Big Write-Downs

In lieu of today's usual featured example, we will be looking at properties that we reviewed earlier this year but have not sold - rather the prices have been slashed. The earliest of these examples was from July - so the mark downs are just for the last 5 months. The term commonly used in housing bubble terminology is chasing down the markets. Lets take a look at three to see how far down the price have come without a sale in sight -

Our first property was featured in July - Living Large in Lake Hopatcong.


Lets take a look at the previous numbers -

• The property was purchased October 2003 for $384,900.

• The original mortgage in October 2003 was for $307,920 with Citimortgage.

• A HELOC was opened on the same day in October 2003 for $38,400 with CitiBank.

• A HELOC with Fleet Bank for $98,400 the following April of 2004.

• Another HELOC with Fleet was opened the following December 2004 this time for $64,200.

• A Lis Pendens filed May 2006 for the original Citimortgage.

• A Lis Pendens was filed May 2006 for the April 2004 Fleet HELOC.

• The REO property is currently for sale through a realtor for $465,000.

The property has been reduced down to $381,300 still for sale through a realtor.

The lenders total loss for the property will be at least $150,498 if the property sells for the current full asking price and the realtor receives the standard commission. That is an additional write-off of $78,678 from when the property was originally featured.

Our next revisit is a property in - Losing Money in Dover.

Lets revisit the financials -

• The property was purchased for $412,500 in August 2006.

• The original mortgage at time of purchase was for $371,500 using an ARM with Accredited Home Lenders.

• Foreclosure started by a Lis Pendens filed August 2007.

• The property is currently an REO for sale using a realtor for $279,900.

The property price has now been reduced to $229,900.

The increases the loss to the lender at a minimum of $155,394 again if the property sells for the full asking price with the realtor receiving the standard commission. This loss has increased by another $47,000 from when we first featured the property.

Our last review is the Losing your ReFi in Wharton post. Here is is property -

• The property was purchased for $118,000 in February 1998.

• The original mortgage in 1998 is not available on the database.
  

• A HELOC was opened in August 2000 for $25,000 with Chase.
  

• In February 2003 a HELOC was opened for $73,594 with Wells Fargo.

• A second mortgage for $68,047 was taken in August 2003 with Wells Fargo.

• The condo was refinanced in October 2004 for $236,000 with an ARM from Decision One.

• In January 2006 the property was refinanced for $276,250 with Countrywide.

• The foreclosure process started in May 2007 with the filing of a Lis Pendens.

• The property is currently an REO for sale through a realtor for $257,900.

The property prices has been now reduced to $244,900 still through a realtor.

The total loss for the property to the lender will now be at least $46,044, again if the property sells for the current full asking price and the realtor receives their standard commission. This brings the total property loss up another $12,220 since the property was originally featured.


To sum up, the total losses featured today will be at least $351,936 which is increasing the write-off another $137,898 since from when the properties were first featured.

Who is spending your equity?

It is one thing to be underwater through bad choices such as HELOCing the house for a cruise, plasma TV, and landscaping services. It is another to be underwater because someone else - unbeknown to you - HELOCed your house for their cruise, plasma TV, and landscaping services. Just like those identity theft ads on TV for a credit card - people can steal your identity and take all your equity with them. When home values were annually increasing in double digits the problem was big, but not as significant as when people will lose their homes due to these crimes.

Equity theft, like many white collar crimes, requires more man hours, more investment, and are difficult to prove in court due to the complexity of the issues. In the Washington Post there was an article titled Thieves Stole Identities to Tap Equity Lines outlines some of the recently busted crimes. Lets take a look -

The cases highlight what the FBI calls an "emerging scheme" afflicting the struggling real estate and mortgage market. In such crimes, thieves target people with good credit and large, untapped home-equity lines of credit, digging through public records -- such as property deeds and mortgages -- as well as publicly available Internet databases to obtain credit applications, credit reports and victim signatures.

"Home-equity lines of credit are an expanding front in the battle against mortgage fraud," said New Jersey U.S. Attorney Christopher J. Christie. "Homeowners should carefully review their statements to make sure their hard-earned equity is not disappearing from under their noses."

...
In a report released last summer, the Credit Union Information Security Professionals Association said a number of credit unions have beefed up security in response to an increase in home-equity fraud, but those precautions have come with their own costs: "Customer service call times have increased one minute on average due to increased security verifications, and some legitimate members are failing increased security questions," the report noted.

Anne Wallace, president of the Identity Theft Assistance Center, a nonprofit industry group, said properly training bank employees to detect fraud is critical.

"It's a challenging problem for companies across the board," Wallace said, "how to train your employees to balance customer service and protecting critical assets."

Wallace said consumers can help combat this growing form of fraud by keeping a close eye on bank statements and by taking full advantage of a federal law that guarantees consumers a free copy of their credit report from each of the three major credit reporting bureaus. Consumers can request credit reports three times a year for free at each credit bureau.

Restricting access and making more barriers may deter some criminals, but they can also aggravate customers. This will be especially true for people that do nor realize the procedures were set up in place to protect them. Like most victims, they are unaware of their surroundings - even financial ones. The small amount of work to review your credit reports periodically is a lot better than finding out your the victim well after the fact.

Can the Holiday Season go From Red to Black?

A recent Holiday season tradition has been to spend more money than one has available. No worries - just pay it back well into the new years. What better way to let your family and friends know how much you care then to spend beyond your means. After all, when a credit card was maxed out the bubble solution was to just shift the debt onto the mortgage and free yourself to spend more. And who would have thought such practical solutions would not be the eternal answer to managing finances (/snark). This article from the Bangor News titled Black Friday Blues lays out some of the issues we are facing. Lets take a look -

Prof. Jim McConnon, professor of economics at the University of Maine, refers to a chart from the Economic Report of the President that breaks down the GDP. In 1960, consumer spending — on durable and non-durable goods and services — made up 63.1 percent of GDP. That’s nearly two-thirds of the domestic economy.

But there is also evidence that grumpy Uncle Fred is right — the GDP has increasingly trended toward a consumer-spending reliance. Consumer spending as a percentage of GDP held steady at about 63 percent until 1980, when it began to grow. In 1990 it was 66.2 percent, in 1995 it was 67.2 percent, in 2000 it was 68.6 percent and in both 2005 and 2006 it was 70 percent.

The remainder of the economy is linked to business investment (16 percent), government spending (19 percent, a third of which is defense spending) and net exports, Prof. McConnon says. In recent years, as the trade deficit grows, the net export number has extended further into negative territory, which means any growth in the economy must be offset by more consumer spending. So that 7 percent growth in the percentage of GDP linked to consumer spending is even more significant, McConnon says.

The Bush administration has proposed an $800 billion stimulus package aimed at Main Street — not the $600 and $1,200 checks taxpayers got earlier this year, but a targeted investment to get bad mortgages and other debt off the hands of banks to they can begin loaning to consumers again. That may be the first sign that government policies are building bridges back to consumers, who hold the fate of the U.S. economy in their hands — or at least in the credit card they hold in their hands.

But at the same time, President-elect Obama must signal that consumers, whether government regulations intervene or not to save them from excess, must become more responsible. Buying $300,000 houses on annual earnings of $30,000 must end. So must spending home equity as if it is real money. Shop, but shop prudently. Gray Friday may be the best outcome.

A reliance on consumers whose purchases are from debt does not build a sustainable economy. Turning savings into debt and drowning in debt are not good ways to run a national economic policy. Hopefully patriotic shopping through ever-increasing debt does end, and out of the rubble a better national policy arises.

Lets Be Thankful

Happy Thanksgiving! And be grateful for what you have! In a few years what you have today may be gone. Still have your house - be thankful! Still have decent credit - be thankful! Still have a job - be thankful! Not one of the one in ten that are on food stamps - be thankful!

Waking up to these two articles titled The last Thanksgiving before GD2 and US faces another depression really puts one in the holiday mood. First, lets take a look at the The last Thanksgiving before GD2 article -

The U.S.S. Titanic encountered this iceberg during the week of October 6, 2008. Everything that happens afterwards and in the immediate days, weeks, months, and even years following is just governments and their corrupt, criminal fiends on Wall Street and elsewhere going through the motions. Like the band that kept playing aboard the real R.M.S. Titanic, the politicians and the “captains of industry” will paint a bright and rosy picture for the third-class passengers aboard the U.S.S. Titanic, while they all don on their financial life jackets and run like hell for the very few financial lifeboats!

...
Buried in a report from Biz.yahoo.com on November 12 titled “Stocks plunge for third straight session” was the following incredible statement: “According to the Dow Jones Wilshire 5000 index [which reflects the value of almost all U.S. stocks], Wednesday’s [November 12] paper losses amounted to about $600 billion. By that measure, the [U.S.] stock market has shed $9.1 trillion since the index’s Oct. 9, 2007, peak.” The bolded emphasis in mine. The Dow Industrial Average or Dow, which is comprised of 30 “blue chip” stocks, closed out at 8,262 on November 12, and was at 8,046 at the close on November 21, so the estimate of $9.1 trillion of financial losses since October 9 is a pretty close guess, if not a conservative one.

...
To provide further evidence, as if the evidence given above and from what you can glean from the corporate mass media are not sufficient, as to the extreme dire straits that is facing the U.S. and the very likelihood of GD2 occurring very soon, I have taken liberty to include an extensive excerpt from my ebook, NO Foreclosures!, that was written in July 2008 (I have also taken the license to forgo most of the footnotes that are included in the ebook). As you probably will realize after reading this excerpt, that even in the short 3 or 4 months since those words were written, with the exception of the temporary rise of the USD and the temporary drop in gas and food prices, everything else have accelerated for the worse.

So America, on this Thanksgiving 2008 which may be the last one before GD2 becomes a cold reality, I have one suggestion:

Be grateful!

And now lets take a look an an excerpt from U.S. face another Depression -

The Great Depression was the result of the combination of the 1929 financial crisis and serious structural problems in the American economy that included widespread poverty. After the 1929 stock market collapse, these factors combined to deeply cut business investment and personal consumption. This caused a downward depressionary spiral that created the worst economic collapse in American history.

Today's economy is hurtling downward on a similar path to depression. The mortgage and financial crises have constricted credit and largely cut off business investment. Stagnant wages and over-borrowing have curtailed consumer spending.

...
Much as was the case in 1929, the twin declines of consumer and business spending are rippling through the economy. They are causing worker income to fall, lower consumption and more layoffs. As unemployment rises, more individuals will be unable to pay their debts, and additional personal and business bankruptcies will follow. This means more bank and investment company failures and bailouts.

The American economy in 2008 is following the same path it took in 1929 -- the collapse of a speculative bubble has merged with problems of the distribution of wealth and working American incomes and consumption. The consequence is that the economy is rapidly spiraling downward into the next great depression.

Well, the future does not look like things are going to be very pleasant for the next few years. And the outcome of Black Friday will probably illustrate of what to expect for the holiday season. Will the holiday season put people deeper in the hole or will we take a reprieve from going further into debt?

The heavy focus on debt-driven consumer consumption does not really have any positive outcomes. We lived in a bubble world financed through money we did not have. We will be paying a heavy toll. We are being forced to create a new paradigm in regards to spending and saving.

Maybe we should be thankful that it has been almost 80 years since the first great depression. We were able to hold on to the lessons learned for several generations. Hopefully after this mess our children, grandchildren and great grandchildren will remember the mistakes we made/allowed/ignored.

The End of Wall Street's Boom

There is an amazing article illustrating all of the shenanigans that took place on Wall Street over the last 3 decades. It is over at Conde Naste's Portfolio in an article by Michael Lewis titled The End of Wall Street's Boom. A real must read for anyone who has any interest in understanding what exactly was going on. Here are some snippets -

To this day, the willingness of a Wall Street investment bank to pay me hundreds of thousands of dollars to dispense investment advice to grownups remains a mystery to me. I was 24 years old, with no experience of, or particular interest in, guessing which stocks and bonds would rise and which would fall. The essential function of Wall Street is to allocate capital—to decide who should get it and who should not. Believe me when I tell you that I hadn’t the first clue.

...
In the two decades since then, I had been waiting for the end of Wall Street. The outrageous bonuses, the slender returns to shareholders, the never-ending scandals, the bursting of the internet bubble, the crisis following the collapse of Long-Term Capital Management: Over and over again, the big Wall Street investment banks would be, in some narrow way, discredited. Yet they just kept on growing, along with the sums of money that they doled out to 26-year-olds to perform tasks of no obvious social utility. The rebellion by American youth against the money culture never happened. Why bother to overturn your parents’ world when you can buy it, slice it up into tranches, and sell off the pieces?

...
Now, obviously, Meredith Whitney didn’t sink Wall Street. She just expressed most clearly and loudly a view that was, in retrospect, far more seditious to the financial order than, say, Eliot Spitzer’s campaign against Wall Street corruption. If mere scandal could have destroyed the big Wall Street investment banks, they’d have vanished long ago. This woman wasn’t saying that Wall Street bankers were corrupt. She was saying they were stupid. These people whose job it was to allocate capital apparently didn’t even know how to manage their own.

...
At the end of 2004, Eisman, Moses, and Daniel shared a sense that unhealthy things were going on in the U.S. housing market: Lots of firms were lending money to people who shouldn’t have been borrowing it. They thought Alan Greenspan’s decision after the internet bust to lower interest rates to 1 percent was a travesty that would lead to some terrible day of reckoning. Neither of these insights was entirely original. Ivy Zelman, at the time the housing-market analyst at Credit Suisse, had seen the bubble forming very early on. There’s a simple measure of sanity in housing prices: the ratio of median home price to income. Historically, it runs around 3 to 1; by late 2004, it had risen nationally to 4 to 1. “All these people were saying it was nearly as high in some other countries,” Zelman says. “But the problem wasn’t just that it was 4 to 1. In Los Angeles, it was 10 to 1, and in Miami, 8.5 to 1. And then you coupled that with the buyers. They weren’t real buyers. They were speculators.” Zelman alienated clients with her pessimism, but she couldn’t pretend everything was good. “It wasn’t that hard in hindsight to see it,” she says. “It was very hard to know when it would stop.” Zelman spoke occasionally with Eisman and always left these conversations feeling better about her views and worse about the world. “You needed the occasional assurance that you weren’t nuts,” she says. She wasn’t nuts. The world was.

...

And short Eisman did—then he tried to get his mind around what he’d just done so he could do it better. He’d call over to a big firm and ask for a list of mortgage bonds from all over the country. The juiciest shorts—the bonds ultimately backed by the mortgages most likely to default—had several characteristics. They’d be in what Wall Street people were now calling the sand states: Arizona, California, Florida, Nevada. The loans would have been made by one of the more dubious mortgage lenders; Long Beach Financial, wholly owned by Washington Mutual, was a great example. Long Beach Financial was moving money out the door as fast as it could, few questions asked, in loans built to self-destruct. It specialized in asking home­owners with bad credit and no proof of income to put no money down and defer interest payments for as long as possible. In Bakersfield, California, a Mexican strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $720,000.

More generally, the subprime market tapped a tranche of the American public that did not typically have anything to do with Wall Street. Lenders were making loans to people who, based on their credit ratings, were less creditworthy than 71 percent of the population. Eisman knew some of these people. One day, his housekeeper, a South American woman, told him that she was planning to buy a townhouse in Queens. “The price was absurd, and they were giving her a low-down-payment option-ARM,” says Eisman, who talked her into taking out a conventional fixed-rate mortgage. Next, the baby nurse he’d hired back in 1997 to take care of his newborn twin daughters phoned him. “She was this lovely woman from Jamaica,” he says. “One day she calls me and says she and her sister own five townhouses in Queens. I said, ‘How did that happen?’ ” It happened because after they bought the first one and its value rose, the lenders came and suggested they refinance and take out $250,000, which they used to buy another one. Then the price of that one rose too, and they repeated the experiment. “By the time they were done,” Eisman says, “they owned five of them, the market was falling, and they couldn’t make any of the payments."

...
There was only one thing that bothered Eisman, and it continued to trouble him as late as May 2007. “The thing we couldn’t figure out is: It’s so obvious. Why hasn’t everyone else figured out that the machine is done?” Eisman had long subscribed to Grant’s Interest Rate Observer, a newsletter famous in Wall Street circles and obscure outside them. Jim Grant, its editor, had been prophesying doom ever since the great debt cycle began, in the mid-1980s. In late 2006, he decided to investigate these things called C.D.O.’s. Or rather, he had asked his young assistant, Dan Gertner, a chemical engineer with an M.B.A., to see if he could understand them. Gertner went off with the documents that purported to explain C.D.O.’s to potential investors and for several days sweated and groaned and heaved and suffered. “Then he came back,” says Grant, “and said, ‘I can’t figure this thing out.’ And I said, ‘I think we have our story.’ ”

If you have time over the long, holiday weekend this is definitely a must read. It illustrates how everything blew up.

Stealing Equity

During the housing bubble extracting equity was quick, easy and common. At one time having a second mortgage was a questionable practice - but during the bubble it seemed as if everyone had one. Lenders were giving them away like candy on Halloween - just ask and you receive with big reward for very little work. Many times things could be done over the computer and with a quick visit to a notary - never having to meet the lender in person.

If you needed equity right away with little documentation home equity loans or lines of credit during the bubble were perfect for you. But requiring little documentation with a fast turn around also made it ripe for fraud. It is no surprise that criminals flocked to an easy way to get large bundles of money. New Jersey became a good target due to its high property values and rapidly increasing property values. An article in the Star Ledger titled ID theft ring targeted N.J. home equity lines of credit discusses a home equity extraction ring that was recently busted. Lets take a look -

Four men were arrested yesterday in connection with an international identity theft scheme that siphoned at least $2.5 million from home equity lines of credit at dozens of banks, including at least 11 in New Jersey, authorities said.

The suspects targeted homeowners with big credit lines at large and small financial institutions, including Citibank, JPMorgan Chase and credit unions in Basking Ridge, Bridgewater and Toms River, authorities said. They used stolen personal data and technological tricks to fool bank employees into transferring funds to accounts in at least seven countries, authorities said.

...
In the days of easy mortgages, identity thieves targeted people with shaky credit, taking out illegal loans in their names from subprime lenders who required little documentation, according to the report. But the credit crisis hobbled that scheme, and the FBI report found identity thieves have turned to homeowners with good credit and deep home equity in places like the Garden State.

...
The alleged plot hinged on the personal information that is the bedrock of most identity theft scams -- Social Security numbers, mothers' maiden names and online passwords, authorities said.

...
Once armed with data, the men called banks and posed as customers. They used a dial-pad code to block the banks' caller identification system and asked to transfer big chunks from the victims' home equity lines. In one case, they moved $675,000 from Affinity Federal Credit Union in Basking Ridge to the Bank of Tokyo Mitsubishi, authorities said.

The system was ripe for fraud. Even without the technological tricks the system was easy to manipulate. Many mortgage brokers received their fees up front so they had no reason to evaluate or question the loans.

The system was easily manipulated by those with criminal intent. It also did not promote or require safeguards for customers - in many cases the layers of protection was discouraged because it would slow down the process.

During the summer we reviewed a three part series from the Miami Herald on the fraud perpetrated in Florida by loan originators - Part 1, Part 2, and Part 3. When questionable activities were being perpetrated by those within the system what real safeguards are those to prevent fraud from the outside.

Wonder if New Jersey will be a Hot Spot for Mortgage Fraud in the 2008 publication. Here is a map of the 2007 problem areas -

Foreclosures Up for Prime Borrowers

In fact they are not just up - but at the highest levels recorded, easily toppling the highs in 1985. With the huge decline in home values even borrowers that purchased properties well in their budget and used conservative, conventional 30-year mortgages are feeling the impact.

Unemployment wages are no where close to levels needed to pay mortgages. This is especially true for states like New Jersey and California. When a prime borrowers loses their job they have few choices to keep the homes. Until the lenders aggressively negotiate with this group problems will continue to rise. In this article from The Los Angeles Times titled Foreclosures, delinquencies skyrocketing among 'prime' borrowers discusses the numbers and implications of foreclosures onto prime borrowers.

Nationwide, 3.07% of prime mortgages were in foreclosure or at least 60 days late in the second quarter of this year, the latest period for which the Mortgage Bankers Assn. has figures, easily topping the previous record of 1.97% set in 1985.

...
One reason, he said, is that home lenders became so complacent during the housing boom that they did little to qualify borrowers besides having computers check a few facts.

" 'Prime' lost a lot of meaning in the insanity of the last few years," said [Christopher Thornberg, founder of consulting firm Beacon Economics in Los Angeles], who was one of the first experts to foresee the housing downturn.

To be sure, the damage has been greatest in subprime mortgages, the high-risk loans tapped heavily during the go-go years by borrowers with the worst credit, the heaviest debt loads or the lowest down payments (and sometimes all three of those).

...
"The only practical help in sight is to get as many of these potential foreclosures modified as possible, so they come off the market," [Stephen C. Levy, director of the Center for the Continuing Study of the California Economy, a private research firm in Palo Alto] said.

Stephen Levy and a group of others are pushing lenders to modify mortgages to decrease the potential fall-out. If the numbers that enter foreclosure end in foreclosure the down-turn will be devastating. The impact of the possible numbers of foreclosures will prolong the down-turn. Lenders have to decide modify and feel the pain or follow through to foreclosure and potentially be wiped out.

One positive sign is that JP Morgan Chase and others are trying are working to modify loans, hopefully this will become more widespread. A good business decision that is in the interest of the lenders, borrowers and the nation.

Washing away ownership in Washington

Many times, and for many people, owning a home may not be the best choice. While the American Dream views home ownership as essential this is not necessarily the best choice for many people. During the Great Housing Bubble people jumped into home ownership without looking afraid they would be priced out if they did not act fast.

Thinking that home values only go up, people often bought more house than the could afford. But at the time these decisions seemed like sure bets to many people. Now they are paying the price - foreclosure, damaged credit, high ARM and Option-ARM payments with little ability to refinance. Some of these decisions were made by need, but many times they were made by greed. While we may not know what helped fuel the ownership decisions in today's featured example, we do know the former owner paid a heavy price. Let's take a look -

Here is the property -

Here is the property info -

Property Features
Status: Active County: Morris Year Built: 1965 3 total bedroom(s) 2 total bath(s) 2 total full bath(s) 6 total rooms Style: Ranch Master bedroom	Living room Kitchen Basement Bathroom(s) on main floor Bedroom(s) on main floor Master bedroom is 16x11 Living room is 23x15 Dining room is 15x11 Kitchen is 20x11	Basement is Partially Finished 2 car garage Attached parking Heating features: 1 Unit, Baseboard - Hotwater,Oil Exterior construction: Stone, Wood Roofing: Asphalt Shingle Approximately 2.46 acre(s)

Here are the financials -

• The property was purchased in September 2004 for $407,900.

• One the same day the property was a purchased an ARM for $326,320 with Meritage Mortgage.

• The property was refinanced with cash-out in December 2004 using an ARM for $391,000 with Long Beach Mortgage Co.

• The property was refinanced with cash-out again in November 2005 for $499,500 again with an ARM this time with Countrywide Mortgage.

• An additional Lis Pendens was filed in December 2007 by Bank of New York for the Countrywide Mortgage.
  
  
• The home is currently for sale with a realtor for $344,900.
  

When the property was purchased the owner put 20% down. The $81,580 was a huge down payment during the bubble years. However, just three months later the $64,680 was extracted from the property. That gave the owner just over 4% equity from the original purchase price.

Just 11 months later another $108,500 was extracted. The homeowner had withdrawn $91,600 more than the original purchase price. That would signify an increase of value of almost 20% during the one year of ownership. Perhaps the money was re-invested in the property thereby justifying the significant increase in value. The $91,600 comes to an second income of just over $24,000 per year for the time of ownership.

The loss on the mortgage will cost the lender $175,294 just for the mortgage. And that is if the property sells for the full asking price and the realtor receives the standard fees. Add all the other foreclosure expenses and the property will cost well over $200,000.


On a side note - one can learn a lot about a family by looking at the mortgage and deed filings. This property appears to have been purchased after a marriage broke-up. The other spouse acquired the "marriage" house. Unfortunately both spouses appear to have lost their domiciles within 4 months of each other due to foreclosure. Hopefully the future turns out better than the recent past for the former couple. And hopefully if there are children they are not experiencing too much pain during the past few years.

Equity Extraction - Is it worth it?

One common response to the freezing of home equity lines is to take all of the available equity before getting cut off. Depending on how the individual handles the funds has a lot to do with if it is a risk worth taking. If you are going to fritter away the funds - better to just be cut off. If you can lock the money up in a safe place with a decent interest rate it may be a option. But being realistic, having no savings and just some equity that has built up probably means one is not that good with their funds that they will leave the money untouched. They also may find themselves underwater eventually - creating a whole new set of problems.

Withdrawal of one's home equity is very risky scheme. In the Seattle Times there is a good article titled the Pros and Cons of home-equity loans. Lets take a look -

Many people who took out home-equity credit lines of $100,000 on their home and used only, say, $20,000 have received letters informing them they can no longer borrow additional money, just as their stock portfolios are dwindling.

...
But a new countermeasure is emerging: take out the money before the bank puts it out of reach.

In this strategy, borrowers draw the maximum amount even if they don't need it, then place the cash in a liquid, and safe, investment vehicle.

...
First, if the value of a home drops significantly and the borrowers have spent the cash from their equity line, they can end up owing more money than their property is worth. (In industry parlance, the borrower is then "under water" or "upside down.")

The prospect of easy money also is a temptation that some borrowers will find difficult to resist.

But for those with enough self-restraint not to spend more than they need, withdrawing the full credit line may be easier than having a credit line rescinded and then finding another bank.

Our view - unless you will still have significant equity in the house after the extraction and another 20% decline and you will not spend the funds except in cases of absolute, ABSOLUTE emergencies perhaps it is a sound choice. If you will be underwater or close to it after the extraction perhaps it is a time to re-evaluate your funds and lifestyle.

However there probably is the group wrestling with the fact that they will be underwater, can take the extraction and just walk away. Is a potential foreclosure worth $100,000? $200,000? $400,000? Probably for a group of people the answer is yes.

Roubini Explains It All

Consumer spending has bottomed out. The bedrock of our economic foundation has cracked and there is really nothing in line to take its place. Things are going from bad to worse. Ever increasing housing values were propping up an economy that did not have a solid foundation. Now we are really in trouble. This article written by Nouriel Roubini titled Twenty Reasons Why We're Not Consuming found in Forbes put everything into perspective. Lets take a look at a few of the reasons -

3. The U.S. consumer is debt-burdened, with the debt-to-disposable-income ratio having increased from 70% in the early 1990s to 100% in 2000 and to 140% in 2008.

5. The value of housing wealth is now falling by over $6 trillion, as home-price depreciation will soon be 30% and reach a cumulative fall of over 40% by 2010. Recent estimates of this wealth effect suggest that the effect may be closer to 12%-14% rather than the historical 5% to 7%. And with home prices falling over 30%, about 40% of all households with a mortgage (or 21 million out of 50 million who have a mortgage) will be under water (negative equity in their homes) with a huge incentive to walk away from their homes.

6. Mortgage equity withdrawal (MEW) is collapsing from the $700 billion annualized in 2005 to less than $20 billion in the second quarter of this year. Thus, with falling housing wealth and collapsing MEW, U.S. households cannot use their homes anymore as ATM machines.

7. The value of the equity wealth of U.S. households has fallen by almost 50%, another ugly wealth effect on consumption.

19. While policy rates are sharply falling, the nominal and real rates faced by households are rising rather than falling: rising mortgage rates, rising rates on credit cards, auto loans and student loans, together with less availability of credit are severely dampening the ability of households to borrow and spend.

What. You are still here. Go read the rest of the article. You will be glad you did.

Its Freezing Time

Just in time for the freezing temperatures, Freddie Mac and Fannie Mae decided to get in the game. They have announced they will be freezing all foreclosures for 6 weeks. But like a frozen pond - it is may look safe but chances are likely you will still fall through. And you once you have fallen it is very difficult to get out safely.

Will this change anything? Perhaps spur a bit of holiday spending. Perhaps allow for a handful of people to get their financial lives back in order. But for most it looks like a 6-week postponement of the inevitable. Bloomberg News cover this story thoroughly in an article titled Fannie, Freddie Suspend Foreclosures Through Jan. 9. Lets take a look -

Fannie Mae and Freddie Mac, the mortgage-finance companies seized by the U.S. government, will suspend foreclosures and evictions over the holidays.

The six-week halt will begin Nov. 26, a day before the U.S. Thanksgiving holiday, and last through Jan. 9, the companies said in separate statements today. The hiatus is designed to give servicers more time to implement a streamlined loan modification program for struggling borrowers.

“It’s a giant time out,” Paul Miller, an analyst at FBR Capital Markets in Arlington, Virginia, said today in a Bloomberg Television interview. “I wouldn’t be surprised to see this across the board.”

Fannie and Freddie, government-sponsored enterprises that own or guarantee $5.2 trillion of the $12 trillion U.S. home mortgage market, were placed under federal control Sept. 6. They have since been pushed to work harder at modifying troubled single-family and multifamily mortgages to curtail foreclosures.

...
The companies plan to reduce interest rates for up to five years and lengthen repayment terms to as much as 40 years to trim monthly payments to roughly 38 percent of a homeowner’s monthly pretax salary. In some cases, borrowers may qualify to temporarily reduce the principal amount of the loan, which would be due without interest if the house is sold or refinanced.

“The Hope Now program is not going to be enough. It’s an incremental step,” said housing advocate John Taylor, president and chief executive officer of the National Community Reinvestment Coalition in Washington. “Obviously, we’re pleased that they’re doing this, but absent a substantive foreclosure program, I wonder if this is this just another problem they’re leaving for the Obama administration.”

Hmm. How much of this is to just keep the numbers under 1 million foreclosures for the year as well as pushing off the problems. The January numbers are going to spike with the "time outs" back in the game as well as all the new people falling through the cracks. But then again it is also the same old same old. Pushing the problem down the road. Hoping that things will fix themselves before someone has to do something.

Like Falling of a Cliff

We know that retail sales are down, way down. But looking at the following graph shows how bad things really are. Remember the growth was fueled by the ever-rising equity. Just trade that equity for consumption. It only appeared to go one way. All homeowners had wealth. If you were 100% financed - just wait a few months and you had equity. And that equity could work for you by providing the goods and services you deserved.

Canada Vs. U.S. Total Retail Sales

This graph was in an article titled Consumer spending in the U.S. takes a tumble, Canada set for a fall from the Daily Commercial News. Here are a few snippets -

The graph [above] shows how closely aligned are retail sales in the United States and Canada. Year-over-year retail sales in both countries can vary to some degree over short periods of time, but the trends rarely differ for very long or to any significant degree of magnitude. This is not good news for Canada since U.S. retail sales have been announced for a period two months in advance of Canada’s and they are sinking into a deep pit.

...

It should also be added that consumer spending - for which retail trade is a leading indicator - accounts for approximately 70% of Gross Domestic Product (GDP) in the U.S. and 55% in Canada. The lower figure for Canada is due primarily to the greater importance of foreign trade in national output.

U.S. retail trade numbers were already trending down before September. But over the last two months, the decline has been dizzying. Since the start of this year, the U.S. economy has jettisoned 1.2 million jobs. Companies in a variety of sectors are announcing layoffs.

The financial crisis that saw credit dry up has meant that consumers have hunkered down to an extent not seen in many years. Plus existing home price declines have further hurt confidence and removed home equity as a financing option. Stock market price declines have been the final straw, cutting into savings through mutual fund and pension fund accounts.

At the start of the downturn there was a belief that the global trading would deter a significant U.S. fall. Rather than preventing a fall, it seems that the U.S. is taking everyone else with us.

Equity for an SUV

One great myth of the equity withdrawal during the great bubble is that much of the money went to necessities. While some people dipped into saving for medical and health care expenses, the great unraveling was due to conspicuous consumption. It is interesting seeing the frivolous purchases directly linked to the meltdown. The Modesto Bee has an interesting article titled A recession would clear air of outdated economic models that is jam packed with facts, figures and historical analysis. Lets take a look -

The arithmetic of our current problem is pretty simple: From 2000 through 2007, U.S. households borrowed $6.2 trillion, nearly doubling their debt. Most of it was borrowed against houses, and about two-thirds was spent on things other than another house or paying down mortgage debt -- including SUVs, flat-screen TVs and all the other consumer baubles of an American lifestyle. But when house prices collapsed, the home-equity cash spigot shut tight. U.S. consumer spending has fallen off the cliff, devastating car companies and closing factories throughout China.

The Treasury Department and the Federal Reserve have responded with pyrotechnics. The Treasury has infused hundreds of billions in cash into banks and other financial players. Even more remarkably, the Fed has distributed more than $1 trillion in new loans and credits to a broad range of financial and nonfinancial companies. The automobile manufacturers have now joined the queue, and Obama has signaled that he'd like them to be included in the bailout.

...

All these frenzied attempts at staving off recession seem to be aimed merely at jump-starting the consumer borrowing-spending binge that underpinned the ersatz growth of the 2000s. But the real need is to shift to a more balanced system that's less addicted to high-leverage finance.

Pouring money from the Fed into the banks just delays the day when banks -- and now we taxpayers -- will have to tally up our losses. The Fed is exchanging Treasury bonds for bundles of subprime mortgages at 98 cents on the dollar. But in the real world, those bundles could barely fetch 30 to 50 cents on the dollar. Does the Fed seriously believe that subprime mortgages are going to recover their value? The Japanese tried papering over bad assets during their 1990s credit crunch, and their economy has barely budged in 20 years.

At the same time, Congress and Treasury Secretary Henry M. Paulson Jr. are insisting that banks increase lending. To whom? House prices are still falling at double-digit rates. Credit-card defaults are spiraling upward. Companies are weak. Banks know how fast their loans books are deteriorating, and they desperately need cash to build up their reserves against all the bad loans they've made. Forcing them to ratchet up lending now is just pushing them back into the quicksand they're struggling to climb out of. It's financial folly. It would also be political folly for the new Obama administration.

There will be pain no matter what decisions are made. Some big things to note is trying to fix the system versus gaining short term political points. The former is what needs to be done. The latter is what got us to the point we are now.

We agree in getting the smartest people together to solve the problems. But we have to watch out for the ideologues.

As for this article - it was written by Charles Morris author of "The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash." Definitely a book to check out.

A Big Ouch Is Headed This Way

The local market is starting to take the hit we have been afraid of. Still nowhere near the huge super bubble state drops but significant even with the local job cuts that our area is going to feel some pain. But with falling prices along with falling prices things are getting worse. One of the few numbers we have have seen increasing is for unemployment levels. This ever increasing number will only bring the others down. In an article in the Star Ledger titled Keeping afloat, the numbers are put into perspective. What things look like now and where they are going. Lets take a look -

Yesterday, the [National Association of Realtors] groups said existing-home sales fell 12.2 percent in New Jersey, as more homebuyers, discouraged by strict lending standards, steep declines in the stock market and a rise in unemployment, dropped out of the market. Nationally, existing home sales, which generally account for 85 percent of total home sales in this country, fell 7.7 percent during the third quarter.

...
Statewide, home prices fell 5 percent, to $312,437, down from $330, 396 during the third quarter, said Jeffrey Otteau, president of Otteau Valuation Group, a real estate research firm based in East Brunswick, which tracks the New Jersey real estate market.

Otteau said the conditions will deteriorate even further before getting any better.

The third quarter officially ended on Sept. 30. But over the past two months, the housing market in New Jersey has weakened dramatically due to mounting job losses and the slowing economy.

For example, in October alone, Otteau said the number of homes contracted for sale in New Jersey fell 28 percent, compared with the previous year, reflecting the weakening jobs picture and the souring economy.

There were two areas in New Jersey that did not have declines. The Trenton-Ewing area had a price increase average of 4.6%. And Hudson County prices rose just about 1% for quarter. But there seems to be consensus that our area will still have more declines before things start to turn around.

Things are bad and we have have yet to feel the full impact. Remember it takes months for the foreclosures to process through the system. Job losses in October will not reach full impact until next summer. New York and New Jersey unemployment rates are too low for many people to afford keeping up a mortgage, taxes and daily living expenses. People will fall through the cracks. Even with the foreclosure barriers the state is trying to implement will not be enough.

One thing that has often felt strange was reading the blogs and news from California, Nevada, Arizona and Florida, it often seemed like another world so removed from our lives. Watching the trash-outs in California seemed as foreign, incomprehensible, and removed as watching the was in Darfur. The bubble bogs have been bracing ourselves for hard times to come. But friends and acquaintances that live in our area often acted like it was another world and those affects were local and regional issues - not national or global.

Now we all know better.

Divorce - Foreclosure Style

An already messy time made even more messy with falling house values. Homes - once an asset that couples fought over are now liabilities that couples are fighting to get away from. An amicable split can turn into messy and complicated divorce thanks to an unwanted property. Here is an article from Miami Herald about some of the problems in an article titled When couples split, the home is a hot potato. Lets take a look -

During the real-estate boom, couples who divorced would fight over who got the house, betting that the winner could get rich from rapidly escalating prices. Spouses plunked down thousands to buy out their partner. Disposing of the ''marital asset'' was easy, since homes were selling in a day or two for inflated prices.

Now, in a twist on the classic divorce dispute, houses have become hot potatoes for couples divorcing during the downturn.

...
Falling property values have turned many homeowners upside down on their mortgages, meaning they owe more than their homes are worth. Negative home equity has made it much harder for divorcing couples to disentangle their finances.

...
''Instead of an asset where they used to fight for occupancy, possession and ownership, they're now fighting to abandon their personal interest,'' said William Koreman, a divorce lawyer in Hollywood. ``Neither of them wants the property because they would be accepting a huge liability.''

In extreme cases, a homeowner has used the mortgage as a weapon of spite, deliberately sabotaging his or her own credit to destroy the credit of the former partner, said Adam Franzen, a Fort Lauderdale family lawyer.

Hard times getting even harder with falling home values. This can get even uglier and confusing when children are involved.

Near the end of the article is a quote from a wife going through a messy divorce -

``If it goes into foreclosure . . . you have to live and move on. I don't think anybody is concerned about their credit anymore. Everyone's credit is shot.''

We have been predicting this for some time - a huge population will have bad credit that bad credit will not mean what it once did. Foreclosures have already lost a lot of their stigmas. Bad credit will not have the harm it was once predicted to have. Perhaps you will not be able to buy a property for a while - probably will turn into a positive for people rather than a negative.

Homage to Irvine

It is always great when a pioneer gets recognized. Our inspiration blogger - Irvine Renter from Irvine Housing Blog - has published a book and gone public. Wow! Amazing and exciting. Here are some snippets from an article in the Orange County Register titled The guy behind that cranky Irvine real estate blog is... Lets take a peak -

Some consider Larry Roberts a hero for saving people hundreds of thousands of dollars in lost home equity. Others consider him a villain, cheering from the cheap seats as home profits vanish and home owners go bankrupt.

Roberts will tell you he's just a blogger, a guy with a keyboard and high-speed connectivity who happened to foresee the big pop in the housing bubble early in the game, and tried to warn as many people as possible.

...
Roberts is better known as IrvineRenter, the online voice that drives the popular Irvine Housing Blog web site (www.irvinehousingblog.com). He has become one of the biggest, best-known mouths in a world of big, mouthy real estate blogs. And he does, in fact, enjoy his role as un-paid economic guru.

...
Roberts stumbled across the Irvine Housing Blog soon after it launched in September 2006, and began peppering the site with comments. By the following January he was contributing posts to the front page, using his jaundiced eye and the nom de blogIrvineRenter. He profiles a different Irvine property for sale just about every day, and has become the blog's main voice.

Nothing, it seems, is off limits. Roberts unleashes his caustic wit on virtually every aspect of a listing; the home's décor, the Realtors' typo-ridden descriptions, the often insane asking prices. He also tracks public records to find out the home's previous purchase price, how many loans and lines of credit have been taken out against it, and how much equity the homeowners have lost.

The book is The Great Housing Bubble: Why Did House Prices Fall? Order it from Amazon.

Modifying Mortgages

There is a set of unfortunate choices that lenders are faced with making - losing a lot of money and owning a home or losing some money by modifying a mortgage. Due to the long and complex process, including the individuals circumstances, of mortgage modification many times the foreclosure process takes wins. Even at the times when loan modification would have been relatively simple and much less costly.

One bug (perhaps really a design during the good times) of the system is that the foreclosure process is cut and dry. Ninety days late the foreclosure process is triggered. But some are trying to change the system. Pointing out that the bug has turned into a parasite that is threatening the life of the housing market - which in turn is pushing towards systemic collapse. I

In an article in Newsweek titled Focusing on Foreclosures, a look at increasing realistic modification is examined. Lets take a look -

It's an effort that began more than a year ago, when the government began offering programs like FHA Secure and the Hope Now alliance. Those programs are intended to help homeowners refinance into more affordable mortgages or work with lenders to modify their loan terms and reduce their payments. But as unemployment increases and more people face the prospect of foreclosure, critics say these initial programs aren't doing enough to help. With taxpayers putting up hundreds of billions of dollars to bail out financial institutions, it's time for the government to become more proactive about saving people's homes.

While there is no shortage of proposals for what should be done, by far the leading contender is being pushed by Sheila Bair, the chairman of the Federal Deposit Insurance Corporation (FDIC). This summer, the FDIC took over a failing bank called IndyMac and went to work swiftly modifying thousands of homeowners loans. Instead of doing a painstaking case-by-case analysis of each loan, which is what made existing modification programs move so glacially, IndyMac began applying standard formulas, based on each homeowner's income to determine whether they could reduce the interest rate or extend the term of the loan to create an affordable monthly payment.

...
Does the FDIC plan make sense? To get an answer, I called Bruce Marks, CEO of the nonprofit Neighborhood Assistance Corporation of America. Marks, whom the Boston Globe once called "one of the most feared men in the corporate boardrooms of the nation's leading financial institutions," has spent years advocating for homeowners. In the last year, his group has helped thousands of U.S. homeowners work with banks to modify their mortgages. His take on the FDIC plan: "It's a huge step forward ... Sheila Bair gets it."

As Marks sees it, there are fatal flaws with the existing government programs to help refinance or modify loans. For many homeowners, refinancing is out of the question, since their homes are now worth less than their loan amount, and their credit scores have fallen due to missed mortgage payments. Marks says too many loan modifications don't take a realistic look at whether the homeowner will really be able to make the new payment.

In contrast, the FDIC program starts by taking a hard look at what homeowners can actually pay. Once it calculates an affordable payment, pros start playing with the mortgage numbers to see what they can adjust to hit that magic number. They start by reducing the interest rate. If that doesn't push the payment low enough, they'll extend the term of the loan. As a last resort, they'll consider lowering the principal amount of the mortgage. The mortgage holder loses money in any of these scenarios, but the appeal of these deals is that they usually lose less than if they foreclose on the house. Marks says these deals are also better in the long run than modifying a mortgage that winds up in default a few months later.

Changing the system is the first step. Evolving from a parasitic relationship to a symbiotic one would do a lot to stabilize the system. If the triggers are in place as readily for modifications as they are for foreclosures the our national devastation may not be mirror the housing cartography of Nevada, Arizona and California.

No Money Down in Denville

During the Great Housing Bubble things that did not seem to make sense were common everyday, ordinary practices. One perfect example of this was 100% - or more - of financing for a property. All the buyer had to do was a sign some papers and they could own a house. No scrimping and saving was necessary. If your finances were questionable just opt for a no document loan.

People were not really worried about buying how they would pay for their mortgage. The property would increase in value so if worse came to worst they could just sell it for a profit. Houses would get scooped up well before foreclosure. Bad credit did not matter, one would just have to pay a bit more in interest. There were lines of lenders willing to give anyone loans.

House values only went one way so this appeared to make good business sense. Until it didn't. Then everything came crashing down. Which brings us to our featured example. Although the property was purchased post-bubble, they still received all the perks of 100% financing, ARM and balloon payments. But since it was post-bubble they also faced foreclosure and credit ruin. Lets take a look -

Here is the property -


Here is the property info -

Single Family Property Status: Active County: Morris Year Built: 1935 3 total bedroom(s) 1 total bath(s) 1 total full bath(s) 6 total rooms Style: Ranch

Living room Kitchen Basement Bathroom(s) on main floor Bedroom(s) on main floor Basement is Unfinished Heating features: Gas-Natural, Gas-Propane, Oil Forced air heat

Exterior construction: Wood,Crawl Space Foundation Roofing: Asphalt Shingle Approximately 0.18 acre(s) Lot size is less than 1/2 acre Utilities present: Public Sewer,Public Water

Here are the financials -

• The property was purchased in November 2006 for $267,800.

• The first mortgage at time of purchase was for $214,240 using an ARM and a balloon payment with WMC Mortgage Corp.
  

• On the same day of November a piggy back mortgage was taken for $53,600 also with WMC Mortgage Corp.

• The foreclosure process was started in June 2007.

• The property, currently for sale through a realtor, is listed at $193,900.
  

The property was purchased with 100% plus $40 financing. Strange as it sounds the numbers were double checked due to the extra $40, but that is on the paperwork the lender and borrower signed and filed.

While 100% financing was common during the bubble, when the bubble started deflating and mortgage brokers were closing shop this was a harder deal to come by. Today it would almost impossible. And with the owner making at most 4 months of mortgage payments it illustrates why 100% financing was a bad idea.

One reason why 100% financing is often called leasing from the bank is that the only investment people have is their credit. The only thing the owner will lose is their credit. If they stayed in a fought the foreclosure they could have lived at the property for less then renting. Perhaps it was not worth the damage to their credit, but that is the only consequence the former owner will face.

As for the lender, the property will lose at least $85,574 if it sells for the full asking price. That loss is just for the original money lent less the new selling price in addition to the standard realtor's commission. But since we know there are additional costs that lenders face in the foreclosure process, this property will easily exceed $100,000 in total losses. Not a good business plan.

Still Borrowing

Increasing unemployment levels, reducing expenditures for retail activities and eating out, but our debt is increasing. Our revolving debt that is, which is the only access to debt that many people have right now. In this article from the Associated Press titled Consumers unexpectedly borrow more in September the issues are examined. Lets take a look -

Consumers boosted their borrowing in September, defying expectations for a cutback.

The Federal Reserve's report, released Friday, says consumer credit increased at a 3.2 percent annual pace in September. That was up from a 2.9 percent rate of decline in August and marked the biggest increase since July.

...
The Fed's measure of consumer borrowing does not include any debt secured by real estate, such as mortgage or home equity loans.

...
But for the July-September quarter as a whole, consumers pulled back sharply in their spending, a main reason why the economy contracted during that period, the government reported last week.

With jobs disappearing and Americans watching their wealth shrink, economists are expecting further retrenchment by consumers. That's factoring into predictions for more shrinking economic activity in the current October-December quarter.

The bubble methods of refinancing with a cash out or HELOCing is no longer possible to fund expenses. Credit cards and other revolving debts are easy ways to keep up with expenses. It would be fascinating to find out what type of purchases these were - essentials of food, gas, clothing and utilities would be our guess.

How much will cutbacks on non-essentials affect holiday shopping. A time of the year that retailers count on to keep them in the black is going to be pretty. How many others will follow Linens and Things lead?

Job Losses Help Accelerate Foreclosures

Job losses and unemployment levels are on the rise. In high priced areas such as New Jersey and New York unemployment checks are far too low to come close to paying most mortgages - adding the property tax and insurance make the numbers even gloomier. Those not able to pay their mortgages due to job losses face foreclosure issues. In this article CNN Money titled Mounting job losses now fuel foreclosures illustrate the interconnected of foreclosure rates and the employment sector. Lets take a look -

For years, bad loans and their aftershocks have been sending homeowners into foreclosure. Now it's lost jobs that are putting troubled borrowers over the edge.

As the economy tanks, unemployment is the major factor driving a much larger proportion of foreclosures now than in the earlier stages of the mortgage meltdown.

In June, 45.5% of all delinquencies reported by Freddie Mac were due to unemployment or the loss of income, according to the company. That's an increase from 36.3% in 2006.

"The two economic factors that most contribute to foreclosures are falling home prices and rising unemployment," said Richard DeKaser, chief economist for National City Corp (NCC, Fortune 500). "It's hard to pay your mortgage when you don't have a job."

And that's a situation that more and more people are finding themselves in. Nearly one million Americans have lost their jobs in 2008. The Bureau of Labor Statistics reported in early October that 159,000 private sector jobs were lost in September, and on Friday, economists expect the BLS to report that 200,000 jobs were lost in October.

"The rise in job losses will increase and extend the delinquency trend," said Doug Duncan, the chief economist for mortgage giant Fannie Mae (FNM, Fortune 500). Foreclosures spiked 71% in September alone according to RealtyTrac.

As this post being being composed the October numbers came out - unemployment rose to 6.5%, with a cut of 240,000 jobs. This will just add to the foreclosure levels. Probably another spike next month. With the increased unemployment levels and the shaky economy the holiday season is bound to be flat, with probably decline over the past several years growth.

How much of an impact will President-Elect Obama's 90-day foreclosure moratorium have on the spiral downward?

All Great Things Must Come To An End

And it happened.

Housing Panic has officially closed up shop. We were warned. But now it is reality. There will be a large void in the housing blogsphere. Keith's commentary and views were necessary. He basically helped to start a movement of people realizing that housing growth was based on fraud. Although his voice will not be silenced it will no longer be found on Housing Panic and he will address a variety of topics at his new website, appropriately titled Soot and Ashes: Reinventing American After the Crash.

Here is an exert of his final post -

But now, on the 5th of November, 2008, it's time for HousingPANIC to end. It's time to rebuild. It's time to reform. It's time to arrest the guilty. It's time to root out the corruption. It's time to address our ills. It's time to hope. It's time to renew. It's time to reinvent. It's time to move on.

Thank you to all my fellow bubble bloggers. For most of us this was simply a calling, a passion, a desire to serve our fellow man. A fight against the evil and corrupt. And we have won.

And thank you to the HousingPANIC community. The HP'ers. The brown shirts and the chicken littles and the tin foil hatters. History proved us right, and our detractors wrong. You have won.

I'm going to keep blogging, but on all the issues I find interesting that are confronting America and the world, not just housing. More on the new blog in the next post.

I'll turn off comments here tonight. This body of work will then be complete. I hope future generations, when they're studying this bubble, the biggest financial bubble in human history, enjoy this real-time view of what happened, and how it happened. The HousingPANIC blog will hopefully remain here on this lonely little corner of the internet forever. It should serve as a warning to the folly of man. And it should serve as a beacon of hope. That the little guy stood up and said no more. No more.

Peace out.

It's been an honor.

-Keith

Of course we will be reading his new site and will definitely link to the must read posts. Of which we are sure will be numerous.

Thank you Keith!

More Underwater Info

The people with negative equity face numerous challenges. They are unable to refinance and have no equity to fall back on in an emergency. Banks are much less likely to renegotiate with them which means that foreclosure may be looming. This is also the group that struggles with the "walk away" decision. Why bother with a short sale or upcoming foreclosure? Why bother paying down a property that is now worth half the purchase value? These are some reasons why underwater issues affect the entire housing sector - not just those in trouble. This brings us to an article in the Philadelphia Inquirer titled Negative home equity less in Pa., N.J. Lets take a look -

In Pennsylvania, 5.7 percent of the state's 1.413 million single-family homes had negative equity, according to the study, released Friday by First American CoreLogic Inc. It was the company's first state-by-state assessment of homes worth less than the amount of the mortgage.

Nationally, more than 7.5 million mortgages - 18 percent of all properties with a mortgage - were in negative-equity position or, as it is often known, "under water," as of Sept. 30, the California company reported.

About 9.3 percent of New Jersey homes with mortgages were in negative-equity territory, the study said. Its overall analysis suggested that most of those houses were in the higher-priced northern areas of the state, near New York.

...

Patrick Newport, an economist at IHS Global Insight Inc., a Waltham, Mass., economic-information company, agreed with the estimate by CoreLogic, but said most borrowers with homes "underwater" would not default. His reasoning: First, as a matter of principle; second, because walking away from a home damages a person's credit for years afterward; third, because they plan on living in the house for years and can afford the payments; and finally, because they expect the market to recover.

...

Joel L. Naroff, the chief economist of the former Commerce Bancorp Inc., which is now TD Bank, said being underwater and losing homes were two totally different issues.

While underwater and foreclosure are not the same, they are related. As noted above, underwater is basically on the financial brink. Some will survive in tact and probably get stronger from the experience.

The article also provides this table of information -

Homes worth less than the current mortgage*:

Total Number Mortgages Underwater

Pennsylvania 1,413,181 79,978

New Jersey 1,748,179 162,411

*As of October

SOURCE: First American CoreLogic Inc.

While these numbers are a good sign, part of this is due to the lower decline of housing values in the region. As foreclosures rise, property values will fall and the number of underwaters will then increase. The impact of the financial industry on the region will have a big impact on employment levels, property values, and regional economic stability.

Rising Foreclosures

There seems to be a bit of a prejudice that foreclosures are limited to lower income neighborhoods. Exclusive communities are perceived as immune to the unfortunate circumstances of increased foreclosures. Maybe people think that if you make more money you know how to handle it better. Maybe it is a perception of economic class and stability. But these beliefs are beginning to change with the growth of foreclosure numbers in upper crust Bergen communities. Bergen is often thought of immune to economic problems, but as the following article from The Record Titled No place to hide from foreclosures we can see the problem is spreading regardless of income and status. Lets take a look -

There were 2,422 foreclosure filings in Bergen County and 3,883 in Passaic from January through August of this year, according to RealtyTrac, which tracks foreclosures nationwide.

By contrast, in the same period last year, Bergen County saw 571 filings and Passaic, 2,594. Those numbers include all foreclosure actions, from the initial bank notice that a homeowner is late on mortgage payments, all the way through to a sheriff’s auction.

...
In New Jersey, foreclosures have had the heaviest impact on urban and working-class towns. In those places, low-income homeowners stretched beyond their limits to buy houses, or borrowed against their homes to pay other bills.

But middle-class and even wealthy areas are not immune. Foreclosure actions have been filed this year in Woodcliff Lake, Tenafly, Franklin Lakes and Saddle River, among other affluent towns.

...
Foreclosures are a tragedy for the family involved, of course, but they also affect nearby properties. When banks buy the homes at auction, they put them back on the market, usually priced aggressively for a quick sale. That tends to depress the prices of neighboring properties.

One big issue of foreclosures is the domino affect it creates in neighborhoods. One foreclosure drops the comp price in a neighborhood which in turn depreciates the value of other houses, reducing values that can increase foreclosure levels. Not only does it have the negative economic impact but is also fragments neighborhoods and communities as people are forced to leave. Once a occasional issue in poorer neighborhoods it is becoming common in wealthier areas.

Living on Debt

People's lives are intertwined with their credit and credit scores. We are accustomed to living beyond our means. The best of us keep reserve that for our mortgages, the worst of us go well beyond. And the downturn has not changed patriotic consumption, rather it has just increased our debt. This article from the Christian Science Monitor titled The 'Catch 22' of consumer credit discusses the issues. Lets take a look -

Renting an apartment, securing a home mortgage, seeking employment, buying a car, even turning on utilities – each of these life experiences will demand a review of your credit history. Nearly 1 in 3 purchases in the United States is made with plastic, or $40 out of every $100, adding to nearly $1 trillion of credit-card debt as of August, according to the Federal Reserve.

Faced with an extended economic recession and a tumultuous global credit meltdown, Americans are finally recognizing the negative consequences of leverage (the number of dollars borrowed for each dollar of wealth). Many people are making a concerted effort to de-leverage by reducing their use of credit cards and adopting a "pay as you go" philosophy. Abstinence from credit cards has become chic among some younger consumers who have formed Web-based networks to support their pledges of credit-card withdrawal.

Some older borrowers are placing themselves on cash-restricted budgets to reduce their urge to buy. A poll of 1,000 Americans released last week by Consumer Action reported that 69 percent of consumers intend to pay with cash and do not expect to take on additional debt in the next 12 months. Only 1 in 4 had opened new credit-card accounts in the past year.

But Americans' commitment to curb credit-card use has ironically become a Catch-22 scenario: By weaning themselves from credit cards, they actually harm their credit reputation.

Whenever consumers lock up or gleefully cut up their plastic, their credit scores drop as they have increased their credit-utilization ratio. This ratio is determined by dividing a person's total of outstanding debt by their total available credit. As borrowers' credit lines are closed, either by themselves or by creditors, their utilization ratio increases and their credit score decreases, hence the Catch-22.

The system is to rely on debt and credit. If you do not have debt you are not shown to be a good consumer. In order to make a huge purchase as a house you need to show that you have lived with credit (debt) for years and that you consistently pay it. If you do not have the proper debt you have a lower FICO score. A lower FICO score can result in a higher interest rate. SO the system is designed to penalize those that do not want to live beyond their means.

Seems like a very unsustainable system for the consumers, however quite beneficial to the lender. Guess it is obvious as to who designed the system.

Reducing Foreclosure Rates

It is wonderful to see a business look at the long-term stability rather than just to the next quarterly report. And when the long-term stability of a company is intertwined with their customer's stability it is even better. Few business decisions have as huge of an impact as keeping people in their homes, and reducing foreclosures, as load modifications do. Especially when the loan modification is in the best interest of all the parties involved.

This brings us to an article in the Wall Street Journal titled Massive Effort to Save Mortgages. It is about a loan modification program that JP Morgan is implementing to reduce foreclosure levels. Lets take a look -

J.P. Morgan Chase & Co. launched an ambitious plan Friday to modify the terms of $70 billion in mortgages for borrowers who are behind on their payments or soon could be.

The move by the New York bank will cover as many as 400,000 borrowers. They'll be moved into loans carrying lower interest rates, smaller principal amounts or other more-affordable terms.

...
The move also suggests that banks are realizing they can improve the value of their loan portfolios through mass modifications rather than foreclosures, which tend to produce larger losses. Until now, mortgage holders have been reluctant to renegotiate loans or have been doing so one-by-one, a time-consuming process. The bundling of loans into securities that are then sold to investors further complicates matters.

...
J.P. Morgan's push is especially aimed at so-called option adjustable-rate mortgages, or options ARMs. These allow borrowers to make a minimum payment that may not even cover the interest due -- resulting in a higher loan balance.

Under the plan, option ARMs that are accumulating interest will be replaced with fixed-rate loans that are more stable for borrowers and seen as far less likely to default. J.P. Morgan said it wouldn't begin the foreclosure process on borrowers during the next 90 days, as it opens loan-counseling centers and takes other steps to launch the program.

This is a very good business decisions. These Option ARMs are toxic. Once the recasts start there would be a massive wave of foreclosures. While it is letting people stay in homes they could never afford. Many people may not be able to even be able to make a fixed rate mortgage payment at the new, lower value. However it will definitely slow the bleed, and possibly long enough for prices to stabilize.

Another interesting morsel in the article is the following -

Nationwide, 7.3 million American homeowners are expected to default on their mortgages between 2008 and 2010, about triple the usual rate, according to Moody's Economy.com, a research firm. Some 4.3 million of those are expected to lose their homes.

As we note over and over, things will get worse before they get better.