contrarian economic thought circa 2005 should be. If Greenspan and Geithner and Paulson and all the talking heads on CNBC and the other networks couldn't see the bubble, how could the average home buyer?

I can't believe he is making that argument. Ignorance is ignorance, and if it costs someone money, too bad. He is setting up ignorance as some reason people should be given a bailout. That is ignorant.

The truth is, most people buy homes because they need a place to live — and because for generations they've been told that buying a home is preferable to renting. Our tax code is structured to encourage home ownership, and the ownership message is reinforced in everything from news reporting to popular culture. (Think Miracle on 34th Street.)

BULLSHIT!!! (pardon the realtorspeak) People bought during the bubble because they wanted to get the appreciation and spend it. Very few people bought because they needed a place to live during the bubble. It was always a speculative investment they could also live in.

And generalizations about irresponsible, speculative borrowing overlook the fact that the nation's housing problems vary widely by geography. Some areas aren't having a housing bust:

Is a homeowner in Glens Falls, NY any more "reckless, speculative, and foolish" than one a couple of hours down the road in Poughkeepsie? Poughkeepsie experienced a boom in prices followed by a bust, while high-performing Glens Falls experienced a boom with no bust. West of Glens Falls, my home town of Utica did pretty well too, as this chart illustrates:

It probably helps that Utica experienced its financial collapse a long time ago, so housing prices were already unusually low.

Above is a fine example of the intentional use of confusing and misleading data. If you can't dazzle them with brilliance, you can baffle them with bullshit. Obfuscation is helpful when there is no point to be made. The fact that the housing bubble varied by region was caused by many variables, and irresponsible borrowing and speculation are chief among them. This author is throwing up a mud screen of meaningless and confusing data to dupe you into thinking he must be some kind of special expert who understands these things. He is an idiot with an agenda.

Here's something interesting: The areas with stable housing prices had a much lower percentage of nonprime loans than the country as a whole. As the report's authors mention, the explanation for that probably "runs in both directions–an increase in nonprime lending led to more significant home price appreciation, and more rapid home price appreciation led to a rise in nonprime lending."

In other words, it was a cycle: Risky loans drove housing prices up, and climbing housing prices led to greater availability (and selling) of risky loans. That's not a borrower problem — it's a pattern of lender behavior. It's a sign of banks driving a speculative frenzy as a "get rich quick" scheme, then leaving the borrowers with the wreckage.

It takes two to tango. This is clearly a lender problem, and I have argued that Lenders Are More Culpable than Borrowers, but the endless stream of HELOC abusers and squatters I find right here in our affluent community of Irvine, California, show how widespread borrower malfeasance was. Hard-working honest borrowers are not the ones in trouble right now. Speculators and foolishly over-extended borrowers are the ones who are asking for bailouts.

Ritholtz makes some excellent points about the weakness of HAMP (the Home Affordable Modification Program), and its tendency to reward banks for their very real "moral hazard." The biggest problem with the revised HAMP program isn't that it's too generous to troubled homeowners. It's that it's a "pretty please" program that only requires lenders to consider lowering the principal on home loans (or, in the Orwellian language of the program's Fact Sheet, "servicers will be required to consider an alternative Modification approach" – "required to consider" being one of those self-contradicting phrases George Carlin used to rattle off, like "jumbo shrimp.")

But the idea of principal reduction — whether it comes from HAMP or individual lenders like Bank of America — is a reasonable one. Most reductions in principal will still leave homeowners owing more than their house is worth, which should give them their just portion of punishment for any "moral hazard."

The idea of principal reduction is not a reasonable one. It is a really, really stupid idea. They have received no punishment at all for their behavior, and that is exactly why moral hazard is a problem. The only people who think it is a good idea are the people whom might personally benefit from principal reduction. Of course, the author knows this. He is pandering to those people in hopes that they will support him. This is part of the evolving left-wing narrative and populist appeal.

"More foreclosures, please" is exactly what we don't want. Ritholtz is understandably concerned about the unfairness of "rewarding" homeowners who got in trouble in a way that keeps prices higher for those who behaved responsibly. But he paints an overly rosy scenario of bad actors being driven from their homes like poltergeists, so that new and vibrant families can move in — families that can afford the mortgage and have money left over to spend in the local economy. The real solution is going to look less like a ghost story and more like Tim Burton's Beetlejuice, where the ghosts and the living learn to live together happily.

More bullshit. Barry is exactly right, and this guy is exactly wrong.

The millions of homeowners who got in over their heads have already suffered a lot. Let's get them some help. And let's keep the focus on the people who caused this problem: The bankers who got rich off these schemes, and the politicians and regulators who let them do it.

I actually agree with his conclusion that we should focus our efforts on regulating banks and stopping the huge bankster ripoffs. However, the millions of fools who got themselves in trouble deserve not one penny of our tax money in bailouts. Not one penny.

I don't care about party affiliation, and I don't identify with labels of Progressive or Conservative. Any politician who supports bailing out anybody has lost my confidence. This shouldn't be a battle between the side the supports the lenders and the side the supports the common man. Both sides of that argument are wrong. Where is a good Libertarian when you need one….

Calculated HELOC use?

Occasionally someone will defend HELOC abuse as ordinary HELOC use, as if it is okay to spend home equity and use a house like a credit card. If there were no government bailouts, I might be more persuaded, but since we are all paying for the abuses, the line between "use" and "abuse" gets pushed much closer to zero use.

  • This property was purchased ages ago on 6/22/1993 for $334,000. The original loan information is not present, but we can assume they used a $267,200 first mortgage (80%) and a $66,800 down payment.

  • On 10/26/1999 they refinanced into a $307,500 first mortgage.

  • On 1/7/2000 they opened a HELOC for $60,000.

  • On 3/17/2003 they refinanced with a $424,000 first mortgage.

  • On 9/14/2004 they refinanced into a $540,000 option ARM. It appears to have blown up 5 years later.

  • On 12/22/2004 they opened a $116,000 HELOC.

  • Total property debt is $656,000 plus negative amortization.

  • Total mortgage equity withdrawal is $388,800.

Foreclosure Record

Recording Date: 02/23/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 01/04/2010

Document Type: Notice of Default

Foreclosure Record

Recording Date: 11/20/2009

Document Type: Notice of Default

This property is scheduled for auction on 20 April 2010. Do you think the sale will close in time or will this go REO?

The borrowers who are about to sell today's featured property obviously grew their mortgage to obtain and spend their equity. They avoided a short sale; although, they spent most of their equity, and their credit is trashed. What lesson have they learned? Why won't they do this again on their next property?

The lesson this family learned is that they could spend their home equity the moment it appeared, and there is no real consequence. Of course, they could be leaving home with several hundred thousand dollars more in a closing check, but they wouldn't have had all the fun with their HELOCs. Do you think this behavior is wise? They do.

Renting with housing income

There is another way to look at this transaction. It may help explain why California homes are so desirable.

Lets say someone rented this home for 10 years with an average rent of about $2,500. It may rent for more now, but it probably rented for less in 2000. A renter would have spent $300,000 on housing during a ten-year period ($2,500 X 12 X 10 = $300,000).

These owners started their HELOC frenzy around the millennium, so they probably paid more in cost of ownership than they would have spent in a rental, so their total cost of ownership would have been closer to $360,000 during the same ten-year period ($3,000 X 12 X 10 = $360,000). At first glance, it would appear that owning was not a big advantage; however, If you factor in the mortgage equity withdrawal of $388,800, their net cost of ownership was less than zero. The house paid for itself.

That's why everyone in California wants a house.

When this family moves out, they are no better or worse off than a renter. They will leave with no equity. But the renter would have endured a housing cost whereas this owner endured none.

Irvine Home Address … 34 CAPOBELLA Irvine, CA 92614

Resale Home Price … $745,000

Home Purchase Price … $334,000

Home Purchase Date …. 6/22/1993

Net Gain (Loss) ………. $366,300

Percent Change ………. 123.1%

Annual Appreciation … 4.8%

Cost of Ownership

————————————————-

$745,000 ………. Asking Price

$149,000 ………. 20% Down Conventional

5.23% …………… Mortgage Interest Rate

$596,000 ………. 30-Year Mortgage

$158,324 ………. Income Requirement

$3,284 ………. Monthly Mortgage Payment

$646 ………. Property Tax

$67 ………. Special Taxes and Levies (Mello Roos)

$62 ………. Homeowners Insurance

$41 ………. Homeowners Association Fees

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

$4,099 ………. Monthly Cash Outlays

-$811 ………. Tax Savings (% of Interest and Property Tax)

-$686 ………. Equity Hidden in Payment

$309 ………. Lost Income to Down Payment (net of taxes)

$93 ………. Maintenance and Replacement Reserves

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

$3,004 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$7,450 ………. Furnishing and Move In @1%

$7,450 ………. Closing Costs @1%

$5,960 ………… Interest Points @1% of Loan

$149,000 ………. Down Payment

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

$169,860 ………. Total Cash Costs

$46,000 ………… Emergency Cash Reserves

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

$215,860 ………. Total Savings Needed

Property Details for 34 CAPOBELLA Irvine, CA 92614

——————————————————————————

Beds:: 3

Baths:: 3

Sq. Ft.:: 2325

Lot Size:: 4,695 Sq. Ft.

Property Type:: Residential, Single Family

Style:: Two Level, Other

Community:: Westpark

County:: Orange

MLS#:: S606385

Source:: SoCalMLS

——————————————————————————

Spectacular Westpark location with 3 spacious bedrooms and a loft. Extremely private with property angled so neighbors cannot see in. Property is light and bright with cathedral ceilings and recessed lighting. The family room features a fireplace and the kitchen has GE Profile stainless steel appliances with dual convection ovens. The home has an in-ground spa and will be perfect for entertaining.

Foreclosures Will Drive the National Economic Recovery

Barry Ritholtz is leading the chorus demanding that lenders get on with the foreclosure process and get the economy moving again.

Today's featured property may have the Irvine record for HELOC abuse. We are up over $1,000,000!!!

Irvine Home Address … 58 CEZANNE Irvine, CA 92603

Resale Home Price …… $1,600,000

{book1}

Tell it like it is

Don't be ashamed to let your conscience be your guide

Life is too short to have sorrow

You may be here today and gone tomorrow

You might as well get what you want

So go on and live, baby go on and live

Aaron Neville — Tell It Like It Is

I like people who tell it like it is, and I try to do the same. I think "balanced" reporting is one of the reasons for the death of newspapers. Most issues in life are shades of gray, and presenting both sides of an argument can be helpful for people to decide for themselves what they believe is right and what is wrong. However, there are many issues that fall much more to the extreme of black or white, wise or foolish, good or bad, right or wrong. When these issues are presented in a balanced way, it distorts the truth.

I think the various bailouts for both lenders and borrowers are wrong — 100% wrong. There is no balanced middle where some moral hazard is acceptable. Taxpayer funded bailouts are state-sanctioned theft, not in the general sense of government compelling us to pay taxes, in the specific detail of my tax dollars going to support foolish and greedy lenders and borrowers who will inflate another housing bubble and take my money again. It is 100% wrong, and no amount of balanced coverage is going to change that fact.

Barry Ritholtz is one of my favorite writers concerning the real estate bubble because he sees the issue so clearly, and when he writes about it, he does not sugar-coat what he sees.

More Foreclosures, Please . . .

By Barry Ritholtz – March 25th, 2010, 7:15AM

I have been dismayed about the latest actions out of Washington and Wall Street. The banks are now pushing all manner of mortgage mods and foreclosure abatements. These are little more than “extend & pretend” measures, designed to put off the day of reckoning. They are not only ineffective, they are counter-productive. They reward the reckless and punish the responsible, and create a moral hazard. Worse yet, they penalize middle America for the sake of giant Wall Street banks.

It may sound counter-intuitive, but the best thing for the nation (but not necessarily the banks) is to allow the foreclosure process to proceed unimpeded. We need more, not less foreclosures.

How did we get to this bizarre place in history? A brief recap of our story so far:

It started with the ultra-low rates of 2001-04. It was aided and abetted by an abdication of traditional lending standards, at first by non-bank lenders, but eventually, by nearly all. The Lend-to-Sell-to-Securitizer NonBanks pushed lending standards ever lower to the point of non-existence. This increased the pool of potential mortgage buyers, credit worthiness be damned.

The net result of all this was a credit bubble. I estimate that making mortgage requirements disappear brought between 10 and 20 million marginal new home buyers into the real estate market during the 2,000s decade. This drove prices to unsustainable levels, leading to a huge boom and eventual bust cycle in housing.

Prices have fallen about 30% nationally from the 2005-06 housing peak. As the artificial demand created by free money and an accompanying gold rush mentality disappeared, the housing market collapsed.

Despite this, even down 30% or so, prices still remain elevated by historical metrics. The net result has been 5 million foreclosures and counting. One in four “Home-owers” are underwater — meaning, they owe more on their mortgages than their houses are worth. There are another 3-5 million likely foreclosures coming over the next 5+ years.

The net results of the credit bubble are as follows:

1) An enormous number of families living in homes they cannot afford.

2) Bank balance sheets laden with current bad loans and lots of potential future defaulting loans.

3) Real Estate Sales, despite being propped up with historic low mortgage rates and tax purchase credits, are continuing to slide.

4) A weak overall economy with a very slow, soft recovery.

Whether a function of populist politics or bad economics, the proposals so far appear to address items one and three. But upon closer examination, they do nothing of the kind. In fact, they are actually gaming the system to help issue two — the bad loans the banks are carrying.

Even worse, they are making issue #4 — the economy — increasingly problematic.

We should allow the real estate market to experience a healthy price normalization process. Even though home prices have fallen dramatically, they have yet to reach their historical means relative to income or the cost of renting. This is to say nothing of the usual careening past the median towards under-valuation that typically follows a massive mis-allocation of capital.

We own a home, and have a vacation property. Rooting for falling prices is “talking against my own book.”

Why is it so beneficial to allow foreclosures to proceed unimpeded? Consider the following benefits of foreclosure:

• Increasing Economic Activity: The areas of the country with the greatest foreclosure rates have seen the biggest increase in real estate activity. Look at California and Florida — they have seen enormous upticks in sales versus the lower foreclosure states.

The process moves real estate holdings from weak hands to stronger ones. When someone purchases a home they actually can afford, they end up spending quite a bit of money on additional goods and services. They do renovations, hire contractors, make durable goods purchases, buy cars. They do lawn work, plant gardens, paint and repair. They even hire baby sitters, go out to diner and movies, they spend money in the local community.

The people who are hanging on by their fingernails, however, do almost none of these things. They pay a vastly disproportionate amount of their incomes to service their mortgages. This is not productive economic activity.

• Helping Families: Foreclosures, wrenching thought hey may be, move over-stretched families into housing they can afford. They avoid a steady stream of all manner of excess fees. The banks squeeze whatever they can from delinquent homeowners, who end up futilely tossing $1000s of dollars down the drain.

Worse, the HAMP programs have been totally ineffective in keeping families in their homes. The vast majority ultimately default anyway. More fees paid, more debt accrued, for nothing. The last thing these families need is a banking fee orgy, before they ultimate lose the house anyway.

The HAMP programs have been an enormous taxpayer subsidized boondoggle for the banks, however.

• Punishing the Prudent: The boom and bust saw irresponsible and reckless behavior by lenders and home buyers alike. They overused leverage, disregarded risk, ignored history. Having the taxpayers subsidize this behavior presents a moral hazard.

Worse than that, it punishes the people who behaved prudent and responsibly. Those who refused to buy a home they could not afford, chose not to over-extend themselves, and have been saving for a down payment are the net losers in this.

By working so feverishly to artificially reduce foreclosures and prop up home prices, we punish the first time home buyer, the newlyweds, the savers who want to buy a house they can actually afford.

The net result of all these programs and subsidies for recklessness is that we prevent home prices from normalizing. The people who are punished the most are the group that was not reckless, speculative or foolish.

• Rewarding Bad Banks: Despite the helping families rhetoric, it is not what these mods are about. The various foreclosure abatements, mortgage mods and capital write-downs are little more than a game of kick the can down the road. All of these programs are part of a broad “Extend & Pretend” mind set. They are an extension of the FASB 157 rule changes that allows banks to hide their bad loans.

The entire set of proposals can be described as “What's good for the banks is good for America.” Only they are not. The various foreclosure programs are essentially a way the banks don’t have to take their write offs now. Avoid the hangover, have another shot of tequila, push the pain of into the future, regardless of economic cost.

Were the banks required to report their mortgages accurately and/or write them down, they would be revealed as insolvent.

~~~

Now we get to the ugly Truth: The mortgage mods and foreclosure abatement programs are really all about propping up insolvent banking institutions on the taxpayer dollar and at the expense of the middle class. These programs are another losing round of helping Wall Street at the expense of Main Street. It is the worst kind of trickle down economics.

Herbert Spencer wrote, “The ultimate result of shielding men from the effects of folly is to fill the world with fools.” We have done precisely that.

Barry has a clear understanding of the situation, and he is one of the few who openly tells it like it is.

Good Stoploss Management

The Ponzi Scheme in California went on for too long. There are adults whose entire financial life is an illusion sustained only by lender greed and stupidity. Many California borrowers believe a money-rentership position in real estate can provide them sustainable productive income they can extract through mortgage equity withdrawal.

To them, periodic trips to the housing ATM is simply good cash management. It's like getting a paycheck. But is also serves one other useful purpose; by periodically extracting all the equity available in real estate, borrowers can shift any risk of loss to lenders and maximize their gains.

One of the most perplexing issues with trading is management of exits and getting back into cash. If you don't take profits as they accrue, you risk losing them when prices reverse; however, if you sell and take profits, you miss the remainder of the upward price move. Fortunately, lenders make it very easy to manage cash exits with HELOCs.

By periodically removing all profits through mortgage equity withdrawal, very little potential cash profit is left to the market. Also, since this is a loan and not the reduction in an equity position like selling part of a stock holding, the borrower gets to obtain the full cash advantage of owning real estate while prices were rising.

Of course, the best part of the system is getting to pass all losses on to the lender. When prices go south, the lender is holding the bag.

So far the only potential downside is a negative credit report and the potential for a lender to go after other assets. This is probably not a big concern for sophisticated borrowers because the spendthrifts no longer have any assets, and the clever ones probably figured out some tax shelter to hide them.

Lenders are going to get crushed again after the next housing bubble. I hope taxpayers don't have to backstop that one as well.

Today's featured HELOC abusing squatter

Now that I am watching the trustee sale market more closely, I am seeing the turds float by that bypassed the MLS. Very few properties scheduled for auction appear on the MLS. When they do, they are like today's.

  • This property was purchased for $1,262,500 on 4/9/2004. The owner used a $883,557 first mortgage and a $378,943 down payment.

  • On 8/8/2005 he refinanced with a $1,260,000 first mortgage and obtained a $180,000 HELOC. So far so good. There is no evidence he used the HELOC.

  • On 5/26/2006 he obtained a $500,000 HELOC.

  • On 11/21/2006 he refinanced with a $1,750,000 first mortgage and another $500,000 HELOC.

  • Here is where it starts to get fishy: On 3/9/2007 he sells the house to a couple for an undisclosed amount, then on 12/17/2007 it is deeded back to the original owner. This appears to be in preparation for default.

  • On 5/6/2008 the lender files a notice of default

  • On 6/4/2008, the owner transfers ownership to an entity he formed. My guess is he did this to try to shield himself from liability to the lender. Good luck with that.

  • Total property debt is $2,250,000.

  • Total mortgage equity withdrawal is $1,366,443, including his down payment. That may be a new Irvine record!

Foreclosure Record

Recording Date: 03/23/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 08/12/2008

Document Type: Notice of Sale

This owner has not made a payment since late 2007, perhaps early 2008. He is scheduled for auction, but do you think a lender is ready to absorb the loss on this one? They will lose $750,000 or more.

Irvine Home Address … 58 CEZANNE Irvine, CA 92603

Resale Home Price … $1,600,000

Home Purchase Price … $1,262,500

Home Purchase Date …. 4/9/2004

Net Gain (Loss) ………. $241,500

Percent Change ………. 26.7%

Annual Appreciation … 4.0%

Cost of Ownership

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$1,600,000 ………. Asking Price

$320,000 ………. 20% Down Conventional

5.23% …………… Mortgage Interest Rate

$1,280,000 ………. 30-Year Mortgage

$340,024 ………. Income Requirement

$7,052 ………. Monthly Mortgage Payment

$1387 ………. Property Tax

$400 ………. Special Taxes and Levies (Mello Roos)

$133 ………. Homeowners Insurance

$398 ………. Homeowners Association Fees

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$9,370 ………. Monthly Cash Outlays

-$1609 ………. Tax Savings (% of Interest and Property Tax)

-$1474 ………. Equity Hidden in Payment

$663 ………. Lost Income to Down Payment (net of taxes)

$200 ………. Maintenance and Replacement Reserves

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$7,151 ………. Monthly Cost of Ownership

Cash Acquisition Demands

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$16,000 ………. Furnishing and Move In @1%

$16,000 ………. Closing Costs @1%

$12,800 ………… Interest Points @1% of Loan

$320,000 ………. Down Payment

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$364,800 ………. Total Cash Costs

$109,600 ………… Emergency Cash Reserves

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$474,400 ………. Total Savings Needed

Property Details for 58 CEZANNE Irvine, CA 92603

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Beds:: 4

Baths:: 3

Sq. Ft.:: 3200

$0,500

Lot Size:: 0.28 Acres

Year Built:: 2004

Days on Market: 654 days

MLS#:: P643120

Property Type:: Residential, Single Family

Community:: Turtle Ridge

Style:: One Level, Other

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Rare single story home with upgrades, large lot. desirable entertainment backyard with gazebo.