Category Archives: Library

OC high-end prices fall, strategic default rises

High end Orange County asking prices continue their long-term decline. With declining prices, strategic default among jumbo loan holders continues to rise.

Irvine Home Address … 5021 BARKWOOD Ave Irvine, CA 92604

Resale Home Price …… $469,000

When it will be right, i don't know.

What it will be like, i don't know.

We live in hope of deliverance

From the darkness that surrounds us.

Paul McCartney — Hope of Deliverance

Hope springs eternal, and each spring realtors will call the bottom, and for several months each spring, prices will rise. This is a normal seasonal pattern. By late summer, reality sets in, and the dreams and delusions of the spring give way to the cold reality of winter declines.

Hope of future equity is what motivates underwater loan owners. Most should strategically default, and many will, but what keeps from from doing so is hope. Hope of a better future is a basic human need, and when hope is lost, people are often motivated to take more drastic measures such as strategic default. Declining home prices erode hope, and the biggest worry of most lenders is that a sustained decline will cause underwater borrowers to abandon hope.

More price cuts from high-end O.C. house sellers

November 1st, 2011, 2:14 pm — posted by

Whatever hopes that high-end sellers of Orange County homes had for a price rebound this year melted in the summer and have continued in an autumnal fall.

HousingTracker.net follows the Orange County market by an interesting metric: the 25th and 75th percentiles of asking prices listed in brokers’ MLS system. Or in simple words: this website follows a median of the top and bottom of the market, by price.

Through October, HousingTracker shows:

  • 75th percentile at $641,160 — that is down 1.69% in a month and the 4th consecutive cut after five straight increases — longest upswing in two years. October pricing is also back at February’s levels and down 6.5% in a year (19th straight year-to-year cut).
  • 25th percentile at $286,000 — that is down 1.37% in a month (3rd drop in a row.) It’s also down 6.8% in a year (11th straight dip.)
  • Using HousingTracker data, we see that the gap between top and bottom shows the 75th percentile listings running 124.2% more expensive that the 25th percentile vs. 123.5% a year ago and a 133.1% average during the past four years.
  • By the way, HousingTracker’s overall median listing price of $407,800 is down 2.84% in a month (4th consecutive month-to-month drop.) The median is also down 8.8% in a year (18th such straight drop.)

Strategic default is caused by a number of factors, but the primary reason is a lack of equity and the belief the loan owner won't have equity any time soon.

Mortgages are like call options. Just because the owner doesn't currently have any equity, there is still value in the house if the owner believes prices are rising and they will have equity soon. The moment a loan owner no longer believes they will have equity in a reasonable period of time, they lose hope and strategically default.

This is one area where lenders embrace the bullshit market puffing of realtors. Lenders and realtors both want to convince people prices will rise but for very different reasons. realtors want to induce people to buy, and if that takes telling them prices are going up, that is what realtors will say. Lenders want to convince loan owners prices are going up so they will not strategically default.

Unfortunately for both realtors and lenders, prices are not going up, and prices will not go up any time soon. The liquidation phase of the housing bubble is going to drag on for a long time, and in all likelihood prices will drift lower while lenders clear out their books. In particular the high end of the market is most likely to see the downward drift because prices are still inflated, and there is no move up market. Therefore, strategic default will be an ongoing problem for the high end where the jumbo loans are concentrated.

Strategic default risk growing for negative equity jumbo mortgages

by JON PRIOR — Tuesday, November 1st, 2011, 4:19 pm

Projected losses on securities backed by subprime mortgages are beginning to stabilize, according to Moody's Investors Service, but the risk of borrowers defaulting on jumbo loans is growing.

The subprime borrowers most at risk of defaulting already have, analysts said. The risk is looming however for jumbo loans, those originated above the conforming limits set by Fannie Mae and Freddie Mac. More than 80% of jumbo loans backing RMBS are current but more than half owe more than the home is worth.

Subprime borrowers have largely already defaulted because their mortgages recast and reset earlier, and since lenders foreclosed on the subprime defaulters, prices where subprime loans dominated have been crushed.

The experience of jumbo borrowers has been very different.

  1. First, the toxic loans this group took on blew up later.
  2. Second, most jumbo borrowers have enough other resources to juggle their finances longer than subprime borrowers, so they can hold back the crashing waves.
  3. Third, banks learned from the subprime crash, so they haven't foreclosed on jumbo borrowers and have instead allowed this group to squat in the bank's house.
  4. Fourth, and probably most importantly, because lenders haven't foreclosed, prices where jumbo loans predominate have not crashed nearly as hard, so fewer underwater borrowers have strategically defaulted. Many have been suffering from the delusion their neighborhood is immune or that the crash may bypass them. As they realize this isn't the case, many jumbo loan owners will default like their subprime brethren.

As jumbo loan price points continue to erode (see chart in above story), more and more jumbo loan owners will submerge beneath their debts, and the long-term nature of this decline will cause many of them to lose hope that equity is in their near-term future.

Comparatively, roughly 22% of all outstanding mortgages are underwater, according to CoreLogic.

“Since home prices have been fairly stable over the past year, that increasing proportion of underwater borrowers likely reflects the ability of the stronger borrowers to refinance and exit the mortgage pools,” Moody's analysts said.

Borrowers in negative equity are more likely to walk away or default in order to receive a modification or some other loss mitigation service. Falling home prices from a still flooded foreclosure pipeline are simply pushing more of these borrowers further underwater.

Those circumstances will not change any time soon. People will continue to default in larger numbers.

Loans considered always current or those with LTV ratios below 100% are shrinking in the jumbo space. In September 2011, these loans made up less than 35% of the jumbo universe, down from more than 50% in November 2009.

Indeed, default rates among always-current borrowers have not come down as much as in the subprime sector, meaning that the pool of current borrowers has not strengthened as much over time,” Moody's said.

I have no data to back this, but I speculate that jumbo borrowers are more likely to strategically default than subprime borrowers. Many subprime borrowers recognize that the subprime loan they never should have been given is their only reasonable opportunity to attain and sustain home ownership. This will motivate them to hang on tighter and sacrifice more. On the other hand, jumbo loan owners know they will be given another change to borrow and own again, so if things don't work out in their favor, they can simple walk away and start over. It is much more of a business and financial decision for a jumbo borrower.

The Obama administration and the Federal Housing Finance Agency revamped new rules for the Home Affordable Refinance Program to help more of these borrowers refinance into lower interest rates. Analysts at Moody's said the retooling could result in 1.6 million more refinancings before the program expires at the end of 2013, benefiting the hardest hit states of Florida and Nevada the most (see the graph below).

As of September, home prices in Las Vegas remain 63% below their peak in November 2006. But the problem is widespread. Marta Libby, a real estate agent in Victorville, California, said several rental houses she manages were bought as new housing tracts similar to Vegas at $312,000 at the peak in 2006 but are now selling for $81,000.

Write to Jon Prior.

Follow him on Twitter @JonAPrior.

They got $80K

  • Today's featured REO was purchased on9/16/2004 for $646,000. The borrowers used a $513,000 first mortgage and a $132,400 down payment.
  • On 1/19/2005 they liberated some equity with a $63,800 HELOC.
  • On 8/8/2005 they obtained another $123,200 HELOC.
  • On 12/29/2005 they refinanced with a $600,000 Option ARM with a 1.5% teaser rate and obtained a $75,000 HELOC.
  • On 10/31/2006 they refinaced with a $646,000 Option ARM with a 1.25% teaser rate and obtained a $80,000 stand-alone second.
  • Total property debt was $726,000 plus negative amortization.
  • Total mortgage equity withdrawal was $213,000. Not large by Irvine standards, but considering they purchased this property on late 2004, they managed to get this $213,000 in just over two years.

It was great being a homeowner during the bubble, wasn't it?

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This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707

949.769.1599

sales@idealhomebrokers.com

Irvine House Address … 5021 BARKWOOD Ave Irvine, CA 92604

Resale House Price …… $469,000

Beds: 4

Baths: 3

Sq. Ft.: 1800

$261/SF

Property Type: Residential, Single Family

Style: Two Level, Contemporary

Year Built: 1971

Community: El Camino Real

County: Orange

MLS#: P801778

Source: CRMLS

Status: Active

On Redfin: 3 days

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Wonderful family home on Cul-De-Sac. The property has a good lay-out, offers a bright and open floor plan, two bedrooms and two bathrooms, kitchen, living room, dining area/ family room downstairs, and two bedrooms and one batroom upstairs. Includes french doors in family rm & master br, master bath , kitchen tile counter & appliances, large country kitchen/family rm w/ fireplace and laminate wood flooring.

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Proprietary IHB commentary and analysis

Resale Home Price …… $469,000

House Purchase Price … $646,000

House Purchase Date …. 9/16/2004

Net Gain (Loss) ………. ($205,140)

Percent Change ………. -31.8%

Annual Appreciation … -4.4%

Cost of Home Ownership

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$469,000 ………. Asking Price

$16,415 ………. 3.5% Down FHA Financing

4.08% …………… Mortgage Interest Rate

$452,585 ………. 30-Year Mortgage

$124,114 ………. Income Requirement

$2,182 ………. Monthly Mortgage Payment

$406 ………. Property Tax (@1.04%)

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

$98 ………. Homeowners Insurance (@ 0.25%)

$520 ………. Private Mortgage Insurance

$0 ………. Homeowners Association Fees

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

$3,206 ………. Monthly Cash Outlays

-$340 ………. Tax Savings (% of Interest and Property Tax)

-$643 ………. Equity Hidden in Payment (Amortization)

$24 ………. Lost Income to Down Payment (net of taxes)

$137 ………. Maintenance and Replacement Reserves

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

$2,384 ………. Monthly Cost of Ownership

Cash Acquisition Demands

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$4,690 ………. Furnishing and Move In @1%

$4,690 ………. Closing Costs @1%

$4,526 ………… Interest Points @1% of Loan

$16,415 ………. Down Payment

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

$30,321 ………. Total Cash Costs

$36,500 ………… Emergency Cash Reserves

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

$66,821 ………. Total Savings Needed

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Shevy Akason and Larry Roberts will host a short sale and REO workshop at 6:30 PM Wednesday, November 16, 2011, at the offices of Intercap Lending (9401 Jeronimo, Suite 200, Irvine, CA 92618).

Register by clicking here or email us a sales@idealhomebrokers.com.

Banks expected to get off easy in settlement of foreclosure practices

The bank settlement deal being negotiated limits future exposure and inflicts little pain on the banks.

Irvine Home Address … 71 GOLDENROD #47 Irvine, CA 92614

Resale Home Price …… $458,900

Lighten up while you still can

Don't even try to understand

Just find a place to take your stand

and take it easy

The Eagles — Take It Easy

The negotiations with banks over their shoddy foreclosure practices are working out in the banks' favor. I contend Robo-signer and other issues which have delayed foreclosures are merely a ruse to buy time for the banks who are praying the market will come back and bail them out. Banks managed to turn this issue to their favor. By negotiating immunity from further lawsuits, banks are limiting their risk and shoring up a gaping hole in their balance sheets. When its over, they can take it easy, and push forward with foreclosing on the squatters and restoring the nation's housing markets.

A Deal That Wouldn’t Sting

By GRETCHEN MORGENSON

Published: October 29, 2011

AFTER months of back and forth, a deal that is supposed to punish large financial institutions for foreclosure misconduct may be nigh.

While the exact terms remain under wraps, some aspects of this agreement — between banks on one side, and the federal government and a raft of state attorneys general on the other — are coming into focus.

Things could change, of course, and the deal could go by the boards. But here’s the state of play, according to people who have been briefed on the negotiations but were not authorized to discuss them publicly.

Cutting to the chase: if you thought this was the deal that would hold banks accountable for filing phony documents in courts, foreclosing without showing they had the legal right to do so and generally running roughshod over anyone who opposed them, you are likely to be disappointed.

By and large, banks have not been foreclosing improperly. There are very few stories of errors by the banks where they foreclosed on a debtor who was current on their payments. 99.9% of the foreclosed were not paying their mortgage and should have expected to be foreclosed on. Despite beliefs to the contrary, banks are under no obligation to “work with” delinquent mortgage squatters, and loan modifications are not an entitlement.

That being said, I do want to see the banks punished — not because of their foreclosure practices but because their activities inflated a massive housing bubble which required them to foreclose on millions of people. Banks need to bear the full brunt of their losses or they will repeat this mistake.

This may not qualify as a shock. Accountability has been mostly A.W.O.L. in the aftermath of the 2008 financial crisis. A handful of state attorneys general became so troubled by the direction this deal was taking that they dropped out of the talks. Officials from Delaware, New York, Massachusetts and Nevada feared that the settlement would preclude further investigations, and would wind up being a gift to the banks.

Banks are only interested in a settlement because they want to preclude further investigations to limit their ongoing liability. This is essential for the banks to recover. Otherwise, as they make profits, the attorneys both public and private will sue them to take their money. These lawsuits will be endless. This is why banks are pushing for this settlement, and it's why their are willing to pay billions to get it. It's better to plug the leak for $5 billion than sink slowly into a $30 billion hole.

It looks as if they were right to worry. As things stand, the settlement, said to total about $25 billion, would cost banks very little in actual cash — $3.5 billion to $5 billion. A dozen or so financial companies would contribute that money.

The rest — an estimated $20 billion — would consist of credits to banks that agree to reduce a predetermined dollar amount of principal owed on mortgages that they own or service for private investors. How many credits would accrue to a bank is unclear, but the amount would be based on a formula agreed to by the negotiators. A bank that writes down a second lien, for example, would receive a different amount from one that writes down a first lien.

The loans they reduce principal on are likely to be the lost causes they were going to lose anyway in a foreclosure. Most likely they will forgive part of the principal on some deeply underwater loan owners to induce them to make a few more payments. By giving false hope to the hopeless, they will actually gain a few additional payments they would otherwise miss to strategic default.

Sure, $5 billion in cash isn’t nada. But government officials have held out this deal as the penalty for years of what they saw as unlawful foreclosure practices. A few billion spread among a dozen or so institutions wouldn’t seem a heavy burden, especially when considering the harm that was done.

What harm? She makes it sound like millions of people who were current on their mortgages were foreclosed on. This simply isn't true.

What we have seen in the mainstream media is a focus on a few sensational incidents which they have blown all out of proportion. For example, Bank of America foreclosing on home that no longer exists, no missed payments is a story about a rare clercal error, the type of which occurs when you are servicing several million loans, and this rare incident is being portrayed as a huge systemic problem with bank servicing. It isn't.

The real purpose stories like this serve is to demonize the banks and make delinquent mortgage squatters feel better about sticking it to the man. Don't get me wong, I want to see the banks suffer, but not because they are foreclosing on those who don't make their payments but because their shoddy lending practices inflated a massive housing bubble which precipitated the economic decline we are still struggling with today.

The banks contend that they have seen no evidence that they evicted homeowners who were paying their mortgages. Then again, state and federal officials conducted few, if any, in-depth investigations before sitting down to cut a deal.

The two sentences together above represent the worse form of tawdry reporting. She reveals a fact, which is that banks are not foreclosing on their good customers, but then she smears them by implication by insinuating if investigations were conducted, they would find all manners of wrongdoing. Yellow journalism is alive and well.

Shaun Donovan, secretary of Housing and Urban Development, said the settlement, which is still being worked out, would hold banks accountable. “We continue to make progress toward the key goals of the settlement, which are to establish strong protections for homeowners in the way their loans are serviced across every type of loan and to ensure real relief for homeowners, including the most substantial principal writedown that has occurred throughout this crisis.”

All principal reduction is a bad idea, but as I noted above, banks will use this as a loss mitigation measure to try to induce some deeply underwater loan owners to make a few more payments.

Still, a mountain of troubled mortgages would not be covered by this deal. Borrowers with loans held by Fannie Mae and Freddie Mac would be excluded, for example. Only loans that the banks hold on their books or that they service for investors would be involved.

One of the oddest terms is that the banks would give $1,500 to any borrower who lost his or her home to foreclosure since September 2008. For people whose foreclosures were done properly, this would be a windfall. For those wrongfully evicted, it would be pathetic. Roughly $1.5 billion in cash is expected to go into this pot.

Doesn't this feel like guilt money? The banks did nothing wrong in the foreclosure process. Why should they be giving former loan owner's money? It is because they screwed the masses when they inflated the housing bubble and they are paying guilt money for that misdeed? Of course, this further rips off those who haven't gone through foreclosure and are struggling with bloated payments. Doling out bailout money is never fair.

The rest of the cash that would be paid by the banks is expected to be split this way: the federal government would get about $750 million, state bank regulators about $90 million. Participating states would share about $2.7 billion. That money is expected to finance legal aid programs, housing counselors and other borrower support. If 45 states participated, that would work out to about $60 million apiece.

OBVIOUSLY, the loan modifications would make up a majority of the deal. And this is where real questions arise. For example, how can we be sure this plan won’t reward banks for modifications that they would have agreed to or should already have done absent the deal?

Why is that important? Banks are going to do what's in their best interest financially. They want to keep borrowers paying. The deal doesn't have to be punitive to be effective.

Perhaps most important, will the banks change the terms of loans enough to ensure that borrowers can actually meet their obligations over time? Or will these modifications default again, as is often the case? If so, the banks will have received a lucrative credit, even though borrowers fall back into trouble.

Why do we want to give borrowers who foolishly overextended themselves a break. I would be more upset if irresponsible loan owners were given a break than if the banks foreclosed on all of them.

Such concerns are justified because past settlements promising big help to borrowers have failed to live up to their hype. An example is the 2008 settlement with Countrywide Financial that was struck by Illinois and California. Characterized as providing $8.7 billion in relief to troubled borrowers, it turned out to generate nowhere near that benefit.

She obviously has not figured out that the only purpose behind the fanfare associated with the various bailouts has been to create false hope in the minds of loan owners sot they keep paying mortgages they cannot afford. Politicians got involved to look like they were doing something when they really weren't.

The deal being discussed now may also release the big banks that are members of MERS, the electronic mortgage registry, from the threat of some future legal liability for actions involving that organization. MERS, which wreaked havoc with land records across the country, was sued last week by Beau Biden, Delaware’s attorney general, on accusations of deceptive trade practices.

The MERS registry was also subpoenaed last week by Eric Schneiderman, the attorney general of New York, as part of his investigation into the fun-while-it-lasted mortgage securitization fest. If he were to sign on to the settlement, his investigation into MERS could not move forward.

“Rules matter,” Mr. Biden said in announcing his suit. “A homeowner has the obligation to pay the mortgage on time and lenders must follow the rules if they are seeking to take away someone’s house through foreclosure.”

Abiding by the rules has not been the modus operandi in the foreclosure arena. That’s why any settlement must be tough, truly beneficial to borrowers and monitored for compliance. Otherwise, the deal would be another case where our government let the big banks win while Main Street loses.

Gretchen Morgenson is full of crap — as usual. This poor article panders to the emotions of loan owners but fails to identify the real behind-the-scenes workings of this issue. The New York Times must feel her reporting helps sell papers, but it does little to enhance the reputation of the newspaper.

She couldn't afford it

The main thing which kept me from buying during the housing bubble was a recognition of the fact I couldn't afford a property equivalent to what I could rent with a 30-year fixed rate mortgage. I never researched beyond that. I knew from my finance background that terms other than a fixed-rate amortizing mortgage are not stable, so I didn't look around for other alternatives. Unfortunately, I was in the minority.

Everyone else embraced the financial innovation and its embedded Ponzi financing scheme, and they believed they could afford properties as long as another creditor would always be around to give them Ponzi loans to make their payments. Obviously, these borrowers were wrong.

The former owner of today's featured REO bought back in 2003, increased her mortgage once, and took out an $80,000 HELOC later on. It isn't clear whether or not she needed the cash out or even took it, but what is clear is that she could not keep up with the payments, and the property went to auction on 3/16/2011.

Fannie Mae owns the property now, and despite it taking seven months to get to market, they will not fool around with its disposition. Expect this to be sold in the next 120 days for whatever the market will bear. During this time of year, that won't be much.

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This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707

949.769.1599

sales@idealhomebrokers.com

Irvine House Address … 71 GOLDENROD #47 Irvine, CA 92614

Resale House Price …… $458,900

Beds: 3

Baths: 2

Sq. Ft.: 1370

$335/SF

Property Type: Residential, Condominium

Style: Two Level, Mediterranean

Year Built: 1986

Community: Woodbridge

County: Orange

MLS#: U11004357

Source: CRMLS

Status: Active

On Redfin: 22 days

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WELCOME HOME TO THE CITY OF IRVINE AND TO ONE OF THE VERY BEST CITIES IN ORANGE COUNTY. THIS IS A CONDOMINIUM THAT LIVES LIKE A SINGLE FAMILY HOME. LOCATED IN THE SOUGHT AFTER COMMUNITY OF WOODBRIDGE. THE PROPERTY FEATURES 3 BEDROOMS, TWO AND ONE HALF BATHROOMS, WITH CLOSE TO 1,370 SQUARE FEET OF INTERIOR LIVING SPACE THAT MAY BE JUST THE RIGHT SIZE FOR YOUR ACTIVE LIFESTYLE. WE THINK THAT YOU WILL AGREE, THAT THE HOME IS IN MOVE IN CONDITION, AS IT HAS BEEN REFRESHE WITH NEW PIANT AND CARPET AND MORE. YOU ARE PART OF AN ASSOCIATION THAT CREATES THE FEELING OF BEING ON VACATION IN AN EXCLUSIVE RESORT. YOU WILL ENJOY THE ASSOCIATION POOL, SPA, AND MANICURED COMMON AREAS. THE LOCATION IS FANTASTIC YOU ARE CLOSE TO ALL THE GREAT THINGS IN IRVINE; PARKS, SCHOOLS, RECREATION, TRANSPORTATION AND SO MUCH MORE. SO COME HOME TO IRVINE, AND START TO LIVE THE ORANGE COUNTY LIFESTYLE TODAY.

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Proprietary IHB commentary and analysis

Resale Home Price …… $458,900

House Purchase Price … $445,000

House Purchase Date …. 12/19/2003

Net Gain (Loss) ………. ($13,634)

Percent Change ………. -3.1%

Annual Appreciation … 0.4%

Cost of Home Ownership

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$458,900 ………. Asking Price

$16,062 ………. 3.5% Down FHA Financing

4.08% …………… Mortgage Interest Rate

$442,838 ………. 30-Year Mortgage

$132,938 ………. Income Requirement

$2,135 ………. Monthly Mortgage Payment

$398 ………. Property Tax (@1.04%)

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

$96 ………. Homeowners Insurance (@ 0.25%)

$509 ………. Private Mortgage Insurance

$297 ………. Homeowners Association Fees

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

$3,434 ………. Monthly Cash Outlays

-$333 ………. Tax Savings (% of Interest and Property Tax)

-$629 ………. Equity Hidden in Payment (Amortization)

$23 ………. Lost Income to Down Payment (net of taxes)

$77 ………. Maintenance and Replacement Reserves

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

$2,573 ………. Monthly Cost of Ownership

Cash Acquisition Demands

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$4,589 ………. Furnishing and Move In @1%

$4,589 ………. Closing Costs @1%

$4,428 ………… Interest Points @1% of Loan

$16,062 ………. Down Payment

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

$29,668 ………. Total Cash Costs

$39,400 ………… Emergency Cash Reserves

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

$69,068 ………. Total Savings Needed

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November's presentations have been moved

Due to competing demands from holiday parties, we have decided to move the November and December presentations to the classroom at the offices of Intercap Lending.

Larry Roberts is hosting a Las Vegas cashflow properties presentation at the offices of Intercap Lending (9401 Jeronimo, Suite 200, Irvine, CA 92618) on November 9, 2011. Please RSVP at sales@idealhomebrokers.com. Register online here: Las Vegas cashflow property – Intercap Lending

Larry Roberts and Shevy Akason are hosting an OC housing market presentation at the offices of Intercap Lending (9401 Jeronimo, Suite 200, Irvine, CA 92618) on November 9, 2011. Please RSVP at sales@idealhomebrokers.com. Register online here: OC Housing Market – Intercap Lending

See you tonight.

Donald Bren on the recovery: "No. I don't see the light."

When asked if he sees the light at the end of the economic tunnel, Donald Bren replied, “No. I don't see the light.”

Irvine Home Address … 69 CARTIER AISLE Irvine, CA 92620

Resale Home Price …… $400,000

I never cared much for moonlit skies

I never wink back at fireflies

But now that the stars are in your eyes

I'm beginning to see the light

Ella Fitzgerald

While the Irvine Company touts their bold building plans as a beacon of hope for a recovery in the real estate market, Donald Bren, the chairman of the Irvine Company isn't quite so optimistic.

Irvine Co.'s Bren plans for slow recovery

Published: Oct. 28, 2011 Updated: Oct. 31, 2011 7:20 a.m.

By JONATHAN LANSNER

COLUMNIST

THE ORANGE COUNTY REGISTER

jlansner@ocregister.com

“No. I don't see the light.”

That's how arguably the most successful American real estate developer – Donald Bren of the Irvine Co. – answers the “Do you see the light at the end of the tunnel” question about the overall economic outlook.

Bren, 79, was honored last week by the Urban Land Institute trade group with its new Vanguard Award for a career of cutting-edge real estate planning and development. The billionaire – ranked No. 26 on Forbes' list of America's wealthiest with an estimated $12 billion fortune – sat down with The Orange County Register to discuss his business success and the economic outlook.

He described an overall national economy in deep distress. To Bren, the business climate suffers from both a lack of leadership – a slowly reacting government and skittish business leaders – plus limited financing that only provides fresh funds to the lowest-risk individuals and companies.

We've all been into it for five, six years,” Bren says in an exasperated tone that symbolizes the frustrations of most Americans – business icons as well as modest individuals – at the slow pace of the rebound from the Great Recession of last decade.

Bren and the Irvine Company embraced the false rally of 2009. I think they were genuinely surprised when it fizzled out. Their plans were clearly to build on momentum from the false bottom in 2009 with a large production run in 2010 extending into 2011 and beyond. When the props were removed from the market and the underlying problems frequently discussed here surfaced, I don't think they anticipated it. Empty developments like Orchard Hills and half-dead developments like Portola Springs speak to this reality.

Bren's own businesses are seemingly faring far better than the lethargic regional and national economy. The owner of the large, private development company kept most of his finances out of the discussion at a conference room overlooking the Pacific at his company's Newport Beach headquarters. He did mention that the company has been profitable each year throughout the downturn. Plus, the company's grade A credit rating remains intact – a rarity for real estate enterprises. That financial resolve has allowed the Irvine Co. to finance its recent growth spurt, in part, through business lines of credit.

Bren has been conservative in his use of debt which is part of his success. Most real estate entrepreneurs lever up to the max and roll the dice. If they win, they win big, but if they lose, they completely crap out and lose everything. When I look at the Irvine Company's holdings what impresses me the most is the wide variety of blue-chip cashflow properties they have developed and acquired. Their biggest hurdle is figuring out how to invest all the excess cash they have coming in.

It's no secret that construction is in a horrific slump nationwide. But look around Bren's land holdings and you'll see a rarity: extensive building of new homes, apartments – and even an office tower at Fashion Island.

This activity isn't any wild bet. It's largely the result of Bren's basic business mantra: “We can't predict, but we can plan.”

Based on how heavily they bet on the bear rally, I would agree: they can't predict.

He's leveraged the long-running homebuying appeal of Irvine – plus tax incentives for buyers in 2009 and 2010 – to get an early jump on a new homes rebound, selling 1,722 residences in north Irvine since the start of 2010. That's almost triple the budgeted pace.

That sounds great, but they were touting they sold 1,350 in 2010, so tha puts them on a pace to sell less than 400 in 2011.

His extensive apartment portfolio is nearly full with tenants, so he's aggressively adding new complexes in Irvine – plus in Silicon Valley. And he's constructing a new office tower around the bend from Irvine Co. headquarters only after he signed a world-class tenant to occupy the building: money management giant Pimco.

But Bren admits his overall business hasn't grown this year as fast as hoped. Rentals of his office space, for example, may be on the upswing – but the rents tenants will pay aren't acting in tandem. Then again, shopping increases at his malls are a pleasant surprise.

“What we do is plan, then make adjustments,” Bren says.

SIMPLE PLANS

What you don't get from Bren – in watching him accept the ULI award or in an hour's interview, at least – is as much bravado as you'd expect from a guy who's survived four-plus decades of vicious real estate cycles and emerged with America's largest real estate fortune.

He heaps praise on members of his executive team, as well as William Pereira, who authored the original Irvine master plan. Plus, he cites old-school real estate logic – “Location, location, location” – because he's owned land in a great spot.

Bren's humility is admirable. The man's genius is apparent in how me managed to add 30%-50% to the value of the land he purchased through good planning and a commitment to quality. He could have amassed a fortune building out the Irvine Ranch as a run-of-the-mill subdivision, but he aspired for something greater, and he succeeded in creating it.

Bren notes that geography tells one a lot about economic opportunity these days. Especially, when he speaks of what he calls “two Californias.”

His analysis essentially divides the state, down the middle, west to east. (He mentions this confused East Coast financial types, who tend to think of north-south divides. And it bemuses Bren that major financial players have yet to figure out a state that Bren boasts has the eighth largest economy in the world.)

Bren's “two Californias” comprise a reviving, even “vibrant” collection of coastal metropolitan areas – with 100,000 jobs added in a year, by his math. That's in harsh contrast to California's inland areas that are “devastated, maybe as bad as Nevada.”

I guess he won't be picking up any cashflow properties in Las Vegas….

The state hot spot, in Bren's eyes, is clearly Silicon Valley. There, he says, some of this era's greatest artists – and Bren is a student of art – are creating innovative new products and services. Not to mention creating jobs and a thriving regional economy.

The industrial art discussion leads to brief talk about the late Steve Jobs of Apple fame. Bren says he'll soon be diving into a new biography of the technology visionary, part of what he's said is a lifelong pursuit of understanding other business giants' wisdom.

As for the state as whole, Bren's a touch optimistic, saying the trend line is “positive … barely.” California's economy, “has been jolted,” Bren says, and clearly the recovery is at a pace “not what we're used to.”

Without rising house prices and the associated Ponzi borrowing, the California economy will continue to suffer.

He knows too well that economic challenges abound in the state. Still, there's this coastal rebound and a continued influx of new residents.

“People do leave, to Texas and places,” a tiny dig at critics who use the Lone Star State as an economic example. “But that's just a small part.”

QUIET CRITIC

In part of the ULI award ceremony in Los Angeles on Thursday, Bren expressed his great frustration with land-management bureaucracy.

He bemoaned the fact that it's unlikely that we'll see more major master-planned communities like Mission Viejo and Irvine that he helped create. Current regulations, he fears, would make it too difficult. He noted it took a 28-year battle with California's Coastal Commission to win approval for resorts and homes at Newport Coast.

He is probably right. The era of the large master-planned community is probably over. For starters it's too difficult to assemble a large enough parcel of land unless you go way out in the hinterlands, and with the perpetual tightening of regulations, it's far too difficult to develop over multi-decade timeframes.

Yet he's not in the all-regulation-is-bad camp. When he talks about what got the nation into its economic mess – particularly housing – and what might get it out of its funk, Bren bluntly notes government's role. In the middle of last decade, it was obvious to Bren that the mortgage process was being abused by everyone from borrowers to mortgage makers to Wall Street that was reselling the loan to investors. Shoddy loan-making eventually killed real estate.

While it may have been obvious, he didn't mind taking advantage of the morass to sell overpriced homes.

Post collapse, Bren is pained that the government isn't more effective in helping real estate rebound. In housing, for example, a new move by the Obama administration to give refinancing help to troubled homeowners may help, but Bren doesn't think it will be enough. And Bren says calls from some political and economic circles to force more foreclosures and “cleanse” the housing market will only lead to another disaster.

Government help, he says, “has to go further … it has to go beyond normal.

Bren knows the value of his holdings is quite volatile depending on the resale value of houses he can build on his land. Raw land is a very leveraged asset due to the way residual value winds up in the land. When prices go up, most construction costs are fixed, so the price increase becomes profit. Unfortunately, when prices go down, the reverse is true. (See Valuation of Lots and Raw Land). His comments seem self serving, and they probably are.

Much of Bren's criticisms are subtle, polite – and worth noting.

Yes, a crazed mortgage market – with many to blame – created the real estate debacle. But Bren says homebuilders didn't help their cause by continuing to sell “50-year-old designs.”

The Irvine Co.'s recent house selling success has been tied to novel designs that eliminated lightly used formal dining and living rooms, traded for large great rooms that tied into small-yet-functional patios. As is expected from Bren, these new designs were hatched only after two years of extensive consumer research.

The Irvine Company has really been touting these “innovative floorplans.” I like them, but they only real innovation I see is they managed to create a functional space they could build for $50/SF so they could make greater profits at lower price points.

And Bren is clearly no fan of Wall Street, saying that the Irvine Co.'s private ownership is a tactical advantage. He thinks the fickle, short-term demands of Wall Street investors mess with the long-term nature of solid real estate strategy. And Bren knows: Two decades ago, he briefly ran his apartments business with public ownership.

In discussing the failures of other master-planned communities, he explains that juggling real estate planning plus quarterly profit goals – not to mention bankers' demands on land-purchase mortgages – zaps a key trait required of the successful developer: “Patience.”

You know, having that vision thing.

He is undoubtedly right. Wall Street demands short-term performance at the expense of creating long-term value. Bren is expert at creating long-term value, but his plans may never have come to pass if he had tied in with Wall Street money.

Bren's accountants wince that he chose to give away more than half of his Irvine Ranch to open space – and swatch of raw property five times the size of original plans. Sure, part of that was philanthropy and legacy building. Though, establishing surrounding parkland also creates a tangible asset sold to folks considering Irvine housing vs. some of the wall-to-wall development on hills and valleys seen in other parts of his region.

It was also likely a condition of his approvals that he donate open space. Plus, most of the open space he donated was undevelopable anyway.

“Looking back 100 years, we'll see the open space is the most important feature of Irvine,” Bren says. Then he adds, “And the university” – UC Irvine that sits on land Bren donated to the state.

Donating the university was one his best decisions. Having a university in town brings a more educated and higher paid workforce to pay for his houses. The university added much more value to his land than it ever cost him.

And Bren probably didn't have to heavily design everything from his strip malls to his luxury resort to make a buck. But the art historian in Bren wants a product with a lasting look.

Bren didn't directly answer a question seeking his favorite slice of his development career. Yet he took great pride in discussing the pool at the Pelican Hill Resort. He noted fine details, such as its lining of 1 million tiles. And that the pool is visually framed by a series of columns inspired by the Roman-era architectural writing of Marcus Vitruvius.

“Two thousand years old,” says Bren of Vitruvius' logic, “And still valid today.”

Despite the criticism of Irvine as banal, Bren did create a beautiful community with architecture that will stand the test of time. As with any architecture, it will be dated, but the quality is there, and the dated look will be part of the desired style.

I would also note that not all the looks created have proven timeless and popular. I personally felt the commercial center at Culver and Walnut was ugly, and Bren must have felt the same because it was just redone with a completely different architectural feel.

Ah, longevity. Think what you want about Donald Bren's empire. Nevertheless, remember that not only is he still in business – no small feat, in itself – his company is actively expanding.

He's clearly on the list of business leaders putting big dollars on the line today. And, sadly, that list is a short one.

Contact the writer: jlansner@ocregister.com or 949-777-6727

That was a good report. Kudos to Mr. Lansner.

Larry Roberts is hosting a Las Vegas cashflow properties presentation at the offices of Intercap Lending (9401 Jeronimo, Suite 200, Irvine, CA 92618) on November 9, 2011. Please RSVP at sales@idealhomebrokers.com. Register online here: Las Vegas cashflow property – Intercap Lending

Bought at the peak but still got $100K

The owner of today's featured property bought in mid 2005 with 100% financing, and still managed to extract an additional $100K next year before the market imploded. Not a bad deal. He puts nothing down, gets to live in a property for a year, and the property provides him with $100,000 in spending money. I want one of those too.

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This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707

949.769.1599

sales@idealhomebrokers.com

Irvine House Address … 69 CARTIER AISLE Irvine, CA 92620

Resale House Price …… $400,000

Beds: 3

Baths: 2

Sq. Ft.: 1593

$251/SF

Property Type: Residential, Condominium

Style: Two Level, Mediterranean

Year Built: 1989

Community: Northwood

County: Orange

MLS#: U11004470

Source: SoCalMLS

Status: Active

On Redfin: 5 days

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WELCOME HOME TO THE CITY OF IRVINE AND TO ONE OF THE VERY BEST CITIES IN ORANGE COUNTY. THIS IS A CONDOMINIUM THAT LIVES LIKE A SINGLE FAMILY HOME. LOCATED IN THE SOUGHT AFTER AREA OF NORTHWOODS IN THE COMMUNITY OF NORTHWOOD VILLAS. THE PROPERTY FEATURES THREE BEDROOMS, AND TWO BATHROOMS, WITH CLOSE TO 1,593 SQUARE FEET OF INTERIOR LIVING SPACE THAT MAY BE JUST THE RIGHT SIZE FOR YOUR ACTIVE LIFESTYLE. YOU ARE PART OF AN ASSOCIATION THAT CREATES THE FEELING OF BEING ON VACATION IN AN EXCLUSIVE RESORT. YOU WILL ENJOY THE ASSOCIATION POOL, SPA, AND COMMON AREAS. THE LOCATION IS FANTASTIC YOU ARE CLOSE TO ALL THE GREAT THINGS IN IRVINE; PARKS, SCHOOLS, RECREATION, TRANSPORTATION AND SO MUCH MORE. SO COME HOME TO IRVINE, AND START TO LIVE THE ORANGE COUNTY LIFESTYLE TODAY.

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Proprietary IHB commentary and analysis

Resale Home Price …… $400,000

House Purchase Price … $549,000

House Purchase Date …. 5/23/2005

Net Gain (Loss) ………. ($173,000)

Percent Change ………. -31.5%

Annual Appreciation … -4.8%

Cost of Home Ownership

————————————————-

$400,000 ………. Asking Price

$14,000 ………. 3.5% Down FHA Financing

4.18% …………… Mortgage Interest Rate

$386,000 ………. 30-Year Mortgage

$112,142 ………. Income Requirement

$1,883 ………. Monthly Mortgage Payment

$347 ………. Property Tax (@1.04%)

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

$83 ………. Homeowners Insurance (@ 0.25%)

$444 ………. Private Mortgage Insurance

$140 ………. Homeowners Association Fees

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

$2,897 ………. Monthly Cash Outlays

-$296 ………. Tax Savings (% of Interest and Property Tax)

-$539 ………. Equity Hidden in Payment (Amortization)

$21 ………. Lost Income to Down Payment (net of taxes)

$70 ………. Maintenance and Replacement Reserves

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

$2,153 ………. Monthly Cost of Ownership

Cash Acquisition Demands

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$4,000 ………. Furnishing and Move In @1%

$4,000 ………. Closing Costs @1%

$3,860 ………… Interest Points @1% of Loan

$14,000 ………. Down Payment

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

$25,860 ………. Total Cash Costs

$33,000 ………… Emergency Cash Reserves

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

$58,860 ………. Total Savings Needed

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Larry Roberts and Shevy Akason are hosting an OC housing market presentation at the offices of Intercap Lending (9401 Jeronimo, Suite 200, Irvine, CA 92618) on November 9, 2011. Please RSVP at sales@idealhomebrokers.com. Register online here: OC Housing Market – Intercap Lending.

Government-backed loan limits may go back up

The Senate passed a measure that would increase the loan limits on federally guranteed loans back to $729,750. Now it's up to the House of Representatives to decide.

Irvine Home Address … 50 EAGLE Pt Irvine, CA 92604

Resale Home Price …… $285,000

A circumstance beyond our control, oh oh oh oh

The phone, the tv and the news of the world

Got in the house like a pigeon from hell, oh oh oh oh

Threw sand in our eyes and descended like flies

Put us back on the train

Oh, back on the chain gang

Pretenders — Back on the Chain Gang

Every time politicians do the right thing and allow the housing market to wean itself off subsidies, pressures from loan owners prompts them to change their minds. We're being put back on the train leading to temporary market supports which merely delay the recovery.

In the latest dumb move from Washington, the Senate passed a bill which would raise the federally guaranteed loan limits back to $729,750. Apparently, private money is too expensive and somewhat risk adverse — as they should be — so lenders and loan owners are turning to the government to assume this risk and pay for the inevitable losses.

Right now, it's up to the House of Representatives to decide if they want to act on the Senate bill. It faces an uphill battle in the Republican House — thankfully. I suspect it will not pass.

Donovan on Loan Limits: Let’s ‘See What the House Decides’

By Alan Zibel — November 2, 2011, 4:03 PM ET

When it comes to dealing with Congress, the White House’s latest slogan is, “We can’t wait.”

But when it comes to lifting federal mortgage caps, the message seems to be, “You decide.”

Back in February, the Obama administration called for a decline in the maximum size of government-backed home loans as a way to start drawing back federal support for the nation’s mortgage market. They dropped on schedule on Oct. 1 but now a movement is afoot to revive the higher limits to support the ailing housing market.

Obama showed the courage to do the right thing despite pressures from the extreme left. He lacks the courage to say no to this bill, and he is hoping the Republicans in the House will kill it and take the heat for him.

Housing and Urban Development Secretary Shaun Donovan said in an interview Wednesday that while administration officials want to reduce the government’s support of the housing market “in the long run,” they also understand the need to support a weak part of the economy.

I wish I understood the need to support a weak part of the economy. It makes no sense to me at all. The housing market will support itself once prices find their natural bottom and the toxic debt is replaces with stable loans with much smaller balances and payments.

“We have to make sure that we’re taking these steps in concert with what’s happening in the market and ensuring that we’re supporting recovery,” in housing, Donovan said. “Obviously that’s the debate that Congress is having… Honestly, we’ll have to see what the House decides. We haven’t weighed in on it…I don’t think this changes the long-term view that we have” about reducing government support for housing.

Obama is trying to steer clear of this issue to avoid angering his left-wing base, but he clearly does not want to see this loan limit raised again, or he would openly support this measure.

Lobbyists for real-estate agents and other housing and mortgage industry groups are pushing on Capitol Hill to restore higher limits on the maximum size of home mortgages that can be guaranteed by Fannie Mae, Freddie Mac and the Federal Housing Administration.

They argue that the housing market is too weak for the U.S. government to withdraw its support for more expensive loans. The loan limits fell to $625,500 on Oct. 1 in expensive markets such as New York and San Francisco from $729,750. A spending bill passed by the Senate earlier this week would lift those limits until the end of 2013.

The NAr is wining and dining politicians to restore supports which they incorrectly believe are good for their incomes. Realtors would be much better served by allowing the market to clear. Transaction volumes would rise, and despite the lower prices, realtors would generate more commissions and make more money. They are arguing against what is in their own best interest, but they are too ignorant eo see it.

In the House, the issue of raising loan limits has emerged as a point of contention among Republicans, and one that puts House Speaker John Boehner (R., Ohio) in an awkward position.

Mr. Boehner is under conflicting pressures on the issue. Republicans in high-cost areas such as California and New York want to lift the limits. Others such as Rep. Scott Garrett (R., N.J.) and Rep. Jeb Hensarling (R., Texas) argue that raising the loan limits is equivalent to endorsing the unpopular and expensive bailout of Fannie Mae and Freddie Mac.

Any increase in the conforming limit will increase the losses at the GSEs and will serve as a bailout to the banks. When the conforming limit was high, banks could offload their toxic crap through purchase or refinance to the GSEs. Once the conforming limit dropped, banks were stuck with their remaining bad loans.

In February, the administration endorsed allowing the loan limits expire on schedule. And at an event in June, Bob Ryan, a top HUD housing policy adviser, said allowing the loan limits to drop would be a “reasonably modest pullback.”

However, the housing market and the broader economy are in a weaker state than economists expected at the start of the year.

Noted housing-market experts such as Ivy Zelman, chief executive of Zelman & Associates, and Mark Zandi, chief economist of Moody’s Analytics, have said it was a mistake to let the limits drop.

Lawmakers adopted the higher limits in 2008 after private lenders pulled back from making “jumbo” loans, which are loans above the federal mortgage caps.

I haven't read where Ivy Zelman said dropping the conforming limit was a mistake. It clearly was not a mistake. It quite predictably lowered high end prices and contributed to the ongoing weakness in the housing market. What people fail to recognize is that this price correction is a necessary and health-restoring process the market must go through.

Larry Roberts and Shevy Akason are hosting an OC housing market presentation at the offices of Intercap Lending (9401 Jeronimo, Suite 200, Irvine, CA 92618) on November 9, 2011. Please RSVP at sales@idealhomebrokers.com. Register online here: OC Housing Market – Intercap Lending.

2002 rollback

The asking price of today's featured proeprty is just above its 2002 purchase price. When commissions and negotiating room is factored in, this will be a 2002 rollback.

  • The owner paid $270,000 on 9/26/2002 using a $216,000 first mortgage and a $54,000 down payment. She went Ponzi shortly thereafter.
  • On 6/16/2003 she borrowed $221,000 with a new first mortgage.
  • On 5/9/2005 she obtained a $105,000 stand-alone second.
  • On 1/13/2006 she finished with a $200,000 HELOC.
  • Total property debt is $421,000.
  • Total mortgage equity withdrawal is $$205,000. She nearly doubled her mortgage debt in three and one-half years.

All the Ponzis will be flushed from the system before the crash is over. Each of them crossed the Ponzi threshold and became dependant upon mortgage equity withdrawal to make ends meet. Now that lenders aren't giving out free money, these loan owners cannot make ends meet and cannot afford their houses.

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This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707

949.769.1599

sales@idealhomebrokers.com

Irvine House Address … 50 EAGLE Pt Irvine, CA 92604

Resale House Price …… $285,000

Beds: 3

Baths: 2

Sq. Ft.: 1135

$251/SF

Property Type: Residential, Condominium

Style: Two Level, Contemporary

Year Built: 1978

Community: Woodbridge

County: Orange

MLS#: Y1106555

Source: SoCalMLS

Status: Active

On Redfin: 2 days

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FIRST FLOOR. THIS CONDO HAS AN EXTRA BATHROOM. TITLE FLOORS. GREAT WOODBRIDGE COMMUNITY. WALKING DISTANCE TO THE LAKE. CLOSE TO FYW 5 and 405. IT HAS A NICE SIZE PATIO. THIS IS A SHORT SALE PROBATE.

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Proprietary IHB commentary and analysis

Resale Home Price …… $285,000

House Purchase Price … $270,000

House Purchase Date …. 9/26/2002

Net Gain (Loss) ………. ($2,100)

Percent Change ………. -0.8%

Annual Appreciation … 0.6%

Cost of Home Ownership

————————————————-

$285,000 ………. Asking Price

$9,975 ………. 3.5% Down FHA Financing

4.18% …………… Mortgage Interest Rate

$275,025 ………. 30-Year Mortgage

$90,633 ………. Income Requirement

$1,342 ………. Monthly Mortgage Payment

$247 ………. Property Tax (@1.04%)

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

$59 ………. Homeowners Insurance (@ 0.25%)

$316 ………. Private Mortgage Insurance

$377 ………. Homeowners Association Fees

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

$2,341 ………. Monthly Cash Outlays

-$211 ………. Tax Savings (% of Interest and Property Tax)

-$384 ………. Equity Hidden in Payment (Amortization)

$15 ………. Lost Income to Down Payment (net of taxes)

$56 ………. Maintenance and Replacement Reserves

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

$1,817 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$2,850 ………. Furnishing and Move In @1%

$2,850 ………. Closing Costs @1%

$2,750 ………… Interest Points @1% of Loan

$9,975 ………. Down Payment

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

$18,425 ………. Total Cash Costs

$27,800 ………… Emergency Cash Reserves

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

$46,225 ………. Total Savings Needed

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Larry Roberts is hosting a Las Vegas cashflow properties presentation at the offices of Intercap Lending (9401 Jeronimo, Suite 200, Irvine, CA 92618) on November 9, 2011. Please RSVP at sales@idealhomebrokers.com. Register online here: Las Vegas cashflow property – Intercap Lending.

Housing bubble causes mobility to fall to record low

The weak economy and crashing house prices has left many trapped in their homes unable to move.

Irvine Home Address … 40 ATHERTON Irvine, CA 92620

Resale Home Price …… $423,000

I'm holding you captive

(You can't be released)

Captive, holding you captive

(I won't let you go)

Holding you captive, you captive

(You leave?)

Holding you captive, captive

(The answer is no)

Chris Brown — Captive

Americans are captives in their own homes. The economic malaise and the abundance of underwater loan owners has immobilized our country. The mobility rate has recently fallen to its lowest reading every recording — and records go back as far as 1948.

Mobility falls to record low as Americans stay put

Published October 27, 2011

WASHINGTON – Yet another symptom of the economic downturn: Americans aren't moving.

Young adults are staying put, often with their parents. Older people aren't able to retire to beachfront or lakeside homes.

And loan owners are trapped underwater in the bank's house. Underwater borrowers are the root of population immobility.

U.S. mobility is at its lowest point since World War II.

New information from the Census Bureau highlights the continuing impact of the housing bust and unemployment on U.S. migration, after earlier signs that mobility was back on the upswing. It's a shift from America's long-standing cultural image of ever-changing frontiers, dating to the westward migration of the 1800s and more recently in the spreading out of whites, blacks and Hispanics in the Sun Belt's housing boom.

Rather than housing magnets such as Arizona, Florida and Nevada, it is now more traditional, densely populated states — California, Illinois, Massachusetts, New York and New Jersey — that are showing some of the biggest population gains in the recent economic slump, according to the data released Thursday.

Residents have been largely locked in place. Families are stuck in devalued homes and young adults are living with parents or staying put in the towns where they went to college.

Population mobility has always been a key aspect of American society. People can more freely and easily move from state to state to take a better job or start a business. Without population mobility, America does not get the most value from its workforce creating a drag on the economy.

“The fact that mobility is crashing is something that I think is quite devastating,” said Richard Florida, an American urban theorist and professor at the University of Toronto's Rotman School of Management. He described America's residential movement as an important element of its economic resilience and history, from development of the nation's farmland in the Midwest to its coastal ports and homesteading in the West.

“The latest decline shows we are in a long-run economic reset and that we never really recovered — we've just been stagnating along,” Florida said.

There are other reasons than mobility that are contributing to our economic stagnation. The huge mortgage debt overhang which drains our economic resources and dampens household buying power is the real culprit. This debilitating debt also causes much of the social immobility.

About 11.6 percent of the nation's population, or 35.1 million, moved to a new home in the past year, down from 12.5 percent in the previous year. The current level of low mobility comes after the recession technically ended in mid-2009, beating a previous low of 11.9 percent in 2008.

It is the lowest in the 60-plus years that the Census Bureau has tracked information on moves, dating to 1948.

The share of people moving has been declining for decades, due in part to increases in two-income families that are more tied down by jobs and to an aging population that is less mobile. The peak for U.S. mobility came in 1951, when it hit 21.2 percent. The rate had leveled off at around 13 percent before falling off notably in 2008 during the recession.

Among young adults 25 to 29, the most mobile age group, moves fell to 24.1 percent from 25.9 percent in the previous year.

Longer-distance moves, typically for those seeking new careers in other regions of the country, remained largely flat at 3.4 percent.

The biggest drop-off occurred in local moves, down to 15.4 percent from 17.7 percent in 2010. It's a sign that young adults in the prolonged slump weren't even willing to venture outside their counties, continuing instead to live with relatives or on college campuses.

People most often cite a desire to live in a new home as the main reason for moving, as well as reasons of family or economy such as marriage or a new job. But analysts say with many young adults delaying marriage while struggling to find employment and aging baby boomers expressing financial worries about retirement, the current mobility freeze could continue for several more years.

There is no reason to think the problems with mobility will go away until we deal with the issues of underwater loan owners and excessive mortgage debt. Foreclosures and short sales are the way ahead.

An Associated Press-LifeGoesStrong.com poll this month found that more than half of baby boomers born between 1946 and 1964 say they are unlikely to move somewhere new in retirement; about 4 in 10 say they are very likely to stay in their current home throughout all of their retirement.

The annual growth of retirement-destination counties, typically in Sun Belt states such as Florida, Arizona and New Mexico, has fallen sharply since the recession that began in late 2007. It's down nearly half compared with the period 2000-2007, according to recent census data.

I think Nevada and Arizona will see a resurgence in retirees moving in over the next several years. The baby boomers are just starting to retire, and house prices in Nevada and Arizona are relatively cheap.

As I mentioned in a previous post, my parents have purchased three homes so far in Las Vegas. One is going to be empty half the time as they split between their Florida home and the one in Las Vegas. The other two homes are investment properties which provide enough excess cashflow to cover the expenses of the one they use half the year. Basically, a retiree with $50,000 and the willingness to own rental properties can obtain a modest primary residence with no monthly costs. It's a sweet deal that won't go unnoticed by other retirees.

In all, the mid-decade housing boom and subsequent bust took a toll on virtually all age and race groups.

Homeownership declined in 47 states and the District of Columbia while the national ownership rate fell by its largest amount since the 1930s. Hispanics who moved and purchased homes in new destinations in the Southeast were hit especially hard, with bigger drops in average income and increases in poverty after low-wage construction jobs dried up in states such as South Carolina, North Carolina, Alabama, Kentucky and Tennessee.

In contrast, middle-class blacks from the North who migrated to Southern states such as Georgia, Florida and Texas fared better, maintaining higher incomes than African-Americans who remained in declining industrial centers such as Michigan and Ohio.

Other bright spots in the housing bust included urban, high-tech college meccas that are proving to be a draw for young, college-educated adults of all races and ethnicities.

The data covering 2008-2010 show that Raleigh, N.C.; the Texas cities of Austin, San Antonio and Houston; Denver; Pittsburgh; and Baltimore and Washington, D.C., had some of the biggest gains in residents. All of them tend to promise specialized tech jobs and hip lifestyles.

Pittsburgh is hip now?

William H. Frey, a Brookings Institution demographer who reviewed the education and race data, said many of these cities will continue to attract new residents after the economy fully recovers. He said other cities must seek ways to diversify their industries, draw new investment and build partnerships with local universities to attract young talent, much like Pittsburgh has been striving to do after the collapse of its steel industry.

“Right now, the 'cool' cities are serving as way stations for the small number of adventurous young people who are willing to move in a down economy. But when the broader economy picks up, a much larger group of people will move to wherever the jobs spring up,” Frey said, noting that people are staying put for now because they have to, not because they want to.

“We are now just in a lull, albeit a hyperextended one,” he said.

Other findings:

— Texas posted increases in average income across all race groups even after the housing bust. The District of Columbia had the biggest overall gain in average income between 2005-2007 and 2008-2010 time periods, increasing 9 percent to nearly $60,000. Thirty-six states had declines.

— The district, New York, Connecticut, Louisiana, Mississippi, Texas, Alabama and California have levels of income inequality that rise above the national average. Broken down by large metropolitan areas, New York City, Miami, Los Angeles, Houston, Memphis, Tenn., New Orleans, San Francisco, and Birmingham, Ala., each had wider-than-average gaps between rich and poor.

— Across smaller areas of geography, Fountainhead-Orchard Hills, Md., just north of Hagerstown, had the greatest measured income inequality. Country Knolls, N.Y., near Albany, registered the least.

— Suburban and rural homeowners were more likely to stay put than others. Some 93.5 percent of the suburban and 93.7 percent of the rural population in owner-occupied units are residing in the same house as one year ago, up from the 2005-2007 time period, according to Kenneth Johnson, senior demographer at the University of New Hampshire.

Renters were more mobile: Overall, 68.8 percent lived in the same rental unit one year ago.

Besides not losing hundreds of thousands of dollars, being a renter for the last ten years has given me the freedom to move wherever and whenever I wished.

John R. Logan, a sociology professor at Brown University, described consequences for mostly minorities should U.S. mobility stay frozen for extended periods. His research on neighborhood segregation has found that the average black or Hispanic household earning over $75,000 lives in a poorer neighborhood than the average white resident earning under $40,000.

“Being locked into place has its most severe effects on blacks and Hispanics, who are often segregated into disadvantaged neighborhoods regardless of their own incomes,” he said. “Many middle-class homeowners in these neighborhoods have lost home equity, making it harder to move to communities with better schools and safer streets. Even the slow decline in black-white segregation that we've seen in the last 20 years will be hard to maintain under these conditions.”

The lack of mobility kills the move up market. It's not that people are moving shorter distances, it's that they are not moving at all.

The census findings were based on the Current Population Survey as of March 2011, as well as comparisons of the 2005-2007 and the 2008-2010 American Community Survey to provide a snapshot of every U.S. community with at least 20,000 residents. Figures on income inequality come from a census analysis of survey data from 2005-2009.

A few weeks ago, I noted that an entire generation is trapped in their starter homes. This is a big problem, and it will be with us for a long time.

She went Ponzi

The owner of today's featured property bought near the end of the last housing recession on 11/17/1998. She paid $226,000 using a $180,800 first mortgage and a $45,200 down payment. It didn't take her long to start making withdrawals.

  • On 12/7/1999 she obtained a stand-alone second for $50,000.
  • On 7/9/2001 she refinanced with a $251,500 first mortgage.
  • On 11/21/2002 she refinanced with a $269,160 first mortgage.
  • On 7/28/2003 she refinanced with a $285,000 first mortgage.
  • On 4/19/2004 she obtained a $60,000 stand-alone second.
  • On 4/29/2005 she got a $90,000 stand-alone second.
  • On 4/20/2005 she refinanced with a $388,000 first mortgage.
  • On 8/22/2006 she refinanced one last time with a $564,000 first mortgage.
  • Total mortgage equity withdrawal is $383,200.
  • Total squatting time is more than a year so far.

Foreclosure Record

Recording Date: 04/25/2011

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 01/18/2011

Document Type: Notice of Default

This woman pissed away nearly $400,000. The shocking part is how ordinary she seems. I have profiled many larger cases, and despite how obvious it was that this woman had gone Ponzi, her lenders didn't seem to care. After profiling nearly a thousand of these cases, $400,000 in mortgage equity withdrawal hardly registers. It doesn't even earn my half-million dollar club graphic. No, this is an ordinary borrower living an ordinary Irvine life. That's what's so shocking.

Larry Roberts is hosting a Las Vegas cashflow properties presentation at the offices of Intercap Lending (9401 Jeronimo, Suite 200, Irvine, CA 92618) on November 9, 2011. Please RSVP at sales@idealhomebrokers.com. Register online here: Las Vegas cashflow property – Intercap Lending

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This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707

949.769.1599

sales@idealhomebrokers.com

Irvine House Address … 40 ATHERTON Irvine, CA 92620

Resale House Price …… $423,000

Beds: 3

Baths: 2

Sq. Ft.: 1668

$254/SF

Property Type: Residential, Single Family

Style: Two Level, Cape Cod

View: Park/Green Belt, Trees/Woods, Faces South

Year Built: 1980

Community: Northwood

County: Orange

MLS#: S677776

Source: SoCalMLS

On Redfin: 3 days

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Charming 3 Bedroom Townhome Located In The Desirable Sheffield Manor Community. Light & Bright Floor Plan Features Laminate Wood Flooring, Vinyl Slider, Custom Baseboards, 6 Panel Doors, Plantation Shutters, Ceiling Fans & Mirrored Wardrobes. Upgraded Kitchen Includes Granite Enhanced Counters, Stainless Steel Appliances, Breakfast Counter Bar & Garden Window Overlooking The Private Patio Area. Large Master Bedroom Suite With Raised Ceiling, Greenbelt Views & An Upgraded Bath With Granite, Travertine Tile & Shower. Wonderful Association Amenities & Steps To Award Winning Elementary & Middle Schools. Centrally Located Near Walking Trails, Restaurants & Shopping. Low HOA Dues & No Mello Roos

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Proprietary IHB commentary and analysis

Resale Home Price …… $423,000

House Purchase Price … $226,000

House Purchase Date …. 11/18/1998

Net Gain (Loss) ………. $171,620

Percent Change ………. 75.9%

Annual Appreciation … 4.9%

Cost of Home Ownership

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$423,000 ………. Asking Price

$14,805 ………. 3.5% Down FHA Financing

4.18% …………… Mortgage Interest Rate

$408,195 ………. 30-Year Mortgage

$121,375 ………. Income Requirement

$1,991 ………. Monthly Mortgage Payment

$367 ………. Property Tax (@1.04%)

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

$88 ………. Homeowners Insurance (@ 0.25%)

$469 ………. Private Mortgage Insurance

$220 ………. Homeowners Association Fees

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$3,136 ………. Monthly Cash Outlays

-$313 ………. Tax Savings (% of Interest and Property Tax)

-$570 ………. Equity Hidden in Payment (Amortization)

$22 ………. Lost Income to Down Payment (net of taxes)

$73 ………. Maintenance and Replacement Reserves

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$2,348 ………. Monthly Cost of Ownership

Cash Acquisition Demands

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$4,230 ………. Furnishing and Move In @1%

$4,230 ………. Closing Costs @1%

$4,082 ………… Interest Points @1% of Loan

$14,805 ………. Down Payment

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$27,347 ………. Total Cash Costs

$35,900 ………… Emergency Cash Reserves

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$63,247 ………. Total Savings Needed

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Larry Roberts and Shevy Akason are hosting an OC housing market presentation at the offices of Intercap Lending (9401 Jeronimo, Suite 200, Irvine, CA 92618) on November 9, 2011. Please RSVP at sales@idealhomebrokers.com. Register online here: OC Housing Market – Intercap Lending.