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…
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
$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
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