Department Of Justince At It Again.

Insanity is described as repeating what has not worked in the past in the hope that it will work this time. Unbelievably, this is exactly what the DOJ up to, complete insanity. Investors Business Daily reports the following:

In what could be a repeat of the easy-lending cycle that led to the housing crisis, the Justice Department has asked several banks to relax their mortgage underwriting standards and approve loans for minorities with poor credit as part of a new crackdown on alleged discrimination, according to court documents reviewed by IBD.

Prosecutions have already generated more than $20 million in loan set-asides and other subsidies from banks that have settled out of court rather than battle the federal government and risk being branded racist. An additional 60 banks are under investigation, a DOJ spokeswoman says.

Now wait a minute, here. I thought “RACIST” had come to mean, “I don’t like what you said because it doesn’t fit the progressive line so I’m going to call you names until you either shut up, agree with me, or I’ve destroyed you.” So now it can also apply to numbers? If I don’t like your numbers I get to be a racist? If they keep this up pretty soon “Racist” will just be another audible pause, like “Ah,” “Um” and “you know.” I can just see Obama without his teleprompter now: “It would cost us, racist, as much over ten, racist, years as it would, racist, as it would cost us racist, to do what we would have done in the, racist, first place.” The very image of a modern world leader! But enough about semiotics.

I guess if we can debase our language, to say nothing of our capacity for logical thought, there is no reason why we shouldn’t demand that banks also debase their lending standards. Its not, after all, as if they hadn’t done it before. Even though we see how well those debased lending standards worked out over the first decade of this new century here we are again, the government doing for us what only government can do: imposing insanity backed by threats of force.

In several cases, the government has ordered bank defendants to post in all their branches and marketing materials a notice informing minority customers that they cannot be turned down for credit because they receive public aid, such as unemployment benefits, welfare payments or food stamps.

Among other remedies: favorable interest rates and down-payment assistance for minority borrowers with weak credit.

These are exactly the people we see defaulting in droves not because of any racial prejudice against them but because these are precisely the people who have not established by a life long habit of responsibility the financial foundations that would enable them to carry a mortgage for thirty years. We can be grateful for small favors, though. At least they won’t be making these crazy loans to poor white trash.

So why are they doing this? It is certainly not going to be a long term benefit to these unqualified prospective home owners, nor to the banks that will be making these loans. It might be nothing more than the old Socialist reflex to curry favor with the oppressed masses in the hope of lining up future voters. Maybe it is an attempt to rehabilitate the Voter Fraud Arm of the Progressive Party, ACORN (with the added benefit of stimulating jobs amongst the activist faithful). Maybe it is a ploy to promote employment at the FDIC. Maybe its just another ham fisted reminder that the ultimate Too Big to Fail entity is the government, which has unlimited access to other people’s money (yours and mine) to fund them.

Speaking of debased rationality, here’s what the DOJ spokesman says – Justice spokeswoman Xochitl Hinojosa said the anti-discrimination notice “does not compel the banks to make loans to people who do not qualify.” She said such measures are “essential to remedy the harmful effects of the banks’ conduct.”

The question comes to mind: Who is going to save us from the harmful effects of the government’s conduct?

Down to Defeat

The California Senate just rejected a bill that would force lenders to pursue a loan modification before initiating the foreclosure process.  Ostensibly it was an attempt to forestall the robo-signing fiasco revealed last Autumn in which bank personnel were simply signing foreclosure documents without properly reviewing them.  This was done because they were so swamped with delinquencies that bank personnel simply didn’t have time to carefully review every case.  For many homeowners on the edge who might have saved their properties by other means this was a devastating disappointment.  It must be said that in this fiasco the banks bear the responsibility as there was nothing preventing them from ramping up a trained work force when they saw the crisis break in 2008 and 2009.  They economized instead and “mistakes were made” as a result.

That being said, it remains sadly true that the majority of attempted modifications fail because the homeowner simply no longer qualifies for the loan.  It makes no sense for the bank to modify a loan for, essentially make a new loan to a consumer who does not qualify.  Yes, suddenly they’ve realized that.  Even after successfully modifying their loan a majority of homeowners default again in 6 months.  So I can see the banks’ point, why go through the effort and expense to modify a loan in such an unfavorable environment?

Ultimately the best thing for the housing market, as I’ve been saying ever since the housing bubble collapsed, is for the bad loans work their way through the system as quickly as possible.  This means that people who should not have received loans in the first place will go back to renting and those who got caught in bad loans can get free of them and get themselves set to buy again in as little as two years.  Prices, which rose to ridiculous levels, need to come down to where buying a home is just a little more challenging than renting.  The foreclosure process is the the most efficient way of accomplishing this goal.  Unfortunately this is going to be painful, and the state of the overall economy is not helping.  Eventually, though, it will work itself out and we’ll get over collective housing hangover.

However having said that the foreclosure process is the most efficient in the long run for the housing market, doesn’t mean that it is the best for the individual home owner.  Foreclosure is a devastating process, and can cripple those caught up in it economically for many years.  For those responsible home owners who have been able to drag themselves from a certain Egyptian river there are other workable remedies.

Banks are going to continue to foreclose at the current rate, far below the actual number of non-performing loans on their books for years to come.  They continue and will continue to dribble out the foreclosures at a pace that will not crash the market.  Despite the huge number of toxic mortgages on their books these represent a small fraction of their total portfolio, the vast majority of mortgages continue to be paid on time.  They can afford to wait.  This has given a lot of homeowners of distressed properties a false sense of security.  Like the turkey who on the Wednesday before Thanksgiving is convinced that he will be fed on the morrow just as he has been for the last year or two, many homeowners who have not made a payment in months or even years will be shocked when the ax finally falls.  And it will fall.  The aftermath for them will be even more humiliating and painful than for the turkey.

Laws of Economics at Work

A glut of inventory and a dearth of demand can only equal one thing: falling prices, no matter how often we’re told that there will soon be unicorn under every rainbow for everyone.  Excess inventory is due to an increase in foreclosures and short sales.  Falling demand is due, in some measure, to the cyclical “slow” Winter market which normally picks up in Spring.  But jobs remain weak, the California economy has yet to be reformed and more and more people are leaving the State for greener pastures elsewhere.  No surprise then that the LA Times reports that “Home prices nearing new lows.”

The Standard & Poor’s/Case-Shiller index shows January home prices in 20 major U.S. cities continued to weaken and approach the recession lows of 2009.

Home prices in January remained barely above lows hit during the worst of the recession, according to an index that tracks prices in America’s biggest cities, and many analysts said they expected values to fall further as the housing downturn plumbs new depths.

Of course Los Angeles, if not exactly leading the way, is a solid contender.  “Los Angeles fell 1.8%” year over year, and on a month to month basis “Los Angeles fell 0.6%.”  The Time’s expert expects that they will continue to fall and actually dip below the worst of 2009′s lows by June.  I suspect he’s right.

But not everybody really believes that, particularly the government.  I just took two Fannie Mae listings.  Both of them had been overpriced and did not sell.  So I took a look at what the market was doing in each of these areas.

The first is a 924 sq.ft. condo in Montery Hills.  The poor thing has been trashed as can be plainly seen when you go HERE and 898 Temple Terrace #222, Los Angeles, CA 90042.  It plainly needs $12,000 to $15,000 just to make it habitable.  So what do the wizards at Fannie Mae do?  Why they price it 15% above similar properties in the area that have been beautifully remodeled, of course!  This poor condo has been on the market for 18 months at that same price and hasn’t sold, now it’s my turn to try to push this unfortunate wreck on some unsuspecting consumer.  Being essentially government run, I guess they think home buyers are as stupid as they think taxpayers are.

Burns me up!  I guess I have to be a government worker to appreciate the logic.

IRS Rules for Short Sales, Foreclosures and Loan Modifications

The Los Angeles Times has an excellent article about how the IRS interprets the rules of mortgage debt forgiveness enacted by Congress.  As with everything the IRS touches, it is not quite as straight forward as it seems, though it is, mercifully, fairly simple.

In its latest guidance, the IRS focuses on several key points that owners — and former owners — need to know. Tops on the list: If a lender wrote off a portion of your mortgage debt, you don’t automatically qualify for special tax treatment. To the contrary, there are essential tests you need to pass to qualify: The debt your lender canceled must have been used by you “to buy, build or substantially improve your principal residence.”

Some key points:

1. It must be your principal residence.  If you rented it even for a short time after your last payment and the last action (foreclosure, loan modification or short sale) you probably have a problem.
2. Only the money you actually spent acquiring or constructing the house or making capital improvements to it counts.  If you paid off credit cards or bought a new car, you may have a problem.
3. Mortgage cancellation relief is capped at $2 million for married taxpayers, $1 million for married owners filing separately.
4. Anyone who has had mortgage debt canceled as part of a loan modification or foreclosure should go to IRS.gov and download Form 982 and IRS Publication 4681 for additional filing details. Or they can call (800) TAX-FORM to request copies. Lenders who write off unpaid mortgage balances typically provide borrowers with a year-end IRS form 1099-C cancellation of debt statement, including the amount of the loan forgiven and the fair market value of the property.

If you have had mortgage debt canceled but haven’t received a 1099-C from your lender, request it to avoid federal tax hassles.  If you have any questions or are uncertain about how any of this applies to your situation, call a tax accountant.

Wait and Hurry Up!

One of the most irritating and frustrating things about military life is the hurry up and wait syndrome. Someone up the chain of command decides that something must be done, and so the order is given, the word is passed: “Hurry up and do it!” So everybody rushes around and throws themselves into some kind of presentable shape and races off to the ready line. Then its wait, wait, wait. Seldom is that wait only for a few minutes. No, most often its at least an hour, sometimes two or three or four hours of sitting around (or steaming around) prepared but prevented. Sometimes the entire exercise is canceled and everybody stands down. Such is military life.

But things don’t work that way in Washington DC, it seems. Bush 43 made fourteen or so efforts to rein in Fannie and Freddy and was thwarted at every turn by Barney Frank, Chris Dodd, Maxine Waters and the ACORN gang. Why, the Administration and the regulators were just a pack of racists who loved to keep America’s poor downtrodden and prevent them from experiencing the joys of home ownership. Everybody just knew that the Republicans were just a bunch of heartless, mean and nasty devils, that was the only reason these guys could think of to explain the effort to slow the gravy train down and impose some kind of fiscal sanity on the renowned government sponsored enterprises. Then for two years the Obama Administration has contemplated the train wreck and even put Frank and Dodd in charge of cleaning up the mess they made in the first place and defended throughout.

Now, suddenly, what to our wondering eyes should appear? Why, none other than Timothy Geithner instructing the “Republicans must come to grips with how to overhaul U.S. housing finance if they are serious about ending the government’s leading role in the wrecked system!”

Isn’t that marvellous? The man who, while he was tripping the derivatives fantastic at Goldman Sachs but couldn’t figure out how to pay his taxes, suddenly pops up and reads the riot act to the new Congress. I guess this gravy train is totally bust if the likes of Frank are really giving up on it.

After 10 years of “Hold on there, you racists,” suddenly it’s “Full speed ahead!” 10 years of wait, and now a sudden flurry of hurry up.

Taking a look at Altadena

I just took another look at Altadena.  There are 29 bank owned properties, 87 properties have received Notices of Default and 155 are scheduled for auction by the lender; these are of all property types (eg. single family homes, condos, duplexes, etc.).

In contrast, there are 148 residential properties currently on the market, either active or in escrow.  They range from just having gone on the market yesterday to having been on the market for 285 days; prices range from $190,000 to $2,475,000. Of the 29 bank owned properties 21 are either available or in escrow, the others have not yet hit the market.  Of the remaining 230+ distressed properties only thirty are on the market.  What we’re looking at is a pool of distressed home owners that have not taken action to resolve their dilemma which is substantially larger than the entire active market.

All indications are that the banks are stepping up their process to take action on these delinquent loans.  I’m cautious about saying that the foreclosure tsunami is about to hit, as I’ve said that before and been wrong, mostly because the banks were trying to hide the depth of the problem and the government was interfering with the market process with moratoria and and bad incentives.  All these distressed properties are going to have to come to the market sometime.  When they do the law of supply and demand will operate and force prices down.  Add to that the fact that the economy in CA sucks right now, with no upside in sight, reducing the pool of potential buyers, which will also push prices down.

Numbers don’t lie. If you hope to buy and leverage maximum advantage from your home purchase, I’d say hold your ground, keep your powder dry and wait, if you are in a position at all to do so.  If you’re going to sell, do so now while before values fall off the cliff.

Particularly I’d say to people in distress, be brutally realistic about your situation.  Talk it over with a Realtor (not your plumber, not your brother-in-law’s veterinary’s sister’s  hair dresser) whom you can trust, not one that’s going to blow smoke, and explore your options.  Bearing in mind that hope is not a strategy, make strategic plans for your future.  Take action and follow through as quickly as possible.  The sooner you act the sooner you’ll get back on solid ground.

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Chapter 13 and Foreclosure

The Huffington Post has a good article that will undoubtedly be of help to some home owners. Quoted below are the most relevant sections of the article

Flying under the media radar, the right to discharge a second mortgage in a Chapter 13 bankruptcy provides a glimmer of hope to homeowners stuck with a foreclosure because they own a home they can’t afford and can’t sell. With one in 10 Americans out of work, while others have suffered a pay cut as a condition of keeping their jobs, the amount of disposable income available to pay a mortgage is not what is used to be. Getting rid of a 2nd mortgage payment can sometimes make the difference between keeping a home and losing it to a foreclosure. How then does a homeowner qualify? Quite simply, when a home is worth less than the balance of a first mortgage, federal bankruptcy law — at least in most states — permits a homeowner to treat a second mortgage like an unsecured credit card and discharge it in a Chapter 13 bankruptcy.

…

Bankruptcy is a business decision, no less for a homeowner than it was for General Motors when it filed a Chapter 11 bankruptcy. [...] A bankruptcy is usually preceded by a loss of income, a divorce or medical issues, sometimes all three. Bankruptcy is not on anyone’s list of fun things to do, and clients only consider it when the alternative, like a foreclosure, is worse. Many have tried to do a short sale or loan modification to no avail and have found that the bank would rather foreclose. [...] These problems will persist until the powers that be decide to offer more than half-measures to address the foreclosure crisis.

For those facing the loss of their home and wondering whether a Chapter 13 bankruptcy may help get rid of a second mortgage, the following information may be helpful:

(1) It is disingenuous of banks to lull homeowners into a false sense of security by scheduling a foreclosure auction when a loan mod request is pending. If this happens to you, don’t be too trusting when your bank tells you not to worry about the foreclosure because they’ll continue the auction if there’s no answer by the auction date. What they are really saying is if you are denied, the foreclosure will happen. One client told me that Bank of America won’t even consider continuing a foreclosure auction due to a loan mod request until it was 72 hours before the auction date. I regularly receive panicked calls from homeowners denied a loan mod just before the auction occurs. While a Chapter 13 stops a foreclosure automatically, given how busy most bankruptcy lawyers are these days, finding one who has time to do a court filing at the last minute may be difficult.

(2) If you decide to see if you can get rid of a second mortgage, ask a broker to give you an opinion in writing of what your house is worth. Brokers will usually do this as a courtesy, figuring if you ever do decide to sell your house, you’ll go through them. Make sure you ask for the potential sales price rather than a list price, which may be somewhat inflated. If the estimate is less than the balance of your first mortgage, then removing it in a Chapter 13 bankruptcy is possible.

(3) Even if you can get rid of a second mortgage, however, a Chapter 13 is not for everyone. Removing a second mortgage only works if you have enough income to complete the plan successfully. If the real problem is that you don’t have enough monthly cash flow to pay your first mortgage and other expenses, Chapter 13 won’t solve that problem.

(4) Chapter 13 will permit strapped homeowners to discharge most or all of their credit card debt. It usually won’t discharge certain debt like taxes and student loans.

(5) Before making a decision, you want to be sure you can keep all property. Most states have exemptions sufficient to permit a homeowner to keep a house, vehicles, and other assets, however, some states are more generous than others.

The above is not, of course, legal advice.  The best course of action would be to carefully takes stock of your situation, talk to a Real Estate professional (such as myself, ahem!), then if the numbers seem to work, talk to a lawyer.  If you are really strapped for cash you can always call LegalZoom.com or buy a NOLO guide.  I have found Legal Zoom to be quite responsive.  The NOLO books are the cheapest of the cheap way to go (you might even be able to get them cheap at Half.com), but you have to do your own footwork; it can be done but it is daunting at times.  The NOLO option is not recommended as a last minute choice.

If it was me, I’d use the Chapter 13 option to discharge a 2nd mortgage only if I was certain that my income could sustain the payments on the first, otherwise I’d just be delaying the inevitable, and paying for the privilege.  Otherwise I would hold the bankruptcy option as the last ditch ace in the hole to clean up when either I’ve attempted a short sale (whether it succeeds or not) or gone through foreclosure.  I’ve seen a number of cases where a lawyer has talked people facing foreclosure into filing for a bankruptcy that did not help them.  A bankruptcy filing will stop a foreclosure action -  for about 60 days, then you’re on the clock again and  you’re on the hook again, this time for good as you’ve shot your ace in the hole.

Now This is Just Plain UGLY

Big banks, it seems, are getting into the real estate market through the tax door.  I do not consider this a good thing at all.

When a property owner is unable to pay property taxes the county will typically not take action for several years, other than pile up penalties and interest on the unpaid amount.  At the end of that time the property will be sold at auction to recover the lost taxes.  For the savvy investor this is a great way to pick up real estate for pennies on the dollar.  There is an element of risk which requires good research to mitigate, but for a diligent investor it can pay big dividends.

Looking at it from a purely libertarian point of view this is just another market, which it is.  There is something obscene, in my opinion, about these well funded entities coming in to feed off the carcass of the real estate market they have worked so effectively to destroy.

The End May Be Closer Than We Think

Old Republic National Title Insurance, among the nation’s largest title insurance companies, will no longer write new policies for homes foreclosed upon by J.P. Morgan Chase and Ally Financial’s GMAC Mortgage unit.  None of these entities are little guys, this is major.  Inevitably more title insurance companies will follow suit and refuse to offer title insurance for these kinds of properties from these lenders, and the list of lenders will get longer as the depth of the underlying problem becomes clearer.

This does not mean that nobody will issue title insurance to anybody.  So if you are buying a home from a private seller you’ll still be able to get title insurance, which you really do need.  But it seems likely that in the short term it will be difficult or impossible to buy title insurance on a foreclosed property.

I have written previously that for the housing market to recover all the toxic assets (foreclosed homes, and those which are facing foreclosure) which are poisoning the system must be run through the system and liquidated (s0ld).  One could wish for some kind of a Divine Heimlich Maneuver, but I don’t count on it.

But it will be impossible to sell a foreclosed property without title insurance, therefore the huge backlog of foreclosure properties is going to be locked up in limbo for the foreseeable future.  The consequences for the real estate market, and by extension, for the economy at large, are going to be devastating.  It is conceivable that this will tip the entire financial system into coallapse, as it nearly did two years ago.

Hang on to your hats, ladies and gentlemen, its going to be a wild ride.