Hey Mr. President, Larry S., Timmy G. and Benny B:

Does the word “cramdown” mean anything to you?

Holy shite.

So the same banks that are allowed to claim “paper” profits, can refuse to recognize “paper” losses?

sorry – stupid question.

California is in deep doodoo. Their people spent like drunken sailors for years as did their legislature. This one can’t be blamed on the Republicans, sun spots or global warming.
The California legislature is and has been (for a long time) idiots. They never saw a bill (that required bunches of money) they didn’t like.
The chickens have come home to roost.
They shall roost for a very long time.

Where I live in Signal Hill, California, I’m the president of my homeowners association. The foreclosure numbers sited by ForeclosureRadar probably don’t include those foreclosures stemming from HOA members who have fallen behind on their monthly assessments and are being or have been foreclosed by the associations. We have two (out of 82) homeowners teetering at the brink of being foreclosed, and nearly a dozen homeowners who are many months behind in their dues and will soon face the foreclosure ax. I keep reminding our other Board members that the association does NOT want to take possession of these units because we would then have to start making the regular mortgage payments to the mortgage holder, and as fewer and fewer owners are paying their dues we don’t have the re$ource$ for that kind of obligation. Holy shite, indeed. (:>

Nice deal, huh? How do we get in on some of that money?

PS-
There is no Santa Claus.
Sorry.

Do you ever talk with other HOA presidents? If so, what do you hear from them about their associations?

I have a number of friends who work in banking and credit unions in So Cal. They are reporting (from the ground level) that things are very nasty. Talked to a good friend just this morning and he told me that in June, a number of individuals in his shop were told that they could agree to a title reduction, and a 25%+ pay cut, or they could hit the door. Of course, the process involved signing some abstruse legal “gun-to-the-head” document.

And the “executive team”? They ain’t missin’ any meals, of course…

Later on they add, “The increase appears to be primarily due to the fact that lenders are willingly postponing foreclosure sales.” Why postpone? Keep reading, and the answer pops out: “The average California foreclosure has a total loan balance of $425,134 on a home that is now worth $236,739.”

yup, I have a few friends who defaulted on mortgage and the bank is not foreclosing because it’s better for them to leave the house maintained, taxes paid rather then own a home they cannot sell, waiting for some future date when forclosure is more “equitable”, pardon that pun but it works perfectly here

Spending-by-Referendum and the two-thirds rule bankrupted California. Voters were enticed with all kinds of wonderful but not paid-for programs on the ballot. But to pass the budget to pay for these things the voters approved requires a two-thirds vote in the legislature, and the very tiny GOP minority refuses to ever raise taxes — even on oil extraction, smoking, and car fees.

Don’t blame California’s governance troubles on liberals: it’s the ghost of Howard Jarvis who haunts our failed state.

PS-
There is no Santa Claus.
Sorry.

there is however sant clause syndrome

Peterr, thanks for this post. It’s interesting that we have not seen the math laid out this way. Are the banks colluding to keep the losses off their books, do you think? I mean, if one bank sells one house on one cul-de-sac for less than its loan, suddenly none of the banks can use mark-to-model to place a value on their holdings. A market price exists, and they have to use that market price, devaluing all their inventory, right?

So none of the banks will sell, in order to protect all their balance sheets?

Sure hope AG Jerry Brown is looking at this carefully.

Tinman, what part of the south do you live in? You don’t have a clue, but you do have a big mouth. That’s why I suggest you are from the south.

Howard was a man of the people. I remember when Prop 13 passed. Years later (earlier this decade) I lived in CA. At first I hated Prop 13. Then I loved it. I moved out of CA in late 2005…..just in time.

“Don’t blame California’s governance troubles on liberals: it’s the ghost of Howard Jarvis who haunts our failed state.”

Bingo! The ballot initiative process is nothing so much as legislation by mob psychology. I wonder (if half-seriously) whether it might be possible to permanently eliminate ballot initiatives by (gulp) getting such an initiative on the ballot.

The combination of “super majority” requirement and the idiotic proposition thing have done serious damage to the state.

Sorry, not from the south.

Right you are, brother. It’s a real shame what that state did to itself.

Spending-by-Referendum was definitely a problem out there. They elect legislators who then throw the big decisions back in the faces of the voters. The voters are a little busy trying to make a living.

We require a civil discussion here, without insults to other commenters.

If the banks are colluding, then the auditors have to be colluding, too. These guys – the smart one, at least – know how much dog shit there is on these balance sheets. However, they don’t want to mess up their revenue streams either. Hence, they tend to look the other way. It’s all very incestuous.

That a massive cramdown program is warranted (not only in California, but across the country) is so obvious that it hardly merits discussion. So why isn’t it being done? (That was a rhetorical question. Sorry.)

I agree Teddy! It would be good to repeal the part that lets commercial property stay at the same tax base as homes. These corporate entities just seem to keep the ownership unchanged so as to keep the tax base down, while homes get taxed aqt the resale price. This is a major benefit to corporations while screwing home owners…. Must be changed!! That and the two thirds bullshit.

also the sanity clause

Hear hear!

Read somewhere that Dean Baker’s idea of turning owners into renters of the same property is now getting serious consideration. If the banks worked it right, they could receive at least some income and upkeep without having to realize losses.

No one but the corporations understood that by limiting tax assessment increases to when the property changed hands (enabling gramma and grampa to keep their house in the face of rising taxes and services, a good thing) the immortal corporations that never sell their property would never face re-assessments.

Most of PG&E and Southern Pacific’s real estate is still assessed at 1978 prices. Do you think this is the right way to run a state’s tax base? The corporations think it’s just swell — they are immortal persons. But it means that California’s tax base is, very unhealthily, more than 50% dependent on personal income and thus terribly affected by downturns.

I don’t know that they are colluding as much as they are (mostly) all in the same boat, and thus have the same bad set of options.

These banks bid up the real estate bubbles (both residential and commercial RE), they enticed borrowers to purchase at the very upper end of their budgets (or above), and — their worst mistake of all — they fell for their own sales pitch: “The market can’t go down.”

Anecdotally, the places I hear that have the toughest, most frozen real estate markets are the cookie-cutter developments built in the last couple of years. In an older area, one can argue that the house that sold across the street at $150,000 under the initial asking price is NOT a “comparable” home to yours, because of X, Y, and Z. In these newer developments, the differences between the homes are minimal, and so it’s a lot harder to make the case for non-comparability. Add in the fact that these newer developments probably carry the most out-of-balance loan-to-value numbers (having been built as the bubble was being inflated), and these are the ones that make the banks most nervous.

So they hold on to these homes, and pray that no other homes sell in that neighborhood, until the market starts to go back up.

And who drank the milk I left out every Xmas eve?

The Tooth Fairy, maybe?

Restricting Income By Referendum — the Prop 13 mess — is also a problem. I lived in Northern CA for a dozen years and also left in 2005. One major reason: I have a kid who was approaching school age at the time, and the effect of Prop 13 has had on the CA schools has been to strangle them slowly over the past 30 years.

I grieve for my friends in CA.

Benny’s news is in:

http://www.federalreserve.gov/…..90812a.htm

I’ve been reading this guy -

http://www.doctorhousingbubble.com/

and he’s been saying this for some time now.

I saw a lot of things in my CA days because I prepare tax returns. There were flippers and high flyers….and of course some who were talked into loans they should never have taken out.
Loan people out there even tried to talk me into just paying 3% interest each year (my rate was actually around 7%). They said nobody paid regular payments. I could just make a 3% payment and the differerenc would be added to my principal. I still refused. I know the lender thought I was a rube…..maybe even from the south.

Are you referring to Benny Hill?

Pretty close…

These innovative mortgage products are absurd. I recall looking at condos at the height of the bubble, more for fun on a Sunday afternoon than anything else: “They want WHAT for THAT?” But there would always be a “loan packagae summary” out on the kitchen counter, and I would examine it and say in too loud a voice, “but what’s the payment after three years?” and “How much does my principal increase every year when I make these tiny payment?”

The realtors made it clear these questions were unwelcome, and so was I. I see these condos on the market now, for much much less than they sold for, and wonder how much of a bath the buyers and the banks took on them.

So was this lender a con artist, trying to talk you into something unsuitable for you but (presumably) profitable to them, or was the lender an idiot who didn’t know what in the world they were doing?

Because the two dominant players in the CA financial services industry over the last ten to fifteen years appear to have been either crooks or fools.

Tinman, deftly handled.

Republican governors in Ca and Republican presidents for America…we asked for this fukin’ and we got it in spades. We accomplished a feat not even done by humans..we screwed ourselves. heh

“but what’s the payment after three years?” and “How much does my principal increase every year when I make these tiny payment?”

Speaking for myself, I would have enjoyed this. As for the realtors who didn’t like your uppity questions? I’m guessing they’re working graveyard at Dunkin’ Donuts these days. If they’re lucky.

It should be a felony to put the words “innovative” and “mortgage product” in the same sentence. For starters.

Lawrence O Donnell is filleting the woman from Spector’s town hall on Tweety.

You are wrong. First of all, it’s not that bad out here. In fact it’s 75 degrees and sunny in LA right now.

Second and more importantly, this state has been governed by Republicans for all but 5 years since 1982, by my count that comes out to 24 of the last 29 years, including the particularly horrible last 7. A minority of rural and Orange County Republicans can effectively hamstring the legislature, and does, due to our crazy requirement that 2/3s of the legislature has to agree before anything can be done. The problems here can be almost completely laid at the feet of the Republican party, such as they are.

Finally, this is the state that produced Reagan and Nixon, two stalwart heroes of the right. Both a couple of nitwits if you ask me, but nevertheless.

From the SF Chronicle on July 28th:

The owners of a premier San Francisco office tower plan to forfeit the property to their lenders, the city’s second distressed transaction involving a major commercial building in recent weeks and another sign of the growing pressures in the sector.

Hines and Sterling American Property decided to transfer their interest in 333 Bush St. to the original financers, following the surprise dissolution of law firm Heller Ehrman in September, according to a letter Hines sent to local real estate brokers and obtained by The Chronicle. The 118-year-old law firm defaulted on its 250,000-square-foot lease, leaving the nearly 550,000-square-foot property 65 percent vacant.

Industry watchers have been openly speculating the building would fall into default in the months since. Hines and Sterling bought the tower for $281 million in 2007, near the top of the market, when it was 75 percent leased. . . .

More distressed deals are expected. Nearly three-quarters of Class A office buildings downtown sold between 2005 and 2007, a bonanza that drove up prices to all-time highs and squeezed the ratio of rental income to cost to record lows. But the economic collapse sharply reduced rent and occupancy levels, making it increasingly difficult for landlords to meet their debt obligations.

Emphasis added.

Can you say “market-driven cramdown”? Sure you can.

Peter, really interesting post. I’m not too hip to real estate stuff so lemme ask a few q’s:

Foreclosures are trending up, yes?
We can expect foreclosures to trend even FURTHER up, yes?
Banks/Lenders who OWN the foreclosed homes, won’t sell at present pricing, yes?

So at what point WILL they sell? Those houses won’t be worth the paper they were foreclosed on for a decade.

The recession/depression will continue ESPECIALLY in the home building/selling business for a LONG time until jobs are created.

And we are NOT looking at that prospect, of jobs being created, at past wages, for the MASSES who are unemployed since what, ‘04 or so . . . . no jobs in the forseeable future, not on a magnitude that would bring BUYING power en masse, that would elevate home prices, etc.

So. WTF are banks/lenders gonna do? And when? Sit on the inventory for a decade?
What’s the scenerio if banks/lenders DO sit on inventory? Are they staving bankruptcy on their OWN part by doing so?

What does the FDIC job surge indicate? I don’t quite get what those folks being ‘hired’ will be DOING out here in CA? Trying somehow to stave off a HUGE run on the banks (who’s got any money left in them amongst the masses?)?

To close, thanks again for a real brainfood post . . . I doubt that CA has come anywhere CLOSE to the bottom of this mess . . . . without jobs, LOTS AND LOTS OF GOVERNMENT WPA LIKE JOBS, NOW, we won’t bottom out for a few years more. Without jobs, we won’t ever climb out of it, and the gap of have’s/have nots will be huge, third world huge.

Brutal.

“Because the two dominant players in the CA financial services industry over the last ten to fifteen years appear to have been either crooks or fools.”

It has been my observation for many years that the people in this industry are not exactly the sharpest knives in the drawer. Yes, there are a few crooks (and a few more than that who will readily bend the rules), but the majority of them are just plain dumb. Like Class-A Dullards.

Howard Jarvis,Californians and a dysfunctional Sacramento have wrote a crazy quilt history during past 30 years. It has been suggested California gets there before the rest of the country.California now very much has with this game of real estate roulette and tax voiding,simply running out of money to run state government and now passing out State of California IOUs.

California I believe holds rank as having one of ten top economies on the planet( I think number 8?) or at least did up until the last year perhaps.

The Republicans have been talking cut the taxes and grow the economy for about 30 years now. By rights California should be just abooming based on Republican cut taxes and succeed dogma. Hmmmm….scratch head moment.

It is certain the funny money gameboard WashingtonDC is on will run out of paper or electronic multiplication capacity to keep producing $$ that are based on little more than a cheap promise and exhausted credibility or capacity to back anything up in real world measures.

How much money did the Bush/Cheney WH burn through in Iraq? How much does the Obama WH intend to burn through in Afghanistan?

The Pentagon? Burning through about a trillion $$ a year these days to support American militarism and corporatism around the planet.

Sustainable? Doubtful.

Really great questions.

“By rights California should be just booming based on Republican cut taxes and succeed dogma.”

Suck it, Grover Norquist.

tinman I was kind of agreeing with you in your #4, but in your subsequent posts, you lost me with your tired superficial talk radio talking points. Turn Fox News off for 8 minutes and watch this video

http://www.youtube.com/watch?v=ogfNEw2XSbY

This post is about the home mortgage mess not the state’s ability to govern. Do you have an opinion on the home mortgage mess?

BTW everything Teddy said above is correct

Thanks, I’m GREAT with questions when offered the insights such as Peter shares . . . but man, I got NO answers and mostly, re jobs and CA, only doom and gloom to predict . . . think I’ll go for a walk and eat a pizza, double double, large fry, six pack of Anchor Steam, quart of Old No. 7.

Problem is, aside from the walk, I doubt I’ll feel any better tomorrow, likely MUCH worse from the headache! lol

“…Turn Fox News off…”

Fox has news? This is the first I had heard about that…

I usually write it as Faux “News” as a mocking gesture, because they’re not news … forgot this time ;-)

Great vid John! Hadn’t seen that! Heh, Santa Rosa Dem . . .*G*

1) Fed WPA like jobs.
2) Raise corporate taxes.
3) CONSTITUTIONAL CONVENTION!

*G*

As always, thanks for your thoughts on CA matters . . .

Lots of different things play into how a given bank will answer your basic “when do they sell?” question. Let me toss out three scenarios.

Banks can make money on property they hold in three ways. The first is the property they hold as collateral on loans. In this case, the property itself isn’t bringing in the money — it’s the loan that the property secures. In any event, if the bank has foreclosed, then this scenario is out of play.

The second way a bank makes money on property is by treating them as investments. Do they think the market is at/near the bottom? If so, and if their reserves permit, they might wait a bit for things to start moving up and sell then. OTOH, do they think the market is still going down? If so, they might sell now to get out before things get even worse. Complicating this scenario is the role of the bank’s regulator (FDIC, OTC, state banking folks, etc.). If the regulator is nervous about the quality of the loan portfolio, they might be pressuring banks to clean up their books — ie, sell these homes off so that there’s less guesstimating in your accounting department.

Finally, banks may try to use these properties as income-producers via a rental agreement of some kind. If a bank realizes it has a bunch of property that isn’t going to sell for what they think it is worth, they might work out some arrangement with a property management company to rent them out while the market recovers. They might even do this knowing they will lose some money on it — as long as these little losses are less than the bath they’d take by trying to sell in a really bad market.

Until recently, banks paid little attention to this third option, because it costs them money to either manage property or pay someone else to manage it. Better to flip the property and sell a mortgage to the new buyer. But right now, with no buyers (or no buyers at the prices they would be asking), perhaps paying for property management is starting to look more attractive.

When you ask twelve — count ‘em: twelve! — questions in a single comment, you’ve got to expect it may take a bit for someone to begin to put together some answers for you.

*g*

Republics never stop quoting their dogma and never accept responsibility for their policies.

Such facts never stop Republics from shouting their dogma.

VERY cleanly explained! Thanks!

So, who has the money to rent that can’t buy, to rent overpriced housing?
How far DOWN can this bank position, to rent, lower rental prices across the board?

And again, if the people don’t have jobs, they ain’t renting anymore than they are buying.

Vicious spiral. Down. I don’t think we’ve seen the end of it, not hardly.

The bank/lenders are SO screwed. Renting ain’t gonna solve their problem, if no one has jobs to pay rent with.

So, let’s say, none of the 3 options are presently favorable or likely for the banks/lenders.

Then what? How long can they HOLD worthless paper and property with the losses? Forever?

This seems to me to be newly uncharted turf for CA, and the nations. Am I wrong in thinking this? Or does The Depression provide a model?

Without jobs, and strong wages, there’s no way out of this . . . .

NO hurry hoss, just glad to have the dialogue and thoughts from those with experience in these matters! *G*

School’s never out in life, is it . . *G*

Seems like CA AG (and candidate for CA Gov next year) Jerry Brown is coming down more heavily on the “they’re crooks!” rather than “they’re idiots!” side of the discussion.

From CalculatedRisk: California AG Cracks Down on Loan Modifiers

Brown is demanding that more than 300 of these “advisers” post bonds with his office, he’s asking very tough questions about clearly questionable ads and marketing tactics, and the state bar is going after several lawyers for improper activities.

That’s what makes the FDIC angle to the post so intriguing.

If this blows up on the banks, as appears more and more likely, the FDIC takes them over. That’s why — I’m guessing — they are ramping up their staff in Irvine CA.

When that happens, the FDIC sells off the good loans to other banks and ends up eating the bad ones, spreading the costs around to the healthy institutions through their contributions to the deposit insurance fund. (It’s the price the banks pay for having a backstop to the industry. They’ll squeal about it, but they know this is the only way to do it.) If need be, the FDIC can hold property longer than a bank, waiting for the market to stabilize.

The FDIC has done this before, in the 1980s S&L mess — but by the time this is over, it will probably been worse than that. They ran into problems at times back in the 80s, but seemed to have learned from their mistakes as it went along. We’ll see what happens this time around.

Hoorah! It bugs me that these crooks get off with measly fines -if that. The guy swiping cigs at the quikee mart pays a heavier price than the waymore insidious white collar crooks that thoroughly destroy trust. Good on Jerry Brown, may he inspire many other AG’s

Hi Peterr, I saw the post at Calculated Risk. I am very skeptical of the greenshoots, end of recession talk. Both employment and housing, as you point out, are nightmares. This has concerned me for a while. The math for recovery doesn’t add up. Unfortunately, the math for depression does.

Amen.

I’m glad you caught this part of the story. Isn’t it interesting that the FDIC is setting up shop in IRVINE where most of the loan mod fraud is occuring…it’s shameful.

Some lawyers are disgusted that it has taken the State Bar so long to take any sort of action against even the most egregious breaches of ethics and outright fraud. I don’t know why the footdragging, but it seems they are slowing, glacially coming around.

From Larue @ 44; What does the FDIC job surge indicate?
The title of the job, “Resolution and Receivership Specialist”, means they search for the true book values of a bank in receivership, and try to find another bank which will buy the good assets, all the while trying to reduce the drain on FDIC funds going toward customer payout. 24 mid to upper level Resolution and Receivership Specialist means expect more bank failures, probably at least one of the larger sized local institutions. Low level specialists are contract hired locally; FDIC knows thousands of local qualified folk for those “low level” accountancy jobs.

Not.
We have initiatives for bonds to pay for stuff, because the lege is gridlocked to the point where it can barely pass the budget three months late. That’s in a good year, mind. (This year was much worse.)
To give you an idea of how gridlocked things are: When Tom McClintock ran for governor in the recall election, his biggest boast was that he hadn’t voted for a budget since Deukmejian was governor. And he was able to carpet-bag his way into a Congressional seat in Northern California, while still (theoretically) representing a state lege district in Southern California. (The legality of that is questionable: he was living outside of at least one of those while he was doing it.)

I have friends who are telling me that at least half the houses on their two-block section of street are underwater – I think all the houses have lost at least 25 percent of their peak value over the last three years.

I’m wondering how much better off the banks would be if they hadn’t killed mortgage cramdowns in Congress.

Orange County was ground-zero for financial hanky-panky. In 2005, I believe, 17% of economic output in the county consisted of people selling their houses to each other. That’s not counting the banking services such as mortgages, or the physical activities like infrastructure and building construction. We built this massive construct that exported dollars to low-cost producers such as the Chinese, who then exported their dollars back to the US in exchange for Americans filling their houses and garages with cheap goods. So people had this sense that assets such as housing suddenly doubled in value. Of course, we have a good picture of housing price development that extends back as far as 300-400 years in Denmark and the Netherlands, and what we know is that in the long run housing is an inflation-neutral investment. Economists know this, so who turned off the alarm in Orange County’s case?