The end of the banking cartel is being signaled by coordinated efforts at a variety of governmental agencies to expedite the foreclosure liquidation process. 

Irvine Home Address ... 10 EXETER 11 Irvine, CA 92612
Resale Home Price ...... $379,000

You know it all by heart
Why are you standing in one place?
Born to blossom, bloom to perish
your moment will run out

What you waiting for?
What you waiting for?

(What you waiting for)
Take a chance you stupid ho,
Take a chance you stupid ho

Gwen Stefani -- What You Waiting For?

Last week I wrote about The Upcoming Collapse of the Banking Cartel. In that post, I noted that as soon as the parties to the cartel begin to feel some urgency to liquidate their holdings that the cartel would crumble. The only thing sustaining prices are current levels is the limited availability of product. Once enough product hits the market in a salable form (short sales are still a very slow process), prices will begin to fall.

Given how much effort and resources the government has put into market stabilization, it is surprising that the FDIC, the GSEs and the FHA are leading the movement to liquidate properties and bring down the banking cartel.

FDIC sells another $760 million in REO

Jon Prior -- September 3, 2010

Mariner Real Estate Management (MREM), a real estate investment and management firm based in Kansas, closed a deal to acquire a $760 million portfolio of residential and commercial loans and REO properties from the Federal Deposit Insurance Corp. (FDIC).

MREM is part of Mariner Holdings, a $7 billion wealth and asset management company. The portfolio includes roughly 1,100 loans and properties from 20 banks the FDIC has taken into receivership. The properties are located across 24 states.

Earlier in August, the FDIC sold a similar $1.7 billion portfolio to PMO Loan Acquisition Venture, a partnership of other investment firms. If bank failures continue, the amount of REO held by the FDIC would increase. Those banks insured by the FDIC currently hold $49.2 billion worth of REO, a 45% increase from a year ago.

This problem is enormous. Even selling a billion dollars in REO a month, the FDIC is going to take four years to dispose of the REO it currently has, and since they are getting more REO through failed bank takeovers, the actual inventory they will need to dispose of is much larger.

Most people don't understand absorption rates. Buyers at various price points are limited by their incomes. Once the available buyers at a certain income level are satisfied, the only way to move more product is to lower prices and expand the buyer pool. When absorption rates are as low as they are now, lenders will either hold properties forever, or they will need to lower prices to get rid of it.

In this most recent deal, MREM acquired a 40% managing member interest for roughly $52 million in a company created by the FDIC to hold all of its loans and REO assets recovered from failed banks. The FDIC will keep the other 60% interest in the company.

MREM tapped Cohen Financial, based in Chicago, to handle the asset management services for the deal. Cohen provides loan servicing and asset management services to third parties.

“We are very pleased to partner with the FDIC on this important transaction,” said Marty Bicknell, CEO of Mariner, in a press statement. “Together with Cohen Financial, we can offer the FDIC the best asset management solutions for this portfolio.”

Tim Mazzetti, a partner and executive vice president at Cohen Financial said his company has been preparing for an opportunity like this for some time.

“We have been building out our platform over the past four years to be in a position to take on such a large and diversified pool of performing, sub- and nonperforming assets in an efficient and cost effective manner,” Mazzetti said. 

"Taking on" a portfolio of nonperforming assets is code for "liquidation." These guys are going to keep what cashflows and liquidate the rest.

One of the barriers to liquidation is the write downs required by "solvent" banks (we all know most of them are not solvent). A huge problem within the GSE portfolios is that the services of delinquent loans are intentionally delaying foreclosure when the parent bank holds the second mortgage.

For example, let's say the Bank of America is the servicer on a delinquent first mortgage. Their servicer agreement with the GSEs lays out a procedure to mitigate losses for the GSE portfolio. If there is no second mortgage, servicers will generally follow these procedures to the letter, and in the end, most properties end up in foreclosure. However, if Bank of America is the servicer, and they also hold the second mortgage, they do not follow standard procedure because the resulting foreclosure will cause them to lose most or all of the value in the second mortgage.

This servicing arrangement creates an enormous conflict of interest. The easiest solution would be to bar servicers from working on loans where they have a junior lien position, but that isn't what the GSEs are doing. In their first tentative steps toward dealing with this huge conflict of interest, the GSEs are going to start charging servicers who fail to properly follow their loss mitigation procedures.

Fannie Mae gets tougher on mortgage servicers

By Al Yoon -- Wed Sep 1, 2010 

(Reuters) - Fannie Mae (FNMA.OB), the largest provider of funding for U.S. residential mortgages, will begin demanding compensation from mortgage servicing companies that fail to properly handle troubled mortgage loans, the company announced late on Tuesday.

The government-controlled company also said it may begin conducting reviews of loan files, processes and procedures used by the servicers, in another sign it is growing impatient with the firms that collect and distribute homeowners' payments.

Mortgage servicers have come under intense scrutiny as they have struggled with record delinquencies and foreclosures. Their efforts to ease payments on loans to avert default have fallen short in many cases, playing some role in disappointing results of a federal program to refinance or modify mortgages.

"A compensatory fee not only compensates Fannie Mae for damages but also emphasizes the importance placed on a particular aspect of a servicer's performance," Fannie Mae said in an announcement to servicers.

"In some cases, a compensatory fee will relate to the action a servicer took, or failed to take, in handling a specific mortgage loan," it said.

Fees will be applied in various instances, including failure to provide access to records and delays on completing foreclosures and selling foreclosed properties.

These comments are aimed directly at the practice of avoiding foreclosure on properties that have second mortgages on the servicer's books. That is the primary reason a servicer fails to foreclose and dispose in a timely manner.

More aggressive action by mortgage servicers could help ease burdens on Fannie Mae, whose losses on loans it guarantees or owns forced it into regulator's hands in September 2008. It has required some $86 billion in taxpayer funds since then.

Fannie Mae, which uses hundreds of servicers, did not specify any that might have prompted the announcement but has identified rising stress at the firms. A spokeswoman declined to comment beyond the announcement.

"The growth in the number of delinquent loans on their books of business may negatively affect the ability of these counterparties to continue to meet their obligations to us in the future," Fannie Mae said in its quarterly filing with the Securities and Exchange Commission last month.

If the GSEs are not forced to back down from this policy due to pressure from lenders, this change in policy and incentives will signal the end of the banking cartel because this will push product on the market whether or not the market is capable of absorbing it. That will push prices down.  

Are there cashflow properties in Irvine?

Of course the answer to that question is "it depends." I would say no; the prices are too high relative to the income stream it produces. I have a personal test I believe in to test a cashflow property. The capitalization rate must be at least 30% higher than the cost of fixed-rate mortgage debt. Under those circumstances, leverage boosts returns and the cashflow from the property itself makes the payments. That is an investment that you would keep irrespective of what happens to the resale price because you are obtaining a good cash-on-cash return.

The only reason people invest in real estate in Orange County at these prices is because they believe (1) Orange County is a safe haven where prices cannot go down relative to rents and incomes, or (2) they are betting that we will inflate another housing bubble, and they will get to benefit from that appreciation. Note that the belief in option 2 is self fulfilling: those that believe it can happen make it happen. The disease mechanism is in place, and all it takes to release the kool aid virus is for lenders permit loan programs with lending standards that do not amortize loans with payments based on a reasonable percentage of wage income -- or worse yet like interest-only or Option ARMs, that do not amortize at all. The lack of amortization in the prevalent loan programs in the market is a sure sign of Ponzi borrowing and a housing bubble. 

Properties like this one, even at 4.34% interest rates are at best cashflow neutral. Owning it doesn't set and investor back, and they might make a few extra bucks in positive cashflow, but the reason someone is buying this property is because they believe prices are going to go back up and they will benefit from the appreciation or lack of depreciation. I believe this is the wrong place to put money at the wrong time, but I could be wrong. I have no doubt California borrowers and buyers will certainly try to push house prices higher.

The owner facing short sale on this property paid $529,000 on 10/11/2005. He used a $423,200 Option ARM with a 1.37% teaser rate and a $105,800 down payment. He got a HELOC on 11/6/2006 for $75,625 and may have recovered some of his down payment. He hasn't paid his mortgage this year.

Foreclosure Record
Recording Date: 06/28/2010 
Document Type: Notice of Sale

Foreclosure Record
Recording Date: 03/10/2010 
Document Type: Notice of Default 

Irvine Home Address ... 10 EXETER 11 Irvine, CA 92612

Resale Home Price ... $379,000

Home Purchase Price … $529,000
Home Purchase Date .... 10/11/2005

Net Gain (Loss) .......... $(172,740)
Percent Change .......... -32.7%
Annual Appreciation … -6.6%

Cost of Ownership
-------------------------------------------------
$379,000 .......... Asking Price
$75,800 .......... 20% Down Conventional
4.34% ............... Mortgage Interest Rate
$303,200 .......... 30-Year Mortgage
$72,687 .......... Income Requirement

$1,508 .......... Monthly Mortgage Payment

$328 .......... Property Tax
$0 .......... Special Taxes and Levies (Mello Roos)
$32 .......... Homeowners Insurance
$190 .......... Homeowners Association Fees
============================================
$2,058 .......... Monthly Cash Outlays

-$249 .......... Tax Savings (% of Interest and Property Tax)
-$411 .......... Equity Hidden in Payment
$120 .......... Lost Income to Down Payment (net of taxes)
$47 .......... Maintenance and Replacement Reserves
============================================
$1,564 .......... Monthly Cost of Ownership

Cash Acquisition Demands
------------------------------------------------------------------------------
$3,790 .......... Furnishing and Move In @1%
$3,790 .......... Closing Costs @1%
$3,032 ............ Interest Points @1% of Loan
$75,800 .......... Down Payment
============================================
$86,412 .......... Total Cash Costs
$23,900 ............ Emergency Cash Reserves
============================================
$110,312 .......... Total Savings Needed

Property Details for 10 EXETER 11 Irvine, CA 92612
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Beds: 2
Baths: 3 baths
Home size: 1,344 sq ft
($282 / sq ft)
Lot Size: n/a
Year Built: 1981
Days on Market: 3
Listing Updated: 40423
MLS Number: 10475961
Property Type: Condominium, Townhouse, Residential
Community: University Town Center
Tract: 0
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According to the listing agent, this listing may be a pre-foreclosure or short sale.

Well maintained condo located near UCI, Hardwood floor in livingroom with granite counter top kitchen. Plantation shutter throughout. This is a short sale.