California is $42 Billion in the Hole

California Realtors might want to rethink that "great schools around the corner" bit within their age-old home sales pitch. By now the whole nation knows that the state of California is fucking broke. You know, for being the 9th largest economy in the world, California's education system is already national disgrace. And this 2009 budget deficit is not going to improve things in this regard. There are no quick fixes. Any resolution will be a painful, drawn-out process because we Americans are seemingly incapable of making difficult decisions.

California must cut jobs and must cut services, or raise income, gas and property taxes to unbearable levels that nobody can afford to make a decent living here. Even without the current budget crisis, California real estate values outgrew incomes at ridiculous rates between 2001 and 2007. Realtors, mortgage brokers and their self-congratulating enablers on Wall Street all applauded the intoxicating run up.

But now here we are.

Any sale today is likely linked to a foreclosure or the threat of a foreclosure. Counties in California will struggle to earn the same property tax remittances they did in years past. Schools will suffer even further. Home prices may continue to fall dramatically in 2009 as Alt-A loans reset. The national and global economic downturn and fear of job loss will continue to restrict discretionary spending. The recent US bailout will require the printing of money. Unless interest rates are soon raised, inflation will roar across the nation. There is also every reason to believe that oil prices will begin a steady incline once again because the economies of China and India have returned to the bar. And they're fucking thirsty. And finally let me just conclude by asking this question:

Where will the riots begin?

Oh California. You really thought you could have your $700,000 single family home, a HELOC from hell, granite countertops, a new fountain swimming pool, and a new white mustang for your Oprah-watching Mrs., didn't you!? Didn't you!?

Sinner!

And Realtors Wept - Part II

As a follow-up to the previous post And Realtors Wept, the hits keep coming:

American Home Mortgage has offically declared bankruptcy today according to Bloomberg.

Where is that cushy mattress when you need it?

And Realtors wept

American Home Mortgage, one of the largest and most well-known mortgage lenders in the United States of America, just announced the layoffs of 7,000 of it's 7,750 employees. AHM has also stopped accepting mortgage loan applications following a cease and desist order from the states of New York and Connecticut as an investigation into violations of mortgage banking laws at the company goes into overdrive. More will be known as to AHM's business future following hearings August 24th to determine whether the cease and desist order will be permanent and whether AHM can even keep it's lending license going forward.

AHM CEO Michael Stauss:

"It is with great sadness that American Home has had to take this action which involves so many dedicated employees. Unfortunately, the market conditions in both the secondary mortgage market as well as the national real estate market have deteriorated to the point that we have no realistic alternative."

More evidence that the real estate market is slowly, but surely unraveling.

Let's hope the guy behind the curtain comes out with a mattress to ensure that soft landing repeatedly promised by the NAR, that group of oh so in-the-know, trusted advisors.

Cramer Says: "Dump Your House"!

Jim Cramer from CNBC on the collossal housing crash and whether you should keep paying your mortgage on a so-called "asset" declining in value, or just dump your losses and rent.

Very compelling statement also on prioritization of paying your bills: Pay off credit cards first, THEN pay your mortgage.

Nice!

Transcript Courtesy of Housing Doom:

Here's the video link: http://tinyurl.com/2kqgnf

Transcript:

Torabi: "I have to bring up a video we did yesterday that was entitled ‘Walk away from your house’". Torabi: "Jim Cramer says, y’know, ‘there is a time to walk away from your house’. To re-visit the video yesterday, you said, ‘when your house is down 20%, essentially, when you have no more equity left…’"

Cramer: "Right"Torabi: "…that’s a good time to sell…"

Cramer: "Yeah"Torabi: "… but what [unintelligible] because that"

Cramer: "Well not just sell, to walk away. You can’t sell it."

Torabi: "How do you walk away?"

Cramer: "Well you just default on the mortgage. It makes huge economic sense. You go rent. Uh, you don’t want to lose your job, so you keep your car. Uh, you keep your credit cards so you can buy, and all that really happens is is that you made a bet and you lost, so don’t compound it by continuing to pay."

Torabi: "Now the hierarchy of debt, you were saying also that y’know, your credit card debt should be less of a priority than if your house is losing value"

Cramer: "Oh, yeah, credit cards are much more important than your house. Remember, your house is only a good bet if you can build equity. But if you are going to lose money each month, you might as well rent. You shouldn’t own."

Torabi: "And, but, yesterday you’re also saying there are no places in this country where there is value in homes. A lot of homes are depreciating…"

Cramer: "No, No, there is no place where [mumble] you wouldn’t be down on your home if you bought it in 2006, that’s what the issue is. So, I’m saying that buying homes in 2006 was like buying the Nasdaq in February of 2000. They’re very very similar - it was better to be margined out than to continue to put capital against those Nasdaq stocks."

Cramer: "There was a report this morning by David, I believe it was David, uh, Blitzer, on, when I was on with the wonderful and fabulous Erin Burnett and it was that the, some housing prices have, uh, been, have actually stopped going down and some are going up and I just think that’s not true. I think, like, bad CDOs, and, like, bad leveraged loans, the actual mark to market is down everywhere. I get that from the 5 homebuilders whose conference calls I listen to. There are no up markets, and there are markets that are falling 20-30%, and those are the ones where it’s much smarter to walk away from your house."

Torabi: "Is the 20-30%… what’s that based on, or is that just…"

Cramer: "It’s where the, uh, purchase prices are, uh, when you back in the discounts. The discounts are very hard to see, cause all the homebuilders do two things: One is is that they offer incentives that don’t surface, so the list price is $250,000, but you’ll get rebates just like a car, so the list price of a car is $25,000, y’know, but you’re really only paying $18,000, so take in that, and the second thing is is that there’ll be Realtors, and what’ll happen is is that you’ll say ‘look - the list price is $225,000′, but you can negotiate down and go $190,000. I’m using the negotiable prices.

Cramer: "This is happening in the inland empire, in Sacramento, uh, it’s happening in Phoenix, it’s happening in Denver, and it’s happening in Las Vegas, and in southern California, uh, anywhere near the bread, the so-called bread basket, Modesto, these are all places where there’s tremendous overbuilding, and where it may pay to leave your house."

Hey Jim,

"Boo-Yah!" from overpriced and overvalued Orange County, Southern California.

The Rancid Truth - Mortgage Lenders Make More Commissions By Screwing The Borrower

From California's North County Times:

California mortgage brokers, most of whom are licensed by the state Department of Real Estate, are legally obligated to act in the best interest of the borrower.
"However, there is no enforcement mechanism in place to ensure that they (do so)," said Paul Leonard, director for the California office of the Center for Responsible Lending. Leonard told a state banking commission earlier this year that mortgage brokers "have strong incentives to make abusive loans that harm consumers, and no one is stopping them."

A mortgage broker's incentive "is to close the loan while charging the highest combination of fees and mortgage interest rates the market will bear," a 2004 study prepared by Harvard University's Joint Center of Housing Studies concluded.

Brokers can earn higher commissions -- up to 3 percent instead of the typical 1 percent -- by having customers buy loans with interest rates that are higher than market rates, with prepayment penalties charged if the loan is paid off before a certain date, and with little or no verification of the borrower's income, known as "stated income" loans. That's the difference between a $12,000 and a $4,000 commission on a $400,000 loan.

But why will the home finance market bear high fees AND high mortgage interest rates? How can structuring loans that promote perpetual financial serfdom be acceptable to the borrower? How can reckless underwriting practices as well as tried and true "bait and switch" tactics be acceptable to loan consumers?

The answer is the 21st century financial retardation of the American consumer. Sure, one can certainly blame mortgage lenders and realtors for all of the hell breaking lose in real estate. It's almost too easy to do so - much in the same way one might blame ants for showing up at a picnic.

Compensation schemes like the ones described above might make one's blood boil, but the truth is that none of these incentives would ever be that attractive or effective, if the American consumers fueling the insanity weren't so incredibly illiterate when it comes to their own money.

We are approaching the middle of 2007 and millions of American home borrowers (not homeowners) are now paying the price with personal bankruptcy and home foreclosure - harsh lessons to learn that will likely affect their financial lives for years to come.