Vanished money: local foreclosure loss tallied - Money Talks - MoneyTalks's Blog - Bakersfield.com

Apr 4, 2008 at 07:04 PM : Out with the old, in...

Out with the old, in with the new.

People prospered during the depression, and unemployment was five times as high.

Apr 4, 2008 at 08:04 PM : I looked at homes...

I looked at homes today. Almost all were in default due to refinancing. One was purchased in 2004 for 569,000. One year later they took out a home equity for 85,000. Late 2006 another 50,000 was borrowed against the home. It is now on the market for 469,000. What is wrong with these lenders.

Apr 6, 2008 at 12:04 AM : Sheeple Home...

Sheeple Home Market Guide:

"Market value" means the amount that a seller "could expect" to obtain for property or goods sold on the open market. Make sure you understand that without the word "could" before "expect", it would change the whole meaning of the term; in fact many sellers and realtors seem to interpret "market value" that way.

When a house sells, the published amount or comp value is not necessarily what the buyer paid for the house On top of this, the buyer could have (most likely if bought after 2001) overpaid for the house. Many buyers who fall into this category believe that what they paid is "market value", some will even proclaim that they are selling "below market value", which is kind of silly if you think about it. Why would someone want to sell something for less than they can actually get? If they "could expect" to get a certain amount for their house, why in hell would they choose to ask for less? Simple, one word, "propaganda"; they want you to believe that you are getting a great deal so they can unload it fast. As sad and crazy as it seems, there are some people who are being taken by this.

Now that lenders are losing money as a result of irrational lending, many are tightening their lending standards and are cutting a significant amount of irrational buyers out of the market. When the remaining buyers realize how much prices are falling and how much inventory is rising due to the abundance of foreclosures, they will be less inclined to act irrational. When this all plays out, prices will return back to the mean where the true meaning of the term "market value" hides.

Ok, so the asking price is quite meaningless so a realtor does a "Comparative Market Analysis" or a Comp to see what a similar house in the same neighborhood has recently sold for to give you an idea of what a house would sell for. This is definitely more valuable than the sellers asking price since it is what a house sold for, but to what extent?

When a house is sold, many people these days seem to have a hard time coming up with a down payment, that is why the lending industry was offering 100% financing; so that people who have already proven that they can't save money and thus cannot be trusted to make monthly payments would then be able to get a mortgage. Now that the mortgage market is imploding for the obvious reasons, they are tightening up lending standards and those no money down loans are disappearing quicker than the red eye in the "clear eyes" commercial; So now buyers have to come up with a down payment or they won't be able to get a mortgage. Along with having to come up with this down payment, a buyer has to come up with closing costs which can be as high as $15k or more. With all this money that has to be available up front when buying, sellers have come up with what is known as a sellers concession. What exactly is this? The seller agrees on a price for the house and then takes all these added expenses (closing, down payment, etc.) and adds them to the price of the house; this way, the buyer has everything rolled into his mortgage and doesn't have to come up with anything. While this might sound like a good idea to the typical buyer since he doesn't have to lay out any money of his own, the problem with this is that the house along with all those other expenses goes down in the books as what the house was sold for. What this means is that you are screwing over the other buyers who buy based on the new inflated comp you are creating; just as other buyers have screwed you over by creating their own inflated comps that you used to help you decide on what to pay for your house. This is actually illegal, but it still doesn't stop anyone from doing it as you can see. These comps are unreliable and can be used along with the "sellers concession" to help inflate prices by presenting evidence that is thought to be reliable when it is in fact not. It's all just smoke and mirrors; make sure you understand this the next time a realtor does one for you and tells you how much the house up the block sold for.

Apr 6, 2008 at 01:04 AM : “P...

“Phenomenally accurate forecasts”

, this is a little off topic but it applies. This writer has had the best track record on predictions and is a advisor to many corporations, but refuses to become corrupt and remains a independent...Let’s Pray There’s No ‘Next Bailout’
Rick’s Picks

“Phenomenally accurate forecasts”

We expect home prices to fall by at least 70 percent before the “subprime mess” has run its course in perhaps 7-8 years, so Wall Street’s recent show of exuberance would appear to be premature. Case-Shiller estimates that home values have fallen 11 percent in the last 12 months, but that would imply prices have only barely begun their slide. For the Dow Industrials, the bottom may lie even further below, since, like Bob Prechter, we believe the blue chip average eventually will trade for under 1000. That would represent an approximately 90% fall from current levels – not quite as bad as the most extreme cases witnessed during the dot-com crash, but with much broader consequences nonetheless, since ownership of the 30 Dow stocks is far more widely distributed than tech shares were. Concerning payroll numbers, we think the loss of a mere 80,000 jobs in March will come to be regarded with nostalgia at some point and that the economy will shed another two million jobs before the end of next year. The 80,000 figure was of course significantly worse than the 50,000 that had been predicted, but we were puzzled that the predicted number should have been viewed with such dread. If our much darker forecast is correct, monthly job losses should soon start ratcheting up into the 120,000-140,000 range.

Considering the above, last week’s rally on Wall Street might be viewed as a flight from reality. The celebratory mood will surely pass, and probably soon, but until that happens, we should expect the mainstream press to continue force-feeding the theme that the Fed’s heroic and unprecedented measures have saved the day. The catalyst for this latest outbreak of good feelings was of course the Bear Stearns deal. From a public relations standpoint, it has succeeded thus far only because so few investors understand what actually went down. JP Morgan was able to buy bear with a $29 billion line of credit whose ultimate guarantor is Joe Taxpayer. Over ten years, Morgan will pay the discount rate of interest, 2.5 percent -- a privilege that ordinarily is extended only to overnight borrowers.

The reason the terms of the deal are so sweet is that Morgan knows the assets the Fed has asked it to acquire will never be worth much. The Fed stands to reap all of the profits if those assets fetch more than $30 billion eventually, but Morgan’s exposure in any case is limited to $1 billion. Effectively, the bank has purchased a ten-year at-the-money put option on Bear’s toxic portfolio for relative peanuts.

‘Mother of All Subsidies’

One commentator, David Freddoso, writing for National Review Online, referred to this sweetheart deal, which will effectively rescue of Bear’s bond-holders, though not shareholders, as “the mother of all government subsidies --a non-legislative appropriation that doubles the size of all this year’s congressional pork projects combined. Without so much as a vote of Congress, taxpayers are to buy securities of undetermined value for $29 billion — roughly Panama’s GDP, or the Federal Reserve Bank’s entire annual profit.”

The scariest thing about the deal is that it has probably exhausted the potency of the “too-big-too fail” illusion that until now has helped keep the banking system from collapsing. Bear Stearns was indeed too big to fail. But so, for that matter, are Lehman and Citi, and if one of those banks should follow Bear into oblivion (presumably taking the other with it), “too-big-too-fail” would almost surely mutate into “too-big-to-bail.” It seems quite clear that the financial system cannot afford even one more bailout of the magnitude of Bear Stearns. Unfortunately, we do not share the Fed’s evident confidence that Bear will be the last U.S. banking giant to go down.

Immune to Crash?

Meanwhile, anyone who believes that the worst is over for real estate should keep an eye on New York City’s terminally bloated market. It has not crashed yet, but the likelihood that it will seems as certain a bet as that the sun will rise tomorrow. Last week’s report that prices are up while unit sales are down was regarded, incredibly, as evidence that the Big Apple might somehow be immune to the crash that has already spread to most other big cities. We are asked to believe that the high level of foreign ownership is what is keeping NYC’s housing prices buoyant. But if that were true, then how to explain the fact that Citigroup shares, which are heavily owned by foreigners whose pockets are almost infinitely deep, have fallen by nearly 70%?

In fact, signs of an impending collapse in New York City real estate have been masked by the sale of a relative handful of apartments at exorbitant prices in the $25 million-$40 million range. Despite this, in the broad middle of the market – i.e., run-of-the-mill co-ops valued at $1.5 million to $3 million -- buyers have peen pulling back in droves. Under the circumstances, only an imbecile could believe that NYC real estate will somehow weather the devastation of Bear Stearns, Merrill Lynch and hundreds of other financial firms both big and small. Such firms are the life’s blood of the city’s economy, and to think they could implode as they have been doing without a commensurate impact on the real estate market is on a par with believing that the Fed will be able to keep bailing out banks “until things turn around.”

Apr 7, 2008 at 08:04 AM : I think the...

I think the disappeared money is imaginary

Hi Eric-

Thanks for the comments!

I understand what you're saying, but in this case the money isn't imaginary. It's the amount that bank actually loaned on these properties previously.

So, let's say the bank loaned Joe Blow $100,000 for House A.

Joe Blow defaults. Because of loan terms, he hasn't paid down any of the principal even if he made mortgage payments for a year or two.

The bank forecloses on the loan. It repossesses the house, then sells it to Mr. and Mrs. Homebuyer for $75,000.

The bank takes a hit for $25,000.

Banks will of course use more sophisticated accounting techniques but they're still losing real money here from failed loans.

The $2.1 million in the story came from adding up all of the failed mortgages and subtracting how much banks eventually sold the repossessed homes for.

Hopefully that's clear!

-- Gretchen

Apr 7, 2008 at 07:04 PM : Gretchen, the bank may...

Gretchen, the bank may or may not take a $25,000 hit--but what about the investors who'd purchased that mortgage as a part of a bundled deal, borrowing *THAT* money from someone who's now going to call *THAT* loan. You're looking at just the ground floor of the Ponzi scheme.

"And so on...and so on...and so on..."

Apr 9, 2008 at 10:04 AM : Good point...

Good point Random.

Who will ultimately hold the bag remains to be seen as these losses work through the system. Mortgage insurance policies for lenders, last I heard, don't have enough dough to handle all these failing loans.

As the famous curse goes: We live in interesting times!

-- Gretchen

Apr 9, 2008 at 10:04 AM : Oh, I don't think...

Oh, I don't think there's any question who'll be holding the bag. The American taxpayer.