Archive for August, 2012

The people we elect to public office should set a higher standard for conduct than ordinary citizens. If we are to trust them to make laws governing the rest of us, we should be able to rely on them to follow the rules rather than gaming the system to their advantage. Unfortunately, that's not the world we live in. Many California lawmakers got caught up in the mania of the housing bubble, and when their faith in ever-increasing house prices was shaken, their ethics went on sabbatical. Real estate bubble bursts for California lawmakers too In the boom years, several California legislators bought homes but are now having trouble keeping up with mortgages or avoiding big losses. By Patrick McGreevy,…[READ MORE]

Economists and housing market observers pour over sales numbers each month to divine the direction of future house prices. Everyone has their pet theories on whether house prices have bottomed or if there is more pain ahead. Many rely on these numbers as gospel forgetting that these numbers are generated by the actions of people responding to the conditions around them. Change the conditions, and the numbers can change quickly. CA - Foreclosure Outcomes For example, in February of 2012, lenders across the Southwest abruptly stopped processing their backlog of foreclosures, not because they exhausted the supply of delinquencies but because of internal policy changes brought about by the foreclosure settlement with state attorneys general around the country. The story…[READ MORE]

Foreclosure rates are declining across the Southwest. Lenders are slowing foreclosures because they want house prices to bottom and start going up due to a lack of distressed supply on the MLS. This would be a natural occurrence once shadow inventory is eliminated, but right now, this slowing of foreclosures is a contrived policy of a cartel desperately hoping they can force prices to move higher. If foreclosures were declining because lenders were out of delinquent mortgages to foreclose on, we would all be celebrating the housing market recovery. However, lenders are not out of delinquent mortgage squatters to boot out of the houses they are not paying for. In fact, lenders have slowed their foreclosure rates so much, they…[READ MORE]

Conventional wisdom is that foreclosures reduce neighborhood values. It turns out, that isn't the case. It's easy to see why people come to this erroneous conclusion. Properties that go through foreclosure often sell for less than recent comparable sales, particularly after the peak of the housing bubble when values were grossly inflated and ripe for a serious correction. However, it wasn't the foreclosure that caused the discount, it was a motivated seller dealing with a property in poor condition that ultimately caused prices to fall. You wouldn't know it by the huge inventories they currently manage, but lenders are not in the real estate business. They don't profit from the real estate they own. They only obtain real estate when…[READ MORE]

With the serious problems facing the housing market including high delinquency rates creating a massive shadow inventory, a weak economy, tepid demand from owner-occupants, excessive consumer debt, a depleted buyer pool due to credit impairment, and artificially low interest rates, it's a wonder housing prices aren't still heading straight down. The recent uptick in prices is largely due to a successful attempt by the lending cartel to restrict for-sale inventory on the MLS. Without this inventory restriction, prices would almost certainly be headed lower. At some point, the shadow inventory of delinquent mortgage squatters will be cleared out. The liquidation will either lower prices or limit appreciation for a long time while these properties are processed. The big question is,…[READ MORE]

Most federal assistance programs are a waste of money. They set up an entrenched bureaucracy that drains taxpayer resources and provide little economic return. There are exceptional government programs that deliver great benefit at little cost to taxpayers, but the foreclosure counseling services are not one of those programs. Most of these borrowers are hopelessly underwater or overextended. The counseling might have done some good before they got into this mess, but at this point, telling them what they should have done differently isn't going to help. Programs like this are created as political cover to deflect criticism that the government is not doing enough. There is little or no hope these programs will have positive outcomes for anyone involved.…[READ MORE]

Despite being an outspoken renter over the last five years (I've actually been a renter since 2001), I still believe there are virtues to home ownership. The emotional benefits are palpable, and there are financial reasons to own. The main financial reason I plan to own again soon is to lock in a cost of ownership lower than the cost of a comparable rental. A secondary reason is to obtain the "forced savings" benefit of a conventionally amortized mortgage. I know a lender would give me a HELOC if I asked, but I have no intention of it. At some point, I want to pay off a mortgage and live truly free. Renting has been good to me, particularly over…[READ MORE]

I believe the low end of the housing market is finding a bottom. Due to the timely processing of subprime foreclosures, prices crashed hard at the low end, and shadow inventory is much less abundant. Low interest rates and lower prices pushed affordability to record highs, and investor interest has helped absorb the visible MLS inventory. As a result, properties priced below the median in most markets is probably not going to go down much from here. The high end is another story. Banks have not foreclosed on it's high-end customers preferring to allow them to squat in luxury. Lenders know the losses here will be huge if they force the air out of the bubble they created, so they…[READ MORE]

One hundred percent of those who lost homes in foreclosure suffered from excessive debt -- 100%. The total amount of debt is important, but the terms of repayment are far more critical. The monthly payment (plus taxes, insurance and other costs) must be a manageable percentage of the borrower's income, otherwise the borrower is likely to default. Historically, this value was 28% or less, then it was expanded to 30%, and now the GSEs underwrite to 31%. Debt-to-income ratios higher than this are proven to have accelerating default rates absent Ponzi borrowing. Thirty-one percent doesn't sound like an onerous percentage of income. But most people forget this is gross income, not net. A 31% debt-to-income ratio is 50% or more…[READ MORE]

Just as buying a home is an emotional decision, defaulting on the mortgage and giving up a home is too. Any borrower who is deeply underwater and making payments in excess of a comparable rental would benefit financially from strategic default. That's the math. However, defying the logic, very few loanowners are actually defaulting. People cloak their reasons with intellectual rationalizations, but it's an emotional decision based on the desire to keep their family home and the ethical considerations that go along with the decision. As with any emotional decision, it may be right, or it may be wrong depending more upon the perceptions of the decision maker rather than some outside measuring stick. Since this is an emotional decision,…[READ MORE]

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