Dec232015
Foreclosure 101: vesting title
The next three days get a little wonkish. Prepare for a primer on foreclosures.
Ownership is primal. The first two words children learn in any language are “no” and “mine.” People have an deep intuition of what is theirs and what is not. Emotionally, It’s Mine defines ownership; in the real world, it is not so black and white.
When people own real estate, what they really “own” is a bundle of property rights. What rights are the bundle, and how are these rights held? Today, I want to take a step back and review real estate law and outline property rights and vesting title. As I recently took the excellent Broker’s review course from Real Estate Trainers, much of the legalese comes from their study manual.
Who or what is an Owner?
The Owner of Real Property can be (1) an individual owning in his or her own name; (2) a group owning together either as Community Property, Tenants in Common, or Joint Tenants; (3) an entity such as an LLC or a Corporation, (4) or a living trust.
Many people hold unshared title in their own name, and it is not limited to singles as many married owners in California are listed as either a man or a woman owning as “sole and separate property.” This distinction is important in a Community Property state like California where it is assumed that husband and wife act as a family unit with ownership apportioned equally between the two parties. In instances of inherited wealth, prenuptial agreements, or other business dealings, spouses often buy and sell property in their own name; however, these separations are tenuous in a marriage, and in hostile divorces, sole and separate can be anything but.
Tenants in Common is the most common form of multi-party ownership other than Community Property. Each Tenant in Common can dispose of their share of ownership as they see fit including passing it to descendants upon death. This stands in contrast to Joint Tenants where the death of one tenant causes their share of ownership to pass automatically to the other. Joint Tenancy is more common as a form of spousal ownership in states without Community Property laws.
Investors and others hoping to limit liability and remain somewhat anonymous often buy and sell real estate through special entities. These entities have the legal status of individuals capable of entering into contracts including owning real estate. There are advantages and disadvantages of using entities, and anyone considering doing so should consult an attorney and a tax advisor.
Another way people hold title is through a living trust. The trust itself holds title just as an individual or entity would, the main feature of living trusts, which make them a desirable method of holding real estate, is that property can transfer upon death directly to the heirs avoiding probate.
What does an Owner Own?
An owner, to the exclusion of all others, has a bundle of rights: possess, use, sell, enter, give away, lease, encumber, dispose, exclude or, do nothing subject to governmental powers and claims of others, and the owner may dispose of the whole bundle or any one of these rights at any time. Ownership can be held in a number of ways known as Estates, of particular interest to us is the perpetual Freehold Estate; it has no termination date and no party to accept ownership after reversion as does the Less-Than-Freehold estate known as a lease.
Most homeowners possess a Freehold Estate known as a Fee Simple Estate or Fee Simple Absolute where the owner holds title without any qualifications. In my description of property rights above, I mention ownership is subject to claims of others, the most common being the mortgage encumbrance. Owners whose properties are encumbered by Trust Deed (similar to mortgage) also signed a Promissory Note with a lender stating they will pay back borrowed funds according with terms and conditions described in the Note. These owners still possess a Fee Simple Estate, but the mortgage lien is such an onerous encumbrance that an argument can be made that lenders are owners, and owners are money renters.
Trustee sale occurs because borrowers, for whatever reason, are not meeting their financial obligations. A process is set in motion when borrowers default leading often to a change in ownership either through (1) market sale, (2) short sale, (3) deed-in-lieu (legal abandonment) or (4) trustee sale.
Mortgage or Deed of Trust?
The legal system of Mortgages and Promissory Notes identifies the parties to the transaction and establishes rights and responsibilities. There are two basic systems from managing the complexities: Mortgage or Trust Deed. In California as in some other states, we have a Trust Deed system, but since it is the more complicated of the two, I will address the Mortgage system first.
The Mortgage system is simple; the borrower signs a Promissory Note and issues a Mortgage to the lender. The borrower is the Mortgagor, and the lender is the Mortgagee. The borrower still holds title, and if the lender desires to force foreclosure auction, they must petition in court as any other litigant would. I can only imagine the court system backlog in Florida where this system is in place. In reality, in the Mortgage system, all foreclosures become judicial foreclosures because they move through the judiciary, but the term Judicial Foreclosure has special meaning and entails obtaining a judgment against the borrower (a topic for tomorrow).
Courts are ill-equipped to handle several hundred thousand mortgage actions. What is ordinarily a rare occurrence courts can easily handle can become a crisis, and the Trust Deed system avoids the court backlogs.
In a Trust Deed system, a neutral third-party is involved similar to an escrow; in fact, the trust deed system functions just like an escrow lasting the term of the Promissory Note because legal title is actually held by the Trustee not by the Owner. The borrowers have a recorded interest in a property, and they possess all the rights of ownership subject to the Trust Deed encumbrance, but their interest is not unencumbered ownership, and it will not become true ownership until they pay off the Promissory Note; until the Note is paid off, legal title is held by a Trustee while Owners have Equitable Title with rights of possession and use.
The trustee is empowered to call a public auction without going to court — avoiding court being the main reason the system was developed. This gives lenders the option of forcing sale at minimal cost and minimal delay. The system is streamlined and capable of expanding and contracting to meet demand. Lately, the Trustee business has been a stellar growth industry.
A business transaction
First and foremost, the documents exchanged by borrowers and lenders are a business transaction as Henry Blodget recently informed borrowers:
“Specifically, when you borrowed money to buy your house, you engaged in a business transaction. The bank or mortgage-lender evaluated the risk of the transaction and concluded that it would was a risk worth taking. To protect its money, the lender also required that you pledge the house as collateral, and it required you to have some equity in the house as an additional cushion. In the event that you didn’t pay, the lender retained the right to seize the house, sell it, and pay itself off before you got your equity. The lender loaned you the money because it concluded that this was a smart business decision.
You, meanwhile, also made a business decision. You decided to borrow money to buy your house even though it meant risking your equity, home, and credit rating.
And now it turns out that both of you made a bad decision.
Fortunately, you don’t have to fight about what happens next. The contract between you spells everything out: If you stop paying, the lender gets the house. That’s it. Unless the contract specifically differentiates between a failure to pay based on hardship (involuntary) and a failure to pay based on a collapse in the value of the house (voluntary), there’s no difference. If the lender thought at the beginning that you had a “moral obligation to pay,” it would have specified that in the contract.
Now, compare this to a situation in which you DO have a moral obligation to pay: When you borrow money from a friend at no interest, for example, and you promise that friend that you will give him or her every penny back. THAT is a moral obligation to pay. In this case, your friend did not lend you money to make a profit. Your friend loaned you money to help you out–with no collateral or contract other than your promise to pay.”
Many people persevere in business transactions throwing bad money after bad for vanity, entitlement or misplaced moral obligation.
The big bluff
Threat of calling a foreclosure auction is supposed to be a bluff. Neither the lender nor the borrower want an auction, but similar to Texas Hold-em, each party has cards to play, and where they are in the process and the relative strengths of their bargaining positions matter.
Ordinarily, threat of forcible eviction from the family home compels borrowers to do whatever is necessary to make payments, and the carrot (keep a home) and stick (threat of foreclosure) are enough to keep the system working. However, when people don’t have equity or when it is in their best interest financially to get out of a loan, lenders find the threat of forcible eviction less compelling; in fact, the more underwater a homeowner is, the less power lenders have. What possible threat can a lender hold over a money renter who is 30% underwater?
What property right does the 30% underwater homeowner particularly value that they don’t obtain as a renter?
The right to improve a lender’s property? Good luck getting a loan for that.
The right to lease out for less than the mortgage payment? Not a great deal for the owner.
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Existing-Home Sales Suffer Setback, Hit 19-Month Low
WASHINGTON (December 22, 2015) — Existing-home sales dropped off considerably in November to the slowest pace in 19 months. All four major regions saw sales declines in November.
Total existing-home sales1, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, fell 10.5 percent to a seasonally adjusted annual rate of 4.76 million in November (lowest since April 2014 at 4.75 million) from a downwardly revised 5.32 million in October. After last month’s decline (largest since July 2010 at 22.5 percent), sales are now 3.8 percent below a year ago — the first year-over-year decrease since September 2014.
Lawrence Yun, NAR chief economist, spun the bad news this way “Sparse inventory and affordability issues continue to impede a large pool of buyers’ ability to buy, which is holding back sales,” he said. “However, signed contracts have remained mostly steady in recent months, and properties sold faster in November. Therefore it’s highly possible [but highly unlikely] the stark sales decline wasn’t because of sudden, withering demand.”
What’s the next Ponzi trick from the Fed?
Manipulated and centralized markets only work until the music stops, and after 30+ years of perpetually cheaper interest rates and over 4 trillion in QE, the music is definitely growing quiet.
The collapse is approaching.
The fed is praying that real economic growth finally kicks in. They’ve played the game of smoke and mirrors as long as they could. If we don’t get real growth, we will have real problems.
What is Shevy’s verdict on the effects of TRID on escrow timelines?
I haven’t asked him.
I don’t doubt TRID increased loan processing timelines in October.
I do doubt that this explains the decline in sales. Prices are too high, and affordability is pricing out marginal buyers. Pending sales show a similar decline, and pendings have nothing to do with TRID delays on closings.
California pending home sales dial back in November, C.A.R. reports
I don’t think that explains it. Pendings are down due to the normal seasonal slowdown, but still up double digits from last year.
10 Real Estate Trends Coming Your Way in 2016
It’s been nearly a decade since the housing bubble burst and home values have yet to come back. But 2015 offered great strides toward full bubble reflation, with small reminders of a still-recuperating market.
Home prices are up year-over-year and new home sales are on track for the best year since 2007. But the share of first-time homebuyers remains at the lowest level on record, while the homeownership rate slumped to a 48-year low earlier this year.
What will 2016 hold for homebuyers, sellers and renters? Here are the top real estate trends to watch for next year.
1. Home prices will continue to rise…moderately.
2. Interest rates will inch up.
3. First-time buyers will continue to struggle.
4. Credit will get—a little—looser.
5. It will still be cheaper to buy than rent.
6. The suburbs will make a comeback.
7. Buyers will want green and smart homes.
8. Videos will be the new photos.
9. All-cash sales will continue to decrease.
10. New homes will come back big time.
LOL! Yeah, right… NOT.
Are you doubting Beth’s prognosticating abilities?
I found her article, “Why Now Is a Great-Time-Buy a-Winter-Coat” a mastepiece.
http://www.thefiscaltimes.com/2015/12/23/Why-Now-Great-Time-Buy-Winter-Coat
Don’t count Beth out.
U.S. economy set to grow less than 3% for the 10th straight year
The economy expanded a touch slower in the third quarter than previously reported, revised government figures show, but the path of growth is still the same: The U.S. running well below the historical norm more than six years into a recovery.
Gross domestic product — the sum of all the activity in an economy — increased at a 2% annual pace from July to September, according to the government’s latest update. Previously the Commerce Department had said the U.S. grew at a 2.1% rate after a 3.9% increase in the second quarter.
The slight downgrade was triggered by a larger trade deficit and a smaller buildup in inventories than earlier estimates showed.
The U.S. expanded at a 2.2% rate through the first nine months of the year, and the economy is projected to grow at a similar pace in the fourth quarter that ends on Dec. 31. If so, the economy will have failed to reach 3% growth for the 10th straight year, marking the slowest stretch since the end of World War II.
Historically the economy has expanded at a 3.3% rate.
NIMBYs Thwarted Development Should Get Easier In California
What Reverse CEQA Opinion Means
SACRAMENTO—The California Supreme Court issued its long-awaited opinion last week in California Building Industry Association (CBIA) vs. Bay Area Air Quality Management District, (BAAQMD) commonly referred to as the “Reverse CEQA” case. Heather Riley, partner, litigation, environmental and natural resources at Allen Matkins, offered some analysis on the opinion.
The Supreme Court’s opinion upholds four published CEQA decisions and rejects the so-called “reverse CEQA” argument, which would require an analysis of the “impact of existing environmental conditions on a project’s future users or residents” for every proposed development project in California, says Riley. The Court held–based on the plain language of CEQA–that a lead agency must analyze the impact of existing environmental conditions on a project only for certain airport, school, and housing construction projects and when a proposed project “risks exacerbating” existing “environmental hazards or conditions.”
Opponents of development have often advanced the reverse CEQA argument as a back-up claim in case their substantive claims fail. The Supreme Court not only took on the issue, thereby limiting the circumstances under which the opposition can make such a claim, but the Court also disputed the “reverse CEQA” nomenclature as “misleading and inapt.”
The Supreme Court’s decision is good news for the development community.
Hillary Clinton Embraces Bubble Driven Growth Model
This is what the NYT told readers in an article that reported Secretary Clinton wants to embrace her husband’s economic record as president. While the last four years of the Clinton presidency did have low unemployment and rising real wages for workers at the middle and bottom of the income distribution, these gains were driven by the demand generated by the stock bubble.
The bubble led to a surge of investment in high tech, as start-ups were using the money they could raise from issuing stock to finance their investment. (Generally companies first issue stock to allow the founders to cash out some of their profits.) The stock wealth generated by the bubble also led to a consumption boom as savings rate fell to what were at the time record lows.
While the bubble did produce a period of prosperity, its collapse was both inevitable and predictable. While the recession resulting from the crash is usually thought to have been short and mild, it actually led to what was at the time the longest period without job growth since the Great Depression. The economy did not gain back the jobs lost in the recession until January of 2005. At the time, the economy was being propelled by the housing bubble.
Clintonomics set the economy on this path of bubble driven growth through its engineering of the bailout from the East Asian financial crisis. The result of the bailout was a huge run-up in the dollar against other currencies. Developing countries, which had been borrowing capital, switched to become huge lenders of capital as they tried to accumulate all the reserves they could to protect themselves from facing a similar situation as the East Asian countries.
The direct result of the run-up in the dollar was an explosion in size of the U.S. trade deficit, as the over-valued dollar made U.S. produced goods and services less competitive in the world economy. The trade deficit has led to a huge gap in demand (now around $500 billion annually) which can be filled only by large budget deficits or bubble-driven growth.
It is striking that Secretary Clinton would embrace policies that have led to so much pain for large segments of the American public. This could hurt her prospects in getting the nomination or winning the general election.
I think America is waking up and things are about to change, and the political establishment that’s been **cking us for the last half of a century are not going to embrace it without kicking, scratching and screaming.
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Guest Post: The Ugly Truth Donald Trump Has Exposed
The fear in both the GOP and Democratic party is visible at the surface when it comes to Trump, and it’s not that he’s any of what they’ve accused him of. No, it’s really much simpler than that, and both Republican and Democrat parties, along with the mainstream media, are utterly terrified that you, the average American, is going to figure out what underlies all of these institutions in America.
No, it’s not that they’re evil.
It’s worse, for evil frequently is recognized and fought back yet for decades America has not awakened to what has been going on in the political and media establishment. It was evident during the Vietnam war and has only gotten worse since.
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Folks, this is where Trump is really freaking the establishment out. See, Trump already has anything material that he wants, and if something pops up he wants and doesn’t have he can simply stroke a check. He has no need to play the indifference game; there is no amount of money he can gain or lose in his lifetime that will change his lifestyle. He has his own security and doesn’t need yours, he has his own money and also doesn’t need yours.
The visceral reaction you’re seeing in the media isn’t about Trump’s policies. It’s fear that’s motivating them.
They fear that you might come to realize that you can’t demonize the “other side” for being evil; rather, they are both equally guilty almost to a single man and woman at being simply indifferent as to how much you get screwed and by whom, up to and including your death and the death of your children, so long as their desire for more power and control, either for them or their friends, is realized.
If that happens — if you quit the left/right, republican/democrat, liberal/conservative game and instead demand the indictment of all of them for their treasonous and outrageously unlawful behavior along with their removal from office and are willing to back that up with action up to and including a general strike until they are all gone and in chains then they are all screwed.
That is what is driving the animus toward Trump.
Wake up America.
http://www.zerohedge.com/news/2015-12-13/guest-post-ugly-truth-donald-trump-has-exposed
Corporate America has the whole Republicrat system in their pockets. Having a leader who is not in their pockets wouldn’t change a thing.
The game must be changed, not the players. The players merely play the game. The only way I see that happening is if laws that strongly favor a two-party system are changed. If the two parties are neck and neck, and divided along party lines, special interests only need to buy a few votes to change outcomes.
The only way were going to see change is if the game does not strongly discriminate against third parties.
I think a truly populist politician could change things a great deal. Read up on what Teddy Roosevelt did while he was in office. He was considered a dangerous traitor to the Republican establishment at the time. He was probably the most effective and most popular president we ever had (perhaps Andrew Jackson).
I could only hope for a president who will kill the banking cartel (Andrew Jackson) or smash the incumbent crony monopolies chocking our entrepreneurs.
The only way were going to see change is if the game does not strongly discriminate against third parties.
Donald Trump is a Third Party candidate. Hell, the GOP party elders hate him more than the democrats do. Trump is an absolute threat to the entire political establishment statuesque of big banks, cheap labor and electoral votes.
Good article, Lee in Irvine. Thanks for posting.
Trump is a classic populist candidate the likes of which we haven’t seen in decades. The only similar candidate I can think of in the 20th century was probably Harry Truman. If we go back to the 19th century, we have William Jennings Bryan (a three-time loser) and Teddy Roosevelt.
I agree with Trump … we (America) has been stupid.
The best thing Bill Clinton did was to embrace the tech innovation and not get in the way of it. As President, there’s very little he could have done about the misallocation of capital that was occurring. We live in a free country and people are allowed to make dumb investment decisions.
I think Hillary would be more business friendly than Obama has been. Just look at her donor list for confirmation of that. She isn’t going to bite the hand that feeds her.
I wouldn’t say so much was wrong with allowing a tech boom from Bill Clinton. He did create the conditions for a housing bubble though.
However, he left office in 2001. The time-frame of the housing bubble is 2001-05. That all falls under George W. Bush.
So what’s worse?
a) unknowingly creating the conditions for the housing bubble
b) sitting through the entire housing bubble and doing nothing until it’s too late?
The answer to that question depends on your partisan affiliation. Democrats will blame Bush, and Republicans will blame Clinton.
I think the argument that Clinton was the cause is very weak. Bush had both houses of Congress and 80% approval ratings after 9/11. He could have done or undone anything he wanted. Very few of Clinton’s policies survived.
I think it’s easy to criticize in hindsight but even during Bush’s term, very few people recognized that a housing bubble was taking place. What should Bush have done if absolutely nobody in government saw it coming?
You could have changed all the players out with new ones and the result would have been exactly the same. No.. The Fed was the only entity with the brain trust that should have seen it forming and the tool set to let it slowly deflate.
Greenspan was the Fed Chair during both presidencies. He advised the repeal of Glass Steagall and he was pushing Option ARMs at the height of the bubble. He completely botched his job regulating the economy and kept rates ultra low even as inflation and GDP was soaring, which is why I place full blame on the Fed and not the elected leaders.
The blame lies with Alan Greenspan and his perpetual manipulation of interest rates downward causing the misallocation of scare resources.
I blame Bush more than Clinton.
Bush is the reason why McCain lost, Romney lost and Trump is going to win. The people that make this country work are pissed off. IMO, This election more than anything is going to be about immigration.
Should We Reevaluate The Ideal of Homeownership?
Should national housing policy move beyond its traditional emphasis on homeownership to focus more broadly on “shelter?” Faith Schwartz, CoreLogic Senior Vice President, presents that alternative in the current issue of The Market Pulse. She points to recent data from several sources to suggest that such a change could be necessary.
The level of homeownership has been a concern for several years as it has drifted down from its 2006 peak of nearly 70 percent to a current level of 63.6 percent, a 40 year low. Now the National Association of Realtors (NAR) says that the share of first-time homebuyers is at 32 percent, a near 30-year low and the third consecutive year it has declined. Recent gains in home sales have come from repeat buyers, those with dual incomes according to NAR’s senior economist Lawrence Yun.
Meantime rental demand continues to climb and vacancy rates remain low. Key to this is that Millennials have been unable or reluctant to make the jump to homebuying. That generation has not embraced homeownership, largely because of financial considerations, the way earlier generations did.
Rising rents are cutting into renters’ ability to save for a downpayment. The rental portion of the Consumer Price Index has gained 4 percent just this year and the effect is compounded by slow wage growth for Millennials although that is changing and may soon allow them to save for a downpayment and qualify for a mortgage loan.
Schwartz says the governments focus has traditionally been on homeownership, supporting Fannie Mae, Freddie Mac, and the FHA, giving tax deductions for mortgage interest, etc. But the data suggest that these efforts are not as effective in helping young people as they form households. She asks “Do we need to do more for the millions of renters? We need to have a much stronger conversation around multifamily affordable housing stock that is available in the same geographies as available jobs.”
She quotes her CoreLogic colleague San Khater: “Homeownership is often perceived as always superior but there are many reasons it may not be. Moreover it implicitly exposes the fact that subsidies are not just tilted to ownership but are demand side subsidies not supply side where the issue is most dire.”
Fewer Homes Will Gain Value in 2016: Weiss Analytics
The recovery in the housing market will slow dramatically over the next 10 months, according to Weiss Analytics.
The number of homes nationwide that will gain value on a monthly basis will fall by 12% over the next 10 months, Weiss said. About half of U.S. homes will continue to appreciate by October.
There has been three years of double-digit annual price increases, but the pace of change in home values is slowing, said Allen Weiss, chief executive of Weiss Analytics.
“This retrenchment may delay the return to price parity in some markets but in others it will help to prevent the formation of bubbles of overvalued properties that could result in defaults,” Weiss said.
Since July 2014, the percentage of appreciating homes has fallen from 65.2% to 58.4% in October 2014.
China’s Minsky Moment Is Nigh—-Super-Credit Bubble Nearing Implosion
Ever since 2010 we have explained that one of the biggest risks facing the world is China’s gargantuan mountain of debt, seen in its consolidated state in the following McKinsey chart…
… a mountain which has doubled from its 2007 levels of 158% of GDP and which as of Q4 2015 is well over 300%, as China races to catch up with world-record holder Japan and its 400%+ total debt/GDP.
As we have also explained repeatedly, the problem with China’s debt load is that while it was China’s historic leveraging spree in the years of the great financial crisis, the world’s most populous nation, where debt has been rising exponentially, appears to be approaching its debt capacity load, and as such when the developed (and emerging) world slides into its next recession, there will be no “growth dynamo” which can add trillions in new debt to kick start world growth once more.
An Aging Society Is No Problem When Wages Rise
Eduardo Porter discusses the question of whether retirees will have sufficient income in twenty or thirty years. He points out that if no additional revenue is raised, Social Security will not be able to pay full scheduled benefits after 2034.
While this is true, it is important to note that this would have also been true in the 1940, 1950s, 1960s, and 1970s. If projections were made for Social Security that assumed no increase in the payroll tax in the future, there would have been a severe shortfall in the trust fund making it unable to pay full scheduled benefits.
We have now gone 25 years with no increase in the payroll tax, by far the longest such period since the program was created. With life expectancy continually increasing, it is inevitable that a fixed tax rate will eventually prove inadequate if the retirement age is not raised. (The age for full benefits has already been raised from 65 to 66 and will rise further to 67 by 2022, but no further increases are scheduled.)
The past increases in the Social Security tax have generally not imposed a large burden on workers because real wages rose. The Social Security trustees project average wages to rise by more than 50 percent over the next three decades. If most workers share in this wage growth, then the two or three percentage point tax increase that might be needed to keep the program fully funded would be a small fraction of the wage growth workers see over this period. Of course, if income gains continue to be redistributed upward, then any increase in the Social Security tax will be a large burden.
For this reason, Social Security should be seen first and foremost as part of the story of wage inequality. If workers get their share of the benefits of productivity growth then supporting a larger population of retirees will not be a problem. On the other hand, if the wealthy manage to prevent workers from benefiting from growth during their working lives, they will also likely prevent them from having a secure retirement.
“If projections were made for Social Security that assumed no increase in the payroll tax in the future, there would have been a severe shortfall”
So the article is advocating that today’s PONZI attitude is fine with social security because we’ve been doing this PONZI attitude since the 40s?
Unsustainability of a program and lack of wage growth are separate issues. Wage growth does not address the unsustainability as taxes do not rise with wage growth.