Bad financial management decisions at California public agencies is nothing new. Orange County declared bankruptcy in the 1990s due to gross financial mismanagement, and the California state budget continues to be a mess. Sweetheart deals for public officials is nothing new here either. Public employees in the City of Bell paid themselves salaries approaching a million dollars a year, and California public worker’s unions negotiate compensation packages far in excess of the value they provide. With the culture of corruption rampant in California, it isn’t surprising that minor agencies are also doling out the largess.
AC Transit stuck with ex-manager’s home
Phillip Matier and Andrew Ross, Chronicle Columnists
Updated 11:06 p.m., Tuesday, December 4, 2012
AC Transit directors sank more than half a million dollars into an Oakland hills home for their former general manager – and now they’re stuck with it.
The cash-strapped district foreclosed on the four-bedroom house in July, six months after ex-GM Rick Fernandez stopped making his loan payments.
That has saddled the agency with an estimated $232,000 loss, based on a pair of loans totaling $500,000 that directors gave to Fernandez starting in 2004, plus additional sale and foreclosure costs.
“It turned out, in hindsight, not to be a good idea,” said longtime AC Transit Director Greg Harper, who was among the board majority that supported the loan.
The district is now $232,000 underwater after the former GM strategically defaulted. Yes, it was not a good idea. I can’t believe the people who approved this aren’t losing their jobs.
The loans were always rather odd.
Fernandez first requested $400,000 in 2004 so he could buy the house that had belonged to his late girlfriend, a former AC Transit employee, for $350,000.
Why does a guy need $400,000 to purchase a $350,000 house? Did he and his girlfriend get a $50,000 signing bonus out of the deal?
A year later, the district loaned another $100,000 to Fernandez. AC Transit general counsel Ken Scheidig, who had been kept informed of the deal, recalled Fernandez “advising me he wanted to do improvements to the house.”
Well, apparently the $50,000 didn’t go to improvements because he needed another $100,000 for that. Why would the district loan this guy money to improve his private residence?
Fernandez, who was being paid $276,000 a year, got the loans in lieu of a pay raise.
The guy was making $276,000 per year, and he didn’t have any savings to either put down a payment or improve the property?
The variable-rate loans initially had a 3 percent interest rate. AC Transit directors figured the agency would make more money by lending to Fernandez than it could if it put the cash in short-term investments.
So the transit directors thought they could make money on interest rate arbitrage? Are they financial experts now?
Oakland City Councilwoman Rebecca Kaplan, who served on the AC Transit board at the time, argued then that the deal carried “zero cost” to the agency. Kaplan did not return our calls this week seeking comment.
In 2009, Fernandez had a falling-out with the transit agency and exited with a year’s salary, and an extra year or two to pay off the home loan. Within a year or so of leaving, however, Fernandez began missing his payments.
He gets a $275,000 golden parachute, and he couldn’t make the payments on a $500,000 loan at 3%?
Fernandez did make “catch-up” payments, but in January he notified AC Transit that he was done – and the money stopped coming.
Fernandez did the wise finanical thing by stiffing the agency. It didn’t make sense for him to continue paying on a severely underwater home. Besides, he already looted their coffers.
Fernandez, who still lives in the Bay Area, told us he had no comment.
I am not surprised. What would he say? “Yeah, they were pretty stupid loaning me money. Screw them.”
In a recent report to the district’s board, General Manager David Armijo said the home on Seminary Avenue is now appraised at $300,000 – $210,503 less than the district’s $510,503 investment.
Armijo recommended selling the property, but AC Transit directors have asked staffers first to explore renting the house – hoping to buy time for the market to pick up.
LOL! They’ve become floplords. How many years will they own this rental before the value rises enough for them to escape without a loss? 20?
“It was one of those things that looked too good to be true,” Harper said, “and it was.”
It wasn’t too good to be true for Fernandez. He made out like a bandit.
Did they see the writing on the wall?
The former owners of today’s featured REO weren’t consistent Ponzis. They did refinance out their down payment in 2003, but they did nothing further until 6/6/2007 when the refinanced again with a $400,000 first mortgage. In the process they extracted $146,000 and left the bank holding the bag. Most likely it was luck, but they did manage to get their money out while the banks were still giving it out like crack to a drug addict.
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Proprietary OC Housing News home purchase analysis
1234 West CLAREDGE Dr Anaheim, CA 92801
$415,500 …….. Asking Price
$254,000 ………. Purchase Price
3/8/2002 ………. Purchase Date
$161,500 ………. Gross Gain (Loss)
($20,320) ………… Commissions and Costs at 8%
============================================
$141,180 ………. Net Gain (Loss)
============================================
63.6% ………. Gross Percent Change
55.6% ………. Net Percent Change
4.6% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$415,500 …….. Asking Price
$14,543 ………… 3.5% Down FHA Financing
3.40% …………. Mortgage Interest Rate
30 ……………… Number of Years
$400,958 …….. Mortgage
$102,960 ………. Income Requirement
$1,778 ………… Monthly Mortgage Payment
$360 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$104 ………… Homeowners Insurance at 0.3%
$418 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$2,660 ………. Monthly Cash Outlays
($262) ………. Tax Savings
($642) ………. Equity Hidden in Payment
$15 ………….. Lost Income to Down Payment
$124 ………….. Maintenance and Replacement Reserves
============================================
$1,895 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$5,655 ………… Furnishing and Move In at 1% + $1,500
$5,655 ………… Closing Costs at 1% + $1,500
$4,010 ………… Interest Points
$14,543 ………… Down Payment
============================================
$29,862 ………. Total Cash Costs
$29,000 ………. Emergency Cash Reserves
============================================
$58,862 ………. Total Savings Needed
The property above is available for sale on the MLS.
Contact us for a comparative market analysis, a cost of ownership analysis, or information on how you can make an offer today!
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Loan buybacks extended to more bubble-era loans
Freddie Mac is ramping up repurchase demands and “the put-back that they’ve been going through from 2006 forward on loans … they’re increasing that put-back now to ’04 and ’05,” U.S. Bancorp CEO Richard Davis told investors at the Goldman Sachs Financial Services Conference in New York Tuesday.
According to Davis, whose presentation is archived on his company’s website, Freddie Mac informed U.S. Bancorp and other large servicers Friday night that the GSE will require them to buy back defaulted loans originated in years prior to the housing crisis.
While Davis said the move was “unexpected,” Freddie Mac notes that it has always had the authority to pull files for review when loans stop performing regardless of when the loans were originated.
Foreclosure starts plummet due to procedural requirements
Foreclosure starts fell even further in October after a steep drop in September, according to data from Lender Processing Services (LPS).
In October, foreclosure starts numbered about 124,000, which represents a 22 percent decline from September to October and a 48 percent decrease from October 2011, the analytics company reported. In September, foreclosure starts were down monthly and yearly by 21 percent and 28 percent, respectively.
LPS explained the plunge in foreclosure starts was likely driven by new borrower notification requirements from the national mortgage settlement.
“LPS observed a drop-off in foreclosure starts in September that accelerated in October,” said Herb Blecher, LPS Applied Analytics SVP. “This decline coincided with the implementation of new procedural changes outlined in the National Mortgage Settlement, which requires, among other things, that mortgage servicers provide written notice to borrowers 14 days prior to referring a delinquent loan to a foreclosure attorney.”
However, LPS believes the influence of the national mortgage settlement will not have a lasting effect.
“This has resulted in what is likely a temporary slowdown in foreclosure starts that we do not believe is indicative of a longer-term trend.
Radar Logic: Current Recovery Unlikely to Last
Despite reports of improvements in home prices and sales, Radar Logic argued that upon closer examination, the housing market is not doing as well as assumed.
As of September 25, 2012, Radar Logic’s RPX composite price increased 5.2 percent year-over-year across 25 metro areas, according to the company’s monthly housing report. In addition, sales activity has gone up by 12.3 percent over a one-year period.
However, the increase in prices tracked by Radar Logic is not a result of “significant appreciation in household-owned homes,” the report stated.
Instead, it is due to a decline in “motivated sales,” or sales of foreclosed homes and REOs, which are sold at significant discounts compared to non-foreclosures.
Radar Logic’s composite shows homes sold through motivated sales were 34 percent lower than the composite price for all sales in September.
Overall, motivated sales have fallen yearly by 39.2 and monthly by 9.4 percent since September 25. As a share of total sales, motivated sales have shrunk to 13 percent, the smallest share since January 2008, according to the report.
On the other hand, the share of “other sales” have gone up by 27.9 percent year-over-year during the same time period.
The report further stated “a significant and increasing share of demand in the last year has come from institutional investors rather than households.”
Among the 25 metro areas tracked, the share of purchases from institutional investors has increased to 9 percent from 7 percent a year ago. Monthly investor purchases also jumped 42 percent over a one-year period.
While investors are helping to push prices up, Radar Logic says the growth is not likely to last as prices for REOs see an increase.
“If prices rise to a point where investors’ expectations of future home price appreciation do not support their desired returns, then demand for REO will decline and prices could fall again,” the report stated.
The report also pointed to data from LPS, which shows 1.8 million properties are in pre-sale foreclosure inventory and another 3.5 million properties are more than 30 days or more past due but not in foreclosure, leading to a total of 5.3 million properties in distress.
Radar Logic believes that at some point, “these distressed properties will make their way onto the market, and as they do they will weigh on home price metrics.”
In addition to the supply of inventory that may potentially flood the market, the more than 10 million estimated underwater borrowers also gave Radar Logic a reason question the authenticity of the recovery.
With ‘usury’ as the business model, contemplating recovery is nothing more than an exercise in futility.
How foreclosure backlogs could hurt home buyers
CHICAGO (MarketWatch) — Backlogs in foreclosure processing are causing delays in home-price improvement and could wind up affecting the cost of a mortgage.
The situation appears worst in New York, where it takes an average of nearly three years — 1,072 days, to be exact — for a home to go through the foreclosure process. It’s not much better in New Jersey, where it took an average of 931 days to foreclose on a home in the third quarter, according to statistics from RealtyTrac. Or in Florida, where it took about 858 days. See: How long a foreclosure takes in your state
Nationwide, the average time for homes to spend in the foreclosure process, meanwhile, was just 382 days. That may seem better, but it’s actually still an extended stretch compared with the average of 336 days in the third quarter of last year — and only 140 days in the third quarter of 2007.
At the current rate of processing, no wonder the volume of foreclosures in progress is still high, even as the economy is improving and fewer mortgages are becoming delinquent. And some experts think it’ll be 2015 before foreclosure inventories begin to approach normal levels.
That could pose a problem. “As unpleasant as it is for everyone involved, when a borrower can’t — or decides not to — make payments, the more quickly you can move [the house] back into the inventory and get a new homeowner in it, the better it is for the community,” says Rick Sharga, executive vice president at Carrington Mortgage Holdings.
Isn’t it amazing. It’s basically now 2013, almost, and we are talking about backlogs into 2014 or beyond.
With foreclosure processing taking almost three years in judicial foreclosure states, we know the foreclosure backlog will be with us until 2016, and that’s if banks stopped adding to the inventory. Realistically, Florida, New York, and other judicial foreclosure states will be still processing in 2020.
“So the transit directors thought they could make money on interest rate arbitrage? Are they financial experts now?”
It’s the reason why so many local agencies, cities, and school districts are in trouble. They don’t have the basic understanding about income, spending, penisons, and debt. Voters elect these dummies based on non-financial decisions. Ultimately the financial decisions are the most important ones.
And here comings the FHA insurance premiums increases. So, is it now like at 55% effective interest rate increase?
Donovan reiterates desire to outsource FHA special servicing
Posted by cmlynski on 12/6/12 at 11:09am
Housing and Urban Development Secretary Shaun Donovan addressed the need for Congress to grant the Federal Housing Administration authority to require transfer of servicing to specialty borrowers on Thursday.
Donovan testified before the Senate Banking, Housing and Urban Affairs Committee following the FHA’s November actuarial report.
By transferring authority, FHA could better avoid losses arising from poor servicing of FHA-insured loans, would could yield better results for both borrowers and the federal agency, Donovan stated in his recovery guidelines to avoid a first-time Treasury draw.
Ocwen ($34.90 0.49%), Nationstar Mortgage Holdings ($30.99 0.74%) and Walter Investment Management ($43.31 0.87%) are the specialty servicers capable of servicing FHA loans, according to policy strategist Isaac Boltansky of Compass Point.
Ocwen will acquire FHA servicing rights as part of the ResCap acquisition, which is expected to close in the first quarter of 2013.
Nationstar current services FHA reverse mortgages it acquired in the first half of the year and is also considering expanding to single-family FHA servicing.
Walter acquired reverse mortgage originator/servicer Reverse Mortgage Solutions on Nov. 1 and is considering expanding its servicing to include single-family FHA loans.
FHA also plans to use the FHA’s adjustment premium pricing again this year, which is the third time the agency has utilized its flexibility. FHA will increase its annual mortgage insurance premiums by another 10 basis points.
“While the new loans being made today are profitable to FHA and we do not want to over-burden or constrict access to credit as the housing market continues to mend, we also must ensure that we are 1) rebuilding adequate reserves for the future and 2) phasing out of our counter-cyclical role by reducing FHA’s footprint in the marketplace and helping to facilitate the return of private capital,” Donovan stated.
The rising cost of FHA insurance is going to hamper any recovery. As the losses keep mounting, the premium will continue to move higher until private lending sees and opportunity and starts issuing second mortgages again.
In other words, future marginal buyers are forced to subsidize past marginal buyers. Hilarious.
Yes, that’s exactly what’s happening.
Will they just call it another name in the future?
DeMarco says HARP is intended for ‘one-time execution’
Posted by cmlynski on 12/6/12 at 2:01pm
Federal Housing Finance Agency acting director Edward DeMarco stated the Home Affordable Refinance Program is a one-time benefit intended for borrowers with pre-crisis rates.
DeMarco addressed HARP during a post-speech question-and-answer session at the Securities Industry and Financial Markets Association Conference on Thursday.
“When one lays out a set of parameters for a program like this and tells the market ‘these are the rules,’ these are the rules,”DeMarco stated.
Although HARP 2.0 continues to show progress in part due to the efforts of financial companies, DeMarco wants to steadily press forward.
“We want to see real continued focus and attention on it,” DeMarco said.