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Which Investors Might Be Vulnerable?

A report from Kieth Jurow. “The 2004-07 bubble era in U.S. housing markets was a time of utter madness. Much has been written about it, but almost nothing has been said about the craziest aspect of it – the cash-out re-financing lunacy. The second method was for the owner to refinance a second lien called a home equity line of credit (HELOC).”

“During the peak bubble years of 2004-06, roughly 20 million first liens were refinanced across the country.  According to the Freddie Mac report, more than 85% of all refinances were cash-outs in 2006. Since California was the center of the housing bubble in the U.S., it also became the epicenter for the cash-out refinancing lunacy.”

“Roughly five times as many refinance loans were originated in California compared to mortgages for purchasing a home. Millions of Californians refinanced their first mortgage once, twice, even three times during the bubble years. They also refinanced with a cash-out HELOC while their home soared in value. Homeowners partied as if it would never end.”

“By 2008, the housing market collapse in Los Angeles was in full swing. That year, 37,670 homes in Los Angeles County were foreclosed by mortgage servicers according to Property Radar.  Although foreclosures nationwide did not peak until 2010, the peak for Los Angeles was in 2008.”

“As home prices showed no sign of leveling off in 2009 or early 2010, lenders and their servicers panicked. They decided that the bleeding might be stopped if they drastically reduced the number of repossessed properties placed on the active housing market. RealtyTrac had begun reporting as early as April 2009 that most foreclosed properties were being held off the market. They estimated that roughly 80,000 foreclosed properties in California had been deliberately kept off the market.”

“What began in California spread nationwide. This table shows what servicers in major metros were doing with their foreclosed homes according to data provided by RealtyTrac. By mid-2010, Los Angeles County mortgage servicers had just under 30,000 properties in their foreclosure inventory. A mere 1,214 were actively for sale.”

“Did this desperate strategy prevent home prices from falling further? Not at first. There were simply too many delinquent properties that had not yet been foreclosed. The solution was to sharply restrict the number of delinquent properties actually foreclosed. Early in 2012, the number of homes repossessed by the servicers began to plunge.”

“Servicers realized that reducing foreclosures to a trickle had worked. By February 2013, repossessions plunged in LA County to a mere 310. For all of 2013, only 3,340 houses were foreclosed.  What servicers were doing went unreported by the media.”

“Steven Lauffer was a professional staffer at the Federal Reserve Board. In 2013, he published a paper entitled “Equity Extraction and Mortgage Default.” Lauffer carefully laid out the case that mortgage defaults in Los Angeles County were caused by cash-out refinancing much more than by anything else.”

“In a recent column, I discussed why the massive delinquency of bubble-era non-agency mortgages is a disaster waiting to happen. Comments by quite a few readers showed me they had a hard time understanding how fewer than 4 million mortgages could take down major housing markets.”

“That is a fair objection. You need to understand that the problem is much greater than just the non-agency mortgages.  During the bubble years, a total of 28 million first and second liens were refinanced. Recall that roughly 80% of these were cash-out refinances.”

“Modifying mortgages as an alternative to foreclosure just kicked the can down the road. It succeeded in bringing these delinquent homeowners into current status. Yet millions of them are re-defaulting on these modified mortgages. The number of re-defaults is increasing relentlessly around the U.S. Worse yet, many re-defaulters are on their second- or third mortgage modification.”

“Which investors might be vulnerable? Owners of some mortgage REITs, owners of nearly any mortgage-backed securities (RMBS) originated by Ginnie Mae (FHA-insured mortgages), and more than a few hedge funds.”

The Daily Gazette in New York. “Several Capital Region counties saw an uptick in foreclosure activity in 2018. Geri Pomerantz, managing attorney of Legal Aid’s Foreclosure Prevention Project, said there are two ways of tallying foreclosure actions: Initial notices of delinquency issued to mortgage holders and cases that reach the court.”

“‘The important numbers are the delinquency numbers, and they’ve been increasing,’ Pomerantz said. ‘That data really tells you that people are in trouble.'”

“Legal Aid attorney Marlene Morales said: ‘We’ve seen some people re-defaulting on their loans as interest rates step up.’ Morales said expiration of the federal Home Affordable Modification Program is likely a factor in this, as it had provided assistance to those with a documented financial hardship.”            

This Post Has 53 Comments
  1. ‘Servicers realized that reducing foreclosures to a trickle had worked. By February 2013, repossessions plunged in LA County to a mere 310. For all of 2013, only 3,340 houses were foreclosed. What servicers were doing went unreported by the media’

    I recommend reading this report in full. I was reporting on it by at least 2009 because I saw it first hand in the foreclosures I was working on. When I was going to sheriff sales in 2007, I posted here about how 90%+ of courthouse sales were endlessly rescheduled.

    Yet posters will try to tell us housing found a natural bottom. Oh, and shadow inventory is a conspiracy theory but zombie homes is a statistic.

    1. Geithner sacrificed homeowners to “foam the runway” for the banks
      https://www.washingtonexaminer.com/video-geithner-sacrificed-homeowners-to-foam

      Jul 24, 2012 – HAMP borrowers would “foam the runway” for the distressed banks looking for a safe landing. It is nice to know what Geithner really thinks of …
      This man made millions suffer: Tim Geithner’s sorry legacy on housing …
      https://www.salon.com/…/this_man_made_millions_suffer_tim_geithners_sorry_legac…

      May 14, 2014 – In fact, the programs were never meant to help homeowners, designed only to “foam the runway” for the banks, to spread out foreclosures and …
      What Timothy Geithner’s New Book Won’t Tell You – David Dayen …
      http://www.politico.com/…/what-geithners-new-book-wont-tell-you-106404_Page3.html

      May 7, 2014 – The banks could only manage so many foreclosures at a time, he explains, and his goal was to “foam the runway” and allow them to absorb …
      Foaming The Runway – Investopedia
      https://www.investopedia.com/terms/f/foam-the-runway.asp

      Jun 5, 2018 – Foaming the runway in a financial context is the practice of making a … As part of the agency’s policy of propping up of banks during the …
      Chapter 8 “Foaming the Runway” – Hero Neil Barofsky’s BAILOUT …
      https://deadlyclear.wordpress.com/…/chapter-8-foaming-the-runway-hero-neil-barofs…

      Sep 12, 2012 – So HAMP would “foam the runway” by stretching out the foreclosures, giving the banks more time to absorb losses while other parts of the …
      How Treasury Secretary Geithner Foamed the Runways With …
      wallstreetonparade.com/…/how-treasury-secretary-geithner-foamed-the-runways-with-…

      Aug 29, 2012 – It’s real goal, according to U.S. Treasury Secretary Tim Geithner, was to “foam the runway” for the banks. Here’s an excerpt from the book:.

    2. Yet posters will try to tell us housing found a natural bottom.

      Yeah, it’s infuriating that they succeeded in convincing the masses of that.

    3. ‘Servicers realized that reducing foreclosures to a trickle had worked.’

      Collusion! Quick, someone notify the FBI!!!

      1. “They estimated that roughly 80,000 foreclosed properties in California had been deliberately kept off the market.

        What began in California spread nationwide. This table shows what servicers in major metros were doing with their foreclosed homes according to data provided by RealtyTrac.”

        And this was not an antitrust violation because…!?

        1. Sadly, the same scenario is about to play out. The banks will get bailed out allowing them to hold off on liquidating foreclosures until they can get the next asset bubble inflated. Then after they’ve diluted the value of your hard earned savings, by printing money and giving it to themselves, they will trickle out whatever is left that hasn’t been gobbled up by insiders. As Max Kaiser so fittingly described it, “the casino gulag”. They gamble away your money on insane Ponzi schemes but there is no way to opt out of the system.

        2. That’s exactly what I want to know?! I’d live to see a Presidential candidate run on that issue !!

        3. Because servicers discovered the strategy and all did it independently. And is there a regulation that a servicer has to sell an underwater asset? If a bank wants to keep a losing property on their books, then that’s their business. So whatever they did, I guess it was legal. (But IMO those banks should not have received federal bailouts.)

          That said, the real issue here was suspending that FSAB257 (don’t remember the exact name) that allowed banks to keep the crap on the books at last sale price instead of market comp price. The losing properties didn’t look like losing properties.

          1. “Because servicers discovered the strategy and all did it independently.”

            I’d like to see a shard of evidence that competition, not coordinated action, drove servicers across the land to pursue the same strategy.

          2. They even bullied FASB into changing accounting rules (which never happened before) so they could hoard houses. It’s not like this was some big secret.

          3. Right now on Twitter a bunch of people are trying to tell Taibbi that they really did save the system 10 years ago and he’s totally sticking it back in their face with books full of evidence that they enriched themselves at our expense and the piper has yet to be paid. But it still seems like nobody wants to hear it.

    4. “It is quite likely that there is no feasible solution to this massive problem of mortgage modification re-defaults. As home sales weaken now around the country and sale prices level off, you’ll do well to prepare by assuming the worst.”

      So far, so good.

  2. “Roughly five times as many refinance loans were originated in California compared to mortgages for purchasing a home. Millions of Californians refinanced their first mortgage once, twice, even three times during the bubble years. They also refinanced with a cash-out HELOC while their home soared in value. Homeowners partied as if it would never end.”

    Luckily this phenomenon completely died out after 2007.

    1. Homeowners partied as if it would never end.

      Some partied. Some just avoided the cramdown thinking it was temporary. The problem with a cramdown is managing expectation and avoiding pitchforks. But when you offer them a line of credit during a cramdown OF COURSE they’re going to use it to maintain what they think of as a “normal” standard of living. They’ve been crammed down on paper but not inside their heads yet. The fallout from that still has to be handled. They still don’t know that everyone’s plan is that they will live like European and Asian peasants as soon as we can figure out how to pry the guns out of their hands. In the meantime we give them more credit.

    2. “Millions of Californians refinanced their first mortgage once, twice, even three times during the bubble years.”

      Yep. Just as regular as getting your teeth cleaned.

      By utilizing my “No Dollar Escapes” program ignorant pukes could now and then visit my bank, have their magically created home equity tallied up, sign a dotted line or two, and – presto! – walk out of the bank with their pockets (and mine 😁) stuffed with lots of spending cash.

      No muss, no fuss. The Good Ol’ Daze. Too bad the American public had smartened up since then (just kidding).

  3. “Much has been written about it, but almost nothing has been said about the craziest aspect of it – the cash-out re-financing lunacy.”

    Back in 2006 – 2009 I thought the cash-out re-financing was covered quite extensively on this blog.

    I remember one young couple that “owned” a house in the second hood I rented. I looked through their refis in public records and posted here how they first got a pool then new vehicles and a re-fied rack for her and when they could borrow no more a divorce.

    1. I was getting weekly mailers offering me $0 closing cost cash-out refis back in the 2005-2007 era. I was tempted one more than one occasion, but never did it. And the temptation for me was partly based on seeing my neighbors buy all sorts of fun new toys, with that cash out money.

      And yeah some of them ended up foreclosing. But so what? They borrowed $100K and bought $100K worth of cars, trips, boob jobs and boats. Then they walked away from the house but kept the $100K worth of stuff. And usually it took 1-2 years before the sheriff showed up, which means another $25-50K worth of free rent on top the $100K stuff. Pretty sweet gig if you ask me.

      Meanwhile I was Mr. Responsible, paid off my mortgage like a sucker while everyone around me was partying. At least I had the good sense to get out of real estate in 2007 and buy back in 2010. But still in the long run, I’m not sure if I was that much better off than the supposed FBs everyone here loves to laugh at.

      1. Those 100k worth of stuffs is now worthless junks. But I get your point! The idiot bankers and lenders got bailout from responsible folks like us so they can do it again and over again.

      2. My neighbors purchased for $385 refinanced at $1.3. Bought all the toys etc. Stopped making payment and lived rent free for 2 years. Rent is $5,000 a month.
        When they left the destroyed the interior and even took the custom from door.
        I continued to make my payments.
        Who is the stupid one?
        They got almost $1 mil free

        1. Gazillion of stories like that all over the land. Which is why I always chuckle when I see the term FB thrown around. Those supposed FBs, made a killing, while the “smart people” were chumps. And I was chumpy as anyone else.

          1. Yeah, and I foreclosed hundreds of shacks. Why were they so unhappy? Why did they have bills piled on the kitchen counter? Cuz they were smart?

        2. How do you know they were unhappy? Bills were piled up. Which means they weren’t paid. Which was my point. They borrowed hundreds of thousands of dollars and never paid it back. So yeah pretty smart if you ask me vs me, like an idiot, paying back the money I borrowed.

      3. In Phoenix I took the name cactus because my boss was getting his technicians to help him dig up cactus from home owners just days away from foreclosure, they were selling everything including the landscape. neighbors called the cops but of course the owner still owned the house. I just rented then it was crazy times around 2007-2008. he also took stoves out of kitchens but I didn’t like the name stove. These were great big things 100’s of pounds he landscaped his yard with them I guess ?

      4. “And the temptation for me was partly based on seeing my neighbors buy all sorts of fun new toys, with that cash out money.”

        I saw that, too. And then after the crash, all the toys disappeared, along with the neighbor.

    2. I always wondered – how people could give the ‘very good life given their occupations’. Perhaps some of them re-fi’ed cash-out – but not before they had take 72 month loans on their very expensive cars.

      Apparently i am a fool to be cautious and pay my bills.

      1. Loser above. Why work and pay your bills when taxpayers will? Everything will be free in the future anyway! AOC will pay for it. Suzanne told me

        1. Joke about AOC all you want. But she and Bernie and their bro dude Irishman Blotto O’Rourke are promising exactly that. Free everything including housing. And there are tens of millions of dullard voters out there who will fall for it.

          As the old bumper sticker says…Vote Democrat. It’s Easier Than Working.

          1. You don’t want to earn so little that you qualify for the earned income tax credit. It’s basically there to make working a more attractive option for low income families than staying at home with the kids.

    3. While I understand and sympathize with the frustration from having been financially responsible, I’m reminded of a lesson that I thankfully learned early on in life from my 4th-6th grade teacher: Life’s not fair.

      1. Life’s not fair. But that said, why would anyone want to rig the rules to encourage and reward cheaters and fraudsters? Other than cheaters and fraudsters who themselves benefit from such a system?

      2. Yes it’s good to be aware that life isn’t always fair and that we need to be grateful for things we do have. However, once people accept irresponsibility, fraud, and cheating as normal and legitimate, society rapidly devolves.

        1. I wholeheartedly agree with both points. My original comment was in response to numerous dwellings on the past. It was not intended as a resignation to or an endorsement of rigged rules.

        1. Oops! Texas library apologizes for hiring sex offender to dress in drag & read to kids

          Published time: 16 Mar, 2019 07:57
          Edited time: 18 Mar, 2019 11:12

          The Houston Public Library has apologized to parents after a man who volunteered to read to kids during “Drag Queen Storytime” turned out to be a sex offender charged with assaulting a child. What are the odds?
          Albert Alfonso Garza – a volunteer drag queen associated with the Houston Public Library program, who performs as Tatiana Mala Nina – was charged with child sex assault on an eight-year-old boy in 2008, according to Mass Resistance, a group that has protested the Drag Queen Storytime program.

          The library admitted they had hadn’t run a background check on Garza and issued a statement saying they are very sorry and promising never to do it again, though some protesters want more than an apology.

          “If they had done their job and due diligence, if they had said wait…maybe it’s not a good idea to have a sex offender who at 200 pounds and 5-foot-11 assaulted an 8-year-old boy!” said Tracy Shannon, a member of Mass Resistance.

          https://www.rt.com/usa/453976-drag-queen-storytime-sex-offender/

          1. At the top that was supposed to say,,,

            Maybe now Colorado Gov. Jared Polis (D) “Drag Queen Storytime” for the children of the state.

  4. I think the Fed is pumping up the stock market lately. They’ve decided that they are not even going to allow it to try to fall, it should be suspended at its lofty heights at any and all costs.

    1. I believe that happened in the run-up to the 2007-2009 financial crisis as well. I recall day after day of stock market gains on Big Hank Paulson’s watch at Treasury.

      What I don’t get is why it all eventually had to come tumbling down. Wouldn’t it have been a lot less painful to just keep it propped up in perpetuity?

  5. Tesla! Here’s an article …

    “A Modified Ponzi Scheme”: 78% Of Tesla Operating Cash Flow Has Come From Customer Deposits | Zero Hedge
    https://www.zerohedge.com/news/2019-03-18/modified-ponzi-scheme-2008-78-tesla-operating-cash-flow-has-come-customer-deposits

    Here’s a snip …

    “Tesla is in effect a modified Ponzi scheme. Throughout its history, the company has financed its operations by announcing a new product (originally the roadster, then the Model S, the Model X, the Model 3, the Semi, the roadster 2, and now the Model Y as well as the vaporware full self driving package) and then taking deposits for the product before it has ever designed a production system for the product. The company then spends the deposits on operating expenses and the capital expenses to manufacture the original product. When the company is close to running out of funds, the company announces a new product and takes deposits on it in order to finish the production of the first product. Since 2008, 78% of TSLA’s cash flow from operations has come from customer deposits!”

    1. As the report’s author points out, “unlike a bank, Tesla does not segregate customer deposits and in reality customer depositors are just unsecured creditors of the company. In Ashlee Vance’s Elon Musk biography he has a telling scene in late 2008, Kimbal Musk worries about the legal implications of Elon raiding the customer deposits in order to keep the lights on.

      (emphasis added)

      1. Time will tell. All things come out in the wash. Building a gigafactory in China is expensive, as was the one in Reno. The beauty of taking customer deposits is that it lets you know what your demand is. Tesla made a mistake with the model 3 because they led with the $35k base model and a bunch of people gave $1k to have that model. But they produced the higher end model first, so that irked a lot of early reservation holders. With the model Y, it looks like they are only taking deposits for the higher priced models first, so that will inform their decision on how many to manufacture.

        You see a ponzi scheme, but I hardly see that. I see them rolling all of their profits in to capex expansion. Yeah, if they only wanted to make Model S cars as a niche automaker, then I guess it doesn’t make sense to expand the battery factory. By the way, Trump is calling on GM to quickly sell it quickly or open it. Tesla could open it if GM would sell it at a good price, though I’m not sure they’d want any union workers.

  6. What you’ve been waiting for

    Hudson Yards is a billionaire’s fantasy city and you never have to leave — provided you can pay for it.

    By Justin Davidson Photo-illustration by Joe Darrow

    On March 15, after 12 years of planning and six of construction, the Related Companies (which is actually just one mammoth real-estate company) will open the gates to its new $25 billion enclave, an agglomeration of supertall office towers full of lawyers and hedge-funders, airborne eight-figure apartments, a 720,000-square-foot shopping zone, and a gaggle of star-chef restaurants. When the rest of it is finished — when the remaining rectangle of exposed rail yards between 11th and 12th Avenues is covered by a deck and more residential towers — the whole 28-acre shebang will be bigger than the United Nations, the World Trade Center, or Rockefeller Center and physically vaster, more populous, and more expensive than any private development in the country.

    http://nymag.com/intelligencer/2019/02/hudson-yard-billionaires-fantasy-city.html

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