The Wells Fargo CEO is getting involved in the political posturing around mortgage market reform being considered in Washington. Today we will examine his recent statements on reform.

Irvine Home Address … 15 CANDLEWOOD Irvine, CA 92620

Resale Home Price …… $999,999

When you try your best, but you don't succeed

When you get what you want, but not what you need

When you feel so tired, but you can't sleep

Stuck in reverse

Coldplay — Fix you

The CEO of Wells Fargo, John Stumpf (I like saying that last name), has put forth some good ideas concerning mortgage reform. I recently reported that he wanted to see a 30% down payment requirement on the new qualified residential mortgage. His proposal is self-serving as his bank is better able to carry loans than small banks, but it also makes for good policy, so I'll embrace him when he's right.

Wells Fargo's John Stumpf: How to fix the mortgage mess

By John Stumpf, chairman, president, and CEO, Wells FargoApril 4, 2011: 6:09 AM ET

FORTUNE — For most Americans, their home is the largest and most important investment they will ever make. Ensuring that they have the right kind of mortgage is critical to their financial well-being and — as we've seen recently — critical to our entire economy.

That means we have to solve the Fannie Mae and Freddie Mac problem and eventually figure out the proper role of the federal government in supporting a secondary market for home mortgages. Doing that right is one of the most important issues facing Congress and the Obama administration.

This issue is very important. As i wrote recently in Defining qualified residential mortgages: a battle over minimum down payments, “We have witnessed many tempest-in-a-teapot issues like robo-signer that flare up and go away without long-term impact on the housing market. This issue is different. The minimum qualifying standard on this loan is going to become the bedrock of mortgage finance. If we get this wrong, we will rebuild the mortgage market on a weak foundation.”

Some people ask, Why do we even need a secondary market for home mortgages? Why don't we just go back to the good old days before those markets existed and require banks to hang on to all the mortgages they create?

Let me tell you why. When I went to buy my first house in 1976, mortgage money was hard to find. In fact, it was rationed. Banks simply didn't have the deposits on hand to meet the demand. That was 35 years ago, and we don't want to go back to those “good old days.” Mortgage rationing is not the future we want for our customers, their children, or their grandchildren.

I would have no problem at all going back to the mortgage market of 1976. Mortgages were almost exclusively 30-year fixed rates, debt-to-income ratios were manageable, and house prices were affordable. The debt we created since then has only served to inflate real estate values, destabilize pricing, and increase the overall level of indebtedness among the populace. From a banker's point of view, the last 35 years made great progress — at enslaving the population.

Consider these facts: There are 76 million homes in the U.S., of which 51 million have mortgages. Taken together, those mortgages represent a debt of $11 trillion. That's a level of debt that banks can't afford to hold on their balance sheets alone. As a nation, if we want to make home ownership broadly available and affordable, we need a secondary mortgage market that operates fairly and efficiently for all parties.

Freddie Mac and Fannie Mae were created in part to help achieve those goals, but they've run into big trouble along the way. They now own or guarantee nearly 31 million home loans, worth more than $5 trillion. Their role is so critical in mortgage finance that the federal government bailed them out in 2008 to the tune of what might end up to be more than $250 billion.

This is how your tax dollars are paying the debts of Ponzis everywhere. The stupid loans both insured and purchased by the GSEs at the top of the housing bubble paid for many things I would rather not see my tax dollars go toward.

So as Fannie and Freddie unwind, as they certainly will, what principles should shape the future of home financing? I believe the answer comes in three parts. First, all parties involved in making and investing in mortgage loans need to share a financial interest in the quality of those loans. That includes the customer taking out the loan, the financial institution or broker originating the loan, and the investor who ultimately owns the loan. All parties need to have skin in the game. If originators don't have a financial interest in the loan, they will have less concern for its quality, and poor lending decisions will happen and be passed along to investors. That creates a house of cards.

I believe his analysis is accurate. Without financial accountability throughout the supply chain, the incentives are wrong, and bad behavior will ultimately ensue.

A healthy debate is already taking place about how much a homeowner should put down and how much a bank should keep on its balance sheet when it bundles and sells mortgage loans. There is no magic number out there, but I can tell you one thing: The more the risks and rewards of a mortgage loan are shared by all parties — and the better those risks and rewards are understood — the better the quality of the loan will be.

Will this mean higher down payments for homeowners and more financial skin in the game for banks? Probably so, but the long-term costs for homeowners, bankers, and the economy will be dramatically lower. Just look at what past mortgage lending practices have cost all of us.

Mr. Stumpf bears some responsibility for the past mortgage lending practices that caused our woes, doesn't he?

Second, whatever role the federal government assumes in mortgage finance going forward, its role needs to be explicit, not implicit. Currently federal backing for Fannie and Freddie is implied because they are “government-sponsored enterprises.” It needs to be crystal clear for investors around the world whether GSE loans are backed by the full faith and credit of the United States. If they are, consumers would benefit from worldwide liquidity for mortgage products.

Right now, it is crystal clear: GSE mortgage-backed securities are insured by Uncle Sam. There is little difference in risk between a 10-year T-bill and a GSE MBS. There is usually a spread between the two that represents the risk premium the market demands for risk of loss. With direct government backing, the spread is very small, so mortgage interest rates are relatively close to 10-year yields.

Keeping interest rates low allows lenders to roll over their toxic debt into amortizing loans insured by the US government. Eventually the mortgage market will be cleansed, or at least the losses will be transferred to Uncle Sam who can borrow money to pay for it. If lenders absorb all the losses, significant capital would exit the banking system, and our economy would be seriously impaired.

The private market at the government fringe — the jumbo market — is a complete mess. Spreads are high because jumbo loans carry risk, and the underwriting standards are high which means very few borrowers qualify. Hence, the high end has low transaction volume, and a lot of shadow inventory.

If we fully convert to a private market, mortgage interest rates will almost certainly rise because the private market will price the risk back in to mortgage-backed securities. If rates rise too soon, affordability will become a problem, and the supply liquidation will push prices lower.

To protect taxpayers, adequate levels of private capital should be required to take the risk of loss. In this way, the federal government would only act as a “catastrophe risk” backstop much like the role the FDIC plays in protecting bank deposits up to a certain limit. Banks would pay a fee, just as they do for FDIC insurance, and the homeowner's mortgage would be guaranteed up to a certain amount by the federal agency providing the insurance.

This is the traditional role of the FHA. The government through the FHA makes sure loans will always be made available to people who meet their underwriting guidelines. These guidelines are strict in order to protect the government from loss. And despite some weakening after the bubble, FHA guidelines still serve to limit the taxpayer's risk.

The private market is free to underwrite FHA loans, or it can create competing products to entice customers. Since the FHA is a government agency, it doesn't mind losing market share to the private sector. It has no pressure to change its guidelines to adapt to the market. If its market share goes down, the bureaucrats process less paper. They get paid the same either way.

The FHA is a worthy government bureaucracy as far as they go, but the rigid guidelines they adhere to make for a poor business model. Private sector lenders must be responsive to changes in the marketplace or they will lose customers and go out of business. Therefore private lenders must have more flexible guidelines than the FHA if they are to survive.

The GSEs are a poor synthesis of a government program and a private sector endeavor. The mandate of a government program is to provide financing and limit taxpayer risk. This is incompatible with the survival needs of a business entity. The GSEs were asked to provide financial innovation. Financial innovation is an oxymoron. It usually results in a financial bubble or Ponzi scheme.

The GSEs in their current form must die.

And third, as we move forward in a post-GSE marketplace, we need to make sure we have uniform underwriting and servicing standards for mortgage loans, and more common products for what are called conforming mortgage loans. An efficient secondary market depends on relatively standard products and processes. Otherwise every batch of loans has to be examined in detail for its unique qualities, an examination that results in higher transaction costs and ultimately less attractive investments. The lack of standardization drains the lifeblood out of secondary market operations.

Mortgage financing is a big deal for millions of Americans and for our economy overall. All sides should be looking for solutions that will help all Americans. The path forward will not be easy, but I truly believe the solutions can be found. It will require hard work, courage, and cooperation across the board.

The real question we must face with the GSEs is to what degree society wants to subsidize the mortgages of middle- and upper-middle class Americans. We could convert the shell of the GSEs back into a government program, sell off the portfolio of securities, and collect insurance fees to reserve for future losses. We could layer them on top of the FHA to provide price support to places like Orange County.

There will be many in Republican rural America that will resist the idea of their tax dollars going to subsidize the shenanigans they see on the Real Orange County housewives. Republican Orange County won't resist quite so much.

CNN Money on mortgage issues

A little Ponzi

Not all Irvine loan owners are big-time Ponzis. Some are merely frequent credit card consolidators who slowly but consistently grow their mortgage balances albeit at a rate less than appreciation. Is that wise?

In the HELOC Abuse Grading System, I described people like this:

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.

This property was purchased at the bottom of the last real estate crash.

• On 9/22/1997 they paid $301,000 for today's featured property by using a $240,450 first mortgage, a $30,050 second mortgage, and a $30,600 down payment.
• On 1/12/1999 they obtained a $55,000 stand-alone second and withdrew most of their down payment.
• On 1/29/2002 they refinanced with a $282,000 first mortgage.
• On 7/9/2003 they refinanced with a $322,700 first mortgage.
• On 7/14/2006 they refinanced with a $322,000 first mortgage. I am impressed by that one. Three years after their last refinance, a period in which their property value went up 50% or more, they did not add to their mortgage.
• On 5/23/2008 they refinanced with a $350,000 first mortgage.
• On 8/3/2010 they refinanced one last time with a $360,000 first mortgage.

The will likely leave the closing table with a $500,000 check. It's not as big as it could be, but it is much more than most Ponzis take with them.

The problem with Ponzi borrowing isn't the high-profile flame outs I profile here frequently. The real problem is the pervasive use of Ponzi borrowing to sustain daily life. It's the little guy multiplied millions of times that destabilizes our economy. California has become so dependent upon borrowed money that the entire state economy crumbles when mortgage money fails to flow in.

The only real solution is a period of frugality and economic weakness while the Ponzis adjust to living within their means. We will see some of this natural economic purging take place as many Ponzis endure the unceremonious fall from entitlement. However, this cleansing will not go far enough because government policy and our federal reserve seem determined to keep the Ponzi scheme alive.

Irvine House Address … 15 CANDLEWOOD Irvine, CA 92620

Resale House Price …… $999,999

House Purchase Price … $301,000

House Purchase Date …. 9/22/1997

Net Gain (Loss) ………. $638,999

Percent Change ………. 212.3%

Annual Appreciation … 8.8%

Cost of House Ownership

————————————————-

$999,999 ………. Asking Price

$200,000 ………. 20% Down Conventional

4.84% …………… Mortgage Interest Rate

$799,999 ………. 30-Year Mortgage

$203,304 ………. Income Requirement

$4,217 ………. Monthly Mortgage Payment

$867 ………. Property Tax (@1.04%)

$150 ………. Special Taxes and Levies (Mello Roos)

$208 ………. Homeowners Insurance (@ 0.25%)

$165 ………. Homeowners Association Fees

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

$5,607 ………. Monthly Cash Outlays

-$1023 ………. Tax Savings (% of Interest and Property Tax)

-$990 ………. Equity Hidden in Payment (Amortization)

$371 ………. Lost Income to Down Payment (net of taxes)

$125 ………. Maintenance and Replacement Reserves

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

$4,089 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$10,000 ………. Furnishing and Move In @1%

$10,000 ………. Closing Costs @1%

$8,000 ………… Interest Points @1% of Loan

$200,000 ………. Down Payment

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

$228,000 ………. Total Cash Costs

$62,600 ………… Emergency Cash Reserves

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

$290,600 ………. Total Savings Needed

Property Details for 15 CANDLEWOOD Irvine, CA 92620

——————————————————————————

Beds: 4

Baths: 3

Sq. Ft.: 2350

$426/SF

Property Type: Residential, Single Family

Style: Two Level, Georgian

View: Canyon, Fields, Mountain, Orchard/Grove, Park/Green Belt, Trees/Woods

Year Built: 1998

Community: Northwood

County: Orange

MLS#: S653275

Source: SoCalMLS

Status: Active

——————————————————————————

* * * ONE OF ONLY 10 HOMES ON A SINGLE LOADED STREET FACING MEADOWOOD PARK AND CANYON VIEW ELEMENTARY SCHOOL * * * Cleaner than a Microsoft and Apple computer lab – COMBINED!!! MOST UNIQUE LOCATION ON THE IRVINE RANCH! Light and bright east facing with cathedral ceilings! Incredible privacy and location. Amazing floor plan with guest suite downstairs, 3 bedroom upstairs with option for bonus over garage or 5th bedroom with own bathroom. upgarded with cutom paint, large covered patio, granite kitchen counters, upagrded cabinets, plantation shutters. Hardly been lived in and immaculately clean!

MOST UNIQUE LOCATION? I don't think uniqueness can be modified. How is something less unique than something else? It's either unique or it's not, right?

* * * Cleaner than a Microsoft and Apple computer lab – COMBINED!!! He has a sense of humor.

upgarded? upagrded?

What were you doing at 10:50 last night?

Last night due to a technical problem at 10:50, I lost today's post. I last successfully saved the basic infrastructure of a post, but the analysis of the CEOs comments — something I spent two hours writing — was gone.

For a moment, I was in total shock. I could believe what happened. After a few unsuccessful attempts at recovery, I conceded defeat, and I was devastated. The sense of loss was powerful and jolting. Then the reality of staying up late to re-write the post set in, and I was just devastated (and pissed). I sought out my wife to calm down.

I didn't realize how important it was to me to put up a daily post (weekdays anyway). I felt like an injured Brett Favre who wanted to start if for no other reason than he always started. Some guys are just built that way. I calmed down, wrote this pep talk to myself, drank my coffee, and hunkered down to rewrite it all. Reliability trumps sleep.

And the tears come streaming down your face

When you lose something you can't replace

When you love someone, but it goes to waste

Could it be worse?

Lights will guide you home

And ignite your bones

And I will try to fix you

Coldplay — Fix you

Both principal reductions and loan modifications fail to prevent redefault. Borrowers are not sustaining ownership under those circumstances.

Irvine Home Address … 8 HUCKLEBERRY Irvine, CA 92618

Resale Home Price …… $497,000

Less conversation

No moral obligation

I see what's at the ending of the rat trap

…

The rabbit dug a hole straight through to China

So where do we go?

And where is the rabbit's hole?

I'm feeling like I'm pulling away, yea

I'm feeling like I'm pulling away, yea

Stone Temple Pilots — Huckleberry Crumble

In early 2010, i predicted the moral trepidation about strategic default would largely be gone from the American psyche. People are beginning to look at their homes as their other investments, and when the numbers favor waling away, they do so. People are opting to get out of the rat trap of working to service a bottomless pit of debt.

As underwater borrowers strategically default, lenders are trying different methods for holding back the rising tide. Loan modifications have postponed some foreclosures, and principal reductions might postpone a few more. The value in doing a few principal reductions goes beyond the money spent. It makes for a fantastic carrot lenders can dangle in front of distressed borrowers. Lenders benefit if the herd makes a few more payments based on false hope — whether that false hope be imminent appreciation or potential debt relief, lenders don't care. They just want a few more payments.

The article you are about to read touts the success of principal reductions and attempts to persuade the reader principal reductions are a viable alternative. In reality, principal reductions do little to sustain home ownership. The only real benefit is that banks may get a few additional, albeit reduced payments from some borrowers.

Mortgage Servicers Resist But Cut Debts

By RUTH SIMON And NICK TIMIRAOS — March 28, 2011

U.S. banks are resisting efforts by state attorneys general to force them to cut the amounts owed by some borrowers facing foreclosure. Yet mortgage companies already have reduced home-loan balances for more than 100,000 borrowers.

In for a penny, in for a pound? Who cares if they tried some principal reductions? They tried some, found out it didn't help, so now they don't want to do more of them.

How much larger the number will grow is likely to be at the center of negotiations this week aimed at reaching a settlement to the nationwide investigation of mortgage-servicing practices.

Officials from Bank of America Corp., J.P. Morgan Chase & Co., Wells Fargo & Co., Citigroup Inc. and Ally Financial Inc.'s GMAC unit have been summoned to Washington for a Wednesday meeting with state attorneys general and at least three U.S. agencies, according to people familiar with the situation.

It will be the first faceoff since the five companies, the largest home-loan servicers in the U.S., got a 27-page “term sheet” earlier this month from state attorneys general that would require the servicers to consider more borrowers for principal write-downs.

What does it mean to “consider” someone for a principal write down? Won't the banks “consider” each borrower for principal reduction, say no, then foreclose on them? Are the AGs suggesting a specific change to lender guidelines?

In addition, some of the financial penalties resulting from any settlement are “very likely” to be used for reductions in loan balances for certain borrowers, said Iowa Attorney General Tom Miller, who is spearheading the 50-state investigation.

Statements like his merely feed into the false hope of distressed borrowers everywhere. Principal reductions will only occur on the mortgages deepest under water in a belated attempt to keep the hopeless paying a little longer.

Even among state officials, there are disagreements as to whether shrinking loan balances is a good idea.

There's debate about the idea of principal reductions because it's a really bad idea. Foreclosure is a superior form of principal reduction.

The “term sheet's principal reduction proposals may actually foster an unintended 'moral hazard' that rewards those who simply choose not to pay their mortgage,” the Florida, South Carolina, Texas and Virginia attorney generals wrote in a March 22 letter to Mr. Miller.

At least of few of these guys get the implications of their pandering.

The chief executives of Bank of America and Wells Fargo have questioned the fairness of writing down loans, while claiming the costs could be enormous if widespread principal reductions are triggered by a settlement.

Speculation that “we want everybody 'underwater' to receive a principal reduction is not true,” Mr. Miller said in an interview, though lopping off thousands of dollars from what a borrower owes on a mortgage “has been underutilized as a tool.” An underwater borrower is one who owes more on a property than it is worth.

They may not want everyone to get a principal reduction, but they do want to create the false impression that everyone might get one. Principal reduction has not been underutilized as a tool to cure mortgage default. It doesn't work. Chainsaws are underutilized tools in operating rooms, and I hope it stays that way.

This month's proposal by state attorneys general would require banks to reduce loan balances for some borrowers if a modification that includes a principal reduction would provide a better long-term return than foreclosure or a loan modification that simply cuts the borrower's interest rate or extends the loan's life.

Based on the statistics, there is little or no difference in redefault rates between those who received principal reduction and those who only obtained a modification. How could anyone establish that principal reductions are better when the data clearly shows they aren't?

Loan balances would be trimmed over a three-year period, but only if borrowers made steady payments.

Bailouts and false hopes. String people along for three more years and pray the market has moved higher. It merely delays the inevitable.

Some loan servicers under investigation by state and federal officials already are slicing loan balances on a very narrow basis. In 2009 and 2010, Wells Fargo forgave a total of $3.8 billion in principal—or an average of $51,000 per loan—for roughly 73,000 borrowers whose mortgages are owned by the San Francisco bank.

There are 11,000,000 underwater loan owners. The 73,000 loan owners Wells Fargo gave money to represent 0.66% of the total.

Bank of America, based in Charlotte, N.C., had offered loan modifications to more than 127,000 borrowers as of December as part of its previous settlement with state attorneys general over alleged predatory lending by Countrywide Financial Corp., which it bought in 2008. An estimated 35,000 of those offers included a principal reduction.

Officials at Bank of America and Wells Fargo said the two banks are comfortable reducing loan balances for certain borrowers, but oppose broad-based cuts. One reason: Some borrowers could stop making payments to get their debt reduced.

A recent study by Columbia University economists concluded that Countrywide's relative delinquency rate “increased substantially…during the months immediately after the public announcement” of the 2008 settlement.

Banks have empirical proof of their own common sense. If you give people incentive to quit paying their mortgage to obtain a principal reduction, many borrowers will default.

“It's certainly something to be worried about, but you can't point to this and say, 'Well, we can't do any modifications,' ” said Christopher J. Mayer, one of the study's authors.

Why not? Why do we have to do loan modifications or principal reductions? People are scurrying about in Washington trying to solve a problem they made up in their own minds — a problem that will solve itself if they let the process go forward and foreclose on the delinquent mortgage squatters.

Most loan-modification programs have focused on temporarily reducing interest rates and extending loan terms.

Principal reductions have gotten more attention recently because so many borrowers owe more than their homes are worth.

At the end of 2010, nearly 11.1 million borrowers, or nearly 23.1% of those with mortgages, were underwater, according to CoreLogic Inc. The tepid nature of the housing recovery suggests many borrowers could remain underwater for years.

There isn't much hope for appreciation bailing this group out. With that many distressed owners, enough of them are going to succumb to their own debts that a steady supply of distressed properties will stop any real appreciation.

Supporters of principal reduction say borrowers who receive such cuts are less likely to redefault.

“Principal write-downs are much more likely to create a loan that is sustainable over the long-term,” said Massachusetts Attorney General Martha Coakley, who has made principal reductions a component of four predatory lending settlements.

A study last year by the Federal Reserve Bank of New York found that loan modifications with principal reductions are far more likely to succeed than those that simply reduce interest rates.

According to mortgage servicer Ocwen Financial Corp., 17% of its borrowers who got a principal reduction were behind on their payments again six months later, compared with 20% of those with a modification that reduced payments but not the loan balance.

The data clearly does NOT support the contention that principal reduction sustains home ownership. If 12 months later the difference in redefault rates is so small as to be negligible. No matter what you do with the over-indebted short of foreclosure and bankruptcy is going to save their homes. It isn't just the first mortgage debt that is weighing these borrowers down. They often have huge second mortgages or HELOCs, large credit card debts, and car payments.

Over the past year, Ocwen has cut balances on more than 16,000 loans, representing 22% of its modifications.

“We found that it's essential to include principal reduction in our modification arsenal to be able to address the negative equity problem,” said Paul Koches, Ocwen executive vice president. In February, Ocwen rolled out a program that will spread principal reductions over three years and let mortgage investors share in any subsequent increase in value when a home is sold.

Some mortgage companies say principal reductions are best used when borrowers are deeply underwater. PennyMac Loan Services LLC will consider reducing principal if the borrower is likely to remain underwater even after three or four years of loan payments, said Steve Bailey, chief servicing officer for PennyMac, which has used principal reduction in 58% of its modifications.

—Dan Fitzpatrick contributed to this article.

Write to Ruth Simon at ruth.simon@wsj.com and Nick Timiraos at nick.timiraos@wsj.com

How principal reduction could work

The Ocwen program described above is the only way principal reduction could work in the real world.

Let's say a borrower in Las Vegas owes $400,000 on a house currently worth $200,000 — a common occurrence there. Let's say the owner is given a principal reduction down to $200,000, but if they sell the house for a price between $200,000 and $400,000 the overage goes to the lender to recover the loss from the principal reduction. What that arrangement would effectively do is release the borrower from the property. They could sell without future financial liability, and if prices go up all the way to their entry point, they may even have equity again.

Of course, this approach would strongly encourage people who obtained principal reductions to immediately sell their homes. It would be far wiser to sell the house, buy one across the street, and keep the appreciation on that one. Hmmm…. I guess it doesn't work after all….

If you want to explore more on this issue, I recommend one from early in the IHB: 04-16-2007 — How Homedebtors Could Avoid Foreclosure — A look at a potential financing mechanism which might be used to assist homeowners who are underwater. It also examines the potential implications of the widespread use of such tools.

More stamina than most

I have always admired the stamina and determination of Japanese soldiers who never surrendered and finally come out of the jungle years after the war was over. Like the Japanese solders who carried on, many loan owners who bought at the peak will endure the crash and the very long climb back to their purchase price.

For those who put money down or who may not be too far underwater, it's easier to endure a little payment hardship rather than surrender the option value on the house. Prices will eventually go back up.

However, those property owners who bought at the peak and put no money down have a much lower pain threshold. Many of the posts I did in 2008 were peak buyers using 100% financing who walked away. I don't see those very often any more. And like the Japanese soldiers, when we find them, we should acknowldege their sacrifice… Although, I may question their wisdom.

Did they gain anything for their pain and suffering?

I hope they really enjoyed the high rent on this property while they were there. That money was expensive.

This property was purchased for $663,000 on 11/29/2006. The owner used a $530,400 first mortgage, a $132,600 second mortgage, and a $0 down payment. There is no telling how long they may have been delinqent in shadow inventory, but they were finally served notice last fall.

Foreclosure Record

Recording Date: 01/19/2011

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 10/15/2010

Document Type: Notice of Default

Irvine House Address … 8 HUCKLEBERRY Irvine, CA 92618

Resale House Price …… $497,000

House Purchase Price … $663,000

House Purchase Date …. 11/29/2006

Net Gain (Loss) ………. ($195,820)

Percent Change ………. -29.5%

Annual Appreciation … -6.5%

Cost of House Ownership

————————————————-

$497,000 ………. Asking Price

$17,395 ………. 3.5% Down FHA Financing

4.79% …………… Mortgage Interest Rate

$479,605 ………. 30-Year Mortgage

$100,463 ………. Income Requirement

$2,513 ………. Monthly Mortgage Payment

$431 ………. Property Tax (@1.04%)

$150 ………. Special Taxes and Levies (Mello Roos)

$104 ………. Homeowners Insurance (@ 0.25%)

$160 ………. Homeowners Association Fees

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

$3,358 ………. Monthly Cash Outlays

-$410 ………. Tax Savings (% of Interest and Property Tax)

-$599 ………. Equity Hidden in Payment (Amortization)

$32 ………. Lost Income to Down Payment (net of taxes)

$62 ………. Maintenance and Replacement Reserves

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

$2,442 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$4,970 ………. Furnishing and Move In @1%

$4,970 ………. Closing Costs @1%

$4,796 ………… Interest Points @1% of Loan

$17,395 ………. Down Payment

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

$32,131 ………. Total Cash Costs

$37,400 ………… Emergency Cash Reserves

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

$69,531 ………. Total Savings Needed

Property Details for 8 HUCKLEBERRY Irvine, CA 92618

——————————————————————————

Beds: 2

Baths: 2

Sq. Ft.: 1508

$330/SF

Property Type: Residential, Condominium

Style: 3+ Levels, Contemporary

Year Built: 2001

Community: 0

County: Orange

MLS#: P775055

Source: SoCalMLS

Status: Active

On Redfin: 1 day

——————————————————————————

Immaculate Detached 2 Bedroom + Loft Home in the Desirable Gated Community of Oak Creek. Main Floor Bedroom and Own Bathroom with Access to Private Patio. Gourmet Kitchen Features Granite Counter Top, Upgraded Stainless Steel Appliances including Dishwasher, Refrigerator, Gas Oven and Microwave. Kitchen, Dining Area and Livingroom ( Wired for Surround Sound System ) with Balcony on 2nd Floor. Master Bedroom with Large Loft Area on Third Level. 2 Car Attached Garage with Extra Storage Unit, Water Softner and More. ..

Reports were released from First American CoreLogic and Lender Processing Services on the current state of shadow inventory and the mortgage market.

Irvine Home Address … 33 ERICSON AISLE Irvine, CA 92620

Resale Home Price …… $419,000

How do you think I'm going to get along

Without you when you're gone

You took me for everything that I had

And kicked me out on my own

Are you happy are you satisfied?

How long can you stand the heat?

Queen — Another one bites the dust

How are people going to get along without their own ATM machines? Chasing free money induced many to pay peak prices, and now the lender has taken everything that they had and kicked them out to the street. I doubt they find the forbidden fruit of HELOC riches very satisfying under an ocean of debt.

Shadow inventory of foreclosures drops 11% from one year ago: CoreLogic

LPS' Mortgage Monitor Report Shows Enormous Backlog of Foreclosures; Option ARM Foreclosure Rate Higher Than Subprime Foreclosures Ever Reached

March 28, 2011

JACKSONVILLE, Fla. – March 28, 2011 -The February Mortgage Monitor report released by Lender Processing Services, Inc. (NYSE: LPS) shows that while delinquencies continue to decline, an enormous backlog of foreclosures still exists with overhang at every level. As of the end of February, foreclosure inventory levels stand at more than 30 times monthly foreclosure sales volume, indicating this backlog will continue for quite some time. Ultimately, these foreclosures will most likely reenter the market as REO properties, putting even more downward pressure on U.S. home values.

February’s data also showed a 23 percent increase in Option ARM foreclosures over the last six months, far more than any other product type. In terms of absolute numbers, Option ARM foreclosures stand at 18.8 percent, a higher level than Subprime foreclosures ever reached. In addition, deterioration continues in the Non-Agency Prime segment. Both Jumbo and Conforming Non-Agency Prime loans showed increases in foreclosures and were the only product areas with increases in delinquencies.

The data also showed that banks’ modification efforts have begun to pay off, as 22 percent of loans that were 90+ days delinquent 12 months ago are now current. Timelines continue to extend, with the average U.S. loan in foreclosure now having been delinquent for a record 537 days, and a full 30 percent of loans in foreclosure have not made a payment in over two years.

A 22% cure rate is abysmal. Only by comparing it to the even more abysmal 2008 numbers makes 22% sound good. Historically, cure rates are very high because borrowers used to have a rising market to sell into if they got into financial trouble. With the collapse of the Ponzi scheme, lenders were unwilling to extend credit, so borrowers couldn't Ponzi borrow to make payments. Since many borrowers were also underwater, they couldn't sell into a rising market, so they squat in comfort and wait for the bank to do something.

As reported in LPS' First Look release, other key results from LPS' latest Mortgage Monitor report include:

• Total U.S. loan delinquency rate: 8.8 percent
• Total U.S. foreclosure inventory rate: 4.15 percent
• Total U.S. non-current inventory: 6,856,000
• States with most non-current* loans: Florida, Nevada, Mississippi, New Jersey, Georgia
• States with fewest non-current* loans: Montana, Wyoming, Alaska, South Dakota, North Dakota

Investor Contact: Parag Bhansali, 904.854.8640, parag.bhansali@lpsvcs.com. Media Contact: Michelle Kersch, 904.854.5043, michelle.kersch@lpsvcs.com

Let's walk through a few graphs to figure out what it all means.

The number of 90+ days delinquent loans continues to grow. We need to stop the increase and reduce the number to near zero. Historically, the percentage more than 90 days in arrears is very low.

To look at the chart above, one could mistakenly believe we are over the worst and delinquency rates are near historic norms. The truth is delinquencies are double historic norms, and distressed inventories are nearly eight times historic norms. How are prices supposed to go up in the face of that?

Another one bites the dust

Another one bites the dust

And another one gone and another one gone

Another one bites the dust hey

Hey I'm gonna get you too

Another one bites the dust

Queen — Another one bites the dust

Further we are making very little progress on foreclosures. For every borrower entering foreclosure, three are delinquent. We are continuing to build shadow inventory.

Notice on the chart below that foreclosures kept pace with delinquencies until early 2008. The foreclosure statistics show a peak during that time when lenders realized they were crushing the housing market and embarked on amend-extend-pretend and created shadow inventory.

What are the prospects for curing these loans? Most bulls assume cure rates of 85% or better will mop up this mess. With less than a quarter of loans curing, foreclosure is the most likely outcome for shadow inventory even if cure rates continue to improve. Distressed inventory will be with us for a long time.

And, in case you needed any reminder from me, mortgage squatting is an national epidemic with nearly 30% of delinquent borrowers enjoying over two years of free living.

There are plenty of ways that you can hurt a man

And bring him to the ground

You can beat him

You can cheat him

You can treat him bad and leave him

When he's down yeah

But I'm ready yes I'm ready for you

I'm standing on my own two feet

Queen — Another one bites the dust

To make matters worse, the Option ARMs are beginning to reset and recast putting many borrowers into delinquency.

Foreclosures related to Option ARMs increased more than any other loan program over the last six months. We are only now entering the two-year period with the most resets. Look for the delinquency rates on these loans to continue to perform poorly.

We are going to see many more distressed sales over the next several years. I question whether lenders can maintain current pricing and liquidate inventories in a reasonable timeframe. Lenders will not want to hold this property forever, and as a society, we don't want them to. The only real question is how orderly will the liquidation be? How The Lending Cartel Disposes Their REO Will Determine the Market’s Fate.

Taking their lumps and moving on

Everyone who buys during a decline should know they may have to move and sell when the resale value is down. It is an avoidable financial loss. Renting is always an option. The owners of today's featured property paid $470,000 on 6/17/2008. They put 50% down. I have no idea why why they are selling. I do know that any losses come out of what was their down payment. Ouch.

Irvine House Address … 33 ERICSON AISLE Irvine, CA 92620

Resale House Price …… $419,000

House Purchase Price … $470,000

House Purchase Date …. 6/17/2008

Net Gain (Loss) ………. ($76,140)

Percent Change ………. -16.2%

Annual Appreciation … -4.0%

Cost of House Ownership

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$419,000 ………. Asking Price

$14,665 ………. 3.5% Down FHA Financing

4.79% …………… Mortgage Interest Rate

$404,335 ………. 30-Year Mortgage

$84,696 ………. Income Requirement

$2,119 ………. Monthly Mortgage Payment

$363 ………. Property Tax (@1.04%)

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

$87 ………. Homeowners Insurance (@ 0.25%)

$140 ………. Homeowners Association Fees

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$2,709 ………. Monthly Cash Outlays

-$346 ………. Tax Savings (% of Interest and Property Tax)

-$505 ………. Equity Hidden in Payment (Amortization)

$27 ………. Lost Income to Down Payment (net of taxes)

$52 ………. Maintenance and Replacement Reserves

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$1,938 ………. Monthly Cost of Ownership

Cash Acquisition Demands

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$4,190 ………. Furnishing and Move In @1%

$4,190 ………. Closing Costs @1%

$4,043 ………… Interest Points @1% of Loan

$14,665 ………. Down Payment

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$27,088 ………. Total Cash Costs

$29,700 ………… Emergency Cash Reserves

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$56,788 ………. Total Savings Needed

Property Details for 33 ERICSON AISLE Irvine, CA 92620

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Beds: 3

Baths: 2

Sq. Ft.: 1424

$294/SF

Property Type: Residential, Condominium

Style: One Level, Contemporary

Year Built: 1989

County: Orange

MLS#: S651484

Source: SoCalMLS

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Rare single-level three-bedroom, two-bath condominium located in the wonderful Northwood Villas tract. The large master bedroom features two closets, along with built-in custom storage, and the master bathroom offers dual-sinks and an oversize tub: perfect for unwinding after a hard day! Revel in the elegant hardwood flooring, plush carpeting, newer appliances and central cooling system. Relax in the very spacious living room by the cozy fireplace – and enjoy the great SoCal weather outside on the spacious and private wrap-around enclosed patio. One will also find a indoor laundry room. Northwood Villas is located centrally to many entertainment and shopping venues and restaurants, including the Irvine Spectrum – and the Irvine school district is rated one of the best in the U. S. Plus, it's a short drive to the huge Heritage Park, which features many tennis and basketball courts, tot lots, a large pond, county library and community center. Make this a home on your short list.