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Mostly through short sales, banks met 40% of settlement requirement

The settlement with the major banks dramatically altered their incentives. As part of the settlement, banks can count short sale losses toward their settlement amount. Foreclosures don’t count. So how did banks respond? They dramatically reduced their REO processing and focused on approving short sales. This had two impacts on MLS inventory. First, the lingering short sales that polluted the MLS for months were cleared out. And second, far fewer REO were processed to replace the REO the banks were selling. By clearing out the backlog and not replacing with fresh supply, the number of properties available for sale on the MLS dried up. As a side benefit, prices went up increasing the bank’s capital recovery on the properties they did sell.

This change in incentives is one of the many policy changes and manipulations impacting the housing market. It’s very difficult to predict when such changes will occur and what their impact will be. Anyone who guesses right about the direction of home prices in this environment is either extraordinarily insightful, or rather lucky.

BTW, the headline of this article is misleading nonsense.

Mortgage settlement with banks starts to ease foreclosure crisis

Nearly 140,000 homeowners have received a total of $10.6 billion in mortgage debt relief from March through June, a federal report on the banks’ progress says.

By Jim Puzzanghera, Los Angeles Times — August 30, 2012

WASHINGTON — The nation’s five largest banks are off to a good start on their promise to help ease the foreclosure crisis, providing nearly 140,000 struggling homeowners with a total of $10.6 billion in mortgage debt relief, according to a government report.

But the banks have much more work to do to fulfill their requirements under a $25-billion agreement reached in February to settle federal and state foreclosure abuse investigations, key officials said.

$10M out of $25M is 40%. That is tremendous progress for only six months. Of course, that progress was almost entirely in the form of short sales, which are losses the banks would have absorbed anyway, but it makes for good public relations for both the banks and the government.

And to keep the pressure on, the government released the preliminary report Wednesday — the first look at how Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co., Citigroup Inc. and Ally Financial Inc. were carrying out their commitments.

“We will continue holding the banks’ feet to the fire in the months ahead, and we will be watching like hawks to make sure they live up to the requirements under this settlement,” Housing and Urban Development Secretary Shaun Donovan said.

Self-serving bullshit. The government regulators are trying to come off as tough guard dogs when in fact all they’re doing is watching the banks approve short sales — something the banks would have done anyway.

The report from the Office of Mortgage Settlement Oversight showed that Bank of America … did not complete a single modification of a first mortgage from the settlement’s start date of March 1 through June 30.

The other four banks had completed a total of 7,093 modifications of first mortgages worth $749 million during that same period. JPMorgan Chase completed the most, 2,920, with the highest value, $367 million.

Bank of America quickly responded to the report with updated numbers, saying that from July 1 to Aug. 21 it had completed 3,823 first-mortgage modifications, worth $596 million. Bank spokesman Dan Frahm said the modifications were difficult to complete by June 30 because each homeowner must first go through a three-month trial period.

That’s a plausible explanation. The banks want to keep can-kicking, so they are happy to complete loan modifications to get a few more payments out of hopeless debtors.

It’s amazing how many loan modifications fail in the first three months. According to the most recent HAMP report, 14% of loan modifications don’t even survive the three-month process to become permanent. Loan modifications are can kicking, not a viable long-term solution.

Overall, 137,846 borrowers nationwide received some type of monetary relief from the banks during the four-month period for an average of about $76,615 each. Californians received about $4.6 billion in relief, by far the most of any state.

The banks stopped taking back properties as REO to comply with the settlement. They are making good progress.

“We are happy with California’s share of the pie, but the pie needs to get bigger,” said Shum Preston, spokesman for California Atty. Gen. Kamala D. Harris, who was a key player in the settlement. “There’s a lot of hurt out there.”

Kamala Harris is an opportunist hoping to gain notoriety for herself. She had egg on her face when Jerry Brown decided to spend the relief money on other purposes. There may be a lot of mortgage hurt in California, but the settlement is doing nothing to alleviate that pain.

…The banks get credits for various types of homeowner relief. Each dollar forgiven in a short sale, for example, results in a credit of 45 cents if the bank owns the loan and 20 cents if it is held by investors.

There are two outrages in that sentence. First, it’s ridiculous that banks get relief credit for approving short sales. That was a massive loophole designed for the banks. When a delinquent borrower wants to leave a property, they can complete a short sale, or they can strategically default. If the borrower does not want to complete a short sale, they can default and live for free until the bank finally forecloses. Once the borrower decides to stop paying, the banks don’t have much leverage. Banks should not be given relief credit for completely a short sale instead of a foreclosure.

Second, why are banks getting credit for short sales in which they don’t lose money? When the act as servicers for an asset-backed security pool, they aren’t the ones losing money, yet they are getting relief credit. Outrageous.

The settlement was a complete and total victory for the banks.

The report did not say how much the $10.6 billion provided as of June 30 would reduce the $20-billion obligation. The largest amount of relief came in debt forgiveness as part of short sales, in which the bank allows a homeowner to sell a home for less than what is owed on the mortgage. The banks forgave about $8.7 billion in first- or second-mortgage debt as part of short sales.

Big surprise. The banks are maximizing their credits under the loophole.

In addition to the $749 million in principal reductions on first mortgages, the banks provided $231 million in principal reductions or outright forgiveness for second mortgages.

The banks also are adopting 304 servicing standards required by the settlement, with four of the banks saying that they implemented more than half the standard as of July 5. The report did not identify those banks.

Overall, Bank of America had provided the most relief to homeowners for the report period — $4.9 billion, nearly all in the form of short sales.

Now we know who’s clearing their books. Most of it was likely the crap they bought from Countrywide.

Kevin Stein, associate director of the California Reinvestment Coalition, a housing advocacy group, said he was concerned that most of the relief from the banks was in the form of short sales instead of principal reductions, which allows people to keep their homes.

That’s the best part of the settlement. At least the settlement didn’t create incentives to maximize moral hazard.

“It’s still early, and we want to be hopeful that will turn itself around,” Stein said.

Donovan said short sales were easier to complete in the first few months of the settlement than principal reductions. But he said short sales are capped and are not as attractive to banks because they result in less credit toward fulfilling the settlement terms.

Bullshit. Short sales cost the banks nothing. This is money they would have lost anyway — hell, this is money they would have recognized as losses years ago if not for amend-extend-pretend. They could have given banks 5 cents on a dollar and they still would have met the entire requirement with short sales. They will meet their settlement requirements long before they run out of short sales to lose money on.

Katie Porter, a UC Irvine law professor who is monitoring the settlement compliance for the state attorney general, said the report showed that the banks had moved quickly to start providing relief, though their performance was uneven.

“We need to see more, but the trend is in the right direction,” she said.

The bank settlement was a sham. I suppose it’s good that banks are now encouraged to recognize some losses, but this shift to short sales and away from REO processing has created acute shortages of MLS supply across the southwest. Delinquent mortgage squatters are not stepping up to fill the void left by the diminished REO processing. Why should they? They benefit more by squatting until foreclosure.

So what happens when the banks finally meet their requirements for the settlement? At the rate they are going, they will be done by next spring. At that point, I would expect them to turn their attention to the committed squatters and finally force them out.

Daily Debtor Debacle

I was recently approached by a law firm specializing in debt settlement negotiations. They were intrigued and amused by the daily stories of woe I profile each day on the blog. They liked my educational approach bringing light to the foolish mistakes people make that bury them under mountains of debt. They see it every day in their practice, but since their cases are confidential, they can’t educate anyone on the mistakes they see.

They believe in the public service I provide, and they asked me if they could sponsor this segment. I will be compensated for any clients this sponsorship generates. Although most of my readers resonate with my anti-debt message, they believe many readers may know friends or relatives who got caught up in the madness and are looking for alternatives to bankruptcy which is the service they provide.

I have been to their offices and interviewed their lead attorney. From what I can tell, they are legitimate operators focused on providing real customer service. I have not used their services, so I can’t attest to their abilities.

The transition between the daily post and the daily property profile will be the graphic below (or some similar one). If you click on it now, it will send them an email where you can request more information. Soon it will link to a landing page providing more detail.

I want to thank Resolve Law Firm for their sponsorship. Now, on to today’s daily debtor debacle…

The former owner of today’s feature REO didn’t put much down, but he certainly extracted his fair share of HELOC booty before he imploded.

  • On 4/26/2001 he paid $393,000 using a $314,400 first mortgage, a $78,000 second mortgage, and a $10,400 down payment.
  • On 7/30/2002 he refinanced with a $396,000 first mortgage and withdrew his down payment and opened a $121,750 HELOC.
  • On 4/28/2004 he refinanced with a $567,000 Option ARM with a 1.2% teaser rate.
  • On 5/26/2005 he obtained a $50,000 HELOC.
  • On 7/9/2007 he refinanced with a $750,000 first mortgage
  • On 4/15/2010 South County Bank actually gave this guy a $100,000 HELOC. WTF were they thinking?
  • Total mortgage equity withdrawal was $457,600 assuming he maxed out the HELOC.

[idx-listing mlsnumber="S709686" showpricehistory="true"]

Proprietary OC Housing News home purchase analysis

34462 CALLE PORTOLA Dana Point, CA 92624

$679,900    ……..    Asking Price
$393,000    ……….    Purchase Price
4/26/2001    ……….    Purchase Date

$286,900    ……….    Gross Gain (Loss)
($31,440)    …………    Commissions and Costs at 8%
$255,460    ……….    Net Gain (Loss)
73.0%    ……….    Gross Percent Change
65.0%    ……….    Net Percent Change
4.8%    …………    Annual Appreciation

Cost of Home Ownership
$679,900    ……..    Asking Price
$135,980    …………    20% Down Conventional
3.55%    ………….    Mortgage Interest Rate
30    ………………    Number of Years
$543,920    ……..    Mortgage
$124,524    ……….    Income Requirement

$2,458    …………    Monthly Mortgage Payment
$589    …………    Property Tax at 1.04%
$0    …………    Mello Roos & Special Taxes
$170    …………    Homeowners Insurance at 0.3%
$0    …………    Private Mortgage Insurance
$0    …………    Homeowners Association Fees
$3,217    ……….    Monthly Cash Outlays

($385)    ……….    Tax Savings
($849)    ……….    Equity Hidden in Payment
$155    …………..    Lost Income to Down Payment
$190    …………..    Maintenance and Replacement Reserves
$2,328    ……….    Monthly Cost of Ownership

Cash Acquisition Demands
$8,299    …………    Furnishing and Move In at 1% + $1,500
$8,299    …………    Closing Costs at 1% + $1,500
$5,439    …………    Interest Points
$135,980    …………    Down Payment
$158,017    ……….    Total Cash Costs
$35,600    ……….    Emergency Cash Reserves
$193,617    ……….    Total Savings Needed

34671 CALLE ROSITA, Dana Point, CA $1,149,000
0.26 miles
4 bd / 3 ba
3,200 Sq. Ft.
34701 CALLE ROSITA, Dana Point, CA $1,525,000
0.28 miles
4 bd / 4.5 ba
3,684 Sq. Ft.
3907 VIA MANZANA, San Clemente, CA $1,299,000
0.32 miles
4 bd / 3 ba
3,800 Sq. Ft.
34622 CALLE NARANJA, Dana Point, CA $549,000
0.36 miles
5 bd / 2 ba
2,800 Sq. Ft.
34351 VIA FORTUNA, Dana Point, CA $869,000
0.39 miles
4 bd / 4.5 ba
3,000 Sq. Ft.
3916 CALLE ANDALUCIA, San Clemente, CA $1,290,000
0.42 miles
5 bd / 3.25 ba
3,574 Sq. Ft.
26782 CALLE REAL, Dana Point, CA $1,199,000
0.44 miles
5 bd / 4.25 ba
3,038 Sq. Ft.
34752 West DOHENY Pl, Dana Point, CA $1,900,000
34752 West DOHENY Pl
0.54 miles
4 bd / 3.5 ba
3,780 Sq. Ft.
34887 DOHENY Pl, Dana Point, CA $2,196,000
34887 DOHENY Pl
0.57 miles
3 bd / 3.25 ba
3,890 Sq. Ft.
26856 CAMINO DE ESTRELLA, Dana Point, CA $1,249,000
0.64 miles
4 bd / 3.5 ba
3,600 Sq. Ft.


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