What separates homeowners from people who don’t own homes? The answer is not as simple as you might think.
If you go back to antiquity, the person who “owned” a house was generally the strongest warrior who was capable to taking it and holding it against all rivals. Over the last 500 years the development of government and stable laws of land ownership made it possible for ordinary people to have claims to real property stronger than the edge of a sword or the barrel of a gun.
One of the first attempts to establish property title was the English Doomsday Book of the 11th century. The King set out to establish who owned what so he could better establish and collect taxes. This was the beginning of the chain of title in the British Isles. Here in California, many locations can trace back chain of title to the original Spanish land grants. Each land owner through history is listed in chronological order, and for most properties, no gaps exist in the chain creating clouds on title. Clearly, holding title is a strong claim to home ownership, but is it the definitive claim?
Is the person holding title the one who owns the property? Not necessarily. In some states, the lender on a property actually holds title until the promissory note is paid in full. In land installment contracts, the seller retains title until the contract is paid in full. Also, people can usurp the rights of titleholders through adverse possession. And obviously, even in states where the borrower holds title, such a claim can be extinguished at an auction if the borrower fails to repay a mortgage. In many circumstances, the person who possesses the property with intention of becoming the unencumbered owner either does not hold title, or they may have a tenuous claim to it.
I described this further in Money rentership: housing and the new American dream:
In a pioneer society, people go out and stake a claim to real estate by using it and occupying it. If property is not capable of producing food (income) and providing shelter, it has no value, and people do not compete to own it. Canadian and Siberian tundra is a modern pioneer expanse of thinly populated land of little value. Owning is occupying and making use.
With society comes division of labor, and fewer people live a subsistence life. Ownership becomes more complex and people enter into agreements where they exchange stored wealth (money) for shelter. Ownership is a special right of ongoing use, whereas rental is a contractual right of finite use followed by a reversion to owner. In societies of inherited multi-generational wealth, real estate is the best vehicle for transferring wealth because it provides a perpetual cashflow. With exception of low-yield savings accounts, no other asset class provides this feature.
One of the key features of true ownership is a lack of encumbrances. The more restrictions a property has on it, the smaller the bundle of rights an owner controls. For instance, if you pioneer a property in Northern Canada, nobody is going to review and approve your cabin’s front elevation or limit your exterior color choices as they will in Irvine. We give up many individual freedoms for the harmony of society, and the ever-dwindling bundle of property rights is among them. Historic properties are at the extreme as owners often feel as if the property actually owns them.
One of the most common encumbrances on property is the mortgage lien, and it is among the most restrictive. For instance, if you own a property not encumbered with a mortgage lien, you could demolish any structures on the property (within legal and practical constraints) and nobody will care; it is your property. Once a property is mortgaged, the “owner” no longer has the right of demolition because a lender has claim to the real estate and has interest in preserving its value. In fact, the lender will even require a borrower to carry insurance to prevent loss. If the lenders is not the owner, how can they require insurance, and why do they care?
Lenders want to protect the value of their collateral, the property they may force sale of at auction. At a public auction, the lender, standing in first lien position, bids the property up to their outstanding balance in an attempt to regain their loan balance from a cash buyer. If the house is worth less at auction than their loan balance, lenders often buy the property at auction and sell in the resale market were prices are usually 15% higher. In short, through a complicated chain of events, lenders know the collateral may become their house, so lenders make borrowers care for collateral as if the lender owned it even though the lender doesn’t…
legally…
Hey, if it walks like a duck and quacks like a duck….
Since lenders behave like owners of a borrower’s real estate, and since lenders have right to force sale if a borrower defaults, lenders are owners, and owners are money renters.
Money Rentership (Loanership)
Over the years, the slow erosion of property rights has made the distinctions between owning and renting less dramatic, particularly in renter-friendly cities in California. Owners have few rights renters don’t, and with exception of equity participation, owners obtain few benefits to outweigh the burdens of ownership. And over the last few years, equity participation has not been a bonus.
The mortgage encumbrance gets to the core of the unnoticed change in people’s concept of property ownership; people who have little or no equity stake in a property have no ownership despite what legal documents may say. What they have is money rentership and the illusion of home ownership. Emotionally, they still feel like homeowners; they still behave and believe like homeowners, but they’re not home owners. They own a loan; they’re loan owners.
At some level, people know this, and we observe high default rates once borrowers fall underwater. Despite the Government’s best efforts, people are walking away because once they no longer own, they see money rentership for what it is, and unless the cost is less than a comparable rental — which it rarely is — then people walk.
Money rentership — the antithesis of owning — is the California conception of home ownership.
Do these people own property?
Renters clearly do not own the properties they occupy. Renters acknowledge their status in the lease agreement, and renters make no claim to ownership of the real estate. Renters do obtain beneficial use of the property for the term of the lease, but they have no claim beyond that. Obviously, renters are not owners.
Do loan owners own property? They are on title, so if you asked a loan owner, they would certainly answer yes, but what do they really own? At least as long as they continue to make payments, they retain control of their ownership destiny, so emotionally they still feel like homeowners despite having no equity, and if they keep paying — and if their loan is amortizing — eventually they will become homeowners.
What about loan owners with interest-only or negative amortization loans? Do they own? Eventually, all toxic loans have a time of recast when the loan amortizes over some period of time down to zero. So eventually, if they can survive the transition, even those who possess the most toxic mortgage products may eventually own their homes. However, the road they have to travel is an extraordinarily difficult one, and very few survive the journey.
What about people who sign loan papers and take possession with no money down and never make any payments? Do they own? I know this sounds far fetched, but we have met homeowners like this recently in the post, Grifters for God: fraudulently occupying a $1.3M home for five years.
Obviously, they feel as if they own the property. However, I’m not so sure. If they never paid even a single penny toward the debt used to acquire the property, does it matter what the title shows? In my opinion, their claim to home ownership is fraudulent, but it’s been nearly five years, and the courts haven’t been able to extract them.
A guy in Montana forged documents deeding properties over to him so he could be on title. The courts did recognize this as a fraudulent conveyance, and they threw that guy guy in jail.
So it appears getting on title makes the person on title feel like a homeowner, and it also makes it very difficult to get them out of the property.
So what does it take to be a true homeowner? Clean title with no encumbrances? If so, only about a third of those who claim to be homeowners really are. Someday, I hope to join them.
Are zero down Ponzis homeowners?
The former owners of today’s featured property, like many others, put no money down, and they Ponzi borrowed every penny of equity from the properties as it appeared. The no longer have any claim to this house because they borrowed and spent it, but were they ever homeowners? If they were, they represent everything wrong with our current system of home ownership.
- They bought this property on 5/14/2001 for $459,000 using a $350,000 first mortgage, a $109,000 second mortgage, and a $0 down payment. Their return on investment was infinite because they made no investment. All the free money which followed was truly free.
- On 5/23/2003, just two years after taking title, they refinanced with a $468,750 first mortgage and a $125,000 stand-alone second. This netted them over $60,000 per year in free money for signing some loan papers. It gets worse.
- On 10/1/2003 they obtained a $125,000 HELOC.
- On 6/24/2004 they refinanced with a $637,000 first mortgage.
- On 9/23/2004 they refinanced with a 645,000 first mortgage.
- On 10/20/2004 they obtained a $90,000 HELOC.
- On 7/19/2005 they opened a $210,000 HELOC.
- On 4/10/2006 they refinanced with a $840,000 first mortgage.
- On 8/30/2006 they opened a $105,000 HELOC.
- Assuming they maxed out the HELOC, their total property debt was $945,000, and their total mortgage equity withdrawal was $486,000 — on a $0 investment.
What exactly did they own, and when did they own it?
Lake Forest Overview
Median home price is $337,000. Based on a rental parity value of $480,000, this market is under valued.
Monthly payment affordability has been improving over the last 10 month(s). Momentum suggests improving affordability.
Resale prices on a $/SF basis increased from $223/SF to $225/SF.
Resale prices have been falling for 12 month(s). Price momentum suggests falling prices over the next three months.
Median rental rates declined $4 last month from $1,995 to $1,990.
Rents have been rising for 12 month(s). Price momentum suggests rising rents over the next three months.
Market rating = 7
Proprietary OC Housing News home purchase analysis 
25 FLORES Lake Forest, CA 92610
$695,000 …….. Asking Price
$459,000 ………. Purchase Price
5/14/2001 ………. Purchase Date
$236,000 ………. Gross Gain (Loss)
($36,720) ………… Commissions and Costs at 8%
============================================
$199,280 ………. Net Gain (Loss)
============================================
51.4% ………. Gross Percent Change
43.4% ………. Net Percent Change
3.7% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$695,000 …….. Asking Price
$139,000 ………… 20% Down Conventional
3.74% …………. Mortgage Interest Rate
30 ……………… Number of Years
$556,000 …….. Mortgage
$140,046 ………. Income Requirement
$2,572 ………… Monthly Mortgage Payment
$602 ………… Property Tax at 1.04%
$200 ………… Mello Roos & Special Taxes
$174 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$70 ………… Homeowners Association Fees
============================================
$3,618 ………. Monthly Cash Outlays
($584) ………. Tax Savings
($839) ………. Equity Hidden in Payment
$173 ………….. Lost Income to Down Payment
$107 ………….. Maintenance and Replacement Reserves
============================================
$2,475 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$8,450 ………… Furnishing and Move In at 1% + $1,500
$8,450 ………… Closing Costs at 1% + $1,500
$5,560 ………… Interest Points
$139,000 ………… Down Payment
============================================
$161,460 ………. Total Cash Costs
$37,900 ………. Emergency Cash Reserves
============================================
$199,360 ………. Total Savings Needed
——————————————————————————————————————————————-
We're sorry, but we couldn't find MLS # P824088 in our database. This property may be a new listing or possibly taken off the market. Please check back again.
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$779,900 3 COCA |
0.55 miles 6 bd / 3 ba 2,805 Sq. Ft. |
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$749,900 19442 JASPER HILL Rd |
1.47 miles 4 bd / 4 ba 3,103 Sq. Ft. |
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$699,999 28616 Big Springs Rd |
1.67 miles 4 bd / 3 ba 2,525 Sq. Ft. |
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$672,000 28551 MALABAR Rd |
1.73 miles 4 bd / 3 ba 2,600 Sq. Ft. |
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$799,000 28161 MODJESKA GRADE Rd |
1.84 miles 3 bd / 2.75 ba 3,300 Sq. Ft. |
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$659,900 28661 MALABAR Rd |
1.91 miles 5 bd / 3.75 ba 2,821 Sq. Ft. |
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$774,976 - |
1.96 miles 4 bd / 3 ba - Sq. Ft. |
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$775,000 19721 HIGHRIDGE Way |
1.99 miles 5 bd / 4.25 ba 3,200 Sq. Ft. |
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14 Responses to “What distinguishes homeowners from the rest of us? It’s not what you think”
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The word ”owner” has more to do with marketing than with full claim rights or dominion, especially pertaining to land.
Reality is, homedebtors are renters and mort-free households are leasers.
I know several loan owners that want to become renters. This was a very recent change in their thinking. They purchase high, can’t refinance, and paying 1.5X mortgage vs rent. Plus, they are putting money into maintaining the property. These owners will probably short sale and I don’t think they don’t care about the credit hit.
People are wising up to the virtues of the strategic short sale. I think this will become very common over the next two years.
At least someone in Washington recognizes the truth and isn’t afraid to say it.
Deputy Director of Consumer Financial Protection Bureau Blames Bankers for Housing Bubble
Sparking indignation in the mortgage broker community, Raj Date, deputy director of the Consumer Financial Protection Bureau laid the bulk of the blame for the housing crisis on brokers during a speaking engagement Monday. His statements have led at least one industry trade group to call for his resignation.
“After all, if you think back to the most problematic vintages of mortgages during the bubble… most of those problematic mortgages were originated not by supervised banks, but by mortgage brokers and finance companies,” Date said before a group of banking professionals at an American Bankers Association conference Monday.
Marc Savitt, president of the National Association of Independent Housing Professionals called Date’s comments “outrageous.”
Date, who comes from a banking background, came to his position at the CFPB “with a preconceived notion about mortgage brokers,” Savitt told MReport Tuesday.
And it is this “preconceived notion” that Savitt says “shows me that that’s the wrong guy for the job” and has prompted the NAIHP to call for Date’s resignation. (The NAIHP is currently preparing a press release to announce their decision to call for Date’s resignation.)
Not only has Date “energized and infuriated an entire industry,” according to Savitt, but also Date’s claims are simply “not true,” according to the trade group president.
Date says incentives are misaligned and that leading to the mortgage bubble, “If a borrower could qualify for a loan at, say, 6 percent, a broker might juice that rate from 6 percent up to 8 percent.”
The CFPB has been considering mandating a change in loan officer compensation changing it from a percentage model to a flat fee. Savitt believes this “is a done deal” already, and it will just be a matter of time before the CFPB implements the change.
However, Savitt insists, citing independent studies from Harvard and Georgetown University that brokers have traditionally helped borrowers receive lower interest rates.
Either way, Savitt says, “The banks approved these loans, not the brokers.”
While Date speaks of “transparency, fairness, and proper financial incentives,” Savitt believes his bias makes him unfit for his role.
Raj Date’s point is accurate, but too simplistic. Mortgage brokers and finance companies were the main players in making the option-ARMs and NINJA loans, but they could only make them because larger players (banks) stood behind them ready to purchase them. These banks controlled everything from the warehouse LOC to the underwriting standards – the “puppet masters,” if you will. Focusing the blame on brokers and finance companies removes culpability from the borrowers too, whom I would attribute a third of the blame for the housing crisis.
It’s comments like these, that have a lot of people in the industry very concerned about the CFPB…
Date is correct. Brokers have a fiduciary obligation to their clients (at least here in California). Banks are merely lenders of money. There is a big difference.
The last time we had prudent lending standards was the 90s. As evidence that credit standards have not tightened enough yet, consider how much more likely more recent loans are to default.
New Mortgages 20% More Likely to Default than Those from the ’90s
Investors and lenders should expect loans currently originated to have a 20 percent higher chance of default than those originated in the ’90s due to current economic conditions, according to the University Financial Associates (UFA).
The UFA Default Risk Index rose slightly to 120 in the second quarter of 2012 from 119 in the previous quarter. While loans currently originated are more likely to default than those from the ‘90s, loans originated today are still much less likely to default compared to vintages from 2006 to 2008.
“The worst is clearly over so that mortgage lenders can comfortably loosen credit for newly originated loans,” said Dennis Capozza, business professor at the University of Michigan and a founding principal of UFA. “Important factors in the more favorable outlook include low mortgage rates, the Federal Reserve’s loose monetary policy, and lower house prices now at or below fundamental values in many locations.”
The Index measures the risk of default on recently originated prime and nonprime mortgages. The analysis is based on a “constant-quality” loan, meaning, a loan with the same borrower, loan, and collateral characteristics. The Index reflects only the changes in current and expected future economic conditions.
Every quarter, UFA examines the economic state of the U.S. and determines how certain conditions will affect future default, prepayments, loss recoveries, and loan values for prime and nonprime loans.
UFA was founded in 1990 by two finance professors of finance to bring state-of-the-art analytical techniques to lenders.
REO to rental programs are not slowing the growth of rents. At least not yet.
Rental Market Still Tightening: Moody’s
With vacancies declining and rental prices rising, the climate in the housing industry is clearly warming up to rental properties. According to Moody’s Analytics, “weak income gains, favorable demographics, and the foreclosure crises” are all causing people to choose renting over buying, and demand for rent will remain solid over the next two years.
Between 2000 and 2008, real per capita income grew at an annualized rate of 2 percent compared to 0.8 percent in 2010 and 2011, according to the report. In addition, many households simply don’t have enough for a down payment, and until households gain more in terms of finances or confidence in the economy, fears of homeownership won’t be put aside.
A survey released by Integra Realty Resources reported 31 percent of respondents said a lack of a down payment was the main reason holding them back from making a purchase, 24 percent said it was the fear of making a bad investment, and 21 percent said the uncertainty of the economy was the main reason.
Another reason the rental market is booming is because of the emergence of a younger age group heading households. The younger age group are the least likely to own a home and more likely to rent, according to Moody’s.
While the overall rental rate is 35 percent, the renter rate for those between the ages of 25-29 is nearly 65 percent, and for those under 24 years old, it is 77 percent, according to the Census Bureau.
And, growth for those between the ages of 20-29 is not likely to slow down, either. The report stated that this group has been growing at an average pace of 0.9 percent from 2007-2011 and grew only 0.3 percent between 1990 and 2006.
Another factor helping to strengthen demand for rent is the foreclosure crises. As many former homeowners who were foreclosed on search for a new residence, single-family rentals have become the next best thing to owning a home since a previous foreclosure makes it difficult to obtain a mortgage. Foreclosures stay on one’s credit for 7 years, and some lenders do not approve of a loan within that period.
While rent is strengthening, Moody’s stated new construction is being developed that will keep rent prices from escalating. According to the report, developments with five or more multifamily units have increased from an average of 67,000 at the end of 2009 to 221,000 in the three months ending in April.
On the other hand, Moody’s waved away concerns for the increasing pace of multifamily construction and said apartment construction has actually fallen short of its normal pace. All the while single family rentals are also tightening as shown through the declining single-family vacancy rates.
Big news day today
Lyon nabs 6.2-acre Irvine school site for 48 homes
Even the older parts of Irvine are getting some new homes.
William Lyon Homes will build “The Branches” in Irvine, a 48-home neighborhood that’s the first new community in the Woodbridge neighborhood in 15 years.
Lyon with partner Resmark Cos. got the 6.2-acre site as part of the closing and sale of a school. Models are expected to open in February.
Lyon’s Lesley Pennington: “The Village of Woodbridge is considered one of the finest communities in Orange County, so there is growing excitement regarding the development of The Branches and the homebuying opportunities it will bring to this very desirable Irvine setting.”
The Branches at Alderwood and E. Yale Loop will include:
Three, two-story floor plans that will range from approximately 2,209 to 2,542 square feet.
Home with three to five bedrooms, 2.5 to three baths and two-car garages.
Prices are anticipated to start from the $900,000s.
Lot sizes will average 3,900 square feet.
$1 million to breath gas fumes from the 405 no thanks.
I still don’t understand why somebody would pay 900K for a 2500 sq ft house on 4k sq foot of house. Do you not want any front/backyard?
I think these will not sell well. First, anything priced over $800K requires a move-up buyer, and those buyers simply don’t exist right now. Perhaps this is a small enough number of units they believe they can absorb them, but the sales cycle will likely take much longer than they are anticipating.
I live about a mile from proposed site in Woodbridge.
IMHO site is not ideal in that frontage is on heavily traveled E. Yale loop.
Whats particularly sad is that the school is adjacent to a very large open grass area that was contains a baseball diamond and soccer field that is very popular with local families for use on the weekends.
Just what we need, more population density. (Regardless of price)
[ I have lived in Woodbridge for 33 years. The overall increase in congestion and noise -- especially during the last 10 years has been *dramatic*. ]
I know what distinguishes a smart individual from a sucker and in my opinion it is what someone will take at face value.
In terms of rentals I see rentals cheap as can be all over the damn place. The demand is so strong? Really? Well it is awfully ironic there are empty houses all over my neighborhood like nothing I have seen in 30 years. There are apartment and condo buildings with vacancy signs clearly meaning empty all over the place. Rent to me is supply and demand in my view and the supply is grossly overflowing. So I just wonder why there are people pumping the rent issues always with studies and surveys. I do not buy anyone’s damn studies or surveys. I too could manipulate statistics to show anything I desire, so when I see so-called studies or statistics I just immediately question the motives …and run the other way. I did the same thing I ran the other way with “buy now or be priced out of the market” bullshite!
Now I question if people who may have places they cannot get out of or cannot sell so now what? try to make a buck via another avenue on the new drug scare tactic? to me I see it as a new scare tactic being pawned off those smart individuals who stayed far away from the real estate sales pitch. Well my take is word to the wise; many people were and now are off the real estate drug. The scare tactics do not work with me.
I enjoy that you have also correctly nailed the Title issue of who is, or how and or WHEN someone is ever really an owner. The ignorance out there is astonishing.