'Crocodile Tears' for the 'Jumbos'!

The NAR and the NAHB have been whining and crying hoarse that the 'jumbo' loan market is just dead and that the rich guys are finding it difficult to get jumbo loans at cheap rates. As a result, the high end borrowers are just not in a position to secure a mortgage to buy their cookie cutter homes!

I sat down to do some simple math to try and understand all of this whining and crying. Let us take a family and a home in San Ramon, CA. 50% of the households in this City have a household income that is greater than 125K. The other 50% of the households have an income that is less than 125K.

So, doing the simple affordability test, the average selling price of a home in San Ramon, CA could be in the range of $400K-450K.

According to the website Trulia.com "The average selling price of detached single family homes for May 2009 in San Ramon California was $676,176".

Without getting into the complicated calculations, it would follow that a vast majority of the population in San Ramon, CA has purchased homes that are actually way beyond their 'affordability' levels using these "Jumbo" mortgages to leverage themselves!

I would think the same logic applies to all these so called "High End neighborhoods". It is all about leverage and leverage and leverage!!

Are Home Prices Really As Low As "Experts" Say?

I love Diana Olick. She is sooo good at putting her foot in her mouth! Here is one example. Read this article:

http://www.cnbc.com/id/30603534/

Please note the parting shot of the article - “I did, however, get a call today from a real estate investor who claims the housing crisis in California is over. He says a house listed under $200,000 got 20 (!) offers and wound up selling for over $200,000.”

Well, I also got a call from a realtor friend who also informs me that that there have been multiple offers on newer (move-in/livable) homes listed around $ 200K and that they were originally sold for more than twice that price.

And by the way, this realtor friend of mine is busy once again working on arranging Short Sales for his ex clients (some of them are common friends) whom he had helped buy those same houses at inflated prices during the boom!

I guess I would be labeled an “Investor” because I was too timid to buy during the boom and as a result I have good credit and cash lying in my bank.


He sent me over some REO and Short Sale listings (which are at a 50% discount from their original sale prices) in the Sacramento area and I did the math to see if it any of em pass the Rent vs Buy smell test and still could not be convinced that I could get a Monthly Rent on the properties that would cover my Mortgage (with a 25% down payment!), Property Taxes and Insurance, HOA etc. So, I told him I am still not biting!!

Another thing he told me was that the higher end homes were just not selling and that banks were overloaded with REO’s in the 300K - 700K listed price range because very few qualified buyers were interested in them.

He thinks that once the newer/livable homes in the less than 300K price range get cleared, there is going to be a long drought in home sales for the simple reason that the lending norms have been tightened and as a result naked speculators (flippers) are shut out of the market, while the "Investors" like me are doing the simple math to see if a home can at least be rented out to cover the Mortgage and Taxes, which I would think would be the case with the regular buyer too. I cannot fathom any rational reason why anyone would buy a property by plunking a down payment of 25% and end up having a monthly payment of more than the rent they were paying!!

Till now a majority of the shoes that have fallen have been in the mid to lower end of the homes. The next shoes to fall would be in the upper end of the homes. With Jumbos having become virtually impossible to obtain and the homeowners unsure of any appreciation in the future, there is going to be a loong loong pause in home sales!!

So, I am not convinced that the housing crisis in California is over yet. Phase II of the crisis is just unfolding with interest rates rocketing up in the last 2 weeks.

Why am I paying for my neighbors Vacation/Cruise to Hawaii/Bahamas snd their new BMW and such...

Here is the story of a friend who bought a New home in Tracy, CA in January, 2004.



The cost of the home at that time was 350K. I paid 20% down. My neighbors also bought the same model at the same time with a 3% down payment.


They refinanced into a 3/1 Arm cash out with a low teaser rate in November, 2005 for 500K because the value of the home had gone up. I did not do any such thing and just continued to pay my mortgage.



They quickly spent the money on buying a BMW, an exotic chandelier, granite countertops, stainless steel appliances and other high priced furniture in their home and went on a Vacation to Hawaii and then on a Cruise the Bahamas. In between they had time to party out in glitzy Vegas.


In 2008 their first re-set took their payment way above what they could afford and they are behind on their payments. The current value of the home is back to what it was valued in 2004 - 350K.


Now, per some of the advocates of foreclosure prevention, a principal write down (from 500K to 350K) is going to be handed out to my neighbor by the government using my tax dollars, so that he can continue to pay the same monthly payment as me after having run through 150K of Tax payer money! Thus forcing me to pay for my neighbor's luxuries?


Both of us have teenaged kids. I did not indulge in any of the splurges that my neighbor indulged in. I drive around in my old Ford Taurus, saved money equal to 8 months of living expenses just in case I lose my job and put away some more in a CD so that it could help pay for my kids college tuition fees!

Mortgage Mods - The Right Way!

As the government seems to be hell bent on subsidizing the stupid and greedy idiots who bought over priced homes in the last few years, we might as well try to make it simple and straightforward, instead of throwing in a bunch of impractical rules.

I would say, the most simple solution would be to write down the principal to the current market value (CMV) and create an IOU in favor of the lender/s for the difference between the CMV and the Mortgage balance, which would be payable with interest if and when the home sells above the CMV and will be extinguished on the sale of the home.

If the home sells for less than the CMV, the IOU will be a total loss for the Lender.

If the home sells for more than CMV+IOU, the Homeowner keeps the balance above the CMV+IOU.

If the home sells for more than CMV but less than CMV+IOU, then the value above CMV will go towards paying off the IOU.

These IOU's can be securitized and traded providing liquidity to the Lenders, although I am not aware if anyone would be willing to buy these IOU's, I can definitely bet my hat that there will be at least a value of a dollar on these IOU's.

If these IOU's become tradeable, the homeowners could buy out their own IOU's too (at the market price, which would be a steep discount to their face value), that would definitely improve the price of these IOU's. The value of these IOU's would also increase in tandem with the home value. I see some exciting possibilities on the IOU's. If the initial value of the IOU is say $ 100000 and the IOU is trading at say 10000 the homeowner can buy it off for that price and then they get to keep any profits on the sale of their home!!

Another possibility is to replace the IOU with a 'Student Loan' type of loan, with the option to make the payment left entirely to the borrower. This should have 2 simple features - one that it shows up on the Credit Report as a Loan till it is repaid and the other is that the borrower has the flexibility to make the payments at will.

Now, about the abuses of this rather simple program:

1. Should this mod show up on the Credit Report? I would say yes!. The IOU can fall off the report when it is paid in full with interest! Yes, we will need for the Credit Reporting agencies to incorporate new parameters into their calculations.


2. What about me selling my home to my brother and vice versa and thus getting rid of the IOU liability? - item 1 should take care of that because banks may not be too willing to lend to someone who has had a mod..

3. What about people who need to move for whatever reason and buy a home where they have moved? - I would say, this is a tricky issue, my suggestion would be for the IOU to be transferred to the new home.

4. Should documented income be a criteria to qualify for the mod? - I would say that documented income should be a pre-requisite to any mod.

5. What about those who lost their jobs? - My suggestions would be to allow a moratorium of a max of 2 yrs on the payments and bundle these payments into an IOU again.

6. Do people who can afford the current payment also qualify for this mod? - I would say YES to this also, because by reducing the monthly payment, we are allowing the people to spend, which supposedly drives our Economy!! The other flipside is that even if the people end up saving this money, it can be used by the banks to enhance Credit to businesses.

The bottomline, is to keep it as simple as possible so that it does not lead to more fraud and cause heart burn amongst the diligent home-owners or the honest tax payers!!
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