By directing the GSEs to relax their eligibility requirements for refinancing, the Obama administration will increase the losses on the GSE portfolio and add to the final cost of the bailout.

Irvine Home Address … 54 CITY STROLL Irvine, CA 92620

Resale Home Price …… $537,375

I've been caught stealing;

once when I was 5…

I enjoy stealing.

It's just as simple as that.

Well, it's just a simple fact.

When I want something, and

I don't want to pay for it.

Jane's Addiction — Been Caught Stealing

Attention renters: the government is stealing from you and giving the money to the loan owners who occupy the houses they can't afford that you are waiting to buy.

Obama has succumb to the pressure from the extreme left that wants to give people free houses. Rather than take a courageous stand and say no to more bailouts and loan owner assistance, the Obama administration has decided to give loan owners a break, increase the taxpayer losses at the GSEs, and ask renters, prudent borrowers, and no-debt homeowners to pay the bill.

I think this policy really sucks.

The $85 billion in savings they are touting will be added to the billions of losses the government has already covered since taking over the GSEs. This is not a low-cost program. That $85 billion in revenue would have helped offset losses at the GSEs. Instead it will go to benefit banks and loan owners. That isn't the way I want my tax dollars squandered.

FHFA removes barriers to refinance more borrowers

by JON PRIOR — Monday, October 24th, 2011, 8:45 am

The Federal Housing Finance Agency removed several key barriers to the Home Affordable Refinance Program Monday to allow more underwater borrowers to move into lower-rate mortgages.

HARP, which launched in March 2009, helped 838,000 Fannie Mae and Freddie Mac borrowers with loan-to-value ratios between 80% and 125% refinance. But roughly 7% of those held LTVs above 105%.

In order to assist more of the estimated 11 million borrowers who owe more on their mortgage than their home is worth, the FHFA removed the 125% LTV ceiling on the program.

I got an email from an appraiser right after this was announced. By removing the LTV restriction, the government is taking appraisers entirely out of the refinance transaction. Further, it basically says the value of the collateral doesn't matter. No matter how far underwater the owner is, they are eligible for the refinance. That doesn't sound like a good banking practice to me.

Of course, the servicing banks are happy, particularly BofA which will get a nice revenue boost from all the refinances.

The FHFA also eliminated certain risk-based fees borrowers had to pay and waived certain representation and warranty risk for lenders of the new, refinanced mortgage. An appraisal would also no longer be required if an automated valuation model estimate was already provided by the government-sponsored enterprise.

HARP was already extended earlier in the year, but the FHFA committed to pushing the program end date out even further to Dec. 31, 2013 for loans originally sold to the GSEs on or before May 31, 2009.

The borrower must be current on the mortgage at the time of the refinance, with no late payment in the past six months and no more than one late payment in the past 12 months, the FHFA said.

At least they are limiting this program to the people who have been paying their bills. I think most of these people should have strategically defaulted, but if they didn't, they are being rewarded for their actions. If this program had been opened up to delinquent mortgage squatters, it would have been outrageous.

Realistically, for the deeply underwater, this merely delays the inevitable. If you are living in Las Vegas, and you have a $300,000 mortgage on a $120,000 house, a refinance at a lower rate isn't going to help you much.

Mortgage insurers agreed to automatically transfer coverage from the old loan to the new loan, and servicers agreed to resubordinate second liens into the new refinanced mortgage.

Fannie and Freddie will release more specific operational details for servicers and lenders by Nov. 15.

The FHFA could not give a specific number of borrowers the revamped program could reach, but in its published frequently asked questions, the agency said the “the best estimate is that by the end of 2013 HARP refinances may roughly double or more from their current amount but such forward-looking projections are inherently uncertain.”

Considering all previous projections have been completely wrong, it is likely this won't reach that many people. And those it does reach will likely strategically default or short sell eventually.

“We know that there are many homeowners who are eligible to refinance under HARP and those are the borrowers we want to reach,” said FHFA Acting Director Edward DeMarco. “Our goal in pursuing these changes is to create refinancing opportunities for these borrowers, while reducing risk for Fannie Mae and Freddie Mac and bringing a measure of stability to housing markets.”

The CEOs for Fannie Mae or Freddie Mac both said the program would definitely reach more borrowers.

“By removing some of the impediments to refinance, lenders can more easily participate in the program allowing more eligible homeowners to take advantage of the low interest rates,” Fannie chief Michael Williams said. “While HARP is only one refinancing program, it is a critical one for those homeowners who may be underwater on their mortgage and facing difficult decisions during these tough economic times.”

It's only critical to the banks who are trying to fend off more strategic default.

“These changes mark another step on the road to recovery for the nation's housing market and underscore Freddie Mac's vital role in making affordable mortgage financing available to America's homeowners and future homebuyers,” said Freddie CEO Charles “Ed” Haldeman.

No, this marks another impediment to the recovery of the housing market and guarantees the inventory from the crash will be metered out over a longer period of time.

In a conference call with investors Monday morning, JPMorgan Chase analysts said the representation and warranty waivers would come through two key areas. Lenders would not be responsible for the original loan file and would also not will be held to new appraisal mistakes because of the AVM.

“We believe this is the most material of all the things they are doing,” analysts said.

It's hard not to become jaundiced with the way our government steals from us and gives money to those who are not deserving (if someone can make a compelling argument why loan owners should be bailed out, I am open to hear it). It really feels like the government is out to make sure anyone who avoided the housing bubble is being punished while those who foolishly participated are being rewarded. Loan owners are given the house while renters are given the bill.

Governments have been redistributing wealth since ancient times. Perhaps I should just accept this and fade quietly into the night. But I can't do that. I find so much of this irritating and outrageous, and I don't read many others who are pointing out the injustices. It's as if loan owners have control of the media and only their point of view matters. Perhaps someday I will feel differently. I guess I haven't picked up enough houses in Las Vegas yet.

New homes in Woodbury under $260/SF

One of the reasons Columbus Grove prices fell so far so fast was because the builder kept building and selling while mortgage financing dried up. It takes active and motivated sellers to push prices down quickly. Without their activities, prices drift down slowly and transaction volumes remain low.

Woodbury has fallen more since the crash than other neighborhoods that are not as nice. I live in Woodbury, and I really like it. I think it is one of the best Villages in Irvine. The only explanation I have for its weak price performance is the plethora of overextended borrowers from the bubble (most of Woodbury was built out during the peak of the housing bubble), and the ongoing activity of the Irvine Company as they try to build out the community.

The new product in Woodbury is selling for considerably less than most people realize. (Median US New Home Price Has Biggest 3 Month Drop Ever) Today's featured property is $259/SF. Remember when most of Woodbury was selling for north of $400/SF?

At this price, today's featured property has a reasonable cost of ownership (the Mello Roos is a guess). I have long maintained the problem with the new product offerings has largely been price. If prices on the new product remains this affordable, sales volumes ought to pick up. We will see.

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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 … 54 CITY STROLL Irvine, CA 92620

Resale House Price …… $537,375

Beds: 3

Baths: 3

Sq. Ft.: 2074

$259/SF

Property Type: Residential, Condominium

Style: Two Level, Spanish

Year Built: 2011

Community: Woodbury

County: Orange

MLS#: S677619

Source: SoCalMLS

Status: Active

On Redfin: 3 days

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This two story masterpiece lives like a single family residence! Downstairs, enjoy the attached two car garage, tech center, main floor bedroom and open living room, family room, kitchen combo. Upstairs, enjoy the large loft that be easily be a playroom or entertainment area, huge master retreat with walk in closet, dual sink bathroom and generous sized secondary bedroom. Fixtures include gourmet kitchen with granite countertops, stainless steel appliances and more! Design credit available to customize your flooring! Located in the desirable Village of Woodbury, just outside your door is shopping, parks, pools and more. One of the last opportunities to own a brand-new home in Wodbury. Charming motor courts provide access to oversized 2 car attached garages. Within walking distance to stores, restaurants, entertainment at Woodbury Town Center. Less than two miles from the I-5 and the 133 Toll Road.

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Proprietary IHB commentary and analysis

Resale Home Price …… $537,375

Cost of Home Ownership

————————————————-

$537,375 ………. Asking Price

$107,475 ………. 20% Down Conventional

4.18% …………… Mortgage Interest Rate

$429,900 ………. 30-Year Mortgage

$122,824 ………. Income Requirement

$2,097 ………. Monthly Mortgage Payment

$466 ………. Property Tax (@1.04%)

$200 ………. Special Taxes and Levies (Mello Roos)

$112 ………. Homeowners Insurance (@ 0.25%)

$0 ………. Private Mortgage Insurance

$298 ………. Homeowners Association Fees

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

$3,173 ………. Monthly Cash Outlays

-$344 ………. Tax Savings (% of Interest and Property Tax)

-$600 ………. Equity Hidden in Payment (Amortization)

$160 ………. Lost Income to Down Payment (net of taxes)

$87 ………. Maintenance and Replacement Reserves

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

$2,477 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$5,374 ………. Furnishing and Move In @1%

$5,374 ………. Closing Costs @1%

$4,299 ………… Interest Points @1% of Loan

$107,475 ………. Down Payment

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

$122,522 ………. Total Cash Costs

$37,900 ………… Emergency Cash Reserves

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

$160,422 ………. Total Savings Needed

——————————————————————————————————————————————————-

Economists from the California Association of realtors are projecting increasing prices in Orange County next year. What a surprise… not.

Irvine Home Address … 10 LAKEVIEW #79 Irvine, CA 92604

Resale Home Price …… $465,000

Any way you want it

That's the way you need it

Any way you want it

She said, Any way you want it

That's the way you need it

Any way you want it

Journey — Any Way You Want It

Any way you want it, that's the way they'll say it, any way you want it. realtor associations exist to tell buyers what realtors believe buyers want to hear. realtors cannot conceive reasons buyers may want to buy if prices are drifting lower, so realtors continually tell people prices have bottomed. realtors are unconcerned whether or not this is the truth, they only care that their statements motivate people to buy.

Will O.C. home prices go up in 2012?

September 24th, 2011, 1:00 am — Jeff Collins

If things go as expected, the typical California house will see its value rise $5,000 next year. In Orange County, the price at the midpoint of all sales could go up by $10,000 to $15,000.

That’s the forecast unveiled this month by California Association of Realtors economists Leslie Appleton-Young and Robert Kleinhenz, who forecast that home sales and prices will go up in 2012, but not by much.

Appleton-Young and Kleinhenz took reporters’ questions during a conference call about their forecast, as well as some direct questions from us. Here’s what they said …

Us: What’s the outlook for the Orange County housing market in 2012?

Robert: Right now, Orange County is behind last year’s sales by 6.7% on a year-to-date basis (through August), but the market will reduce or eliminate that deficit by year end.

Why? What would make sales volumes increase at the end of the year. There is one possible answer: falling prices. Realistically, the only way volume goes up is if prices go down.

The local economy is doing somewhat better than elsewhere in the state and this should carry into next year, and the share of distressed sales is among the lowest in the state at 32% in July compared to 35% a year earlier, so county home sales should improve by a bigger margin than the 1% gain for the state.

Are they joking? Lenders manage the percentage of distressed sales to within a few percentage points as they liquidate their inventory. If 32% is the lowest in the state, then we are nowhere near the end of problems with distressed inventory. The percentage distressed will remain between 32% and 35% for the next several years. I am shocked they even mentioned this.

The county median price should do better than the projected 1.7% increase for the state.

Us: If I’m a homeowner who’s been waiting for a recovery to sell, should I continue to wait or list my home now?

Robert: At this point, we are near the end of the peak market season for 2011, so the best chance of selling before the end of 2011 is probably in the next few weeks.

If our forecast is correct, selling in 2012 may mean that the home will fetch a slightly higher selling price.

Their forecast is not correct. With BofA and other banks increasing their foreclosure filings, the 2012 selling season will be greeted with an abundance of bank-owned inventory. If prices go up, it will only be because banks managed to limit their release of product. Given their pressures to raise cash, it's more likely lender liquidations will push prices down 2% to 5%.

The fact that mortgage rates are likely to stay low into 2012 makes it less urgent for would-be buyers.

I am surprised they admit that.

Beyond that, it depends on the individual homeowner’s circumstances (reason for selling, amount of equity in home or not, whether the individual will sell this home and buy another, etc.).

Us: Lenders recently ramped up the filing of default notices. Do you expect them to really ramp up the number of foreclosures now? And how much longer until foreclosures drop to more moderate levels?

Leslie: Let me take your second question first. It depends on the area, but I would say three to five years.

That's a surprisingly candid and accurate assessment.

Three (years) in areas where (foreclosures) haven’t been the majority of the market, closer to five in the inland areas, where I don’t think we’ve seen a lot of the supply that’s going to come through (yet) come through because you’ve got shadow inventory/negative equity homeowners that are still kind of in a holding pattern.

In terms of banks, Bank of America has switched gears a little bit,

A little bit? LOL! Bank of America foreclosure notices increase 116%.

and we saw a big increase in properties that are starting the process and we’ll likely see those coming through the pipeline – what is it? Six to nine months from now, something like that. Over 300 days. In terms of the other lenders, it’s kind of hard to say.

Robert: It is noteworthy that we’ve heard in the news that BofA was a major contributor to that uptick in the foreclosure filings for the month of August. Even with that uptick, compared to recent history, it’s still below last year’s level for August last year and well below the level for default filings (and) foreclosure filings that took place back in 2009 when California was clearly at the front end of this whole cycle.

The one and only reason foreclosure filings are below 2009 or 2010 levels is because lenders learned the level of foreclosure activity they believe the market can absorb. It certainly is not because they are out of people to foreclose on.

CAR’s 2012 Forecast for Calif. / Numbers are in the thousands; f=forecast

	2005	2006	2007	2008	2009	2010	2011f	2012f
Existing houses	625.0	477.5	346.9	441.8	546.9	491.5	491.1	496.2
% Change	0.03%	-23.6%	-27.3%	27.3%	23.8%	-10.1%	-0.1%	1.0
Median Price	$522.7	$556.4	$560.3	$348.5	$275.0	$303.1	$291.0	$296.0
% Change	16.0%	6.5%	0.7%	-37.8%	-21.1%	10.2%	-4.0%	1.7
30-Yr Fixed	5.9%	6.4%	6.3%	6.0%	5.1%	4.7%	4.5%	4.7
1-Yr ARM	4.5%	5.5%	5.6%	5.2%	4.7%	3.5%	3.0%	3.1

Us: You said there are wildcards out there that could change your forecast for California in 2012. Which ones do you fear the most? What’s the Perfect Storm that would sink the economy and the housing market next year?

Robert: Wild cards are, by definition, unexpected events. That said, my biggest concerns are another recurrence of the European sovereign debt problem that creates uncertainty and economic paralysis, even though it also leads to a flight to safety in the form of U.S. Treasuries.

The election in 2012 is also a big wild card, and the lead up to November could also add to uncertainty and result in another lost year in terms of economic progress.

I am less concerned by a Perfect Storm per se, but more concerned that more mixed signals on the economy and politically will prompt both consumers and businesses to sit on their hands until they sense that the direction of the economy has become clearer.

Again, they miss the obvious. The wildcard out there is the desperation of banks for capital. If BofA feels they need to liquidate more than the market can handle to get their cash, then prices could really crater. If the desperation of BofA prompts other lenders to escalate their foreclosures as well, the cartel could collapse, and we could have a race to the bottom. That's the wildcard, just as it has been for the last several years.

Us: What’s the outlook for areas that got really hammered by the boom and bust cycle, such as the Inland Empire and the High Desert region?

Robert: The thing about the Inland Empire markets, and to some extent the Central Valley markets, you continue to have a lot of distressed properties in those markets. But the supply is constrained by the rate at which the lenders are processing these properties and moving them through the foreclosure pipeline.

Consequently, the amount of inventory in those markets tends to be lean. Prices may be down on a year-over-year basis, but I think as we move through this year, you’re probably going to see more price stability in those areas than in some of the other markets where you might have a higher concentration of equity sales. We still see some prices adjusting down with the equity sales, so you might be pleasantly surprised.

I fully expect to be pleasantly surprised as prices continue to drift lower. I would be shocked if they didn't.

The flip side, though, on the demand side is that you need some economic activity, and huge numbers of jobs were lost in the Inland Empire that were construction and real estate-related jobs, and those aren’t coming back anytime soon.

That's true enough. I still keep a toe in the water of the land development industry, and many developers are starting to prepare to deliver product again. Many of these developers are anticipating a resurgent new home market… in 2015.

So I think to Leslie’s point, we’re to continue to see distressed properties as significant part of the (market).

Us: The limit on loans that qualify for purchase by Fannie Mae and Freddie Mac is due to drop from $729,750 in Orange County to $625,500 on Oct. 1. In some counties, it will drop as low as $417,000. Above those amounts, borrowers will have to use higher-cost “jumbo” loans. Any chance Congress will act to extend the higher limits for lower-cost “conforming loans?”

Leslie: We’ve pretty much accepted the (Oct. 1) expiration as we looked at our forecast. Politically, over the last couple months it’s become clear that there just isn’t any consensus of action possible that would make an extension possible.

Obviously, we’ve been working quite hard to see if we could delay it in some way and it just doesn’t seem to be possible.

Hallelujah! Cool heads do prevail sometimes.

In cities and in counties where you’re looking at median home prices between $400,000 and $500,000, this is going to hit the market. I think that we will likely see evidence of people in that category rushing to get transactions closed by the end of September. There are reports that some of the lenders have already stopped lending at those categories already.

I think that we will definitely see it when we look at our data on closings in September and October. Clearly for that kind of jumbo and jumbo-light categories, it’s going to make financing more expensive. So the aggregate impact, I don’t know. But the marginal impact, it’s going to raise the cost of financing … and put a dent in those markets.

They got that one right too. Lenders stop conforming loans above $625,000 in July, home sale fall. Prices will fall, particularly at the price points where the conforming limit will impact the cost of financing.

She withdrew too much

The owner of today's featured property was not a routine HELOC abuser, but she did make a financially fatal mistake. She purchased the property for $265,000 on 5/12/2000 using a $225,200 first mortgage and a $40,000 down payment. She refinanced on 5/12/2000 with a $265,000 first mortgage and “liberated” her down payment. On 8/31/2006 she refinanced with a $487,500 first mortgage taking out $222,500 in the process. I guess she needed some money.

——————————————————————————————————————————————-

This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707

949.769.1599

sales@idealhomebrokers.com

Irvine House Address … 10 LAKEVIEW #79 Irvine, CA 92604

Resale House Price …… $465,000

Beds: 3

Baths: 2

Sq. Ft.: 1659

$280/SF

Property Type: Residential, Condominium

Style: One Level

View: Peek-A-Boo

Year Built: 1977

Community: Woodbridge

County: Orange

MLS#: P800421

Source: SoCalMLS

On Redfin: 1 day

——————————————————————————

Perfect opportunity for the patient buyer. Live in the wonderful private, gated community of Arborlake. Enjoy the amenities of a gorgeous sand beach, clubhouse and recreational facilities. You'll feel like you're on vacation walking or boating around the lake. Inside your home, you'll love the remodeled, kitchen, engineered wood floors, dual pane windows, cam lighting, large patio yard and open floor plan.

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Proprietary IHB commentary and analysis

Resale Home Price …… $465,000

House Purchase Price … $265,000

House Purchase Date …. 5/12/2000

Net Gain (Loss) ………. $172,100

Percent Change ………. 64.9%

Annual Appreciation … 4.9%

Cost of Home Ownership

————————————————-

$465,000 ………. Asking Price

$16,275 ………. 3.5% Down FHA Financing

4.18% …………… Mortgage Interest Rate

$448,725 ………. 30-Year Mortgage

$142,917 ………. Income Requirement

$2,189 ………. Monthly Mortgage Payment

$403 ………. Property Tax (@1.04%)

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

$97 ………. Homeowners Insurance (@ 0.25%)

$516 ………. Private Mortgage Insurance

$487 ………. Homeowners Association Fees

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

$3,692 ………. Monthly Cash Outlays

-$492 ………. Tax Savings (% of Interest and Property Tax)

-$626 ………. Equity Hidden in Payment (Amortization)

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

$78 ………. Maintenance and Replacement Reserves

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

$2,677 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$4,650 ………. Furnishing and Move In @1%

$4,650 ………. Closing Costs @1%

$4,487 ………… Interest Points @1% of Loan

$16,275 ………. Down Payment

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

$30,062 ………. Total Cash Costs

$41,000 ………… Emergency Cash Reserves

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

$71,062 ………. Total Savings Needed

——————————————————————————————————————————————————-

Peter Schiff is predicting the OC housing market will get much worse.

Irvine Home Address … 30 JACKSON Irvine, CA 92620

Resale Home Price …… $675,000

We think we climb so high

Up all the backs we've condemned

We face our consequence

This is the beginning of the end

You wait your turn, you'll be last in line

This is the beginning

Get out the way, cause I'm getting mine

This is the beginning

Nine Inch Nails — The Beginning of the End

Back at the peak of the housing bubble, it was obvious (at least to me) that prices were too high and were going to crash. Some bears lost their conviction when the false rally of 2009 began, but prices were still too high, affordability was too low, inventory was artificially constricted, and the entire rally was dependent upon government props. With those headwinds plus an enormous shadow inventory to liquidate, there was little or no chance the 2009-2010 rally would be sustained.

Now, with the elimination of many government props, prices at rental parity, and affordability at decade-long highs, the direction of prices is much less certain. I still believe prices will decline for at least a year or two due to the liquidation of shadow inventory and the continuing weak economy. But I could be wrong.

What was most interesting to me when reading the comments on the recent post on Irvine affordability was the difference in opinions among the various astute observers. Most were still bearish, but some were bullish — not stupidly bullish like many commenters over the last 5 years — but thoughtfully bullish based on the improvement in conditions we are seeing now.

I selected today's featured article because Peter Schiff has been right about many of the conditions which contributed to the collapse of the housing bubble and the economy. Further, he knows quite a bit about the Orange County housing market, and is he is thoughtfully and unapologetically bearish.

Housing market will get much worse

October 22nd, 2011, 12:02 am

Before Peter Schiff had a national reputation for calling the economic crash of last decade, he was a highly opinionated money manager from Orange County. (Recall his interview with us when he predicted home prices would fall 50%?) He’s returning to Orange County on Nov. 7 for an investment chat and Q&A at 6 p.m. at the Irvine Barclay Theatre. (Details here!) We asked Peter for his real estate outlook in advance fo his local appearance …

Us: Is real estate pain over yet in O.C. and/or SoCal?

Peter: No, it’s going to get worse. The current market is still being propped up by government-subsidized mortgages, artificially low interest rates, and a backlog in the foreclosure process. Prices will not bottom out until these props are removed and true market forces are allowed to clear the market.

IHB: Yes, I agree. In particular the backlog of foreclosures must be cleared out before we can be certain the market has bottomed.

In addition, the California economy is going to get a lot worse. More business will leave the state and more workers will lose their jobs. More people will chose to rent, and many that do will have to have roommates. The vast majority of new home construction is currently taking place in the multi-unit building category, which confirms this trend.

In addition, many unemployed homeowners may take in borders. College grads loaded up with debt and unable to find jobs will likely move back home with their parents. The elderly, stripped of interest income as a result of rock bottom interest rates and thereby unable to cope with rising costs of living will move in with their grown children. All of these factors will continue to put downward pressure on real estate prices for years to come.

IHB: If his macroeconomic call is correct, the housing market will continue to decline. New household formation is essential to a strong housing market. All the conditions Schiff describes above will hinder household formation and keep prices down until conditions improve.

Us: How bad could it get … again?

Peter: Ultimately it will get very bad. The market is already on life support, even with mortgage rates at the lowest levels in nearly 70 years. But imagine if rates rose to the levels they were at just five years ago, to say six or seven per cent? What will that do to property values? I think ultimately mortgage rates will rise farther, maybe even above 10%.

IHB: I have maintained that higher interest rates will work to pummel prices — when rates finally move higher. Unless higher interest rates are compensated for by wage inflation, the higher interest rates will reduce loan balances, and in areas like ours which are inflated to the limit of income affordability, smaller loan balances will force prices lower.

At the same time, I think the California unemployment rate will continue to rise and taxes in California, will continue to go up. I also think there is a distinct possibility that the ability to deduct mortgage interest from personal income taxes will, at some point in the not too distant future, be curtailed or eliminated, especially for wealthy individuals. What do you think would happen to real estate prices under that scenario? Pretty soon you will not have to imagine this, you will be living it.

IHB: As we discussed yesterday, if the home mortgage interest deduction is curtailed or eliminated, prices locally will likely come down to adjust for the increased cost of ownership.

Us: Do you think the presidential political discourse will be a factor in the 2012 housing market? Why?

Peter: No, housing prices will decline no matter what happens in the election. There is still a large overhang of excess inventory. However, I expect housing and foreclosures will certainly be issues in the campaign. I would imagine that candidates will be looking to outdo one another on ways to bail out overstretched homeowners. Of course, anything the government does to interfere with the foreclosure process, to keep people in homes they can’t afford, and in which they have no equity, only worsens the overall crisis.

IHB: I totally agree with his assessment. The politicians will pander, and if they actually do anything, it will do more harm than good.

Us: Do any political proposals being floated right now stand out as extremely helpful or harmful to real estate?

Peter: Many are harmful. Even those that would help clear the market would mean that housing prices would go a lot lower. The solution to the housing problem can only occur with lower prices. High home prices relative to income are part of the problem, and keeping them artificially propped up only makes that problem worse.

IHB: This describes Orange County, but not Las Vegas. Prices are just now reaching the limit of affordability in Orange County whereas the cost of ownership is a fraction of rent in Las Vegas. In fact, Las Vegas is the example of what happens when prices are allowed to fall freely to reach their market clearing price. Prices there are very low, but the Las Vegas economy will not be near so burdened by mortgage debt in the future. This will have positive repercussions on the local economy.

The best solution would be a vibrant economy that creates productive jobs. We can only achieve that if we reduce government spending, repeal regulations, and lower taxes.

Us: If you had a magic wand and could do one thing overnight to help the housing market … what would it be?

Peter: Specifically for the housing market I would abolish Freddie Mac, Fannie Mae, and the FHA. Then I would reform the tax code to lower marginal rates and abolish the mortgage interest deduction.

IHB: All great ideas. This would eliminate all government subsidies in the housing market. It likely won't happen, but it would be the best thing for the housing market.

Actually, I would abolish the income tax completely, which would make the mortgage deduction moot anyway. If we do that we will have a free market in housing. That will lower prices, and produce a viable market. We will clear up the excess inventory, bring down housing costs, and remove the risk to taxpayers for future mortgage defaults.

IHB: It would also dramatically lower prices and cause the bankruptcy of most of America's banks. I love it.

The free market will make sure that only people who can afford houses buy them, and that there are adequate down payments product lenders in the event of default. At that point, prices will find a real and sustainable bottom. When that happens, the dynamics will change and homes will become a wiser purchase and home lending will become a profitable use of capital, even without government guarantees.

IHB: The housing market would survive the transition to a truly free market. Many loan owners wouldn't like the impact of prices during the transition, but the economy would be much better off without the various subsidies we currently have in place which only serve to inflate prices and shift the risk of loss to taxpayers.

Las Vegas Cashflow property workshop

Larry Roberts will be hosting a Las Vegas Cashflow property workshop at 8:00 PM Wednesday, October 26, 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. at the same location.

Screwing the FHA before the loan limit went down

The owners of today's featured property show why the FHA loan limits need to go down and why FHA insurance premiums are on the rise.

• This property was purchased on 5/8/1998 for $312,000. The owners used a $245,000 first mortgage and a $67,000 down payment.
• On 12/6/1999 they obtained a stand-alone second for $35,000.
• On 4/10/2001 they opened a $60,000 HELOC.
• On 8/3/2001 they refinanced with a $340,000 first mortgage.
• On 3/20/2002 they got a $40,000 stand-alone second.
• On 5/23/2002 they refinanced with a $400,000 first mortgage.
• On 6/13/2002 they obtained a $20,000 HELOC.
• On 5/5/2003 they got a $65,000 stand-alone second.
• On 12/10/2003 they refinanced with a $478,100 first mortgage.
• On 12/12/2003 they opened a $50,000 stand-alone second.
• On 7/26/2004 they obtained a $78,000 stand-alone second.
• On 3/17/2005 they got a $116,674 stand-alone second.
• On 12/15/2006 they raided the bank for a $234,000 stand-alone second.
• On 1/18/2008 they went back again for a $262,000 stand-alone second.

Their mortgage broker must love them. BTW, based on the behavior of these borrowers, do you think it would have been difficult for a lender to recognize these borrowers were Ponzis? Thirteen refinances in nine years! The total disregard of obvious red flags shows just how bad banking standards were during the bubble.

But it gets worse.

Despite the obvious signs of a Ponzi, the FHA approved a $677,407 loan to these people on 8/2/2011 — just a few months before the conforming limit dropped. So how did these borrowers behave after they got their debt-consolidation loan from the FHA?

They opted to sell the house short. They are screwing the FHA and ultimately the US taxpayer — you. I am forced to wonder if they even bothered to make a payment. The loan is only two months old. Given their obvious experience with mortgages, they probably made the first two payments to avoid being charged with mortgage fraud, so now after making the September and October payments, they are selling short.

The started with a $245,000 first mortgage, and now they have a $677,407 first mortgage. That's 432,407 in mortgage equity withdrawal. I wonder how they will adjust to life without a home ATM machine?

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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 … 30 JACKSON Irvine, CA 92620

Resale House Price …… $675,000

Beds: 4

Baths: 2

Sq. Ft.: 2453

$275/SF

Property Type: Residential, Single Family

Style: Two Level, Cape Cod

View: Faces East

Year Built: 1978

Community: Northwood

County: Orange

MLS#: S677010

Source: SoCalMLS

On Redfin: 4 days

——————————————————————————

This will be a DEAL for someone! Inviting curb appeal and a GREAT 4 bedroom floorplan with bonus room. Granite in kitchen, all baths and bar area. Kitchen features sunny breakfast nook, gas cooking and loads of cabinets. Low maintenance ceramic tile floors throughout downstairs living areas. Family room with cozy fireplace. 3 car garage and full driveway. Extra large backyard with room for pool. Slumpstone fence and over 10 fruit trees. One block to elementary school. Don't miss out on this bargain!

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Proprietary IHB commentary and analysis

Resale Home Price …… $675,000

House Purchase Price … $312,000

House Purchase Date …. 5/8/1998

Net Gain (Loss) ………. $322,500

Percent Change ………. 103.4%

Annual Appreciation … 5.7%

Cost of Home Ownership

————————————————-

$675,000 ………. Asking Price

$135,000 ………. 20% Down Conventional

4.18% …………… Mortgage Interest Rate

$540,000 ………. 30-Year Mortgage

$130,065 ………. Income Requirement

$2,634 ………. Monthly Mortgage Payment

$585 ………. Property Tax (@1.04%)

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

$141 ………. Homeowners Insurance (@ 0.25%)

$0 ………. Private Mortgage Insurance

$0 ………. Homeowners Association Fees

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

$3,360 ………. Monthly Cash Outlays

-$432 ………. Tax Savings (% of Interest and Property Tax)

-$753 ………. Equity Hidden in Payment (Amortization)

$201 ………. Lost Income to Down Payment (net of taxes)

$189 ………. Maintenance and Replacement Reserves

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

$2,565 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$6,750 ………. Furnishing and Move In @1%

$6,750 ………. Closing Costs @1%

$5,400 ………… Interest Points @1% of Loan

$135,000 ………. Down Payment

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

$153,900 ………. Total Cash Costs

$39,300 ………… Emergency Cash Reserves

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

$193,200 ………. Total Savings Needed

——————————————————————————————————————————————————-

Larry Roberts and Shevy Akason will host a first-time homebuyer workshop at 6:30 PM Wednesday, October 26, 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.

The political pressure to balance the federal budget may force politicians to curtail or even eliminate the home mortgage interest deduction. Momentum is growing toward this end.

Irvine Home Address … 402 FALCON Crk Irvine, CA 92618

Resale Home Price …… $250,000

I feel so good come payday

I think of all the things I'm gonna buy

when I pick up my pay

Don't you know

but then they hand me that little brown envelope

I peep inside Lord I lose all hope

Cause from those total wages earned

down to that net amount that's due

I feel the painful sense of loss between the two

Johnny Cash — After Taxes

The home mortgage interest deduction is a very important tax policy to most Irvine homeowners. The primary beneficiaries of the home mortgage interest deduction are high wage earners with large mortgages — Irvine residents. People with small mortgages don't pay enough interest to itemize. The wealthy don't have large mortgages. If there is any political issue Irvine residents will have an opinion about, it is the home mortgage interest deduction.

I wrote a detailed analysis of the home mortgage interest deduction in Tax Policy and Housing:

Debt subsidies, in particular the home mortgage interest deduction, are seen as a great benefit to home ownership. The benefit is widely overestimated and misunderstood.

First, people fail to understand that to obtain a debt subsidy, you must have debt. You must be making an interest payment on this debt in order to qualify, and you get to reduce your tax burden by a small percentage of the interest amount. In short, you are paying a dollar to save a quarter. There are people who actually seek to maximize their interest payments in order to increase this subsidy. This is really, really foolish. Anyone out there who believes it is a good idea to spend $1 to receive $0.25 in return, please send me as much money as you wish, and I promise to send back 25% of it.

Realtors try to con people with the “throwing your money away on rent” argument. Homeowners buy into the fallacy. Interest is the rent on money. You throw away money on interest just like you throw it away on rent. In fact, people who overpay for housing throw away more money on interest than renters do to obtain the same property, even after the tax subsidy. The only argument one can make for paying extra interest is if you are receiving a return on that investment through property appreciation. We all see how that is turning out.

The main reason the benefits of the home mortgage interest deduction are overestimated is because people forget they must give up the standard deduction in order to obtain it. This is one area where tax policy can have hidden and indirect impact on housing. Changes in the standard deduction greatly impact the benefit of the home mortgage interest deduction. As the standard deduction is increased, the positive impact of the HMID is decreased. In fact, if the standard deduction were doubled, the average American holding a $150,000 mortgage probably would not bother itemizing to obtain the HMID because it would be of no tax benefit at all. This would certainly simplify people's tax returns. A higher standard deduction is also a boon to renters who do not have the option of obtaining the HMID.

When we set up the RentVsOwnulator, we put in a 25% tax benefit from the HMID. Some people have commented that this is too small a number. It is not. Several people have run the calculations both with and without the HMID, and the net difference is only 25% even at the highest tax brackets. Basically, if you want to figure out your real tax benefit, take your highest marginal tax rate and subtract 10%. That will be a much closer estimate to reality. This reduction is caused by losing the standard deduction.

Another facet to the HMID is the cap level. Currently mortgages up to $1,000,000 are eligible for the deduction. Does anyone think this is right? Do you realize you as a taxpayer are subsidizing $1,000,000 mortgages? When the GSEs were set up, they established a conforming loan limit. The reason they did this is because they are mandated to subsidize mid and low income housing. Why is the limit on the HMID any higher than the conforming loan limit from the GSEs? Why are we subsidizing high income borrowers?

If we were to reduce the HMID cap level to $500,000 and adjust it by the CPI going forward, we are still subsidizing relatively high income borrowers ($500,000 is still almost triple the median home price in the US). A reduction in this cap would have the same impact as the lower GSE conforming limit is having: it would lower prices at the high end by eliminating the subsidies.

IMO, the government has no place in subsidizing house prices that are well above the median. One can argue that the government should not be subsidizing anything in housing, but the low and middle income subsidies are here to stay. If we raise the standard deduction and lower the HMID caps, we can greatly reduce the impact of the HMID and the cost we pay for it as taxpayers. This would have the effect of lowering prices on more expensive homes, but it would help stabilize the lower end of the market. That is what the market needs right now.

I also wrote about the home mortgage interest deduction when Shelia Bair noted the home mortgage interest deduction inflates home prices:

There is a much easier way to figure out how much eliminating the home-mortgage interest deduction would cause prices to drop. What is the marginal tax rate of the borrower? Assume that most buyers borrow the most they can afford on a monthly payment basis, and further assume intelligent ones have already factored in the tax savings. If you eliminate the tax savings, people will need to bring their payment down accordingly. This won't have much effect on the lower priced homes because many of those borrowers don't itemize, but in cities like Irvine, elimination of this deduction would cause loan balances to shrink by 25% to 40% to keep the same payment. Since about 80% of the house price is usually financed, this will lower prices 20% or more.

There is a related issue which isn't often discussed but very important to the housing market. If the home mortgage interest deduction were eliminated, many high wage earners who are underwater would strategically default. First, it would eliminate one of the financial benefits that prompts many to hang on. Second, since most high wager earners who are underwater would realize this will depress home prices in their price range, many more will abandon hope of a recovery and also strategically default.

When this issue was being discussed last year, it really worried the realtor community. In what can best be termed hysterical, California realtors claimed eliminating the mortgage interest deduction would devastate the nation.

The issue is back in the news again, and due to the large federal government budget deficits, some changes to the provisions of this deduction may actually come to pass.

A Taxing Debate: The Mortgage-Interest Deduction

By Ben Steverman – Oct 18, 2011 8:13 AM PT

The mortgage-interest deduction may be your favorite tax break, but be aware that it has some impressive enemies. The fiscal commissions of two different Presidents proposed eliminating it, first in 2005 and then in 2010. There's also a steady stream of research from such places as the London School of Economics and the Brookings Institution arguing that the deduction doesn't boost homeownership, but instead provides incentives for wealthier Americans to buy big houses and take on more debt.

That is exactly what it does.

The home mortgage interest deduction does not boost home ownership because the fringe of home ownership is low wage earners who do not itemize and take advantage of it. If the home mortgage interest deduction were eliminated, it would not impact the home ownership rate in any way.

The deduction does encourage high wage earners to take on extra debt because they are compensated with a tax break. This enables them to increase their bids for real estate and bid up prices higher than they otherwise could and would. In other words, the home mortgage interest deduction inflates home prices in places like Irvine, but it does nothing of value for the rest of society who pays for it.

The people who will argue most vociferously to keep this deduction are existing loan owners who take advantage of it in places like Irvine (don't let me down in the astute observations).

Nevertheless, the mortgage-interest tax deduction survives, fortified in Washington by strong housing industry support and its presumed popularity with voters. Now, according to a recent Bloomberg Poll, a growing number of Americans may be willing to end the mortgage tax deduction — as long as they get something in return. Forty-eight percent of respondents said they were willing to give up all tax deductions, including the home mortgage deduction, in return for lower tax rates for every tax bracket. Forty-five percent were opposed in the survey of 997 adults, conducted for Bloomberg by Selzer & Company.

The results represent a significant shift from a December 2010 Bloomberg survey that asked the same question. That poll showed a majority, 51 percent, opposed to giving up tax deductions, with 41 percent in favor. Given the pressure to lower the federal deficit, “everything is on the table,” says Richard K. Green, director of the University of Southern California Lusk Center for Real Estate. “People are so desperate to figure something out that they're willing to consider anything.”

If politicians believe they have political cover, the home mortgage interest deduction may really be in danger. This is the most momentum I have seen for curbing or eliminating the deduction so far.

Lobbyists versus Academics

The mortgage-interest deduction allows homeowners to lower tax bills by deducting interest on home mortgages from their taxable income. Interest on up to $1 million in mortgages on first and second homes is deductible, along with interest on up to $100,000 in home equity debt.

Lobbyists for homebuilders and realtors vigorously defend the usefulness and popularity of the tax break. Lawrence Yun, chief economist at the National Association of Realtors, says the deduction has “lowered the cost of ownership” and boosted the homeownership rate, which he describes as “the foundation for a very stable, democratic country.” As recently as April, a USA Today/Gallup Poll found that 62 percent of respondents opposed eliminating the tax break.

As usual Lawrence Yun is completely wrong. The home mortgage interest deduction has done nothing to boost the home ownership rate for reasons I outlined above. Further evidence of this comes from countries like Canada which have a higher home ownership rate than the United States without having a home mortgage interest deduction.

If the sentiment in previous polls is an accurate reflection of attitudes, many Americans support the deduction without getting a benefit from it. The deduction has a definite high-income tilt: Only about one in four Americans includes mortgage interest on taxes. Renters and homeowners without mortgages have no interest to deduct, while many lower- and middle-class homeowners receive a standard tax deduction and don't itemize.

Dennis J. Ventry Jr., a professor specializing in tax law at the University of California-Davis School of Law, calls the provision, which costs nearly $100 billion a year, “the most inequitable and inefficient provision in the Internal Revenue Code.” The benefits of deducting interest from income increase with a homeowner's tax rate, he notes. Thus, according to a 2011 study co-authored by Green, 46 percent of the deduction's tax benefit goes to households earnings more than $100,000 per year.

Conservatives always decry the progressive nature of the tax code. Well, the home mortgage interest deduction is the most regressive tax break possible. The more the borrower makes, the more the tax deduction increases. Low and middle income Americans don't gain much if any benefit from this tax break, and of course, renters get none at all.

Unpredictable Effects

Criticizing the mortgage-interest deduction is far easier than calculating the impact of getting rid of it. If, as many argue, the deduction has spurred “overinvestment” in housing, ending the incentive may have negative and unpredictable effects.

The potential hit to the housing economy is a big unknown. Dean Stansel, an economics professor at Florida Gulf Coast University who has studied the deduction for the Reason Foundation, estimates that the tax break inflates housing prices by less than 1 percent; a separate study calculates that it raises prices by 3 percent to 6 percent.

One research paper forecasts serious trouble if the deduction should disappear, predicting that prices could fall from 2 percent to as much as 13 percent, depending on the metropolitan area. Most vulnerable would be parts of the country with higher incomes and higher home prices, which typically benefit most from the mortgage-interest deduction. For example, according to a March 2011 analysis in Tax Notes, residents of Beverly Hills, California, get a $1,873 per person benefit from the deduction, while residents of Clarksville, Mississippi, gain an average of $45 per person.

The research paper mentioned above is probably right. Depending on the area, prices will drop somewhere between 2% and 13%. Locally in Irvine, prices will drop much closer to 13% than 2% because Irvine is much more dependent on the deduction to maintain home values than other areas.

On a personal level, the deduction's biggest beneficiaries will feel the greatest pain if it disappears. Green, of the University of Southern California Lusk Center for Real Estate, estimates that households earning more than $160,000 would pay an average of $2,577 in additional taxes, even after benefiting from a proposed 15 percent tax credit. Places with pricy real estate would bear the brunt of a repeal. “The city of San Francisco would just get whacked,” Green says.

Add Irvine to that list.

Tempting Target

To avoid dire scenarios, Washington would likely do away with the mortgage deduction in a gentle fashion. The tax advisory panel convened by President George W. Bush in 2005 suggested replacing the deduction with a tax credit equal to 15 percent of interest paid. In 2009, the Bowles-Simpson Commission proposed an annual tax credit of 12 percent, limiting interest to first homes and mortgages up to $500,000.

Unlike tax deductions, tax credits can be claimed by all taxpayers, including those who do not itemize their taxes. That could help a greater number of lower- and middle-income people afford houses. Green estimates that a 15 percent mortgage-interest tax credit would boost homeownership by 2.5 percentage points.

I would prefer if we eliminated all tax subsidies on home ownership. Why give a tax credit or a tax deduction? The recent decline in the home ownership hasn't caused any civil unrest, unless you count the occupy Wall Street movement.

Not that I want to see it happen, but I believe Richard Green is right that a 15% mortgage interest tax credit would boost home ownership rates because it would impact the low-income buyers on the fringes.

The mortgage deduction could once again be a target for deficit cutters. According to a 2009 Congressional Budget Office analysis, gradually replacing the mortgage deduction with a 15 percent credit would yield $388 billion from 2013 to 2019. Such savings could prove tempting to the Joint Select Committee on Deficit Reduction, which is charged with finding at least $1.5 trillion in deficit savings over the next 10 years.

The inclinations of this “super committee” are, so far, secret, but the mortgage-interest deduction was discussed at a Sept. 22 hearing. Without making any recommendations, Joint Committee on Taxation Chief of Staff Thomas Barthold mentioned the deduction as an example of a “tax expenditure” that could be eliminated as part of an overhaul of the tax code.

The threat of mandatory deep cuts in defense spending and Medicare if the super committee cannot find enough savings may be the only way that the mortgage interest deduction can die. It's tough to end the tax break, says Green, because the costs are widespread and barely noticed, while the benefits are concentrated in a vocal minority that appreciates the deduction. “It's only in the context of overall reform that you might see something happen,” he says. With public opinion turning, that day may be drawing near.

The circumstances are right for eliminating this deduction. When times are good, eliminating a deduction like this is nearly impossible, but with the realities of a budget ballooning out of control, something has to be done. When something has to be done is when changes as controversial as this one are made.

$7,000 down, $246,00 in mortgage equity withdrawal

The owner of today's featured property demonstrates why houses were so popular during the bubble. The lingering memory of so much free money continues to motivate buyers even today. Fortunately, the crash will grind on, and eventually, people will abandon dreams of free money from houses. When they do, the market will finally bottom.

• This property was purchased on 7/23/1999 for $139,000. The owner used a $132,000 first mortgage and a $7,000 down payment.
• On 3/28/2001 the owner refinanced with a $135,000 first mortgage.
• On 9/7/2001 he obtained a $25,000 HELOC.
• On 2/18/2003 he refinanced with a $192,000 first mortgage.
• On 6/29/2004 he got a $32,600 HELOC.
• On 12/23/2004 he obtained a $60,000 HELOC.
• On 5/3/2005 he refinanced with a $234,600 first mortgage.
• On 8/30/2005 he was given a $75,000 HELOC.
• On 11/29/2005 he refinanced with a $328,000 Option ARM with a 2% teaser rate.
• On 12/11/2006 he received a $50,000 HELOC.
• Total property debt is 378,000.
• Total mortgage equity withdrawal is 246,000.

There have been no notices filed on this property, but since he is selling short, he likely isn't paying the mortgage. This is shadow inventory. It is the kind of borrower which needs to be flushed from the system and the property recycled. The resulting decline in the loan ownership rate will help out this debtor and the rest of the economy.

——————————————————————————————————————————————-

This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707

949.769.1599

sales@idealhomebrokers.com

Irvine House Address … 402 FALCON Crk Irvine, CA 92618

Resale House Price …… $250,000

Beds: 1

Baths: 2

Sq. Ft.: 900

$278/SF

Property Type: Residential, Condominium

Style: 3+ Levels, Traditional

Year Built: 1999

Community: Oak Creek

County: Orange

MLS#: S676279

Source: SoCalMLS

Status: Active

On Redfin: 4 days

——————————————————————————

Elegant home in gated Oak Creek featuring a spacious master suite, one and one-half baths, two-car attached garage, and sun-splashed deck! Sparkling kitchen features handsome cabinetry, built-in microwave, and dry-foods pantry. Upgrades include custome tile floors in kitchen and baths, designer carpet, and custom window treatments. Master suite features walk-in close as well as master bath with dual sinks and soaking tub. Enjoy resort-style pools, spas, tennis courts and award-winning Irvine schools!

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Proprietary IHB commentary and analysis

Resale Home Price …… $250,000

House Purchase Price … $139,000

House Purchase Date …. 7/23/1999

Net Gain (Loss) ………. $96,000

Percent Change ………. 69.1%

Annual Appreciation … 4.8%

Cost of Home Ownership

————————————————-

$250,000 ………. Asking Price

$8,750 ………. 3.5% Down FHA Financing

4.18% …………… Mortgage Interest Rate

$241,250 ………. 30-Year Mortgage

$79,205 ………. Income Requirement

$1,177 ………. Monthly Mortgage Payment

$217 ………. Property Tax (@1.04%)

$100 ………. Special Taxes and Levies (Mello Roos)

$52 ………. Homeowners Insurance (@ 0.25%)

$277 ………. Private Mortgage Insurance

$223 ………. Homeowners Association Fees

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

$2,046 ………. Monthly Cash Outlays

-$185 ………. Tax Savings (% of Interest and Property Tax)

-$337 ………. Equity Hidden in Payment (Amortization)

$13 ………. Lost Income to Down Payment (net of taxes)

$51 ………. Maintenance and Replacement Reserves

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

$1,589 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$2,500 ………. Furnishing and Move In @1%

$2,500 ………. Closing Costs @1%

$2,412 ………… Interest Points @1% of Loan

$8,750 ………. Down Payment

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

$16,162 ………. Total Cash Costs

$24,300 ………… Emergency Cash Reserves

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

$40,462 ………. Total Savings Needed

——————————————————————————————————————————————————-

Larry Roberts and Shevy Akason will host a first-time homebuyer workshop at 6:30 PM Wednesday, October 26, 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.

Larry Roberts will be hosting a Las Vegas Cashflow property workshop at 8:00 at the same location. Register by clicking here.

Lenders have resorted to lobbying Washington to let loan owners rob their retirement accounts to repay bad loans from the housing bubble.

Irvine Home Address … 43 SPARROWHAWK Irvine, CA 92604

Resale Home Price …… $579,000

I’m gonna pick up the pieces,

And build a Lego house

When things go wrong we can knock it down

It's hard to admit a mistake, change course, and pick up the pieces left behind. People who bought in the frenzy of the housing bubble made a mistake. A big one. But rather than short sell or allow the house to be auctioned in foreclosure, people will do nearly anything — including sacrificing their future — to avoid admitting the mistake and doing what's necessary to get on with their lives.

Bill would remove penalty for tapping 401(k) to avoid foreclosure

The proposed legislation would amend the tax code to allow homeowners who have 401(k) retirement plans to pull out money to save their houses from foreclosure without the usual tax penalties.

IHB: are they saving their homes from foreclosure, or saving the banks from taking a loss at the expense of their retirement?

By Kenneth R. Harney — October 16, 2011

With hundreds of thousands of homeowners facing imminent foreclosure and estimates of 2 million or more in the wings, are there any financial tools available to distressed borrowers that haven't been tried yet? And is there a way to help owners that won't rack up huge federal expenditures and add to the deficit?

The Obama administration has been exploring options — including a new refinancing program expected this month — but a concept has surfaced on Capitol Hill that might offer modest help with no revenue cost to the government: Amend the tax code to allow homeowners who have 401(k) retirement plans to pull out money to save their houses from foreclosure without the usual tax penalties.

That is a horrible idea. Retirement accounts are supposed to be protected. If you allow loan owners to sacrifice their retirements to save the banks, what we will end up with is millions of people with no retirement savings in order to save the banks. I think that is terrible.

The change would work like this: Under current rules, anyone making what's known as a “hardship” early withdrawal of funds from their 401(k) must pay the IRS a 10% penalty on top of ordinary income taxes. A bill introduced Oct. 5 would waive the penalty if the purpose of the distribution is to make loan payments to avoid loss of a primary home to foreclosure.

Saving the banks is a special hardship now? This proposal makes me particularly angry. A foreclosure would eliminate the hardship, and the loan owners would adjust to life in a rental — with their retirement savings safely protected.

Co-written by Sen. Johnny Isakson and Rep. Tom Graves, both Republicans from Georgia, the bill would allow owners to pull out up to $50,000. The money could be used in a lump sum to pay down the delinquent mortgage balance or to fill shortfalls caused by reductions of household income.

Using retirement savings to bail out lenders or support a family's current lifestyle is a really bad idea.

It could also be used as part of loan modification agreements with lenders designed to avert a foreclosure. No matter how the money is used to resolve the mortgage delinquency, it would need to be spent within 120 days of receipt and could not exceed 50% of the funds in the retirement account.

Owners would still be subject to income taxes on the amounts withdrawn.

Good. That will likely stop most people from doing it.

Though neither of the co-sponsors assert that the bill would raise revenue — they simply say it won't cost the government anything — some retirement program experts say it might. Edward Ferrigno, vice president for Washington affairs at the Plan Sponsor Council of America, a group that represents employers that offer workers 401(k) accounts, said that by triggering taxable distributions from otherwise untouched, tax-deferred plans, the bill “should generate revenues.” Ferrigno declined to comment on the bill overall, pending further review of its provisions.

Titled the HOME Act, short for Hardship Outlays to protect Mortgagee Equity Act,

Protect mortgage equity? These government labels and acronyms are misleading. If these people had any equity in their properties, they could merely sell them and pay off the loan. Nobody with equity needs this money. It's the loan owners who will take the money.

the proposal sheds light on the potential foreclosure-avoidance resources — and the drawbacks — connected with tapping employee retirement accounts. Many, but not all, 401(k) plans allow loans to participants, including for housing-related purposes. Retirement advisors generally recommend taking a loan from a plan because the money withdrawn is not taxed or penalized. Borrowers are required to pay interest on the loan, but in effect they are paying it to themselves to offset any earnings lost on the balances taken out.

Many 401(k) plans also allow “hardship” withdrawals. But these come with much stricter rules and fewer eligible uses, plus the tax penalties. The Internal Revenue Code limits hardship distributions to situations in which there is an immediate and urgent financial need and there are no other funds available to meet this need. On top of that, the rules require that taxpayers must opt first for a loan from the retirement plan — if permitted — before pursuing a hardship withdrawal.

Though avoiding foreclosure is one of the permitted hardship uses under the code, the 10% penalty discourages potential users, Isakson and Graves argue. Their bill would remove that disincentive and provide an emergency escape hatch for owners sliding fast toward foreclosure.

I have a better idea for legislation: remove “avoiding foreclosure” from the list of permitted hardships. Rather than make it easier for people by removing the penalty, we should make it harder for people to waste their retirement money in this manner.

Putting aside the potential positives, are there downsides to making a hardship withdrawal from your 401(k), even penalty-free? You bet. Pulling out 401(k) dollars early — with or without a tax penalty — is still an expensive way to raise money. Not only does it deplete the tax-deferred savings you've set aside, but in the case of hardship withdrawals you are prohibited by IRS rules from making new contributions to your plan for six months.

It is a very expensive way to raise money. When someone takes money out of a retirement account, it isn't just the loss of the money, it's the loss of the growth of that money over time that gets really expensive.

Even if the HOME bill makes it through Congress — and there's no assurance it will — taking the hardship route should never be your first choice. It should be your last resort, when there's nothing else that will save your house and you don't want to walk away.

Most people who would consider this option would be better off if they walked away.

But also consider the retirement plan alternative that may already be buried away in your plan documents: a save-the-house loan to yourself. If the numbers work, and you have a reasonable chance of avoiding foreclosure and repaying the loan, check it out. It just might be your solution.

kenharney@earthlink.net

So what do you think, IHB readers, should loan owners be allowed to take money out of their retirement accounts without penalty to give to the bank?

Short sale caused my HELOC abuse

The owner of today's featured property is selling short despite the small profit on the transaction. If not for the HELOC abuse, this would not be a short sale. Of course, if not for the HELOC abuse, this owner wouldn't have had the pleasure of blowing over $300,000 either.

• The property was purchased on 6/8/2003 for $551,000. The owner used a $440,800 first mortgage, a $51,100 second mortgage, and a $51,100 down payment.
• On 3/19/2004, only 9 months later, he refinanced with a $502,001 first mortgage and a $60,000 HELOC.
• On 4/25/2005 he got a $100,000 HELOC.
• On 8/7/2006 he obtained a $700,000 first mortgage and a $87,450 HELOC.
• Assuming the final HELOC was maxed out, the total property debt was $787,450, and the mortgage equity withdrawal was $295,550.

$300K in three years. Not bad.

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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 … 43 SPARROWHAWK Irvine, CA 92604

Resale House Price …… $579,000

Beds: 4

Baths: 3

Sq. Ft.: 2129

$272/SF

Property Type: Residential, Single Family

Style: Two Level, Contemporary

Year Built: 1976

Community: Woodbridge

County: Orange

MLS#: S675445

Source: SoCalMLS

Status: Active

On Redfin: 12 days

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Fabulous opportunity to own this outstanding home in Woodbridge, 4 bedrooms, 3 baths with one bed and bath downstairs, nice sized back yard, Formal living and dining room, breakfast nook, family room, open and spacious. Just walking distances to all the ammenities that Woodbridge has to offer

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Proprietary IHB commentary and analysis

Resale Home Price …… $579,000

House Purchase Price … $551,000

House Purchase Date …. 6/8/2003

Net Gain (Loss) ………. ($6,740)

Percent Change ………. -1.2%

Annual Appreciation … 0.6%

Cost of Home Ownership

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$579,000 ………. Asking Price

$115,800 ………. 20% Down Conventional

4.20% …………… Mortgage Interest Rate

$463,200 ………. 30-Year Mortgage

$115,067 ………. Income Requirement

$2,265 ………. Monthly Mortgage Payment

$502 ………. Property Tax (@1.04%)

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

$121 ………. Homeowners Insurance (@ 0.25%)

$0 ………. Private Mortgage Insurance

$85 ………. Homeowners Association Fees

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$2,973 ………. Monthly Cash Outlays

-$372 ………. Tax Savings (% of Interest and Property Tax)

-$644 ………. Equity Hidden in Payment (Amortization)

$174 ………. Lost Income to Down Payment (net of taxes)

$92 ………. Maintenance and Replacement Reserves

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$2,223 ………. Monthly Cost of Ownership

Cash Acquisition Demands

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$5,790 ………. Furnishing and Move In @1%

$5,790 ………. Closing Costs @1%

$4,632 ………… Interest Points @1% of Loan

$115,800 ………. Down Payment

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$132,012 ………. Total Cash Costs

$34,000 ………… Emergency Cash Reserves

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$166,012 ………. Total Savings Needed

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Larry Roberts and Shevy Akason will host a first-time homebuyer workshop at 6:30 PM Wednesday, October 26, 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.

Larry Roberts will be hosting a Las Vegas Cashflow property workshop at 8:00 at the same location.