It is hard to ignore the current foreclosure mess stories regarding banks and their sloppy mortgage paperwork. This shouldn’t surprise anyone since these are the masterminds that brought you the option ARM and managed to convince investors to purchase large pools of toxic mortgage waste that was rated triple-A as a secure investment. These are also the folks that thought nothing down mortgages were somehow a good idea. But here are the hard facts. Out of a total mortgage universe of 50,747,854 (2009 Census data) you have roughly 43,643,154 Americans that are still paying their mortgage on time. The vast majority of Americans are subsidizing the banks. Your question might be with the bulk paying their mortgage on time why so many issues in the system? Because the 11 million underwater homeowners have $2.9 trillion in mortgages. Yet we need to remember that we are living in a moral hazard universe where bad behavior is rewarded and responsible taxpayers need to bailout corrupt banks. The average foreclosure is now up to 18 months! Banks in their haste to sell shoddy mortgages didn’t spend the adequate time to check and make sure all the paperwork was cleared through the system. Forget about systemic failure, we have systemic fraud.

Here is some data on mortgage delinquencies:

“(MBA) The combined percentage of loans in foreclosure or at least one payment past due was 13.97 percent on a non-seasonally adjusted basis, a four basis point decline from 14.01 percent last quarter.”

The reason this is such a big problem when the vast majority of mortgage holders are current is that banks are operating with thin amounts of capital and large amounts of leverage. Our big mistake in this crisis was focusing on banks and the troubled loans. Think of the worst case scenario for many here. In many cases many of these people have to rent (welcome to the world of half the population of California). Would it be so bad for people to rent? Don’t you think we would have advanced our economy further if we would have focused on more productive ways of reviving jobs instead of listening to banks who only wanted a way to dump toxic mortgages off their books while trying to guilt the rest of Americans who do pay their mortgage into doing “the right thing” and staying current? You can see how far that has gotten us. And inventory is still going up:

Hard to tell what these foreclosure moratoriums will do but the legal challenges can drag thing outs for years to come. Yet we already knew that. And guess what? Since Fannie Mae and Freddie Mac own half the mortgages taxpayers are on the hook for many of these loans. In other words, we are getting the price tag of nationalization without any of the benefits from it. We should break up the banks and systematically clear the backlog. This path made sense three years ago and makes sense today. Still trust the banking system with what is going on? If we want to see a tangible example of the problem let us look at a duplex in Culver City that is scheduled for auction.

Culver City Duplex

Beds: 4

Baths: 2

Square feet: 1,417

Built: 1944

Style: Bungalow

Normally I focus on single family homes especially in Culver City but looking at a duplex requires putting on investment goggles. Given the listed size, these are small units. When you purchase an investment property you are looking at a variety of factors including rents, expected appreciation, and alternative investment yields. We’ll examine some of this later in the article but let us take a look at the current financing here:

Here we have another refinancing at the top of the market. On January 2007 a loan of $670,000 was placed on this property. Three months later mortgage superstar WaMu granted a second mortgage of $133,910 on this property bringing the total debt to $803,910. Keep in mind this is for a duplex with roughly 1,400 square feet.

If we assume very generous terms of financing we can expect the following monthly payment:

PITI: $6,653

Now this is the monthly carrying cost here (we are being generous with loan terms). Do you think that each unit can rent for $3,300? That is highly unlikely. Here are additional pictures of the property:

The ad tells us that this place would be ideal for an “artist” type but for those from SoCal many know that no average artist is going to be able to fork out $3,300 a month. And the foreclosure filing data above shows that to be the case in the market as well. If you could break even, wouldn’t you just rent the place out? But this home is being sold for:

Current listing price: $590,000

I find this interesting given that the auction date is slated for early November. It looks like this is a cut of $213,000 from the peak mortgage balance. It doesn’t matter who owns the mortgage here, these numbers flat out don’t work. But look at some other rentals in Culver City:

These are actually bigger units and included 2 baths instead of one (which makes a big deal if you are renting with a roommate). It looks like the rental rate hovers around $1,700 to $1,800 for a two bedroom with this kind of square feet. Is the current price a deal?

Let us examine the three items we first mentioned in regards to rents, expected appreciation, and alternative investments. We already know our rent targets. Let us say we can rent each unit for $1,800 a month for a total of $3,600 a month. We can try to figure out a cap rate. Most conservative property investors set aside 50 percent for operating expenses and I have found that to be the case in the real world as well:

Cap rate = $21,600 (NOI) / $590,000 = 3.6%

Is this good? No. This is much too low. Just to give you an example of a property that may make sense think of a property selling for $100,000 that throws off $1,000 per month:

Cap rate = $6,000 (NOI) $100,000 = 6%

This is a big difference and keep in mind we are estimating that we will get $1,800 for each unit. Now in California for many years, investors also factored in appreciation. As we all know, we are facing anti-appreciation so this should be a moot point. In fact, I would argue that we should be given a premium to protect ourselves from additional price declines.

From experience a good rule of thumb is an investment property should not cost more than 100 times its monthly rent. For example in this case:

$3,600 x 100 = $360,000

For all rules of thumb, you have to factor in many other things but you get the picture that even at the current price it is too high. There is a large glut of rental properties on the market. Given the current paperwork mess, it might just make sense to rent to see how things play out in the next year. The odds of prices going up are remote and rentals are plentiful in the market. The attention right now is all governed on the moral hazard of our banking system. I’ve even heard a few people discussing that if banks can’t get their paperwork straight, they’ll get a free home! At the very worst, they get to live rent free for one or two years. The system is rife with fraud and it is no wonder why so many Americans are frustrated with entire system especially with banks. It is in many ways broken. With 11 million underwater homeowners if things like this catch wind, the temptation to walk away might be too great.

The “free home” idea is one that’s been rattling around since shortly after this house of cards came tumbling down. Apparently, these charlatans who took out their liar’s loan to buy that McMansion on their Walmart income think that, if they make enough noise about “stop the foreclosures,” they will somehow further enrich themselves with their fraud by getting their house “free” courtesy of the taxpayer (meaning those of us who know how to live within our means.)

I’m happy to see that, at least so far, this hasn’t come to pass. But whenever something like this (foreclosure paperwork shenanigans) comes up, it makes me nervous that this will, indeed, be the outcome. The same thing goes with the idea that mortgage principal should be reduced by judicial fiat. Again, this would be a big mistake because it lavishes financial rewards on people who intentionally bought well beyond their means.

The other problem is that such circumstances become a risk that a lender then has to price into all future mortgages.

Your credit might be fine when you go for a mortgage in, say, 2013 but if there was an across the board cram down judicially imposed in 2011, mortgages in 2013 will be more expensive to try to account for the risk of this previously unprecedented action recurring.

I don’t doubt your contention that renting makes sense in an environment of falling values, but let me ask you (and other readers here) a question pertaining to those who already own a home.

In particular, for those homeowners who have been patiently waiting to trade up is it such a bad idea to trade up now – even in the current deflating real estate market. I know this idea is heresy around here, but for those of us who already own a home and still have equity it seems it shouldn’t really matter whether we watch the equity fall in our current homes or in the move-up homes we desire. In my case my house may well drop another $100K in value before the crash is through and the houses I’m considering buying may drop a similar $100-120K. In this case while the smartest move might be to sell now, rent and rebuy after the market falls, unavailability of rentals anywhere I want my family to live precludes this choice. So barring that I don’t see a strong disincentive to trading up now – even in the midst of the mess.

On the plus side, apart from the advantages of living in a home we’d like better, trading up would allow us to extract the remaining equity from our current home and finance 80% of the value of a new home at very attractive rates. If prices don’t fall much then we don’t lose much and we go on living life as usual. If prices fall more than 20% in this non-recourse state, we effectively have a put option on our new house and limit our equity loss (whereas in our current home, in which we still have 60-70% equity, our potential losses are greater). A cold calculation to be sure, but I think a fair one.

I’d sit tight for now. As the values for both your current home and the move up home fall the spread will narrow. To oversimplify, it’s better to move from a 100k house to a 150k house than to move from a 200k house to a 300k house.

WRT asking rents, the realtors are listing properties at bubble rent prices to make their insane sales listing prices seem to be at “rental parity”. Manipulation at it’s finest.

Presently the Low End subset of the housing market is forming a bottom.

Once the Low End bottoms then in a couple years the Middle End will bottom. Then a couple years after that the High End will bottom. High End prices are always more sticky and also the banks are holding back much of their inventory of High End distressed property.

So you will be buying into a falling market.

I am a Realtor and my only advice to anyone buying into the Middle or Upper End Market.

Make sure that you love the house. You are probably going to be living there for a while.

Being in the Bay Area, it’s hard to imagine places that don’t have units available for rent. Perhaps if you give the board a couple of zipcodes of places that you would like to rent, they can help with some alternative possibilities. That said, there really is no “wrong” time to buy, just a “wrong” price to pay. Whether your plan to hedge your risk using the non-recourse law is good depends on too many unknowns. For example, if you have a HELOC (not subject to non-recourse) on your current house and purchasing a new house could wipe out the HELOC and subject the entire mortgage to being non-recourse that factor would support your plan. However, if you are plannning to take out a second mortgage for the purchase that factor would work against your plan.

The length of time you plan to spend in this new home also matters. If you plan to take out a 30 year mortgage, but plan to stay in the house only 10-15 years, do you expect interest rates to rise? Do you expect wages to increase over the same period? What effect would your beliefs have on the price of your home?

Festina lente. We went through the same reasoning process, and while it might work financially in conventional or even exotic financial terms, and get us to a Nicer place than we could afford within our fundamentals in 2001, or whatever, we decided to sit tight.

I concur that you will be buying into a falling market. DHB has labored for years to point out the mechanics of the fall–first toxic mortgages, then less toxic ones, and later hitting the prime sector. First the low end housing stocks, as Tax Home notes, then “moving up,” as in his current RHoG in Culver City. It’s not over yet.

Following DHB’s methods of analysis you might be able to determine how much froth has emptied out of an area, neighborhood, or individual house. You might figure out the whole package–cost of moving, new commute to work and services, new settling-in, new repair/upgrade costs in new place–is indeed a better deal than staying put.

But there’s still more downside to come. *Not just in prices.* It’s not clear what the next wave of bankster fun and games will be, and how that will further impact lending, pricing, and movement. This will also have downstream consequences on what kind of neighborhood you buy into, and how people act as times get harder.

Then there’s the fact that anything you buy that has an other-than-organic and very simple sales history in the past 10 years is likely to have problems with its paperwork later, if/when you really need to get out. (I expect to see some sort of documentation amnesty for the banksters floated by one or the other of the two major political parties as vote-getting fodder prior to 2012. If it hasn’t been already. For consumers, it’ll still be caveat emptor.)

I agree with Doc’s observation that with the current bailout schemes, we have gotten the substance of nationalization without its benefits. How that shakes out after next month’s electoral bloodbath for the Democrats is probably going to be even worse as we small fry figure out how not to get trampled as Godzilla and King Ghidorah duke it out over our heads.

I suppose Bicycle Repair Man could Chaplin-toddle in to fix the economy (Clink! Screw! Bend! Inflate!), and it’ll suddenly yet again be 2006 in Culver City.

Note to entrepreneurs: the dry and dull old role of the Title Searcher is about to join CSI and TV Survivalist as the hottest new career. Call it Mortgage Forensics for the Last Owners Standing.

I’ve come to believe that the banks are using the robo-signer scandal as a convenient excuse to stall for time.
.
Look at it from their eyes. If they had to book all of their bad loans, it would crash their banks. With rumors that the economy is improving, they may have already calculated that by stalling all foreclosures (even if it means free rent to the debtor), they may be able to hold out long enough for a recovery to save them.

I believe most of the toxic garbage loans were sold to the Fed and Fannie/Freddie. The banks are acting as servicers on these loans, and profiting nicely from foreclosure sales. The taxpayer eats the toxic bad debt, and the banks profit from foreclosing on homes they do not even have the right to service They are faking all sorts of legal docs to do so. It’s the crime of the century. The banks are trying to make money on the boom AND the bust, while taxpayers get to eat ALL the losses

I doubt that this is part of some sneaky strategy. They’ve submitted a ton of false affidavits for which they could be sent to pound me in the ass prison. How well do you think Lloyd Blankfein and Jamie Dimon would do in Oz?

Well, with this news, many more people may be tempted to stop paying their mortgage. After all, maybe they were struggling. Why not have a temporary reprieve when the bank can’t come after them?
Ah, but what will this do to the banks bottom lines when many more stop paying? Banks solvency will be threatened, that affects everyone!

And also, when people can’t sell their home because of this, even if they were legit and not underwater? Their paper is screwed b/c of MERS, etc.

People act according to their own best interest. Now that many people will be affected by the foreclosure moratorium, not just the delinquents, banks may be hoping to enroll the avg. American on to their side.

After all, people need a clear title to sell, and almost ALL mortgages in effect after say 2005 may be affected.

We haven’t seen the end.
My guess… legislation handles this shortly after the 2010 elections for once and for all.

California’s budget is a joke. Next year $10billion of special taxes expire. Add that to the deficit of $10billion built into this budget, and we are back to a $20billion deficit. Brown says that the voters will have to vote to give themselves the privilege to pay more taxes. I don’t think that they will. Hence, $20billion of more cuts and more government employees out of work and more immigrants will migrate out of the state because they only came here to work(not to take your job).

John,
I wonder where these immigrants are going to migrate to? They migrate to jobs, where are there jobs? And if there are no jobs to migrate to, where can they find a more hospitable environment to “hang out” than here in California. For God’s sake, it’s one big “sanctuary city.” There used to be more Mexicans in LA than in any city in Mexico, except Mexico City itself. Probably still true. And with “anchor babies” and fake documentation there are a wealth of social services to draw on here as well as. system of under-the-table employment. The only thing that will drive out many illegal aliens is if they can’t get work of any kind without real documents, and if they can’t get social services of any kind without real documents,

Reversing course for survival
As jobs in the U.S. dry up, immigrants return home to work for a fraction of the pay — and many never leave Mexico at all By JAMES PINKERTON
Copyright 2009 Houston Chronicle
March 29, 2009, 11:38AMhttp://www.chron.com/disp/story.mpl/special/immigration/6348003.html

This recession has brought a number of positive things. The traffic is also lighter. Look on the bright side.

Most of the illegals are still here, but not so many are coming and a number are leaving. This is not good for Obama. His INS will have to hurry up with the back door amnesty so they can vote.

so major banks are freezing foreclosures…
wouldn’t this stop the housing prices to go down for while? if not raising a bit?
I know a guy who haven’t paid his mortgage for at least 1.5 years, and he’s very happy to hear this as he is expecting to live free for another year if not longer.
He said he is actually saving up cash right now to buy affordable house when price bottom out sometime. His family has decent income, and already saved up enough money for new house.
Why am I renting and paying 35% of my income as tax and helping these kind of home owners? While it is extremely difficult to save up my own money?

One subset of homeowners coming out ahead in this turmoil. Those with equity who can refinance or have ARMS with lower interest rates. I bought in 2000 with a loan at 6.75%. Refinanced in 2002 to an ARM at 5.25% which reset last year at 3.25 and this year down to 3.0%. Housing prices in SE PA may be off 15%, but my interest plus taxes are 40 pct what they were in 2000 (and in part due to loan amortization). Rents havent fallen 50%, and comparable rentals are over twice than what I pay.

BTW my neighbor bought in 2006 with a neg am ARM and is in foreclosure.

They use a number 180 time monthly rent to determine if you should rent or own. You previously characterized the 100 times number as “a good deal” to buy”… that seems like a more appropriate way of putting.

At 180 times $3600, the Culver city home seems well priced, though I doubt you could get $1800/mo on both units. An extrra bath and sq. footage is important in terms of rental price.

You have to buy into the Trulia “expert” to believe that the property is worth $648,000.00. I’m confident you can rent a decent two bedroom of around 1000 square feet with amenities in a corporate complex in that area for $1800.00 a month. $1800.00 for that 66 year old property is a joke. Figure the income needed at 25% of income for rental rate. You need to make $86,400.00 a year. Just how many people in that geographic market make that kind of money.

I am borrowing the following calculation from a realestate investment site I follow. “All you need are two numbers: the price of the property and the rental income you will get each month. If the monthly income is 1% of the purchase price then you are pretty much guaranteed a property that will cashflow.

For example, if you have a property that costs $300,000 and it gets $3,000 per month in rent, Julie’s simple calculation tells her that it is a property she’d like to learn more about. The numbers are looking really good.

If you have a property that costs $300,000 and the rent is $2,100 per month, it’s hitting .7%. She’d probably still look into this property, but she’d do it knowing that the money will be tight. Anything lower than than .7% is going to be really hard to make cashflow without either a big downpayment, lower purchase price or higher rent.”

That puts the price of this duplex at roughly double it’s true value. I’d estimate $1100.00 to $1500.00 is about the max it is worth in rental terms. Any savvy investor would walk before sinking hundreds of thousands of dollars into this property to make it cash flow. The price for the house is insane clear and simple.

BZ- For rental property, the tried-and-true rule of thumb for decades was that monthly rents should not be less than one percent of purchase price. Or you could say 100 times monthly rent. Or you could say 8 times gross annual rents. Trulia may say 180, the NAR may say not to worry about such things because real estate always goes up. If you believe the hype and think that Culver City property “seems well priced”………well, maybe you should go buy it. I’m sure the NAR and Trulia would be delighted. I suppose the old rules of thumb don’t apply to today’s market with it’s ever increasing values and rents. Snap up that bargain before you get priced out of the market! Don’t listen to old fuddy-duddies like the good Doctor.

@wydeeyed and @justaskin thanks for the replys. I agree the place isn’t worth 2 x $1800/mo in rent. I also think you misunderstood what I was asking. It seems most agree 100 times monthly rent is a good price to buy, but when does it start becoming a bad price to buy? If I keep following so. cal. RE when should I start thinking about buying? Tuilia, with their 180 number, says to rent. What do you say? What does the good doctor say?

BZ- You’re beyond the area of “rule of thumb” with your question. It takes local expertise and depends on the property. In better areas, it’s worth paying more, in poorer areas less. A house in better condition is worth more than one in poor condition. One thing I really didn’t believe until I got into it myself is that non-mortgage expenses run at least 40% of scheduled income. By doing things yourself, scrimping, being very careful, deferring some eventual expenses, you can shave that down quite a bit. Don’t make the mistake of subtracting the payment (which you have to make) from the projected rent (which you may not get) and expecting the balance to be cash flow! Expect the “cap rate” numbers to be fiction.

Are rents really that high in Culver City? Yeesh! I lived in Torrance my whole life and am constantly traveling to Westwood/Culver City to meet friends but could never see myself living there due to the high prices. Even rents are out of whack.

You might want to look in the Antelope Valley or areas of South Los Angeles. South Los Angeles has a strong stock of potential renters (be wary of the unemployment stats). In the Antelope Valley you can buy at great cash flow rates I’d guess but will you find renters?

First of all, I thought we were going to “see” this cute little duplex.
The street side view is laughable.
Is there really a structure behind all that foiliage?

Ok, so then I see the entrances picture.
How quaint.
I can envision artist types sitting on those stoops smoking their medical ganja.
Or a couple of chickens runnnig around, with perhaps a few families sharing the two units.

I kept thinking – OK, 1417 square feet -EACH?
4 bedrooms, 4 bedrooms, you mean per unit?
2 bathrooms. as in 2 per unit.
But I get the joke – that is the sum tota – for BOTH units.

You have got to be kidding. What kind of alternative universe does California live in?
Not to mention, the place was clapped together in….1944! Good god.

By the looks of these units in the pictures, they look like $500 a month units.
Because, let’s make sure my math is correct – it was 700 square feet, one bedroom, and one bathroom per unit.
I stay in larger hotel rooms.
But of course, I’m not an artist type living the high life in sunny Southern California.
No wonder the economy in California is such a trainwreck when people would even consider renting places like this for $1700 – $1800, let alone the nonsensical amount that the $590,000 sale price would demand.
Too much money is being spent on basic shelter.
And make no mistake, this duplex is very basic shelter.

And let me repeat that listing price one more time since it was such a good knee slapper – 590 THOUSAND DOLLARS!
That’s just too funny.

Let us not forget the silver bullet here. The banks were preselling the notes via a prospectus prior to the borrower ever even signing for the NOte! That is what happened on one of my underwater homes. Look up your loan on the Mers website. My loan filed July 3rd 2007 and the loan docs were not even signed until July 17th then there is the right of recission period. The loan closed July 25th but the pre funded MBS wa sin place as of July 3rd. They were lying to SEC representing that they had formed tax free REMICs with the Notes in the Trust but that was not the case. The investors purchsed off prospectuses outlining the “types of Notes that would be in the trust” hence the property was never secured against the Note. They lied to the IRS, the SEC, investors and borrowers. The borrowers were duped into betting thier home on a Wall Street venutre without disclosure. At best the banks hace unsecured debt. But they would have a hard time even proving that since they never loaned a dime and made a fortune off the IOUs they hawked as AAA securities to investors. The servicers have been collected the payments and keeping the money and then stealing homes they have no interest in! It;s the biggest story never told as i have been screaming for years now! Check out this wesbite and download the free guide that explains it all! The housing fraud is only part of the story! http://www.economicsurvivalguide.org

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