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

Irvine Home Address … 14 ROSEMARY Irvine, CA 92604

Resale Home Price …… $275,000

Winter night in Harlem

Radiator won't get hot

Well the mean old landlord, he don't care

If I freeze to death or not

Bill Withers — Harlem

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

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

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

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

By CHARLES V. BAGLI

Published: June 9, 2011

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

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

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

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

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

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

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

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

Wow! That is a great deal of money.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

HELOC Abuse closer to home

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

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

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

Irvine House Address … 14 ROSEMARY Irvine, CA 92604

Resale House Price …… $275,000

House Purchase Price … $207,500

House Purchase Date …. 10/2/2001

Net Gain (Loss) ………. $51,000

Percent Change ………. 24.6%

Annual Appreciation … 2.9%

Cost of House Ownership

————————————————-

$275,000 ………. Asking Price

$9,625 ………. 3.5% Down FHA Financing

4.49% …………… Mortgage Interest Rate

$265,375 ………. 30-Year Mortgage

$57,559 ………. Income Requirement

$1,343 ………. Monthly Mortgage Payment

$238 ………. Property Tax (@1.04%)

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

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

$305 ………. Private Mortgage Insurance

$277 ………. Homeowners Association Fees

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

$2,221 ………. Monthly Cash Outlays

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

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

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

$54 ………. Maintenance and Replacement Reserves

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

$1,818 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

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

$2,750 ………. Closing Costs @1%

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

$9,625 ………. Down Payment

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

$17,779 ………. Total Cash Costs

$27,800 ………… Emergency Cash Reserves

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

$45,579 ………. Total Savings Needed

Property Details for 14 ROSEMARY Irvine, CA 92604

——————————————————————————

Beds: 2

Baths: 2

Sq. Ft.: 1022

$269/SF

Property Type: Residential, Condominium

Style: Two Level, Other

Year Built: 1976

Community: 0

County: Orange

MLS#: P784020

Source: SoCalMLS

Status: Active

——————————————————————————

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

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

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

Resale Home Price …… $189,000

They got little hands

Little eyes

They walk around

Tellin' great big lies

Randy Newman — Short People

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

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

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

Free Speech is a basic human right

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

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

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

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

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

According to Wikipedia:

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

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

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

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

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

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

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

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

Due process and rules of law

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

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

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

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

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

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

Attorney: Realtor group violates law on speech

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

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

.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Court of Public Opinion

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

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

Are you ready to rumble?

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

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

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

$375,000 for a one bedroom condo

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

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

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

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

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

Resale House Price …… $189,000

House Purchase Price … $375,000

House Purchase Date …. 12/2/2005

Net Gain (Loss) ………. ($197,340)

Percent Change ………. -52.6%

Annual Appreciation … -11.7%

Cost of House Ownership

————————————————-

$189,000 ………. Asking Price

$6,615 ………. 3.5% Down FHA Financing

4.49% …………… Mortgage Interest Rate

$182,385 ………. 30-Year Mortgage

$39,559 ………. Income Requirement

$0,923 ………. Monthly Mortgage Payment

$164 ………. Property Tax (@1.04%)

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

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

$210 ………. Private Mortgage Insurance

$337 ………. Homeowners Association Fees

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

$1,673 ………. Monthly Cash Outlays

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

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

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

$44 ………. Maintenance and Replacement Reserves

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

$1,487 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

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

$1,890 ………. Closing Costs @1%

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

$6,615 ………. Down Payment

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

$12,219 ………. Total Cash Costs

$22,700 ………… Emergency Cash Reserves

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

$34,919 ………. Total Savings Needed

Property Details for 11 FALLINGSTAR #20 Irvine, CA 92614

——————————————————————————

Beds: 1

Baths: 1

Sq. Ft.: 852

$222/SF

Property Type: Residential, Condominium

Style: Two Level, Cape Cod

Year Built: 1984

Community: 0

County: Orange

MLS#: S661352

Source: SoCalMLS

Status: Active

——————————————————————————

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

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

Irvine Home Address … 221 MANTLE Irvine, CA 92618

Resale Home Price …… $688,000

I'd pay any price just to get you

I'd work all my life and I will

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

I'd call that a bargain

The best I ever had

The best I ever had

The Who — Bargain

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

Home clearance sale coming ‘desperate’ sellers expected this summer

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Ditto.

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

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

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

Another recent buyer bails on Irvine

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

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

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

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

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

Irvine House Address … 221 MANTLE Irvine, CA 92618

Resale House Price …… $688,000

House Purchase Price … $632,000

House Purchase Date …. 2/25/2011

Net Gain (Loss) ………. $14,720

Percent Change ………. 2.3%

Annual Appreciation … 25.7%

Cost of House Ownership

————————————————-

$688,000 ………. Asking Price

$137,600 ………. 20% Down Conventional

4.49% …………… Mortgage Interest Rate

$550,400 ………. 30-Year Mortgage

$119,380 ………. Income Requirement

$2,786 ………. Monthly Mortgage Payment

$596 ………. Property Tax (@1.04%)

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

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

$0 ………. Private Mortgage Insurance

$134 ………. Homeowners Association Fees

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

$3,792 ………. Monthly Cash Outlays

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

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

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

$106 ………. Maintenance and Replacement Reserves

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

$2,936 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

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

$6,880 ………. Closing Costs @1%

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

$137,600 ………. Down Payment

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

$156,864 ………. Total Cash Costs

$45,000 ………… Emergency Cash Reserves

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

$201,864 ………. Total Savings Needed

Property Details for 221 MANTLE Irvine, CA 92618

——————————————————————————

Beds: 3

Baths: 2

Sq. Ft.: 2181

$315/SF

Property Type: Residential, Single Family

Style: Two Level, Spanish

Year Built: 2010

Community: 0

County: Orange

MLS#: S660361

Source: SoCalMLS

Status: Active

——————————————————————————

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

Question of the day

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

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

With the deflation of the housing bubble, home equity hit its lowest level in seventy years. It will fall further.

Irvine Home Address … 165 ROCKWOOD Irvine, CA 92614

Resale Home Price …… $315,000

My heart is aching, I'm a fool

To let it go on breaking

Maybe I'll awake and find that I'm mistaken

I wonder

Louis Armstrong — I Wonder

The process of market capitulation requires the individual participants to realize their folly. Their pocketbooks are aching, and they ask themselves how long they should let it go on breaking, and finally they realize they were the fool.

As prices fall in the wake of the housing bubble, whatever equity wasn't spent through rampant HELOC abuse is being washed away by falling prices.

One data series that shocked me when I first saw it was the graph of home equity during the housing bubble. Everyone assumed home equity went orbital when house prices rose so far so fast. It would have except for one inconvenient truth: people were extracting that equity and spending it the moment it appeared. As a result, the expected huge increase in aggregate home equity from 2003 to 2006 never happened. Loan owners spent it all.

Home equity sinks to nearly lowest point since World War II

June 9, 2011 — The Associated Press, Bloomberg News

Falling home prices have shrunk the equity Americans have in their homes to nearly the lowest percentage since World War II.

Average home equity plunged from more than 61% at the start of 2001 to 38% in the January-March quarter this year, the Federal Reserve said in a report Thursday. That drop comes as home prices in big metro areas have reached their lowest level since 2002.

Prices fell 33% in 20 cities through March from their 2006 peak, reaching their lowest level since 2003, according to the Standard & Poor's/Case-Shiller index of U.S. home prices on May 31. The decline signaled a “double dip” as the index fell below its previous post-housing-bubble low set in April 2009. Prices more than doubled from 2000 to July 2006.

Further declines in home prices are likely.

Robert Shiller, the economist who co-founded the S&P/Case-Shiller index, said a further decline in property values of 10% to 25% in the next five years “wouldn't surprise me at all.”

“There's no precedent for this statistically, so no way to predict,” Shiller said Thursday at a Standard & Poor's conference in New York.

It's called overshooting to the downside, and it is very difficult to predict because the reasons it occurs is part mechanical and part psychological.

Mechanically, downside overshoot is caused by excess supply. With the millions of foreclosures lenders have already absorbed, and the millions more waiting in shadow inventory, housing markets everywhere have a huge supply problem. It has been masked over the last 3 years by withholding this inventory, but the problem didn't disappear, it's merely being held in abeyance to prevent a catastrophic price decline.

Psychologically, downside overshoot is caused by a change in buyer psychology. Since capturing appreciation was the primary reason people were buying during the bubble, and since prices are now depreciating, buyers who once were enthusiastic about real estate are shunning it like the plague. And they should.

Buyers need a new reason to buy, and and realtors calling the bottom is not sufficient. Only when prices are less expensive than competing rentals will buyers find a new motivation to buy real estate. And since rental parity is well below current pricing in markets like Irvine, buyers sit and wait, and sales volumes are anemic.

A backlog of foreclosures poised to hit the market means prices may stay depressed, dissuading builders from starting new construction.

The main reason for our ongoing economic doldrums is the lack of new residential construction. Housing is the economy. Nearly every recession since WWII has ended when residential investment picked up. Residential investment will not increase until the housing market has found a natural, sustainable bottom. The reason is simple: unemployed construction workers don't buy goods and services and stimulate the economy.

When the government tried to stimulate the housing market with tax credits and the federal reserve bought mortgage debt, their goal was to stimulate housing and jump start the economy. It failed.

The stimulants all failed because prices had not fallen to the point of affordability where real demand could sustain the momentum. It's like drinking coffee to stay up studying for an exam. You might get a temporary boost, but if the body is tired, it needs sleep, not stimulants. Similarly, if prices are inflated, temporary stimulants may cause prices to rise temporarily, but if what the market needs is a deeper price adjustment, that is what is eventually going to occur. And in fact, that is what's happening now.

How could someone tell if the market needed a deeper correction? On a macro level, measures of price-to-rent or price-to-income provide a clue. Plus, simply looking at long-term trendlines reveals prices are still too high.

On a micro level, rental parity is the best indicator. If prices are not affordable as measured by the cost of ownership compared to comparable rents, then prices need to come down. By both macro and micro measures prices are still too high in many markets.

Unemployment, which rose to 9.1% in May, and stricter lending conditions are signs that any recovery in housing may take years.

Shiller's comments paint a more pessimistic possibility for home prices than other forecasts. Additional declines will be “incremental,” Bank of America CEO Brian Moynihan said last week..

The CEO of Bank of America is telling people prices will go down. He is a good person to listen to because he will be one of the primary agents of the decline. Other than the GSEs, B of A has more REO than any other lender, and they are planning to liquidate. They won't dump the properties all at once, but they will liquidate, and their activity will push prices lower.

While it would be a surprise to see prices fall steeply, it's possible for homes to lose more value if inflation picks up, Karl Case, co-founder of the index, said Thursday.

“You could have flat nominal prices but still have it go down 20%,” Case said during an interview at the conference.

“If house prices stabilize, they could still go down in real terms. If we had inflation, it'd be great, because it'd mask a 25% decline.“

Did Karl Case just say inflation would be great because it would mask a 25% decline? A professional economist really said that? WTF? Does he really think it's a good thing for prices of everything else in our economy to rise significantly relative to housing is good because it keeps housing prices up? I'm starting to wonder who the real brains behind the Case-Shiller Indices is.

The Fed report showed that household debt fell in the January-March period at an annual rate of 2% from the previous quarter.

That drop was due entirely to a decline in mortgages.

Auto loans, student loans and other consumer credit rose 2.4% — the second-straight gain after nine consecutive declines.

We still have a long way to go to write down all the bad mortgages lenders are holding. Appreciation is not going to bail them out. The moment prices begin to rise, lenders will sell into the rising prices in order to liquidate their inventory. If both prices and volumes rise, lenders will quicken the pace of liquidations to stop the bleeding from their carrying costs. Any increases in lender selling will snuff out appreciation before it gains any momentum.

As long as lenders have copious amounts of houses and droves of delinquent mortgage squatters, house prices will not go up. Excess supply and carrying-cost pressures for liquidation will prevent price appreciation. Affordability will be excellent.

100% financing makes everything affordable

By far the dumbest idea that was fully executed during the housing bubble was embracing 100% financing. When lenders ran out of people with down payments and high credit scores, they took anyone off the street and gave them all the money to buy a house. With absolutely no barriers to entry to the housing market, everyone could afford to buy, and prices went straight up.

Of course, giving out the money is easy for lenders, but getting it back is more problematic, particularly when they loaned money to people under terms that nobody could meet.

What we are left with are properties like today's featured property. The owners paid $245,000 on 7/25/2002, and they obtained a $245,000 first mortgage. They put nothing down.

After a refinance for $225,600 and a stand-alone second for $24,000 on 6/5/2003, the owners went back to the housing ATM on 5/18/2006 and refinanced the second for $165,000.

Basically, they put nothing down and extracted about $130,000 in HELOC booty during their first four years of ownership. Now that prices have dropped more than 30% for small condos like this one, these owners are underwater and bailing out. Why wouldn't they?

They already extracted whatever the lenders was going to give them, and now with the large debt, it costs them far more than a comparable rental. Since they don't have any of their money in the deal, only their emotional attachment to the property or a sense of moral obligation would keep them paying. Since people don't often fall in love with tiny condos, and the moral obligation to repay debt is largely washed away, short sales like this one should not be surprising.

This is the type of inventory that will prevent appreciation until it is cleared from the market.

Irvine House Address … 165 ROCKWOOD Irvine, CA 92614

Resale House Price …… $315,000

House Purchase Price … $245,000

House Purchase Date …. 7/25/2002

Net Gain (Loss) ………. $51,100

Percent Change ………. 20.9%

Annual Appreciation … 2.8%

Cost of House Ownership

————————————————-

$315,000 ………. Asking Price

$11,025 ………. 3.5% Down FHA Financing

4.49% …………… Mortgage Interest Rate

$303,975 ………. 30-Year Mortgage

$65,931 ………. Income Requirement

$1,538 ………. Monthly Mortgage Payment

$273 ………. Property Tax (@1.04%)

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

$66 ………. Homeowners Insurance (@ 0.25%)

$350 ………. Private Mortgage Insurance

$337 ………. Homeowners Association Fees

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

$2,564 ………. Monthly Cash Outlays

-$141 ………. Tax Savings (% of Interest and Property Tax)

-$401 ………. Equity Hidden in Payment (Amortization)

$18 ………. Lost Income to Down Payment (net of taxes)

$59 ………. Maintenance and Replacement Reserves

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

$2,099 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$3,150 ………. Furnishing and Move In @1%

$3,150 ………. Closing Costs @1%

$3,040 ………… Interest Points @1% of Loan

$11,025 ………. Down Payment

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

$20,365 ………. Total Cash Costs

$32,100 ………… Emergency Cash Reserves

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

$52,465 ………. Total Savings Needed

Property Details for 165 ROCKWOOD Irvine, CA 92614

——————————————————————————

Beds: 2

Baths: 2

Sq. Ft.: 1125

$280/SF

Property Type: Residential, Condominium

Style: Two Level, Contemporary

Year Built: 1983

Community: 0

County: Orange

MLS#: P782595

Source: SoCalMLS

Status: Active

——————————————————————————

Wonderful Woodbridge living at its best. This is a completely remodeled townhome. Nice laminate hardwood floors, beautiful upgraded kitchen w/ granite countertops, new cabinets & appliances. Bathrooms have been remodeled and upgraded. Features scraped ceilings with recessed lighting. Keep cool with energy efficient attic fan and ceiling fans in both bedrooms. Both carports are directly behind patio. Enjoy the Woodbridge Village Association amenities, including the lakes, parks, sport courts, and much more!

RELAY FOR LIFE is THIS WEEKEND

June 11-12 (9:00 am to 9:00 am) CENTRAL PARK in RSM (Behind the Bell Towers, across from the movie theatres) The Relay event is a 24 hour team relay supporting our survivors and in memory of those we have lost and a fundraising effort on behalf of the American Cancer Society. As of this morning we have raised approximately $13,500 with only $1,500 left to raise to meet our goal of $15,000 for St. John's. We have about 30 official team members toward our goal of 50. There is still time to JOIN the official St. John's team on line (avoid filling out waivers on the day of the event) and/or DONATE to the team or a team member — www.relayforlife.com/ranchosantamargaritaca

You are welcome to make cash donations on the date of the event as well. Please note that the despite a possible misunderstanding, there are NO DOGS allowed on the track during the event, sorry. Please note that if you did not get your St. John's black shirts they will be available at the event, and those that pre-registered on line as a team member and raised $100 or more will also be provided with an official RSM Relay for Life T-Shirt as well. As in years past, St. John's will have a booth and will be providing free food and drinks all day to St. John's members as well as providing to the general population on a donation basis (all proceeds will go to the RSM Relay event).

On Sunday morning our own Bob Hayden will be making his “world” famous waffles as a fundraiser to the event as well. Please feel free to stop by and walk a few laps as part of our team and in support of those you have loved and cared about that have survived or fallen to this disease. Help wipe it out…..run, walk, eat, play…. ALSO, there is a silent auction taking place from 11:00 a.m. ending at 6:00 p.m. with over 35 baskets available for bidding (along with our own donated basket from Kathy O'Connor of fabulous Silpada jewelry).

SATURDAY IS THE DAY – RELAY FOR LIFE

BTW, others are picking up on the story of the week.

Twenty-four year member of the Orange County Association of realtors, David R. Sparks, has admitted to lying to clients to cover up his fraud and theft in a $4,300,000 Ponzi scheme.

Irvine Home Address … 4651 LOCKHAVEN Cir Irvine, CA 92604

Resale Home Price …… $575,000

I will burn their souls

In the flames of hell

Brutal display of force

To slaughter the bastards

Brutal display of power

That will condemn them forever

Beheading false prophets

I will go around the world

Beheading false prophets

Undercroft — False Prophets

In every profession or organization there are a few bad apples. The behavior of a few does not necessarily reflect the values and actions of the many. Today we have the story of one really bad apple in an organization already rotting from within.

Irvine real estate broker admits $4.3 million Ponzi scam

By BRIAN MARTINEZ — THE ORANGE COUNTY REGISTER

Published: June 8, 2011 — Updated: 2:47 p.m.

IRVINE – Beware of false profits.

As I have stated on many occasions, chasing appreciation is a fool's errand. Unlike realtors who will tell anyone who will listen that prices only go up, I have been telling people to pay attention to the cashflow. That's where the real value is.

Chasing appreciation is part of today's story. The twenty-four year member of the Orange County Association of realtors made a massive bet on appreciation in rural Utah at the peak of the housing bubble in 2005. Given that he is a realtor, his poor judgment on the housing market is understandable, but the deception and fraud that followed is truly remarkable.

Do you think OCAr will bring him up on ethics charges? He is still a member, apparently in good standing. Also, His MLS access is still working.

Ordinarily, I don't write about individuals, but like Michael Pines, he has achieved infamy without my help, and there is no way to tell the story without mentioning who he is.

David R. Sparks – a veteran real estate broker, former Irvine Planning Commissioner and active church-member – defrauded 34 friends, relatives and clients of $4,265,091 with an elaborate Ponzi-style investing scheme starting in 2007.

The 50-year-old Irvine family man cooperated with the FBI, confessed his crimes and agreed to plea guilty to felony interstate wire fraud, according to documents filed this week in Federal court in Santa Ana by the local U.S. Attorney’s Office.

At least one realtor is taking responsibility for his false representations about real estate appreciation.

Details from his signed plea agreement, two uncontested civil lawsuits and victim statements to The Register paint a picture of Sparks as a charming man and talented liar who claimed to be buying, rehabbing and selling foreclosed or pre-foreclosure homes that he never actually purchased.

Mr. Martinez, the reporter for the OC Register, should be careful when calling a realtor a liar.

1. He forged bank documents,
2. used non-existent escrow companies,
3. provided bogus status updates and
4. falsely reported significant profits, victims said.

If they did not want to reinvest their money with him, Sparks made up excuses for why he could not give it back.

As an upstanding member of the Orange County Association of realtors since 1987, Mr. Sparks embodies the character and ethics many have come to expect from realtors. The following is from his Active Rain profile:

I have been a full-time, professional REALTOR® since 1987 specializing in the sales and marketing of homes in Orange County, Long Beach and Coastal San Diego County. As a licensed broker, I am the owner of Sparks Realty, Inc.

Honest and full of integrity, I work to achieve a win/win situation in my transactions. While always keeping my clients' best interests in the forefront, I know that a truly successful transaction is one in which everyone feels as though they were treated fairly. As an excellent and open communicator, I owe much of my success to the fact that my clients always know exactly what is happening with their sale or purchase. By keeping everyone fully informed at every step, I makes the real estate process easy and stress-free. My constant accessibility as well as my knowledge of the industry and its affiliated services makes me the perfect choice for the real estate consumer interested in total service.

If you are seeking an honest real estate professional who is committed to your satisfaction and peace of mind, call Dave Sparks today.

The bold text is not added by me for emphasis. That was from Mr. Sparks. His honesty and integrity are beyond reproach since he is a realtor.

“We look forward to serving screwing you, your friends and your family for many years to come.”

Back to the OC Register article:

“I am glad he admitted to it but I am sorry I was a part of this,” said victim Aggie Kobrin of Irvine. “I am still very angry and very disappointed and that will stay with me a long time.”

The defendant started speculative real estate investing in the late 1980s, according to the plea agreement. In 2005, he believed that real property in Utah’s Cedar City was likely to see a dramatic increase in value, so he used his own funds and investor cash to buy 35 properties for approximately $7 million in Utah and California, the document says.

i give the guy credit for the courage to act on his analysis. Of course, he was as wrong as wrong gets, and he lost everything, and took his investor's money down the drain with him.

By 2007, the rents Sparks was collecting from the properties were no longer sufficient to cover the debt service.

Let's be real; the rents never covered the debt service. Cashflow positive properties were practically non-existent in 2005. By 2007, he ran out of whatever cash he had, and rather than admit defeat, he opted to commit fraud.

There must have been a moment only Mr. Sparks will understand when he realized he made a huge mistake. At that point, probably when the cash ran out and the market was plummeting, he had to make a choice. He could either admit his failure, tell his investors he lost their money, and give them back whatever he still had, or he could start a Ponzi scheme, delay the Day of Reckoning, and pray for a miracle. He chose the latter.

This was a choice. The twenty-four year member of Orange County Association of realtors had other options, and he chose to lie, cheat, and steal.

Sparks began soliciting cash from investors to cover the debts – deliberately lying to them by telling them the funds would be used to buy new properties. To back up his lies to investors, Sparks created false paperwork.

Sparks took in about $4.8 million under the false pretenses. He spent about $500,000 on “lulling payments” to the investors and about $4.3 million on his debt, the plea agreement states.

Lulling payments are money given to investors to placate their worries and buy time.

One thing that isn't clear to me is where the $4.3 million went. The debt service on $7 million in real estate over a few years wouldn't be more than $1.5 million at hard-money rates. Where is the rest of the money?

Sparks has agreed to pay the $4.3 million as restitution. That figure does not include any taxes the victims paid on the false profits, the costs incurred in the ordeal or interest payments and late fees promised in the investment agreements. Victims will have to seek reimbursement for that money via civil lawsuits.

Some assets are to be transferred to the United States government to liquidate. If his current assets and cash can’t cover the restitution, he will presumably have to pay the rest of it back from his earnings once he gets out of prison, if he goes to prison.

Since he is a member of the Orange County Association of realtors, he shouldn't have any problem finding clients willing to work with him when he gets out.

There is no minimum sentence for the Sparks’ crime and the maximum prison time he could get is 20 years. The U.S. Attorney’s Office in the plea deal agreed to recommend the lower end of that range, but that is ultimately up to the judge.

“Mr. Sparks’ agreement to plead guilty is an important step in his accepting responsibility for his fraudulent conduct,” Assistant United States Attorney Andrew Stolper said.

The guilty plea will also help his victims win their civil lawsuits against this member of the Orange County Association of realtors since 1987.

Two lawsuits were already filed in January – one by a 22-year friend of Sparks from Santa Ana and one by a married couple from Wisconsin. Sparks never responded to the courts, which handed the plaintiffs default judgments.

The FBI’s investigation did not find any evidence that Sparks is in possession of a large sum of money. But some victims say they still believe Sparks has money stashed away somewhere because he was “cheap” and didn’t like to spend money.

The fact that so much money is unaccounted for does raise suspicion.

The FBI began investigating Sparks in late January. Sparks resigned from the Irvine Planning Commission on Feb. 8.

Irvine City Councilman Steven Choi appointed Sparks to Irvine’s Planning Commission in December 2008. Sparks’ resignation letter to the city said the decision came “after careful consideration” and “discussions” with Choi but it did not give a reason for resigning.

Choi said Sparks told him he could not serve any longer because of personal business matters.

While running a Ponzi scheme, he served on the Irvine planning commission. Nice.

“This is a shock, because he appeared to me to be an honest man, and sincere,” Choi said. “I never expected he was involved in anything like this. It is very unfortunate.”

Choi said he first met Sparks when Sparks’ children – who are now adults – were coming to the Choi family’s tutoring center and the two became friends. He appointed the real estate broker to the Irvine Planning Commission because Sparks communicated that he had experience in real estate development out of state and because he had political experience as president of Irvine Republican Council.

“I haven’t analyzed his voting record, but as far as I know he did a good job as a commissioner and did not do anything wrong involving the city,” Choi said.

Fortunately, planning commission decisions do not manage budgets or expenditures.

The ordeal has caused financial hardship to several Orange County residents who say they personally trusted Sparks.

Gary Schultz of Huntington Beach and his father gave Sparks a combined $52,500 toward the purchase of three homes in the San Francisco area. Schultz knew Sparks from attending Westminster High School together.

He’s “a face-to-face guy” who is so cheery and nice that “you let your guard down around him,” Schultz said. He comes across like “Mr. Rogers,” but he is the “worst of the worst,” Schultz said.

Robert Edwin Anslow of Santa Ana, who was friends with Sparks for 22 years, provided $200,000 in 2007 for him to use toward the purchase, rehab and sale of a home in Simi Valley. Sparks reported that he purchased the property for $700,000 in 2007 and sold it for $910,000 in 2008. After allocating $64,000 in profit to Anslow, he talked him into reinvesting all of the money as an unsecured loan to Sparks for future investing. The problem: Sparks never bought or sold the Simi Valley home.

Later, when Anslow sought his money in accordance with the written agreement, he encountered resistance. After pressuring Sparks, he finally got back $100,000. Sparks defaulted on the other $100,000, as well as the interest and profit.

“He has put me in an extremely precarious financial situation,” Anslow said.

Sparks is president of several business entities, including Irvine-based Sparks Realty & Investment Inc. and the Nevada-based Wellington Grant Ltd. that he used in the fraud.

Sparks is also a twenty-four year member of the Orange County Association of realtors. Be careful who you trust these days.

Mortgage debt nearly three times the purchase price

The owners of today's featured property paid $199,000 on 9/13/1988, and now they have a $555,000 first mortgage. Hmmm… I think that qualifies as HELOC abuse.

• My records don't go back all the way to their original purchase-money mortgage, but on 6/3/1998 they had increased their first mortgage to $221,250 which is $22,250 more than they paid.
• On 8/4/1998 they obtained a $37,600 HELOC.
• On 10/20/1999 they opened a $100,000 HELOC.
• On 6/30/2000 they got a $90,000 HELOC.
• On 11/5/2002 they refinanced the first mortgage for $318,000 and obtained a $62,000 HELOC.
• On 9/9/2003 they refinanced with a $312,000 first mortgage and on 9/20/2004 they got a $250,000 HELOC.
• On 6/30/2005 they refinanced with a $550,000 first mortgage.
• Total mortgage equity withdrawal is at least $351,000, and if they put 20% down, the number is closer to $390,000.

Here they are selling twenty-three years after buying the property — only one year less than Ponzi scheme operator David R. Sparks was a member of the Orange County Association of realtors — and they are going to be a short sale.

Irvine House Address … 4651 LOCKHAVEN Cir Irvine, CA 92604

Resale House Price …… $575,000

House Purchase Price … $199,000

House Purchase Date …. 9/13/1988

Net Gain (Loss) ………. $341,500

Percent Change ………. 171.6%

Annual Appreciation … 4.7%

Cost of House Ownership

————————————————-

$575,000 ………. Asking Price

$115,000 ………. 20% Down Conventional

4.49% …………… Mortgage Interest Rate

$460,000 ………. 30-Year Mortgage

$99,772 ………. Income Requirement

$2,328 ………. Monthly Mortgage Payment

$498 ………. Property Tax (@1.04%)

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

$120 ………. Homeowners Insurance (@ 0.25%)

$0 ………. Private Mortgage Insurance

$0 ………. Homeowners Association Fees

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

$2,946 ………. Monthly Cash Outlays

-$388 ………. Tax Savings (% of Interest and Property Tax)

-$607 ………. Equity Hidden in Payment (Amortization)

$191 ………. Lost Income to Down Payment (net of taxes)

$164 ………. Maintenance and Replacement Reserves

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

$2,306 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$5,750 ………. Furnishing and Move In @1%

$5,750 ………. Closing Costs @1%

$4,600 ………… Interest Points @1% of Loan

$115,000 ………. Down Payment

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

$131,100 ………. Total Cash Costs

$35,300 ………… Emergency Cash Reserves

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

$166,400 ………. Total Savings Needed

Property Details for 4651 LOCKHAVEN Cir Irvine, CA 92604

——————————————————————————

Beds: 4

Baths: 3

Sq. Ft.: 2000

$288/SF

Property Type: Residential, Single Family

Style: Two Level, Mediterranean

View: Fields

Year Built: 1972

Community: El Camino Real

County: Orange

MLS#: S659969

Source: SoCalMLS

Status: Active

——————————————————————————

Mediteranian style interior, corner lot . 2 story w/ 2nd floor. Hardwood floor upstairs master suite , cranit counter top. Jacuzzi tub custom built, double pain windows throughout the home, upstairs patio and much more. could also be a bonus room-inlaw, another master bedroom with full bath, downstais with 3 additional rooms and 2 full bath, itilian tile floor downstairs, Firplace, carpet in rooms. 2 separate airconditon unit, for up/down lots of mature fruits trees, large back yard. Close to shops parks, Schools. Library, Fwy 5/405. Property sold as-is This is a HAFA SHORT SALE worth the waite

Mediteranian? cranit? downstais? itilian? waite? Firplace? double pain windows?

This has been a bad week for the Orange County Association of realtors.