patrick.net

"but that should not affect a whole class of people all at once"

Peter P, I'm sure you intended that to mean a certain "class" of loans, a certain "class" of over-leveraged daytraders etc., correct? :)

Making the case that it was "just a run of bad luck" when you fit FAB's "NINJA" loan description to the "t" (along with plenty of company) is a disservice to those that have truly been through a tough patch!

Hello Kitty,

It must feel downright "toasty" to have that level of understanding! Most of what I understand about loss mitigation is through a friend. He's done it for years and I really admire the guy. The number ONE thing he runs in to is when he finally DOES get the FB on the phone is "Oh, we've got it handled, so don't call again!"

Really? And just how is it exactly that you have this "handled"?

Oh, we're selling! We have it listed w/a realtor and he says he can get us____ and have it sold within____ no problem!

His fees aren't even that great ($1,500-$3,000) per "case". The people are rude, back out w/regularity and seldom if ever thankful. What a way to make a living. "Experience in collections a BIG plus".

Randy,

At the end of the last thread, you stated a rule of thumb that "the holding cost to rent ratio returns back to somewhere near it’s long run equilibrium of 1.5-1.7. It’s more than double that now."

If I'm interpreting correctly this is a variation on the theme that the cost of renting should be comparable to the mortgage cost. Except your number seems to lean 50% to 70% more towards buying. I know this is an oversimplification, but I'm wondering if you could elaborate on your equation.

thank you

Peter P Says:

> What if a speculator has 20 properties and he decides
> to default on 5 homes with the least amount of equities.
> What will the lender(s) do?

About 99.9% of the time the lender will just try and get the property back as fast as possible and in California (a single action state) they will not be able to go after the Borrower for any deficiency.

I have never heard of a lender that makes 100% LTV loans so most people with “100% financing” have at least two loans (or three if they also got a HELOC). When the first TD holder starts he foreclosure process the lenders in 2nd and 3rd position can either make the first lender whole or lose everything when the trustees sale wipes out any claim they had to the property equity.

With “homes” a lender may threaten a Borrower with “judicial foreclosure” but it will never make sense for a lender to do it unless there is some massive fraud and/or environmental problems (like a meth lab gone bad).

Let’s say Bill Gates got a call from his cousin Casey in Sacramento in the summer of 2005 warning him that he might be passed up by Warren Buffett or Carlos Slim Helu unless he started to invest in Real Estate.

If Bill stopped making payments on 5 homes this year it would not make any sense for a lender to do anything but take them back (since the 1st TD lender should be close to even after a sale). If Bill bought 20 ten million dollar vacant office buildings and stopped making payments on 5 of them the lender would be able to get a deficiency judgment (but that would never happen since only a poor person will ever lose a property through foreclosure)

I have never had much to do with 2nd TDs (other then paying them as a property manager and working with them as we forclosed on a lot of 1st TDs in the early 90’s) and I have had nothing to do with HELOCs so I have no idea if any of these lenders have any right to come after a Borrower after the 1st TD holder takes back a property and they get nothing….

OO Says:

> FAB, I’d like to know how long does it take before the
> county slaps a lien on back-owed property tax and
> force sale?

I’m not sure how long it takes since for the last 25 years or so everyone I know pays their taxes on time.

Right around the time I started college California made a huge increase in the Property Tax late fees and other changes to try and get more tax money coming in.

When I was a kid the late fees in California were very low and the state never did anything if you didn’t pay so not paying taxes was like getting a low interest loan from the state.

I think in a BK you can keep your primary residence if you don't have a high amount of equity. 50K or less was the amount when I learned about it in the early 90s.

SQT "But what about the slew of short sales? I don’t know about you guys, but I’m seeing a ton of them here. I’ve read/heard that short sales aren’t any easier on your credit than a foreclosure so I’m not really sure why anyone would opt for it; especially if they have to pay taxes on the the loss."

My brother in law did a short sale in the early 90s and it did not blemish his credit. He went and bought another house just a few years later. A short sale is where the lender forgives a portion of the loan in their own interest. One thing that someone can answer for me though is whether the amount of the short is taxable as debt forgiveness income, I imagine it is.

SQT,

Uh, it's not just you. Evidently the SacBee has sighted this previously unknown creature (shortus-saleibus) as well! Word.

Malcom,

Up until now that may have been the case. Bankruptcy has lost much/most of it's negative stigma as well. The question is, with so many looking to go the short sale route will this "pre-foreclosure" measure shed it's negative image too?

Hate to say it, but it'll be a painful and necessary step toward a full recovery. Most listings I look at (if forced into a "distressed sale") would probably only get about 2/3rds of what they're asking. Now I don't need any "confused" people beating me over the head. We all know what a distressed property looks like! I'm talking about occupied, current and well maintained homes! The shorts will greatly "improve" comps.

HelloKitty,
Thanks for that post. Very informative and interesting stuff. It seems like yet another imdediment to RE market liquidity - another reason for price stickiness on the way down...

At least according to DQ, in SoCal:

"Indicators of market distress are still moderate. Financing with adjustable-rate mortgages is declining. Foreclosure activity is rising but is still in the normal range."

http://www.dqnews.com/RRSCA0307.shtm

They've been saying market distress is still moderate for a few months now while simultaneously saying foreclosure activity is rising but still in the normal range. How long before it's out of the "normal range?"

I don't know many people more judgmental than me, but I don't assign a stigma to a short sale. I think when times get bad I respect someone for trying to compromise, and work out a deal with a lender rather than running from their problems. Even if I held such a note I wouldn't hold it against the FB, especially if the guy is actually coming out of pocket to make up some of the difference. Respectable banks know they sometimes have to eat it on a few deals, it's like any other industry.

Unless it is for a medical catastrophe I do think BKs are a last resort and rightfully do still carry a stigma.

What's the deal with back taxes/tax liens? If you buy a property, do you have to end up paying them on top of your purchase price or should the seller?

Will you also have 2nd mortgage people/HELOC's trying to come after you as the buyer as they have a previous claim? I can't imagine 2nd mortgages in CA are just going to let it be when that 2nd mortgage could conceivably be $100,000 - $200,000 in some cases?

It depends on who you buy it from. Those liens show up on a title report and the seller settles them through escrow. Lien sales normally wipe those out because the house is being sold to satisfy them. Sometimes rank does play into it. If a state sells a house for defaulted state tax, that will not wipe out a federal lein.

No if the 1st forecloses, the sale wipes out the second. If you buy the house due to the 2nd foreclosing the 1st is still in place. That is why when you are lending, you want to be as high up the food chain as possible.

So if the 1st forecloses, then they pay the tax lein? Excuse my ignorance, but if the city has not put a lein on the property for unpaid taxes (or is it done automatically) what happens then?

skibum, you're right. It's kind of ridiculous. They ignore the trajectory (foreclosures are doubling YOY in many CA localities) and instead they "report" on the normality of the range. It's like a car that's doing 150mph. Right before it flies off the cliff, driver hits the brakes, it's speed gets down to 55mph, which is within the normal range... So everything should have been fine. What happened?

Claire I was giving different examples unrelated to each other. Buying from a bank is just like buying from an individual. If the 1st forecloses, and there is a tax lein, it will normally be satisfied in escrow when you buy the house from that bank. That's why you do a title search and buy insurance, to gain a clear title. The concept of a lein is to establish an interest that must be satisfied when a property is sold.

Malcom,

So true. My buddy tells me that something like 97% of the people that file a BK to avoid a foreclosure.... wind up getting foreclosed any damn way! Of course his take is, any money you paid out to an atty. is money that could have went toward keeping your lender happy!

One other thing I wasn't sure about was he said let's say you're 10K behind on your payments? And you have 9K in your 401K, rather than give the lender the full 9K (and continue to struggle being delinquent) often he can negotiate on your behalf and get them to take say $2,500. That way when he structures the "work-out" they would still have a little liquidity to keep the lender at bay until they straighten out their financial issues.

Hello Kitty, does that sound right?

Boston Transplant

There are many reasons that holding-cost of ownership (we usually abbreviate as PITI, but also includes a risk factor) is usually about 50%-70% higher than renting, and some factors are cultural and differ among countries.

Financially, the only real justifications (see end of last thread) come down to leverage, tax shelter, prepayment option, and savings-account effect (building up equity). These financial factors do not apply to renting, only to owning (there are other factors on the rental side which partially offset some of these).

But all the financial factors probably only justify (and I don't have a 30 page thesis to support this, just my reasoned opinion) about a 1.2-1.3 ratio.

I believe most of the difference is "personal utility", cultural and psychological. Many people have rational reasons for wanting to own versus renting, even at a premium. The US has a very strong cultural bias towards owning, and there are all kinds of sociology and socioeconomic models and arguments this invokes -- we have at least one regular here who works in this area academically. And finally, in the context of the culture, a large number of people become emotionally tied to home ownership, especially as they become more affluent and/or turn from 1st generation to latter generation immigrants. "The American Dream" at a macro and micro level, if you will.

Sometimes the ration inverts. This is not a normal circumstance, and generally doesn't persist for longer than a few years except in secularly depressed areas. Much of the worst afflicted rust belt, for example currently has ratios around 1.0 - 1.1, which isn't even inverted but many people blame for the degeneration of stability of entire towns. A few places currently have truly inverted ratios (last I looked was actually late last year). Some areas of Detroit, Gary Indiana, East St. Louis are industrial examples. Rural southern Indiana is a non-rust belt example. In these areas renting is more expensive than owning, largely because there is a premium placed on flexibility/transience. Few who find themselves living in these areas are willing to invest in ownership and/or cannot afford to do so. Similarly, landlords who own property they rent out in these areas demand a stiff premium for the risk they are taking by owning property in long-term a depressed region. Aside, I read a study a few months back that also showed people in inverted ownership-to-rent regions actually pay a much _higher_ portion of their income to housing than other regions. This was attributed to depressed incomes + inflated rental prices, sort of a 1-2 punch for people stuck in "poverty traps" (which is what Easterly calls these types of regions that get stuck in positive feedback loops of regional depression).

"DinOR Says:

March 15th, 2007 at 8:53 am
Malcom,So true. My buddy tells me that something like 97% of the people that file a BK to avoid a foreclosure…. wind up getting foreclosed any damn way! Of course his take is, any money you paid out to an atty. is money that could have went toward keeping your lender happy!"

That's because in the end it comes down to individual character. These types of people just can't bring themselves to pay their bills. Like you said, some people horde savings when they could pay off bills. I'll never figure out someone who would rather pay 18% on a small credit card bill, rather than tap their nestegg making 6%.
A BK to avoid foreclosure is just a stall tactic sometimes. I'm seeing it second hand from some investors (lender side) that I know. Their attroneys say the same thing, the FB is only gaining about 3 months before the inevitable. Just because you can keep your house during a BK, you still have to pay the trust deed(mortgage for lack of a better word). People think that gets discharged, you actually have to reaffirm it during a BK or else it is just an asset for which the trustee has a secuirty interest in, and they'll just snatch it right then.

Randy H Says:

> There are many reasons that holding-cost of ownership
> (we usually abbreviate as PITI, but also includes a risk
> factor) is usually about 50%-70% higher than renting…

Other than the last few years (the Real Estate Bubble) and on the early 80’s (the Interest Rate Bubble) the cost of PITI (on a 80% or lower LTV loan) has been lower than rent for almost every home in the US. In the 60’s, 70’s and 80’s every rental home (with a down payment over 15%) my Dad bought in the Bay Area was cash flow positive from day one…

> Sometimes the ration inverts. This is not a normal circumstance,
> and generally doesn’t persist for longer than a few years except
> in secularly depressed areas. Much of the worst afflicted rust belt,
> for example currently has ratios around 1.0 - 1.1,

In the rust belt the ratio is WAY UNDER 1.0. I just went to realtor.com and found 259 homes in Flint, MI for $10K or less (yes homes for under ten thousand dollars). The PITI on an $8K loan will only be $50 a month far less than renting. I know a guy who has a brother in the Detroit area with over 50 rental homes that he buys for $25-50K on average and rents them about double the PITI on average…

P.S. High end real estate has always had a ratio of rent to PITI well above 1.0 so if we are talking about Belvedere, Ross and prime Mill Valley homes the ratio will probably never get below 1.0, but I have friends that own average homes in Sausalito, Mill Valley and San Rafael that had PITI payments that were lower than the rent they were paying for similar homes in the 90’s…

Will you also have 2nd mortgage people/HELOC’s trying to come after you as the buyer as they have a previous claim? I can’t imagine 2nd mortgages in CA are just going to let it be when that 2nd mortgage could conceivably be $100,000 - $200,000 in some cases?

This is an excellent question.

From what I gather reading OO, FAB, Randy H and those with direct experience, the 2nd lender's claim gets wiped out when the first mortgage-holder takes back the property (either as DOT or the less common “judicial foreclosure”)? Basically, they have no (or very limited) legal recourse to a deficiency judgment, unless they can claim fraud or some such. Is this about right?

High end real estate is definitely the exception. You would not rent out a mansion, nor are you likely to be able to rent one. We are talking about generic housing. There is a whole different asset class between normal houses now including McMansions, and the Neverland Ranch. The super super rich buy homes as a status symbol or a lifetime acheivment. If anyone on this board buys a house as a status symbol and it makes poor financial sense then they won't deserve any pity.

They have none, that is the risk of making a 2nd TD. That is why the rates are higher.

One thing to clarify, if at the sale auction there are proceeds exceeding the loan being foreclosed on, those excess proceeds do trickle down the food chain, and if there is enough, the FB will actually get a check. Once everything is said and done, everyone downstream has to live with it.

Malcom,

Right you are sir! The "record" according to my friend is 4 years of delinquent house payments. Rumor has it that it was the C.O.P ex-wife in Toledo. Man, that's a whole lotta bitterness! (I'm sure one or both parties could have afforded "some" kind of arrangement?)

What remains to be seen is w/so many filing for BK/short-sale/foreclosure will the system go into overload? I understand this is a very labor intensive process.

Not much has been said so far about the effects of REFINANCING or HELOCs on the borrower's no-recourse/anti-deficiency standing. As I recall, when s/he refinances, the borrower generally loses the no-recourse protection --even in CA. Is this assumption wrong?

As DinOR likes to say, when you refi your house, you are essentially "re-buying" it. Since at least the clear majority of CA mortgagors have refi'd at least once in the past 10 years (some estimates put it as high as 90%), this means most CA mortgagors no longer have this protection. Also, the debts from any cash-outs and HELOCs remain even after foreclosure. So, basically, most CA FBs will have to file for BK, unless the banks don't feel they are worth pursuing (due to lack of assets, which is likely for most).

Is this about right?

From what I gather reading OO, FAB, Randy H and those with direct experience, the 2nd lender’s claim gets wiped out when the first mortgage-holder takes back the property (either as DOT or the less common “judicial foreclosure”)?

To clarify, I meant "the 2nd lender’s claim gets wiped out when the first mortgage-holder takes back the property IF the auction sale does not bring in enough money to satisfy BOTH loans." Obviously, if the auction sale generates enough $$, both lenders get made whole.

Harm, right on both posts. Refis, and HELOCS are recourse loans, just like a car loan.

I love the pissed off wife stories. I read a story a couple of days ago about some guy in Germany how chainsawed his house in half and took his half away on a forklift.

who...sorry typo

I cite my data here. The last time FAB and I had this argument he failed to produce contrary data. That ownership is more expensive than renting in equilibrium is widely accepted and well established. FAB may be implementing his own form of hedonics.

Home Ownership Costs compared to Renting, 1975 - 2005, HSBC. Method is real price adjusted for inflation, including holding cost and real value of future debt service costs (rounded, you can pull significant digits from the spreadsheet):

[MSAD = San Francisco-San Mateo-Redwood City]
1975: 0.9
1976: 1.1
1977: 1.2
1978: 1.3
1979: 1.7
1980: 2.1
1981: 2.4
1982: 2.1
1983: 1.9
1984: 2.0
1985: 1.9
1986: 1.4
1987: 1.6
1988: 1.8
1989: 2.1
1990: 2.1
1991: 1.8
1992: 1.6
1993: 1.4
1994: 1.5
1995: 1.4
1996: 1.5
1997: 1.5
1998: 1.6
1999: 1.6
2000: 1.7
2001: 1.6
2002: 1.5
2003: 1.4
2004: 1.7
2005: 2.3
(2006): 3.1

[MSAD = Cleveland-Elyria-Mentor, OH]
1975: 1.0
1976: 1.0
1977: 1.1
1978: 1.3
1979: 1.4
1980: 1.5
1981: 1.6
1982: 1.4
1983: 1.2
1984: 1.3
1985: 1.2
1986: 0.8
1987: 0.9
1988: 1.0
1989: 1.2
1990: 1.2
1991: 1.0
1992 .. 2005: 0.9-1.0

Hello Kitty,

You're kidding, right? 20, 50K underwater and they walked? In that case I can't blame you for having a jaundiced view.

And now I have to tread VERY carefully.

Since it's been a decade-long + all out MEW orgy many of us may have lost sight that when something, anything falls out of fashion in CA... it falls HARD! Given HK's summation of his experiences in the mid 90's I'm doubling down on my "renting snobbery" position! :)

Looking for "way below" figures... Even Gary IN isn't "way" below 1.0.

[MSAD = Atlanta-Sandy Springs-Marietta, GA]
1975: 1.1
1981: 1.7
1985: 1.3
1989: 1.0
1993: 0.8
1997: 0.8
2000: 0.9
2005: 1.0

[MSAD = Gary IN]
1979: 1.3
1983: 1.7
1985: 1.1
1987: 0.7
1993: 0.7
1997: 0.9
1999: 0.7
2003: 0.7
2005: 0.8

Toledo: bottom 0.7 in 1985, 1993. Avergae 0.8 after 1984, 1.3 before.

Detroit-Livonia-Dearborn: bottom 0.7 1976-77. peak 1.3 1981. post 1984 average is 0.7. post 200 average 1.0.

Chicago-Naperville-Joliet: 0.9 1975, 1.5 1985, avg. 1.2

Mobile: 1.5 1984, 0.9 1993, avg. 1.0

Pittsburgh: 0.8 1985, 1.2 1981, avg. 0.9

Youngstown-Warren-Boardman: 0.9 1985, 0.6 1993, avg. 0.7

Ok, there we have one I'd call "way" below 1.0, at 0.7 post 1985. That is Youngstown OH. I didn't go through every MSAD. But my point is made, I trust.

http://www.dqnews.com/RRBay0307.shtm

Bay Area DQ numbers are out.

Randy,
Thanks for the data - interesting stuff as always.

One thing I notice is that for the SF numbers, the ratio "normalizes" to what looks to me like the historical average within 5 years from 1981 -> 1986, and it does so in 3 years from 1989 -> 1992.

I wonder what time frame it will take this time around? Or is it "different" this time? :)

From the DQ release:

"But we're also seeing the aftereffects of the historic housing boom of recent years. Some people were motivated by fear - fear of being priced out of the market, missing out on a 'great investment' or a great mortgage rate. They rushed to buy sooner than they otherwise would have, and that stole demand from today. It's tough to quantify, but we think it helps explain the slowdown."

Fear of being priced out, sigh.

That ownership is more expensive than renting in equilibrium is widely accepted and well established.
Haven't we already been around this mulberry bush a couple of times? Randy's HSBC data is aggregate for an area. FAB is talking about like to like comparisons (renting the SAME house versus buying it). Both are useful for showing how out of wack the market is.

I had a big heap of housing price/income charts on my blog about a month ago:

http://www.burbed.com/2007/02/16/how-the-bay-area-caused-home-prices-to-go-up-nationally/

SQT,

No offense, but a MB is the LAST guy I would go to for an opinion on that! Or opinion... period. These guys/gals (for the most part) have skill sets that are slightly by above your avg. P/T bank teller and need constant direction. They regularly lean on the expertise of the title company and/or anyone they can stop in the hallway.