Stopping Mortgage fraud

When credit tightens:

Once again I find myself blogging on a topic brought up (inpired?) on Ben Jones' excellent real estate blog. This one is the problems of mortgage fraud. If its not reigned in... credit will tighten so quickly that we'll see an economic train wreck. Ok, we will anyway. But I accept a recession. Please, lets not be stupid and start a depression part two. Ok?

The initial article that brought this up:
http://thehousingbubbleblog.com/?p=1770

I bring your attention to the middle of that article.

The Grand Rapids Press from Michigan. “With ‘For Sale’ signs seemingly on every street, it may be surprising to hear bidding wars have broken out in the West Michigan real estate market. The bidding wars come most often with homes taken back by a bank, a result of the mounting number of foreclosures in the area.”

“Realtors say they see more of them, and the listing price is often below market value. ‘When I first started, foreclosures were one out of 10,’ said agent Ethan Dozeman, who has been in the business for five years. ‘Now they’re probably one out of four.’”

“Susan Kazma-Hilton, a (broker) in Grandville, said some homes are over priced for the market. ‘The homes are priced to get rid of debt, not priced to sell the house,’ she said. ‘I’ll bet you in 40 percent of the homes, the sellers owe more on the homes than they’re worth.’”

Yikes! Let's play out this scenario. Homes are "bought" with a refund. Almost certainly via identity theft. Maybe willing nieve identity theft ("Become a real estate investor apprentice!") . But not with the perpetrators real ID.

Maybe they use the house to make/grow/sell drugs for a few months (actually make payments) and then skip. Maybe they just skip out with the cash day 1. Either way, by mid 2007 mortgage brokers and more importantly MBS buyers will be onto this scam.

How to stop the scam?
1. Income identification.
2. ID identification (doesn't help the real estate "apprentice," but you can't stop stupid greed.)
3. Down payment

#3 is very important. Right now so few real estate buyers have enough "meat in the game." Can you imagine what this will do to prices if 20% down payments become required again? Perhaps allow 90/10 for conforming loans (but require PMI!). Yes, keep the starter home 3% loans, but those have low enough purchase prices that there isn't much money to be made from these scams.

I'm talking about the $500k+ homes where you can kickback a bunch!

Personally, I would also require as part of the loan origination process a "clear photograph of all persons involved in the transaction." I'm talking about legally requiring a photo of every person face on and from the side (mug shots) plus a body shot (standing or sitting, but enough to start gauging height. Maybe require a yardstick be in the shot?). With digital cameras as cheap as they are... This additional cost to the process is well worth it.

Fraud is plaguing home lending
A local paper:
http://www.dailybreeze.com/business/articles/4566126.html

What do they report? A 35 percent increase in suspected mortgage fraud!
"Mortgage fraud poses a growing risk to banks and other lenders, it says. Federal banking regulators have said that mortgage fraud is growing because it can be very lucrative and fairly easy to perpetrate, especially in areas where home prices have been rising rapidly."

"The regulators also found schemes in which borrowers signed multiple mortgages on the same property from multiple lenders and fraudulent bankruptcy filings to stall or prevent foreclosure."

Now that is clever. Solution? 72 hours before closing a national clearing database. If two or more mortgages show up for the same property... both are cancelled until resolved. But you say this prevents a 2nd for the down payment... Why yes it does. Welcome back to the requirement to put some of one's own "meat in the game."

The problem is mortgage fraud won't be stopped in time to prevent a further drop in prices due to the credit clamp down. Its part of the reason I do not believe home prices will revert to the mean but rather undershoot it. Let's not do a florida 1926 where homes started to sell for 50% of material costs. We also don't want Japan protracted deflation.

Please read my previous article on how Los Angles/OC is now the most overpriced real estate in the world. Why does this matter? Because that is where I want to buy. Those areas that overshot the most will undershoot the most. We'll be exporting population to "fly over country" until at least mid-2008. Possibly longer.

Do not buy until 2008 (at the earliest). Let this crap filter out of the system. But do have a large down payment ready. If you don't like my advice that's ok. Just promise me you'll create a spreadsheet and compare the cost of renting for your timeframe (assume 5 years if you don't know better, that's the average time between jobs). My calculations say buying costs me $400k more out of pocket for 5 years compared to renting the same place. Yours? Oh, and I assumed 7% per year rent increses (high inflation).

Real estate mortgage fraud is going to hurt us all. Sadly, the government is going to have to clean this up and I really don't want them involved (any more). Oh well.

Neil

What would it take for a spring bounce?

If you don't read Ben Jones' housing bubble blog, you should. In particular:
http://thehousingbubbleblog.com/?p=1754

Ok, let's look at that article. Home prices are dropping in Australia, China, Canada, Hawaii, New York, Alabama, and Georgia; all in one article! Its already well know that California home prices are dropping and Florida's are crashing. DC is so overbuilt its not even funny.

First we need to consider the tendency of American's to move about. With 70% of families home owners, that means most people must sell a property before buying. That's getting tough... not improssible for the sensible (read, willing to drop the price to the market price), but most people aren't willing to do that... Thus the difficulty selling homes has to be slowing sales.

Second, read my previous post on housing affordability. I think sales are slowing due to a shortage of GF's.

Third, there seem to be far too many people who must sell.

My prediction? In the spring here in LA we'll be talking more about jobs leaving the state than a real estate 2nd boom. In fact, people will finally start to wake up and wonder what jobs are going to pay for the current homes. Ok, maybe only a few of the sheeple, but enough.

This is going to be a long ride down (read my previous post on RE emotions for my predictions on the length).

Neil

Housing affordability

I found this (old) link while perusing the net. Whatever you do, make sure you look at the figure on slide 14 (Figure 7).

www.demographia.com/dhi-ix2005q3.pdf


Ok, its a pdf (you've been warned). What it does is rack and stack local home affordability to the median income. I *strongly* believe that long term home prices are driven by the median income. What this pdf notes is that Los Angeles has the highest multiple in the world for a large city!

Homes in Los Angles are selling for 11.2 times the median income. This puts it as the poster child of unaffordable locations. Forget having businesses locate here... you won't be able to afford the salaries.

Is Los Angeles becoming a 2nd home destination market. Ok, I would ask why? Its not Florida with Northeastern folk swarming down to avoid the winter. We're not Hawaii with year round perfect surfing. Heck, half of my SCUBA friends have stopped diving California waters as its too cold; they only dive on vacation. I cannot imagine the baby boomers excited about our cold waters... Hmmm...

Now what does slide 14, Figure 7 say? Simple, this market isn't sustainable. If that isn't scary, I don't know what is. No amount of cheerleading is going to sustain... that! Severly unaffordable is a 5.1 multiple or greater, seriously unaffordable is 4.1 to 5.0. Moderately unaffordable is 3.1 to 4.0. Affordable is 3.0 times median wage or less. So we currently have 2/3rds of the markets that are unaffordable about to become affordable. (It was ~55 of 65 markets in 1995 versus 20 of 65 today.)

I've noted before that whenever LA broke through 8.0 times median salary it drops to 6.0. What will be the bottom this time? I'm betting LA will drop down to seriously unaffordable before returning to its normal premium. But how long? How much of that will be wage inflation? How much dropping home prices? We won't know until 2008. Whatever you do, don't buy a home in California, Hawaii, or Florida today!

Neil

No news

Its all been the same information for a bit. All that is happening is the "buyers standoff" is becoming iconified. Sellers won't sell... buyers won't buy. Here is California, we're losing population (if you haven't read the United Van lines 2005 survey, please do).

I'm not betting on much change in 2006. If I'm wrong, that's ok. 2Q 2007 looks to still be when everything converges and prices start to drop significantly.

From what I'm reading/seeing, prices are dropping about 2% to 3% a month here in the south bay. Exciting? No. Its like watching paint dry.

Please read my post on real estate emotions... We're so stuck in denial... until people realize that its not a river in Egypt, yawn.

The only interesting tidbit is that a coworkers wife is selling a home that priorly sold for $940k for $770k. But that's down in oceanside and I intend for this to stay a southbay centric blog.

Neil

Local market observations

My fiance' and I did a little tour of homes on Sunday 10/8/2006. We really only planned on looking at 2 houses (we didn't start until 3:30pm), but instead we checked out a large number.

Observations:
1. Homes are falling out of escrow. Out of about 20 homes we looked at, 3 were back on the market due to homes not closing.
2. N. Juanita is out barometer (Redondo Beach, CA). There is one block with 5 nice townhomes for sale. While not our first choice, they're an ok backup. The last sale on this block was in January. All townhomes have been on the Market since Febuary. No movement in 7 months. Two of the townhomes proudly sported "sold" or "In escrow" sub-signs for about a month. Both are back on the market. Two more townhomes are under construction on this street (in framing).
3. Man are realtors desperate to be buyers agents. One realtor even anounced she wasn't the listing agent but rather the buyer's agent. I had a few words for her.
4. We're seeing 3 townhomes that are identical for sale near the beach in redondo. Each is trying to be $10k less than the others. The rear unit people seem to be the most willing to cut... and cut... and cut... But $1.24M isn't there yet.
5. Lots of construction still progressing. Some gorgeous new homes just completed.
6. Prices are all over the map. 30% differences in equivalent properties. The price point de jour seems to be $1.2 to $1.3 million.


My comment? Price drops will continue to be slow. But if sales drop much more or inventory builds at all... free fall.

Neil