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Author Archive: Irvine Renter

Many politicians and advocacy groups lobbied for principal reduction for underwater borrowers. This was the preferred solution among loanowners because it was giving them free money and removing any consequences for their ill-timed purchase or refinance. Principal reduction was not favored by lenders or taxpayer watchdog groups because either the lender or the government was going to pay the price for trillions of dollars in principal reductions. The compromise solution was loan modification. The early efforts at loan modifications largely failed because far too many people were given debts they couldn't manage during the housing bubble, and they didn't qualify for new loans everyone knew were going to go bad. Over the course of three years from October 2008 when…[READ MORE]

When people bought homes during the housing bubble, they often used toxic financing terms like teaser rates, negative amortization, and other parlor tricks to get themselves into a home they couldn’t afford. Their plan (assuming they had one) was to refinance into a new loan in a few years when their payments skyrocketed. Ostensibly, they were going to get stable financing in the future, but realistically most would have opted for another toxic loan to keep their costs down while they made huge profits on appreciation. The process was known as serial refinancing, and many people fell for it. The false assumption they shared was that another toxic loan would always be available. The credit crunch rudely exposed the folly…[READ MORE]

The housing bust should have wiped out America's lenders. Instead, we deemed these institutions Too-Big-Too-Fail, and we pumped billions of dollars into keeping them afloat. Since the emergency cash was not enough, we suspended prudent accounting rules and allowed lenders to report the value of bad loans based on financial models rather than actual market prices. As long as lenders didn't foreclose, they didn't need to recognize the loss on their non-performing loans. But it's really worse than that. Lenders quickly realized they could turn this accounting loophole to their advantage in several ways. First, they embarked on an aggressive program of modifying loans to keep borrowers making payments. Rather than accept smaller profits, they modified the terms of these…[READ MORE]

I feel bad for loanowners (AKA underwater borrowers). When I started blogging in February of 2007, I felt a sense of urgency to convince as many people as I could they shouldn't buy a house. I knew the impending price collapse was going to have serious long-term consequences on people's lives. Many would succumb to the weight of their debts and lose their homes in foreclosure. Many more would endure years of owing more on their mortgage than their home was worth. Mortgage debt is always a heavy burden, but when it greatly exceeds the value of the house it's attached to, the crushing weight is almost too much to bear (remember Swiller's bizarre rants?) For many loanowners, the last…[READ MORE]

I recently reported the housing bubble fully is reflated in Irvine, California, and the OC housing market ricochets off affordability ceiling. Since the OC market is now priced very near its historical relationship between the cost of ownership and the cost of rent, I want to take a more detailed look at what's happening across the county and find those markets where deals still abound and those markets where none are found. With the dramatic increase in price and rising interest rates, affordability is declining rapidly. As a consequence, the OC housing market, which started the year rated a 10, is now dropping down to a 7. While this is still a good rating by historic standards, it's not the…[READ MORE]

Sometime in late 2011 or early 2012, lenders changed their internal policies regarding foreclosure processing on delinquent borrowers. Prior to that time, most major lenders, and in particular the GSEs, were processing foreclosures to reduce the level of shadow inventory and stop delinquent mortgage squatters from enjoying a free ride. Lenders were still slow at this processing, and the shadow inventory was enormous, but they were processing just the same. Lenders finally came to realize that continued foreclosure processing was providing a steady stream of distressed properties, and these distressed property sales were keeping prices down. They correctly reasoned that if they stopped foreclosure processing, they could greatly reduce the supply of must-sell distressed inventory and alleviate the pressure on…[READ MORE]

It's been called "sticker shock," but perhaps a more apt term would be "price revulsion." The cost of ownership rose so high so fast that buyers simply stopped buying. Between rising prices and rising interest rates, houses have reached the limit of affordability in many markets, and buyers are either unwilling or unable to push them any higher -- and which of those factors it is will determine what happens going forward. Housing bulls postulate buyers are merely adjusting to the new price levels, and probably next spring, they will be out in force to push the market even higher. In other words, they believe it's buyer choice that causing prices to flatten and sales volumes to plummet. Housing bears…[READ MORE]

Actions have consequences -- which is not to say that many bailout advocates want everyone to avoid these consequences -- but in the real world, the decisions we make impact our lives. When rational people make good decisions, they carefully consider the potential consequences of their actions. Bailouts that soften these consequences invariably leads to more high-risk behavior, poor decision making, and an increased sense of entitlement. I was an early advocate of strategic default, and as it turned out borrowers who strategically defaulted early on made the best choice. These early strategic defaulters recognized their shortest path to future home equity was to quit paying, wait the necessary penalty period, then buy again when prices were lower. Those that…[READ MORE]

We haven't inflated a new bubble yet on this cycle, but we have reached a point where we've fully reflated the old one in several markets. Today, I want to take a detailed look at the Irvine, California, housing market. Irvine is a good proxy for other desirable Coastal California markets. What's happening in Irvine is happening elsewhere. In a healthy housing market, the cost of ownership in Irvine exceeds the cost of renting by 15%. Much of Irvine is a move-up market, so people take their equity from a previous sale and bid prices up higher than rental parity. Just one year ago, Irvine was undervalued by nearly 25%. The cost of ownership was lower than the cost of…[READ MORE]

In February I made the case that future housing markets will be very interest rate sensitive. When you look at the mechanisms used to inflate previous bubbles — using teaser rates, allowing excessive DTIs, and abandoning amortization — these were banned by the new residential mortgage rules. Lenders aren’t be able to use these tools to soften the impact of interest rate fluctuations or provide “affordability” when the market reaches its friction point. This is the main reason the market changed so dramatically and so suddenly when mortgage rates surged in June. Today, I want to follow up and show the mounting evidence of the housing markets extreme sensitivity to interest rate fluctuations. We've all been following the headlines over…[READ MORE]

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