Author Archive: Irvine Renter

The housing bust twisted people's point of view so much that deadbeats who gamed the system for personal gain were lionized for their behavior.

Repost from OC Housing News 2011-2016

Many people bought during the housing bubble because they wanted a home for their families. They stayed within reasonable debt-to-income guidelines and used fixed rate mortgages. Unfortunately, the prudent were small in number, and if the prudent borrowers lost jobs or suffered financially during the recession, most of them obtained loan modifications making their super-sized debts manageable. They survived. Many other people bought during the housing bubble because they saw their house as an investment, or worse a cash cow they could milk periodically to supplement their spending. These people saw rising house prices as a way to cash in on the American dream. They believed their houses would go up in[READ MORE]

Recent reports show an uptick in mortgage equity withdrawal. Is this history repeating itself, or did people learn the wrong lessons from the housing bust?

Repost from OC Housing News 2011-2016

Money won’t buy happiness, but it can provide the finest forms of misery. Everyone wants money. If given the chance to do nothing and obtain money, most people would take it. Such was the lure of the housing bubble. People only had to do two things to obtain copious amounts of cash. First, they needed to buy a house. Then they needed to find a lender who would give them money for signing some paperwork. That’s it. No work, no skills, no risk, no sacrifice, nothing. Buy a house, sign some papers, and anyone could obtain hundreds of thousands of dollars. It shouldn’t be surprising that kool aid intoxication is so strong. Who wants[READ MORE]

If Dodd-Frank were repealed as Republicans want, the end result would likely be another housing bubble.

Repost from OC Housing News 2011-2016

Financing terms largely determine the equilibrium price for housing. Short term fluctuations in supply and demand cause gyrations, but over time the amount potential buyers can borrow will determine what houses cost. For example, the reason prices are going straight up right now is because potential buyers can borrow large sums due to very low interest rates. The activities of these buyers coupled with a depleted MLS inventory is causing prices to rise. Prices will continue to rise until potential buyers reach the limits of their borrowing power or new supply comes to the market. Banks are intent on the former outcome. House prices rely on four things:
  • Interest Rates
  • Borrower Income
  • Allowable-Debt-to-Income Ratios
  • Amortization
The type of loan program matters. Amortizing loans make for the smallest loan balances because a[READ MORE]

What separates homeowners from people who don’t own homes? The answer is not as simple as you might think.

Repost from OC Housing News 2011-2016

If you go back to antiquity, the person who “owned” a house was generally the strongest warrior who was capable to taking it and holding it against all rivals. Over the last 500 years the development of government and stable laws of land ownership made it possible for ordinary people to have claims to real property stronger than the edge of a sword or the barrel of a gun. One of the first attempts to establish property title was the English Doomsday Book of the 11th century. The King set out to establish who owned what so he could better establish and collect taxes. This was the beginning of the chain of title in the British[READ MORE]

The economy pulled out of the Great Recession because lenders wrote down billions in bad loans, not because borrowers paid these debts off.

Repost from OC Housing News 2011-2016

The financial mainstream media often tells people what they want to hear. They’ve learned they make more money by providing emotional support to people seeking reassurance rather than providing facts and accurate analysis. This is a shame because people often make important and complex financial decisions based on erroneous or biased information they obtain from the financial press. When these investment decisions go bad, people are often wondering what went wrong. The problem is that they trusted the veracity of what they read in the mainstream media. We’ve seen a great deal of spin and nonsense over the last few years. Barry Ritholtz wrote a post on How to Read National Association of Realtors[READ MORE]

When borrowers and lenders petition the government for relief through debt forgiveness and bailouts for losses, you are the one paying for whatever the borrower did with that money; the government is merely a middleman facilitator of a tax heist.

Repost from OC Housing News 2011-2016

In a bygone era, lenders lost money if they made bad loans to irresponsible borrowers. With the advent of securitization, much of this risk of loss transferred to investors, and with the economic catastrophe of 2008, lenders learned the government would bail them out for any losses they were unable to pass on to investors. The too-big-to-fail banks no longer attempt to conceal the moral hazard behind their actions; they know they will be bailed out, so they act accordingly. The worst example of moral hazard for both borrowers and lenders is the attitude toward mortgage equity[READ MORE]

Many people erroneously believe housing recovered because lenders ran out of delinquent borrowers to foreclose on. They didn't. Instead, they stopped foreclosing in order to dry up the inventory to drive prices back up.

Repost from OC Housing News 2011-2016

When lenders make loans, they far prefer borrowers to repay those loans; in fact, their entire business plan relies on it. As long as borrowers are current with their payments, lenders are happy and making money. When borrowers don’t make their payments, the end result is a distressed sale. If there are enough of these, market prices are reduced dramatically which causes significant lender losses. Lenders know this too, so when distressed loans became an overwhelming problem, they devised can-kicking methods including loan modifications, mark-to-fantasy accounting, and if all else failed, they simply allowed the delinquent borrowers to squat in shadow inventory. Below is the lender decision tree for delinquent borrowers. Today we will explore this[READ MORE]

I revisited my post on Rent Versus Own where I talked about the cost of ownership. Many of the questions people have about our Cost of Ownership analysis are related to the various cost inputs and how they impact values. Therefore, I want to take each of these costs and talk about them in more detail. In order to do this in a logical flow, I have broken this task into a series of four posts that will be debuting all this week. These posts are:free_posts Ownership cost: income, payments and house prices Ownership cost: interest rates and down payment requirements Ownership cost: property taxes, insurance, Mello Roos, and HOAs Ownership cost: taxes and opportunity costs

Four Major Variables that Determine Market Price

There are four variables that determine the purchase price of a property:
  1. borrower income,
  2. allowable debt-to-income ratios,
  3. interest rates, and
  4. down payment requirements.
These[READ MORE]

Unilaterally modifying home mortgages was a necessary step to ensure banks survived the housing bust.

Repost from OC Housing News 2011-2016

Ostensibly, homeowners and lenders agreed to the price of money (interest rate and payment) when the promissory note was signed. Unfortunately, during the housing bubble, the terms of these notes were onerous, and many borrowers faced excessive monthly housing costs while simultaneously facing declining house prices and the elimination of their equity. With no equity, little hope of future equity, and rising payments, many borrowers opted to strategically default -- and lenders worried that more would follow. Banks were still exposed to $1 trillion in unsecured mortgage debt when housing collapsed. The threat of strategic default and the reality of a trillion dollars in unsecured debt forced the banks to renegotiate[READ MORE]

Today is part 2 in the ongoing series on Ownership Cost:4.2.7 Ownership cost: income, payments and house prices Ownership cost: interest rates and down payment requirements Ownership cost: property taxes, insurance, Mello Roos, and HOAs Ownership cost: taxes and opportunity costs

Four Major Variables that Determine Market Price

Yesterday, we discussed the four variables that determine the purchase price of a property:
  1. borrower income,
  2. allowable debt-to-income ratios,
  3. interest rates, and
  4. down payment requirements.
Today we are looking at interest rates and down payment requirements.

Interest Rates

Interest rates go up, and interest rates go down. Interest rates are the yield on debt instruments. If investors lose their appetite for mortgage debt, prices of mortgage-backed securities goes down, payment yields go up, and mortgage interest rates go up with them. This concept is important to understand because right now, the Federal Reserve is the main buyer of agency paper at price[READ MORE]

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