The losses from the housing bubble will exceed $1.1 trillion. Who is going to pay for it?

Irvine Home Address ... 29 SMOKESTONE 30 Irvine, CA 92614
Resale Home Price ...... $285,000

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Yeah runnin' down a dream
That never would come to me
Workin' on a mystery, goin' wherever it leads
Runnin' down a dream

I rolled on as the sky grew dark
I put the pedal down to make some time
There's something good waitin' down this road
I'm pickin' up whatever's mine

Tom Petty and the Heartbreakers -- Running Down a Dream

Mortgage Mess: Shredding the Dream

The foreclosure crisis isn't just about lost documents. It's about trust—and a clash over who gets stuck with $1.1 trillion in losses

October 21, 2010 -- Peter Coy, Paul M. Barrett and Chad Terhune

In 2002, a Boca Raton (Fla.) accountant named Joseph Lents was accused of securities law violations by the Securities and Exchange Commission. Lents, who was chief executive officer of a now-defunct voice-recognition software company, had sold shares in the publicly traded company without filing the proper forms. Facing a little over $100,000 in fines and fees, and with his assets frozen by the SEC, Lents stopped making payments on his $1.5 million mortgage.

The loan servicer, Washington Mutual, tried to foreclose on his home in 2003 but was never able to produce Lents' promissory note, so the state circuit court for Palm Beach County dismissed the case. Next, the buyer of the loan, DLJ Mortgage Capital, stepped in with another foreclosure proceeding. DLJ claimed to have lost the promissory note in interoffice mail. Lents was dubious: "When you say you lose a $1.5 million negotiable instrument—that doesn't happen." DLJ claimed that its word was as good as paper. But at least in Palm Beach County, paper still rules. If his mortgage holder couldn't prove it held his mortgage, it couldn't foreclose.

Eight years after defaulting, Lents still hasn't made a payment or been forced out of his house. DLJ, whose parent, Credit Suisse, declined to comment for this story, still hasn't proved its ownership to the satisfaction of the court. Lents' debt has grown to about $2.5 million, including unpaid taxes, interest, and penalties. As the stalemate grinds on, Lents has the comfort of knowing he's no longer alone. When he began demanding to see the I.O.U., he says, "I was looked upon like I had leprosy. Now, I have probably 20 to 30 people a month come to me" asking for advice. Lents is irked when people accuse him of exploiting a loophole. "It's not a loophole," he says. "It's the law."

The Lents Defense, as it might be called, doesn't work everywhere.

This guy is obviously a crook. Wether the bank can produce the paperwork or not doesn't change the basic facts:

1. There was a note at one time that encapsulated the agreement between this borrower and the lender.
2. He did borrow the money.
3. He did agree to repay the money or surrender the house in a foreclosure action.

Since these basic facts are not in dispute, and since Mr. Lent's is not disputing that he failed to meet his contractual obligations, why can't this foreclosure go forward? He says this is not a loophole, but this clearly is a loophole or technical evasion. This squatter needs to get out the bank's house, then he can fight with them over "damages" caused by their failure to produce the note. Since he obviously is not being damaged in any way, his frivilous counter-suit would be dismissed.

So who ends up paying for the losses caused by this squatter. On the surface, this looks like a bank loss, but we all know that the taxpayer will ultimately be on the hook. Are you happy about this guy squatting in luxury while you pay for it?

Thousands of Floridians have lost their homes in lightning-fast "rocket dockets." In 27 other states, judges don't even review foreclosures, making it harder for homeowners to fight back....

Even if the documentation problems turn out to be manageable—as Bank of America (BAC) and others insist they will be—the economy will still suffer long-term consequences from the loose underwriting that caused the subprime housing bubble.

Bullshit alert! This was NOT a subprime housing bubble. The damage has largely been felt by subprime borrowers only because the alt-a and prime borrowers who defaulted have been allowed to squat. When the media begins falsely portraying this as a subprime housing bubble, it implies this was a problem caused by and limited to subprime. That is not accurate, and if widely believed may cause policy errors directed toward the "subprime" problem.

According to an Oct. 15 report by J.P. Morgan (JPM) Securities, some $2 trillion of the $6 trillion in U.S. mortgages and home-equity loans that were securitized during the height of the bubble, from 2005 through 2007, are likely to go into default. The report says the housing bust will ultimately cause losses of $1.1 trillion on those bonds.

Who is going to absorb the $1,100,000,000,000 in losses? The banks can't absorb that much as it would completely wipe out the capital in our banking system. In the end, it will be a combination of investor losses, bank losses, and US taxpayer bailouts that mop up this mess. As you might imagine, investors and bankers are working feverishly to pass that loss on to you.

While banks and investors take their hits, millions of homeowners continue to be punished by unaffordable mortgage payments and underwater home values.

Punished? Well, it they stupidly took on a mortgage payment they cannot afford, they deserve it. If they bought an overvalued house, that is their problem. The authors are setting up loan owners as victims when many of them were buying based on greed.

Laurie Goodman, a mortgage analyst at Amherst Securities Group, said in an Oct. 1 report that if government doesn't step up its intervention, over 11 million borrowers are in danger of losing their homes. That's one in five people with a mortgage. "Politically," she wrote, "this cannot happen. The government will attempt successive modification plans until something works."

We are revisiting this nonsense again. Why can't this happen? What if it does? People will move out of their homes, and new people will move in. So what?

I think she is right that the government will do everything it can to prevent the market from doing what it must to clear the bad debt, and in the process, the government's actions will delay the recovery and cause more people to suffer. When it's all over, the government will release some bullshit report claiming everything they did was right and helpful.

Meanwhile, a high-stakes fight is breaking out between the banks that made loans and the investors who bought them. A shot was fired on Oct. 18 when a group of major investors claimed that Bank of America's Countrywide Home Loan Servicing had failed to live up to its contracts on some of more than $47 billion worth of Countrywide-issued mortgage bonds. The group said Countrywide Servicing has 60 days to correct the alleged violations, such as failure to sell back ineligible loans to the lenders. According to people familiar with the matter, the group includes Pimco, BlackRock (BLK), and the Federal Reserve Bank of New York.

For banks that have just started making money again after near-death experiences in 2008, mortgage losses could delay the return to good health. Chris Gamaitoni, an analyst for Compass Point Research & Trading, a Washington financial advisory firm, estimates losses for the big banks of $134 billion from having to buy back bad loans from private investors and another $27 billion in losses from buying back loans from Fannie Mae and Freddie Mac. Other estimates are lower—from $20 billion to $84 billion—in part because those analysts are less certain than Gamaitoni that investors will succeed in court.

This battle between investors and bankers is more important than most realize. If the investors win, and if banks are liable to repay these losses, banks will suffer longer, and the economy will continue to sputter.

Bank of America, the nation's largest lender, has resorted to tough tactics in resisting repurchases of bad loans. Facing pressure from Freddie Mac, one of the two government-controlled mortgage financing companies, to buy back money-losing home loans with problems like inflated appraisals, overstated borrower income, or inadequate documentation, Bank of America issued a blunt threat, according to two people with direct knowledge of the incident. If Freddie Mac did not back off its demands for the buybacks, Bank of America officials said, the bank would take more of the new, more profitable mortgages it is originating these days to rival Fannie Mae, these people said. Freddie and Fannie, known as GSEs (government-sponsored entities), need a steady supply of healthy new loans to climb out of their financial hole.

Now that is playing hardball. Good for Bank of America.

The claimed threat from Bank of America, which was not put into writing, according to one of these people, was taken seriously enough that it has been discussed at several Freddie Mac board meetings, including one in mid-October. Some officials have urged the Federal Housing Finance Agency—the government conservator that has controlled Fannie and Freddie since they were bailed out in 2008—to confront Bank of America and prevent it from trying to play one against the other, which may be infuriating but is not illegal. "If the tactic worked, I'd be shocked and appalled," said Thomas Lawler, a former portfolio manager at Fannie Mae and now an economic consultant. "The GSEs are supposed to be run now to minimize losses to the taxpayers. Freddie ought to ignore the threat." FHFA Acting Director Edward J. DeMarco declined to comment, as did officials of Freddie Mac. Bank of America also declined to comment.

Why shouldn't Bank of America play one off against the other? The whole reason there are two GSEs instead of one was to foster competition and prevent either from having monopoly powers.

For policymakers, the dilemma is this: Enormous losses will cause problems wherever they end up. They could further harm Fannie and Freddie, which insure the vast majority of the nation's mortgages and have already received nearly $150 billion in taxpayer support. Or, if Fannie and Freddie succeed in pushing the burden back to the banks, the losses could cripple some of the major institutions that have just emerged from a government bailout. Bank of America faces $12.9 billion in buyback requests, and mortgage insurers have asked for the documents on an additional $9.8 billion on which they may consider seeking repurchases, according to regulatory filings. (Bank of America has put aside $4.4 billion for buybacks, and CEO Brian T. Moynihan says the costs will be manageable.) "The Treasury is very aware that they can't push too hard on this because if you do push too hard it might put the companies in negative capital again," says Paul J. Miller, an analyst at FRB Capital Markets. "There's a lot of regulatory forbearance going on."

Aside from ignoring banks' bad debts, Washington hasn't done much to fix the crisis. Both houses of Congress easily passed a bill this year that would have undermined centuries of law by requiring every state to recognize MERS-type electronic records from other states. Only a pocket veto by President Barack Obama kept it from becoming law.

One option, opposed by the Obama Administration and most Republicans in Congress but favored by Senate Majority Leader Harry Reid and others, is a national moratorium on foreclosures. It would last until regulators assure themselves that lenders have straightened out their foreclosure procedures.

So how is that supposed to work? The banks have all resumed their foreclosure proceedings, and they all claim they have worked out any procedural problems. Who can claim otherwise? Do we want to give a bunch of bureaucrats the ability to hold up foreclosures because in their opinion the banks procedures are inadequate? If the banks were not complying with existing laws, then they should be held accountable, but so far, there have been very few cases where any procedural flaws have been identified, and many reporters, loan owners, and attorneys have been looking.

Opponents say it would delay the recovery of the housing market by preventing qualified buyers from getting their hands on foreclosed homes.

Opponents of a moratorium say those things because it does delay the recovery, and it does prevent a qualified buyer from getting their new home.

Look at the language the authors used, "getting their hands on foreclosed homes." They portray the new buyer -- a buyer qualifying under new stricter lending standards who will likely make their payments -- as some kind of illegitimate claimant, a greedy buyer trying to get their filthy hands on someone else's property. The author's agenda is showing.

Supporters of the idea, such as Dean Baker, co-director of the Center for Economic and Policy Research, say there are plenty of already foreclosed homes available for sale and thus no urgent need to add to the supply.

Goodman, the Amherst Securities analyst, says banks need to reduce the principal that people owe on their homes so they have an incentive not to walk away. "Ignoring the fact that the borrower can and will default when it is his/her most economical solution is an expensive case of denial," Goodman writes. If the home whose mortgage was reduced happens to regain value, 50 percent of the appreciation would be taxed, she says. Meanwhile, to discourage people from sitting tight in homes while foreclosure proceedings drag on, she would have the government tax the benefit of living in the home rent-free.

Those ideas are bad on many levels. First, Foreclosure Is a Superior Form of Principal Reduction. Giving borrowers money only encourages the worst kind of moral hazard. Banks are far better off losing more money now and eliminating moral hazard than encouraging borrowers to steal from them over and over again in the future. Second, the 50% tax on appreciation sounds great, but as soon as some seller somewhere has to actually pay that tax, there will be a tax revolt, and congress will roll over and repeal the tax.

The one idea I do like is taxing the squatters. These people are receiving the beneficial use of the property as surely as if it were a gift of cash. It should be taxed to help pay for the bailouts.

CitiMortgage is testing an innovative alternative based on the legal procedure known as "deed in lieu of foreclosure." The owner turns the deed over to the bank without a fight if the bank promises not to foreclose, lets the family stay in the house after the agreement for six months, and gives relocation assistance.

In other words, CitiMortgage is giving cash for keys, a practice I am learning much about in Las Vegas.

Other ideas: In a New York Times blog post on Oct. 19, Harvard University economist Edward Glaeser suggested federal assistance to overwhelmed state and local courts, as well as $2,000 vouchers for legal assistance to low-income families that can't afford to fight foreclosures.

Just what we need, a handout for attorneys.

Bloomberg News columnist Kevin Hassett, who is director of economic policy studies at the American Enterprise Institute, says in his Oct. 18 column that the newly created Financial Stability Oversight Council should make the foreclosure mess its first big project, "take authority for solving it, and do so as swiftly as possible."

Speed is essential. The longer it drags on, the more the foreclosure crisis corrodes Americans' faith in their financial and legal systems. A pervasive sense of injustice is bad for the economy and democracy as well. Take Joe Lents. The Boca Raton homeowner hasn't made a mortgage payment since 2002, but he perceives himself as a victim. "I want to expose these guys for what they're doing," Lents says. "It's personal now."

Yes, let's take Joe Lents as an example. He is a perfect example of how a pervasive sense of injustice and victimhood can be cultivated among those perpetrating the injustice. Squatters need to get out of the houses they are not paying for. The pervasive injustice is that good families with the buying power to purchase a home are being denied that opportunity by delays in the foreclosure process and political grandstanding.

Evict the squatters now!

He nearly quadrupled his mortgage debt

Some borrowers were obviously gaming the system. No amount of careless spending can explain a borrower that methodically increases his mortgage to its maximum at every opportunity. This borrower had to know he was stripping the equity out of this place, and he was going to do so until he couldn't borrow any more. There was no thought given to actually paying down the mortgage.

• Today's feature property is one of the hardest working condos I have seen to date. The property was purchased on 8/24/1998 for $130,000. The owner used a $104,000 first mortgage, a $13,000 second mortgage, and a $13,000 down payment.
• On 3/9/2000 he got a stand alone second for $35,000. After about 18 months of ownership, he got back his down payment plus $18,000 (about $1,000 per month). It almost makes this property cashflow positive if you look at it that way.
• On 6/7/2002 he refinanced the first mortgage for $176,000.
• On 6/5/2003 he refinanced the first mortgage for $262,675.
• On 4/14/2003 he refinanced with a $274,400 first mortgage.
• On 7/8/2004 he refinanced with a $364,500 first mortgage and obtained a HELOC for $20,250.
• On 11/1/2006 he refinanced with a $353,000 first mortgage and a $43,950 stand-alone second.
• Total property debt is $396,950.
• Total mortgage equity withdrawal is $279,950.
• Total squatting time is over two years.

Foreclosure Record
Recording Date: 07/08/2010
Document Type: Notice of Sale

Foreclosure Record
Recording Date: 04/16/2009
Document Type: Notice of Sale

Foreclosure Record
Recording Date: 01/12/2009
Document Type: Notice of Default

So what do you think about this borrowers behavior? Perhaps we should reward him with principal reduction. He would be happy to borrow that money all over again, particularly if you are going to pay it off for him through your tax dollars.

Irvine Home Address ... 29 SMOKESTONE 30 Irvine, CA 92614

Resale Home Price ... $285,000

Home Purchase Price … $130,000
Home Purchase Date .... 8/24/1998

Net Gain (Loss) .......... $137,900
Percent Change .......... 106.1%
Annual Appreciation … 6.5%

Cost of Ownership
-------------------------------------------------
$285,000 .......... Asking Price
$9,975 .......... 3.5% Down FHA Financing
4.29% ............... Mortgage Interest Rate
$275,025 .......... 30-Year Mortgage
$54,336 .......... Income Requirement

$1,359 .......... Monthly Mortgage Payment

$247 .......... Property Tax
$0 .......... Special Taxes and Levies (Mello Roos)
$48 .......... Homeowners Insurance
$290 .......... Homeowners Association Fees
============================================
$1,944 .......... Monthly Cash Outlays

-$123 .......... Tax Savings (% of Interest and Property Tax)
-$376 .......... Equity Hidden in Payment
$15 .......... Lost Income to Down Payment (net of taxes)
$36 .......... Maintenance and Replacement Reserves
============================================
$1,496 .......... Monthly Cost of Ownership

Cash Acquisition Demands
------------------------------------------------------------------------------
$2,850 .......... Furnishing and Move In @1%
$2,850 .......... Closing Costs @1%
$2,750 ............ Interest Points @1% of Loan
$9,975 .......... Down Payment
============================================
$18,425 .......... Total Cash Costs
$22,900 ............ Emergency Cash Reserves
============================================
$41,325 .......... Total Savings Needed

Property Details for 29 SMOKESTONE 30 Irvine, CA 92614
------------------------------------------------------------------------------
Beds: 2
Baths: 2 baths
Home size: 917 sq ft
($311 / sq ft)
Lot Size: n/a
Year Built: 1980
Days on Market: 174
Listing Updated: 40480
MLS Number: R1003214
Property Type: Condominium, Residential
Community: West Irvine
Tract: Othr
------------------------------------------------------------------------------
According to the listing agent, this listing may be a pre-foreclosure or short sale.

A CLEAN 2 BR 2 BATH DOWN STAIRS CONDO. HARDWOOD FLOORS, PLANTATION SHUTTERS. COZY. GREAT FOR A STARTER OR DOWN-SIZING FAMILY. ENJOY THE CLEAN COMMUNITY OF WOODBRIDGE.