Liar — Rollins Band

Wonder why things are going so well

You want to know why?

cause Im a liar, yeah, Im a liar

Remember all the fun speculators had with stated-income loans? Loan documentation is

usually a routine part of obtaining financing. Lenders ordinarily

require a borrower to provide documentation proving income, assets and

debt. However, during the final stages of the Great Housing Bubble,

loan documentation was seen as an unnecessary barrier to completing

more transactions, and loan programs which circumvented normal

documentation procedures flourished. In short, liar loans were everywhere.

So are these people getting their comeuppance? No. In fact, they are getting a second chance, and this time they get to lie about income in the other direction. Let me explain.

So you stagger back home and wait for nothing

But the solitary refinement of your room spits you back onto the streets

Everyone is doing loan modifications now: Citibank, the GSEs, everyone. They must. You saw in yesterday’s post how destructive the upcoming wave of ARM resets is going to be, and the lenders know this. They will do every loan workout they can to avoid more foreclosures. Part of the loan workout requires the borrower to demonstrate they are unable to make payments, and their income is going to be used to figure out how much principal reduction and other loan terms the bank will adjust to accommodate them. I think you can see where this is going… All the people who exaggerated their incomes to obtain more house than they can afford, are now trying to look as poor as Church mice to get the biggest mortgage principal reduction they can: the reverse liar loan. They lied to get in, now they get to lie in order to keep it. We have a great system in place, don’t you think?

The problem is even bigger than that. The whole loan modification process has built-in moral hazard that is going to burn lenders on a grand scale. I received an email from a realtor friend (yes, some realtors actually like me) that had this story to tell:

A

friend of mine from college purchased a new home in Victorville for

around $450,000. At the same time many others in his neighborhood

purchased as well. My friend and his neighbor were both paying their

mortgage. However, his neighbor called his mortgage company requesting

a loan modification. The mortgage company explained that he is not in

default and therefore they will not complete a loan modification. My

friend’s neighbor decided to quit paying his mortgage while he

continued to make payments on his four-wheeler, quad, and other toys

and make trips to the desert weekly. He called the mortgage company

back a couple of months later and received a principle reduction of

circa $100,000. My friend, a very smart person, math thesis of the year

award winner in college, with a masters degree in math, vice principle

at a high school making excellent money, expresses to his neighbor that

he is upset that his home is worth $100,000 less than he paid for it,

however his neighbor then explains that he received a $100,000

principle write down by not paying his mortgage and negotiating a loan

modification. Stopping by his house a few weeks ago on the way back

from Las Vegas my friend explained this to me and said he thinks that

he is going to get a modification as well.

These loan modifications are going to cause a chain reaction through entire neighborhoods and communities. Are you going to be the only one in your neighborhood who didn’t quit making payments in order to get a loan modification? It is really that simple: stop making payments, and you will get a loan modification. Keep making payments, and you will not.

What is the morality of this? Is this wrong? The holder of your mortgage is offering to give you a great deal of free money if you stop making payments. You are not forcing them; they are freely offering the loan modifications to anyone who qualifies. By not making a few payments, you qualify. If Uncle Sam said to you that you must pay your full tax bill by April 15th, but if you are 90 days late, we will knock 1/3 off. What would you do? Is it immoral to take the discount?

The government’s and the lender’s response to this financial crisis is evolving from an irritating curiosity to a complete WTF-are-you-doing series of terrible missteps. How much more wrong could they be? How much more damage are they going to do by trying to solve the problem? How much is this going to end up costing the rest of us? Is this where our $700,000,000,000 is going? Let them eat cake.

Today’s featured property is a typical Irvine rollback. The owner bought at the peak with an Option ARM, and now he is giving up and letting the property go. Perhaps he should just do a loan modification and get $200,000 knocked off his mortgage…

Asking Price: $799,000

Income Requirement: $199,750

Downpayment Needed: $159,800

Monthly Equity Burn: $6,658

Purchase Price: $950,000

Purchase Date: 9/8/2005

Address: 4471 Elm Tree Lane, Irvine, CA 92612

Beds: 4 Baths: 3 Sq. Ft.: 2,643 $/Sq. Ft.: $302 Lot Size: 5,500 Sq. Ft. Property Type: Single Family Residence Style: Contemporary Year Built: 1970 Stories: 2 Area: University Park County: Orange MLS#: S539024 Source: SoCalMLS Status: Active On Redfin: 128 days Unsold in 90+ days Unsold in 90+ days

Located in the desirable University Park community of Irvine,this

beautiful 4 bedroom, 3 bath family home combines a comfortable classic

exterior with an updated contemporary interior. The totally remodeled

kitchen (completed in 2007) includes custom maple cabinets w/ multiple

pull-outs, granite counter tops and back splash on a center bar with an

over-hang for casual dining, stainless steel counter tops w/ built-in

commercial style sink, DCS stainless steel 48′ natural gas range,

double oven and an 1800-cfm stainless steel hood. The family room is

wired for surround sound, has a beverage service area, recessed

lighting and lots of storage space. The formal living room has vaulted

ceilings, built -in book shelf, pre-wired speaker nooks and a marble

fireplace. Add to that a new Trane central air-conditioning system with

dual drives for energy efficiency and a new Trane furnace with a fully

programable thermostat with touchscreen controls.

I really don’t know what these owners are thinking. This property was originally listed in July for $799,000, and then it was pulled from the market. It was relisted at a higher price in September (must have been that huge rally we had), and now they have lowered the price back to the original asking price. It is still too high. If it was a reasonable price, they would have had offers months ago. I guess losing a lot of money has affected their judgment.

This property was purchased at 9/8/2005 for $950,000. The owner used an Option ARM for $712,500, a HELOC for $100,000, and a downpayment of $137,500. They then spent a lot of money renovating the property and got another HELOC for $143,000 (They probably paid off the other one). The total debt on the property is $855,500 assuming the final HELOC is fully tapped. There is a good chance it isn’t. This seller may be in a holding pattern at $800,000 because that is what they need to pay off the loans. They know their downpayment is gone. All that work, and they get to lose all their money. Bummer.

{book}

You think youre going to live your life alone

In darkness and seclusion… yeah, I know

Youve been out there and tried to mix with those animals

And it just left you full of humiliated confusion

So you stagger back home and wait for nothing

But the solitary refinement of your room spits you back onto the streets

And now youre desperate and in need of human contact

And then you meet me and yur whole world changes

Because everything I say is everything youve ever wanted to hear

So you drop all you defenses, Im perfect in every way

cause I make you feel so strong and so powerfull inside

You feel so lucky

But your ego obscures reality that you never bothered to

Wonder why things are going so well

You want to know why?

cause Im a liar, yeah, Im a liar

Ill tear (rip) your mind up, Ill burn your soul

Ill turn you into me, Ill turn you into me

cause Im a liar, a liar, a liar, a liar…

Liar — Rollins Band