December 7, 2007

Too Many Foreclosures, But It’s Reality

The Miami Herald reports from Florida. “Seven new suspects accused of mortgage fraud were rounded up by police, as Miami-Dade County Mayor Carlos Alvarez unveiled new legislation to increase criminal penalties for people convicted of real estate fraud. The proposal would allow property appraisers to revalue assessments in neighborhoods plagued with fraud, where inflated values have driven up property taxes for nearby homeowners. It would also create a statewide mortgage fraud task force.”

“‘A lot of people think…[mortgage fraud] is just a way of making money, that it’s a business, it’s an industry. But they are going to find out very differently,’ Alvarez said at a news conference. ‘If you’ve done it, you might be in trouble.’”

“None of those arrested had prior records. Police said they were seeking to arrest the appraiser who appears to have overvalued the home, which fraudulently sold for $1.8 million.”

“‘I would venture to say in talking to some of these folks that they probably don’t even think they have committed a crime. It’s a business transaction: You use my credit, you give me money, and we’re all happy,’ Alvarez said. ‘The fact of the matter is that’s fraud. Being a straw buyer is a fraud. Inflating property values is a fraud. Creating documentation is a fraud just to obtain a mortgage.’”

The Daily Business Review from Florida. “‘If we’re No. 1 in fraud in the U.S., then there’s a problem with overvaluation of properties,’ said task force chairman Glenn Theobald, legal counsel to the Miami-Dade Police Department. ‘Everyone’s taxes have gone up because of these knuckleheads doing fraud.’”

“A condo building known to have 30 to 40 percent of its units involved in phony deals, which almost always involves inflating values to get more money back for the fraudsters, could be carved out of tax rolls.”

“‘Everyone’s just values will be what they should be, and they will pay less taxes,’ Theobald said.”

“Miami-Dade’s proposal is one county property appraisers statewide should already be doing, said Frank Gregoire, a Tampa appraiser and chairman of the Florida Real Estate Appraisal Board.”

“‘Sales that are falsely inflated should not be considered in the market-value approach to appraisals because they aren’t a measure of an informed buyer and seller dealing at arm’s length,’ he said.”

“In Pinellas County, numerous sales have been removed from the county’s appraisal strategy, he said.”

“In Miami-Dade County, 20,475 foreclosures have been filed — roughly one of every 32 homes. That’s up from 9,814 foreclosures filed in all of 2006, according to court data.”

“In Broward County, 20,812 foreclosures have been filed, that’s about one of every 30 homes.”

“‘There are too many foreclosures, but it’s reality,’ said attorney Stuart Gitlitz, who has filed foreclosures on behalf of lenders for more than 20 years. ‘It’s all these loans that were refinanced during the last six years or so as interest rates came down, and stayed down.’”

“Aside from mortgage fraud, Gitlitz said, adjustable-rate loans ‘are the single largest culprit of what is happening here because interest rates really haven’t gone up.’”

“For the state, new foreclosures filed in the three months ending Sept. 30 for all types of mortgages rose 49 percent from the previous three months to 1.09 percent, up from .73 percent of all outstanding loans, according to the Mortgage Bankers Association.”

“And the number of loans already in the foreclosure process jumped 54 percent from 1.42 percent to 2.19 percent of home loans during the same period.”

The Sun Sentinel from Florida. “South Florida won’t get a big boost from President Bush’s plan to freeze interest rates for homeowners nationwide who are bracing for sharp increases in their adjustable-rate mortgages, analysts say.”

“Many distressed borrowers across the region can’t benefit because they’re investors or homeowners at least 90 days late on their house payments.”

“What’s more, Bush’s proposal is focused on preventing a national foreclosure crisis and not meant to aid individual states, such as Florida and California, that are leading the housing bust after the boom of 2000-2005.”

“‘It’s not going to help areas that need help the most, and Florida certainly is one of those,’ said Per Gunnar Bergland, chief economist for Moody’s”

The Northwest Florida Daily News. “Local circuit courts are struggling to keep up as mortgage foreclosure filings continue to increase. Already, more than 2,000 foreclosures have been filed in Okaloosa, Santa Rosa and Walton counties.”

“In Santa Rosa, foreclosures have made up most of the civil cases filed in circuit court this year, said Susan Land, supervisor of Santa Rosa County’s circuit civil division. Her division has had about 1,300 cases filed. Of those, 804 have been foreclosures.”

“Okaloosa County has also seen a large increase in foreclosures, going from 466 last year to 892 so far this year, said Danny Luke, courts director for Okaloosa’s Clerk of Courts office.”

“Based on the number filings so far, Okaloosa Clerk of the Circuit Court Don Howard estimates that 930 foreclosures will be filed by the end of the year. That would be a 234 percent increase from 2005.”

“‘That’s substantial to say the least,’ Howard said. ‘With the increases we’ve seen the last couple of years, it’s put a burden on that department. There’s no doubt about that.’”

The St Petersburg Times from Florida. “An increasing number of homeowners are unable to make payments on homes worth less than they owe. But one man’s problem is another’s possibility. A new market is forming for those who buy and sell homes about to be taken back by banks.”

“The process can be complicated. Banks are more interested in receiving payments than taking a home, but they won’t discount a loan for nothing, so there has to be evidence of a problem. And after the fact, there can be tax implications for the homeowner.”

“‘You have to have a hardship,’ said Ken Monduori, who works with Regions Bank and teaches real estate agents the finer points of ‘loss mitigation’ with banks. Typically the story should be ‘the sadder the better’ to persuade the lender to accept less than full payment.”

“‘If you’re financially insolvent, there’s a hardship, but if not, get in line, pal,’ he said. ‘There are a lot of slick people. Banks aren’t going to play that game.’”

“If there is equity in the home, a buyer may get a deal at the expense of the distraught home-owner. If there’s no equity, someone like Mitchell Herman will try to talk the bank down. ‘I have no compunction about making money off of banks,’ said Herman.”

From The State in South Carolina. “S.C. homeowners are falling behind on their mortgages at a greater rate, and more are entering foreclosure than a year ago, according to a report Thursday by the Mortgage Bankers Association.”

“About 1.7 percent of South Carolina mortgages were in foreclosure on Sept. 30, up from 1.6 percent a year earlier. The U.S. foreclosure rate was also 1.7 percent, up from 1.1 percent a year ago.”

“About 6.5 percent of the state’s mortgage holders were more than 30 days late — but not yet in foreclosure — up from 5.9 percent a year ago.”

“Don Schunk, research economist at Coastal Carolina University in Horry County, said the rising delinquency and foreclosure rates reflect loose lending practices of the past few years: offering low teaser rates that adjusted sharply up after a couple years; lending the full price of the house and requiring little or no proof of income.”

“‘We know there were a lot of loans made that shouldn’t have been made,’ Schunk said. ‘A lot of the funding to make those types of loans is gone. That’s a good thing.’”

The Journal News in West Virginia. “Homes, lots and raw land that had been foreclosed upon brought in millions of dollars at auction this week, along with warnings that such instances are ‘just the tip of the iceberg’ that is the current mortgage crisis.”

“‘You hate to see foreclosures, but it’s a sign of the times right now,’ said Darwin Plumlee, of Plumlee Auction Service, which held sales over three days and finished up Thursday afternoon in Berkeley County.”

“On Wednesday, $5.2 million worth of property was sold, with the majority coming from the Apple Knolls subdivision off Dry Run Road — a development Plumlee called ‘one of the nicer in the county.’ On Thursday, raw land prime for the development of additional subdivisions in the southern end of Berkeley County was sold for a total of $2.3 million.”

“In his 34 years as an auctioneer, Plumlee said he has never seen so many foreclosures come through the area. He attributed the increase to the subprime loans made to people who bought homes they truly couldn’t afford.”

“Residential properties, even in growth areas like the Eastern Panhandle, are suffering in today’s downtrodden market.”

“Some of the properties bought at auction, including those in Apple Knolls, were houses that were never even sold. A lot of people need to sell,’ Plumlee said. ‘It’s the best way right now. It’s working.’”

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Comment by Ben Jones
2007-12-07 08:15:30

It’s too bad about West Virginia. They just got over-run from out of state. When I started this blog, they had the lowest prices and the highest percentage of ownership. And look at those massive new houses they auctioned in the photo!

Comment by Chip
2007-12-07 09:18:22

A buddy of mine has an ancestral home in Moorefield, WV. We used to go there every summer and it’s a beautiful area. I think that what helped ruin WV is the road called “Corridor H” that extends I-66 from Washington through WV. It allows equity-locusts from the WashDC area to buy up beautiful property in the hills of WV and screw up the lives of the people were were really happy with it the way it was. In particular I can relate because I was raised in Orlando and it was paradise before Disney barged in. Now it’s “roont.”

Comment by DarthRealtor
2007-12-07 09:45:39

“roont” LOL

Comment by az_lender
2007-12-07 13:52:40

WV state song (letters are melody notes, not chords):
Old Dan Tucker was a fine old man,
Washed his face in a frying pan,
Combed his hair with a wagon wheel
And died of a toothache in his heel.

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Comment by exeter
2007-12-07 10:19:18

Replace WV with VT and you’ve got the same exact thing.

Comment by AndyInJersey
2007-12-07 11:17:12

Same with South Jersey. There’s (was) actually some nice areas before McMansionVilles sprouted up all over the place.

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Comment by phillygal
2007-12-07 12:37:34

the realtors I worked for sold a new community not too far from the Salem plant. We used to joke that the “honey, the kids are glowing” premium was included in the basic package.

Comment by Pank Haulson
2007-12-07 10:08:18

Lowest prices and highest ownership rates. Do you think there might be a connection?

Nah, just a coincidence. Rising prices are good for everyone. So, go ahead all you politicos and investors, prop up the markets. Don’t give a thought to the consequences.

Comment by Doghouse Riley
2007-12-07 11:21:33

It’s only a small part of WV that got whacked by the out of staters. When the commuter rail got put through to Martinsburg that’s what did it.

We own 10 acres in the eastern panhandle with an 800 sq ft A-frame, bought for $45K way before the bubble. Could have sold it for $150K or more in 2004. Not any more. So what…..

Comment by oxide
2007-12-07 11:23:35

Berkeley and Jefferson counties West Virginia aren’t podunk Appalacia. They are the panhandle of West Virginia, that is, the outer-outer exurbs of the bubbly DC area. Lots of tech and gov contracts sprang up in the last 5-7 years, meaning 2-hour commute to the office sprawl of NoVa. McMansion heaven.

Comment by Robbie
2007-12-07 08:20:03

“‘If you’re financially insolvent, there’s a hardship, but if not, get in line, pal,’ he said. ‘There are a lot of slick people. Banks aren’t going to play that game.’”

Yeah .. . . Right! Since when did Banks get wise? Did their IQs go up overnight? It should have said “Banks aren’t going to play that game anymore.”.

Comment by ric
2007-12-07 08:34:32

More like… “Although banks were more than happy to play the game on the way up, even playing the part of dealer, they really really don’t like the game so much anymore that they are also stuck with a losing hand.”

Comment by ric
2007-12-07 08:35:59

…now that they are also stuck with a losing hand

Comment by Hondje
2007-12-07 08:23:23

Austin, Texas is off topic on this post, but still thought Ben and others would find this interesting:

Condo fees, other costs go sky-high
Austin Business Journal - December 10, 2007 by A.J. MistrettaABJ Staff

Prospective buyers of downtown condos who think they may just be able to afford the mortgage on that loft high in the sky might need to think again.

With most downtown Austin condo units priced at more than $300,000, it’s no secret that owning a slice of the urban dream isn’t cheap. But what some would-be buyers may not immediately realize is how high the ancillary costs can climb. Between insurance, property taxes and homeowners association fees, most owners will face monthly expenses well over $1,000 in addition to their mortgage.

Comment by Arizona Slim
2007-12-07 08:35:33

Another problem with those downtown condos: Here in Tucson, I know a fellow who bought one. It was one of those old building conversions, and he’s had numerous problems with it.

Slim’s grapevine reports that he’s trying to get the developer to take it back so he can move back to where he was living before. BTW, he’s not the only one in the building who’s had major problems with his condo.

I’m no lawyer, but I’ve got a hunch that construction defect law’s going to be huge in the next few years.

Comment by Chip
2007-12-07 09:06:00

Here in florida, at least, I think that anyone who buys a condo that was converted from an apartment is almost always a fool. There will be plenty of purpose-built condos at fire-sale prices and they’ll offer better parking and none of the problems that were hidden by rehabbers. Further, condos built in the last few years have way better resistance to hurricane damage.

Comment by Aqius
2007-12-07 11:27:32

When I was a much younger fellow in the late 70’s my step-grandfather was an aucitoneer in Sarasota ,FL. I went along some weekends to provide the cheap maual labor he(generously) offered buyers as he liquidated entire huge apartment blocks, estate sales, or whatever came up. Sometimes a hundred or more apt. units. Everything was for sale & did eventually sell. The deals were incredible & even a young teen such as myself was amazed over things like several boxes of nice new china for $1.00
When it was over the property was a bare as the Grinch visit in the Christmas cartoon.

Yours truly moved many a couch off 2nd floor during these sales.The moving dolly/hand truck and I were like magic partners: nothing we couldn’t transport . .. took it as a personal challenge to figure out ways to safely remove the goods from upstairs.
However, my cheapskate grandpappy gave me a WHOLE $20 for 10hrs of hard labor … which seemed like a fortune to me but I remember my mother giving my father a ” look” after seeing that low amount ,,. hehe, a learning experience fer sure during the 70’s downturn.

(hello going out to Palmetto)

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Comment by flatffplan
2007-12-07 09:34:46

these condo conversions in old buildings w 4 units confound me
who’s roof is it anyway ?

Comment by BP
2007-12-07 08:38:33

Folks please excuse my repost,

With all due respect to Ben I do think this plan will work. Let me explain why. The type of people who took these loans do not care about 2 years from now they only know today they get to live in a McMansion for pennies on the dollar (teaser rate payments). So what if the house is going down in value they still get to live in the “good areas”. They are living for today and 5 years from now is so beyond their thinking it might as well be 100 years from now. Many of these payments are lower than they could rent a good apartment. Ask yourself why would they still walk away from their homes? They will have to pay rent anyway, right? This plan is disgusting but I think it will keep people in their homes and take many off the market within the next year or two.

Comment by essessemm
2007-12-07 08:51:13

But those payments (even with teaser rates) and taxes, insurance, HOA fees (where the exist) are usually much higher than comparable rents if bought within the last 3-4 years.

Comment by Ben Jones
2007-12-07 08:53:10

Rigth, rents are half and the prices are dropping like a rock. Sure, I’m gonna pay double for that.

Comment by BP
2007-12-07 09:11:08

Weren’t the rates around 1-3 percent? The taxes and insurance would have to be insane (like FL) for the posers not to want to pay the somewhat small poser premium to stay in their home.

Comment by Betamax
2007-12-07 10:57:02

they can’t even afford it now; 30% are already in default.

Wait till job layoffs begin in earnest.

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Comment by diogenes (Tampa)
2007-12-07 11:21:08

This is a big misunderstanding on the “teaser rates”.
The rate you are quoting is ARM’s on Prime borrowers. Some Alt-A’s get lower rate at 3-4%, but SUBPRIME teaser is 5-7%, and rates re-set up to 10-12%.
The banks are agreeable because, if the payments are current, they are getting near prime rate on a 30 year fixed from a sub-prime borrower.

This plan just prevents further forclosures from currently performing loans that had higher rates at the start.

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Comment by edgewaterjohn
2007-12-07 08:52:20

And what would happen if Boom Boom lowers rates much more, the economy/housing market makes a miraculous rebound and mortgage rates actually sink lower than rates frozen by Teaser Freezer? (not all teasers were “low” rates mind you)

Does that mean we would have to read sob stories about those frozen into their current rates and unable to refinance to the new lower rates?

Comment by laonlooker
2007-12-07 09:03:16

Here’s my question about freezing the rates. Since banks are not getting the expected revenue increases expected, how might that effect mortgage rates for new loans? In other words, do you think that rates will be higher than what might have been otherwise?

Perhaps the number of loans that will actually be frozen won’t be enough to really make a dent but it’s just a thought I had.

Comment by Chip
2007-12-07 09:09:12

Here’s how I would evaluate that one:

Imagine that instead of covering a previous period of time, the announcement had been that the Teaser-Freezer will cover all loans made on or after Dec. 15, 2007. What do you think would happen to rates, and why? Pretty darned obvious to me.

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Comment by ex-nnvmtgbrkr
2007-12-07 10:10:28

It’s all about risk and profit. Since by just talking about bail-outs has substantially increased risk, and losses will be huge, rates for mortgages will have to rise, rise, rise.

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Comment by postman
2007-12-07 12:37:11

it is other stupid scheme by bush’s boys to cover their b**** from the damage that is already been done. i was in fort lauderdale today and it is for sale or rent everywhere, especially east of i-95.

it is not stopping the train and expect the unexpected in the election of 2008 because, “it’s the economy stupid!”

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Comment by AndyInJersey
2007-12-07 13:00:01

Considering it took these boneheads less than two years to default on their loans, anyone lending thing breed of mouth-breathing FBs money would need to ask for a 36% interest rate just to hope to get their money back in two years, no less turn a profit.

Come to think about it, that’s not to far off from what credit card companies charge.

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Comment by OCBear
2007-12-07 09:08:50

Lowering interest rates may not have the desired effect going forward. Look at the stocks of the re-insurers of the paper, no industry sector can loose valuation like that and not try and make it up somewhere else. Spreads gotta go up for these guys to stay in business, an addition percent or 2 or 3(could you imagine) may not be out of the question.

Comment by Housing Wizard
2007-12-07 09:33:46

edgewaterjohn……I think if the Feds lower the rates as much as I think they are going to lower the fed rates ,the teaser freezer will be at much higher rates than market rates in a year from now ,(at least on a government backed loan ).

Also in Ben’s article the issue comes up about how fraud raises everyones property taxes and creates false values in the areas and they suggest that appraisers are not going to use fraudulent comps.

First, you tell me how you are going get the appraisers to stop using fraudulent comps in which entire sub-divisions were driven up by liar loan speculators and unqualified buyers ,and the builders themselves were giving incentives and cash backs deals that were not disclosed on the sale contracts ? Is the FBI going to issues specific warning on bad comps,otherwise how are the appraisers going to know ?

I have harped a lot on this unfair property tax burden in the last 2 years that was caused by this false /fraud market .This is another reason why appraisals have to be accurate and you can’t give unqualified buyers and low down speculators loans . Think about all the people that had to sell their house because their property taxes went sky high . Property insurance went sky high also . As far as I’m concerned the state is using fraudulent appraisal values to delay lowering taxes right now .A class action lawsuit could be issued against Wall Street lenders/appraisers for falsely raising values by faulty lending ,causing foreclosures .This false property tax problem is why lending must have strict regulations .

You wonder why the lenders are in agreement with this bail out plan . The liability issues in this “crime wave” housing mess are unending .You know how much the Housing Wizard has harped on this fake value/property tax issue ,and now the powers are just thinking about it .

Comment by edgewaterjohn
2007-12-07 11:33:42

You’re very right to stress the importance of property taxes in this. IMO they are yet another trip wire - a well hidden one at that. It is too bad many pay through escrow - and it just becomes another “howmuchamonth”.

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Comment by Fuzzy Bear
2007-12-07 12:12:57

Is the FBI going to issues specific warning on bad comps,otherwise how are the appraisers going to know ?

No, that is up to the state and local juridictions.

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Comment by ChrisO
2007-12-07 09:02:42

Another factor to consider. Many of the qualifying borrowers are undoubtedly at the financial edge of disaster right now, even if their rate doesn’t reset. And I suspect the subprime borrowers at issue are among the most vulnerable folks to job loss in an economic downturn. Once the credit cards are maxed out, where you go from there?

Comment by Chip
2007-12-07 09:10:52

“…where you go from there?”

To a rental unit, where most of them should have been from the start (if not in a much cheaper house), IMO.

Comment by essessemm
2007-12-07 09:56:24

I’m not necessarily disagreeing with you, but am curious as to what your thoughts are behind the statement that “subprime borrowers at issue are among the most vulnerable folks to job loss in an economic downturn.”

Comment by ChrisO
2007-12-07 10:21:19

I’d guess they’re more likely to be lower-level employees subject to layoffs, and they probably have less financial cushion to weather the storm. Not saying that the HELOC idiots who bought the Hummers and plasmas are that far behind, though…

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Comment by packman
2007-12-07 10:58:13

Agree somewhat. To put it succinctly, a generalization would be:

Subprime = low credit score
low credit score = bad decision maker
bad decision maker = poor employee
poor employee = more likely to get laid off

It’s a generalization of course - perhaps overly so, but I’m guessing that’s the line of thinking.

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Comment by diogenes (Tampa)
2007-12-07 11:55:43

Once the credit cards are maxed out, where you go from there?

The’re going to flip the house to one of those rich “baby boomers” or foriegners who are coming to a town near them with sacks full of money.
You remember what the Realtors(tm) were telling us a couple of years back, dont’ you?

Comment by Fuzzy Bear
2007-12-07 12:14:42

Once the credit cards are maxed out, where you go from there?

Down the tubes and into collection land.

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Comment by mrktMaven FL
2007-12-07 09:06:00

Most subprime borrowers start at 7 or 8 pct interest rates and adjust up. So, what’s the big deal? Like prime and Alt-A borrowers, they overpaid for their homes.

More importantly, they helped push the supply and demand curves out to unrealistic levels. What’s more, with the ongoing credit crunch, the demand curve has shifted way to left. Builders will quickly adjust supply to compensate for the 250K frozen FBs.

Comment by DarthRealtor
2007-12-07 09:59:25

Exaxtly. If a home loan is frozen at 7 or 8 percent, the bank looses revenue from the anticipated future rate hikes, but the loan does not default. Long term, which is worse? Still, colecting 7 or 8% for 5 years is short term better than foreclosure.

Builders are already adjustign.

As an additional thought, I think the problem will be valuation. If you are paying 8% on a 350,000 house that you can rent for $1200/mo and is now worth 225K or less, you would tend to see yourself as getting screwed. How long will it be before that house is worth what you owe? To long. you’ll get tired of paying 3 grand a mo and have no equity in the foreseeable future.

Comment by GH
2007-12-07 10:33:57

I believe the important thing is to try and make sure borrowers stick with the payment on their current loan. Obviously with prices falling every day, the banks will get back less and less if they do not… Once FB’s see they are paying on enormous loans and their new neighbors are paying 1/2 on properties purchased in a few years, they will give up en masse and the banks will end up with even more massive losses and even lower end game prices. By then getting credit will be almost impossible as well, as old credit scoring methods are adapted to factor in things like income and such rather than just payment history.

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Comment by jim A
2007-12-07 11:35:38

Well nobody ever expected these borrowers to carry the loans to term. You’d have to be dumber than an average FB to pay LIBOR + 6% for 30 years. If you were still paying after 10, you’d probably qualify for a much lower rate. Of course everyone’s expectation was that these borrower would REFI shortly after the loan started adjusting, and everyone would be paid off. Wost likely case, the FB would sell at a profit and everyone would be paid off.

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Comment by joeyinCalif
2007-12-07 09:25:37

The vacant, but otherwise identical McMansion next door rents for some amount..
Greater fools become less foolish after they’ve been slapped around a bit. If renting saves $400 a month, why not do it?

Comment by Suzanne, I researched this!
2007-12-07 11:21:33

Renting saves us $4000 a month for the SAME place in SoCal. Yes, you read that right. That’s how retarded Californians are. “Renting” is so bad.

Comment by bulwark
2007-12-07 10:06:39

It’s a conspiracy to fix home prices, pure and simple. Lenders get paid based on inflated home values, and the government sells more bonds and collects higher property taxes. Who gets screwed? Prudent savers who waited for the bubble to deflate. They don’t count.

Comment by AndyInJersey
2007-12-07 13:09:01

They’ll count when it comes time to confiscate their precious metals investments once the game is really up. Then they’ll really count. “Come to Jesus.”

Comment by Pank Haulson
2007-12-07 10:15:20

The type of people who took these loans do not care about 2 years from now

One would hope that these buyers would have realized their mistake and never make the same one again.

I have absolutely no idea why the powers-that-be think that this plan will work. If these people are not able to pay now, why would they be able to pay in two years?

In my opinion it’s just lip service and hot air.

Comment by AndyInJersey
2007-12-07 12:53:58

If I’m not mistaken, I believe there’s a clause in all mortgages that the lender can call in the loan at anytime and ask for an accellerated payment for certain reasons. Not sure what they are, but I’m sure the investors on the other side of these contracts, when they pull their money, will really mess up the banks balance sheets which means they’ll need more capital, so that could just accellerate the need to foreclose for other reasons, like asking the homedebtor to either immediately make up the difference that the property is underwater. Currently the lender is only asking that the homedebtor make their payments, which they’re not. There are other reasons that the lender can foreclose which just may come out in the wash now and don’t seem to be stipulated in this bailout.

Comment by az_lender
2007-12-07 14:04:14

In my (Arizona) mortgage contracts, it says I am entitled to call in the loan if the value of the collateral drops below the balance of the loan. (Wow.) I have not ever used this clause; in fact the few times I have ever had an “underwater” client, it was the borrower who decided to walk. This is somewhat consistent with the Boston Globe’s report that falling prices (rather than rate resets) are the trigger for the massive foreclosures.

Comment by Blano
2007-12-07 08:42:52

I have a question about the Minyanville article txchick posted in Bits Bucket re: the Hope(less) Now plan, or whatever it’s called.

At a glance, this “plan” seems to only address first liens. Since many who seem to be in trouble have more than one mortgage on their house, is there anything that would prevent the 2nd lien from foreclosing, even if the 1st is current??

Comment by Flatlander
2007-12-07 09:13:03

Most of the 2nd liens are probably worthless right about now. If unpaid, the 2nd could foreclose and take out the first . . . but, why would you if there is no value to the 2nd? Simple example: $100,000 home purchased with 80/20 loan. Home has now declined 15% in value, 2nd is now worth $5,000, not $20,000 and costs to foreclose, clean up and re-sell the home will exceed $5,000. 2nd has no financial incentive to foreclose.

IMO, there are so many worthless seconds out there right now it is scary . . . and will get worse.

Comment by joeyinCalif
2007-12-07 09:17:07

why would you if there is no value to the 2nd? .. that’s easy.. because RE prices always go up ;)

Comment by Chip
2007-12-07 09:25:18

If it didn’t cost too much to do, I would foreclose on the 2nd just because I was pissed about losing my money. If I’m an institution, I might do it to get it off the books and show the stockholders that I “tried” to collect.

Comment by Flatlander
2007-12-07 10:03:35

Some small banks will do that for just that reason. Either they don’t understand the market and what their collateral is really worth or they do it because they’re pissed that they made a bad loan and they want to give their workout guys something to do. I’ve always found that your first loss is usually your least loss.

The workout guys in this case (small bank) will spend $2k in legal fees, another $1 to 5k fixing up the home, $500 a month in carrying costs, their salary, plus a 5% to 6% realtor fee and sell it for FMV. True, they will do this a couple of times before they wise up and then will start abandoning or selling their second positions. There is always a GF who will buy a worthless second at pennies on the dollar because they think they are getting a steal.

Also, by foreclosing it doesn’t leave their books, just moved to another place. Then a $20,000 non-performing loan becomes a $100,000 non performing asset or REO. This is what is happening to CFC on a much grander scale and could possibly sink them. Many times it makes sense to just walk away, take your lumps and tighten up your lending standards.

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Comment by Salinasron
2007-12-07 11:31:16

Why not take them to court and force them into BK especially if the 2nd is in the form of a HELOC. With the new BK laws in effect you may get a good portion of your money back albeit long term from the more heeled buyers.

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Comment by Home_a_Loan
2007-12-07 09:37:05

In my area I’ve seen a few homes go into foreclosure and then when REO, the asking price is very nearly 80% of the price that the FB got it at. I’m pretty sure that reflects the second-lien holders’ getting their JT treatment as the first-lien holder repossesses at auction at the first-lien price.

The frequency of this is amazing. There are three more of these foreclosure properties going to auction in the next two weeks in the corner of Costa Mesa where I live. Two have been for sale for a while with no takers, and the apparent first-lien amounts (determined via realtytrac) are way higher than the asking price of the nearby REOs (which are comparables) that resulted from recent trustee sales.

Given what I’ve seen, I wouldn’t touch a second-lien mortgage with a very long pole, unless it was priced south of 1-2 cents on the dollar. It’s funny to hear the radio ads for investments that “don’t have the risk of the stock market” and pay an estimated 12%-15%. Yeah right.

Comment by az_lender
2007-12-07 14:09:40

I did some seconds in the distant past. People nattering about how the sum of the first plus the second was only 60% of the property value. Or whatever. Okay, but it’s still true that the only way the holder of the 2nd can get any satisfaction is by paying off the 1st lienholder, who might be owed an inconveniently large amount. I still have one 2nd out there, sort of in this category (there was a huge equity at the time I made the loan). It’s amortizing and will be gone in a few years. None too soon for me.

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Comment by zeropointzero
2007-12-07 09:58:30

If you don’t try, then where is the incentive for any of your other 2nd holders to pay on the second note? Forclosure is the only leverage they have — but, yeah — what’s the point if it just costs more.

Rock, meet hard place.

Comment by Flatlander
2007-12-07 10:16:25

Some of this second mortgage crap has been packaged, securitized, sliced, diced and sold around the world. This crap is worth a whole lot less than a pool of sub-prime crap.

Also, the huge second bagholders don’t have the resources to figure out if their position has any value. They don’t even show up to a foreclosure/sheriff’s sale. Every once in a while you can catch a foreclosure that has a moderate first and huge second, bid a dollar over the first, the second doesn’t show, and you get a good buy.

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Comment by DarthRealtor
2007-12-07 10:14:18

There is a stragey where you buy the second on a house in foreclosure for pennies and get the first mort holder to short sell. Obviously the numbers have to work.

Before this mess happened, I had done this several times. With the exeption that Banks almost never would short sell a first. The 2nd mort holder usually gets screwed in a foreclosure unless he is will to pick up the first, which banks in any market rarely do.

In 2000, I bought a 75K 2nd for 10K and took over the first and sold for a profit. No days that strategy works better because banks will almost always short sell. The problem now is always valuation. You could buy a $100K 2nd for 10K, get the bank to take 125k for the 160K first, own the house for 135K and still not be able to sell at a profit.

I’d buy a house for $100. Above that, who knows what a good deal is anymore.

Houses are selling and it’s all price. I don’t see a huge pent up demand if prices fell overnight, although sales would increase some.

Prices in general in Florida are still to high. They’re coming down, but no plummet …yet. It will happen. I’m just shocked that it is taking so long.

Comment by AnnScott
2007-12-07 12:11:16

The 2nd lien holder is unlikely to foreclose because of the way the money is distributed upon the close of the auction. Here is how it would work:

(1) 2nd lien holder files foreclosure.
(2) 2nd lien holder holds foreclosure auction and has to notify all other lien holders including the 1st mortgage.
(3) Representative of 1st mortgage is at auction to protect its interest
(4) Bidding starts. Bidding is not getting up to enough to cover 1st mortgage.
(5) 1st mortgagor bids in the property for what is owedor less. They get it and 2nd lien holder gets nada unless they were prepared to top 1st mortgagor’s bid AND bid more than the amount of 1st mortgagor’s lien.

Money from auction is paid out in order of priority:

(1) 1st mortgage
(2) 2nd mortgage
(3) other liens in order filed with registrar of deeds

If the money runs out before the number of liens and claims run out, oh well - go after the borrower.

Comment by Housing Wizard
2007-12-07 12:37:11

Wouldn’t taxes owed be paid out first ?

Comment by Flatlander
2007-12-07 12:47:02

Wouldn’t taxes owed be paid out first ?

Yep, RE property taxes supercede the first, as do mechanic’s liens . . . so be careful buying a flipper project as a short sale, there may be some hidden landmines out there. Get a title commitment first.

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Comment by AnnScott
2007-12-07 14:15:31

Sorry - left the taxes off the list. I was thinking in terms of perfected liens from lenders or mechanic’s liens or judgements for unpaid bills like credit cards. But yes, taxes, to the extent that show up in the lien records, get first crack. Now if it is the currently accruing taxes - or the ones just a few months late and the county (or city) hasn’t taken steps yet to collect, then the tax bill just tracks the property.

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Comment by cami
2007-12-07 08:45:10

re: Inflated home values. While I’m sure it’s a comfort to people to know that their taxes will be adjusted downward because of the fraud exposure, I doubt it’s going to make them feel a whole lot better about the fact that they bought and are continuing to make payments on an asset whose price has been artificially inflated.

Comment by Darrell_in_PHX
2007-12-07 08:59:14

But the cities spent the money building roads and schools to all these new developments. The cities have to collect the tax to pay back their costs. If assessments of houses go down, then the tax rates will have to go up, or every local government in FL will go bankrupt.

Comment by jerry from richardson
2007-12-07 09:21:10

The system can only withstand so much in taxes before it collapses. I don’t expect the elected government idiots to understand though. when you take too much money out of people’s pockets, consumption goes down. Businesses start to close. The tax base gets smaller. Government raises taxes again and it becomes a vicious cycle until you end up with a slum like Newark or Detroit.

Comment by Vermonter
2007-12-07 09:29:19

I don’t think it was just high taxes that did in Detroit.

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Comment by Arizona Slim
2007-12-07 10:04:40

Detroit still has a quite a talent for shooting itself in the foot:

Comment by flatffplan
2007-12-07 09:38:45

how many productive workers does it take to support a gov worker ? that ratio and taxes go so far then - bam, end of the roman/ / /fill in the blank empire

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Comment by diogenes (Tampa)
2007-12-07 12:09:18

“But the cities spent the money building roads and schools to all these new developments. The cities have to collect the tax to pay back their costs.”

Wrong. Here in Florida, for about 20 years, jurisdictions charge IMPACT FEES of $10,000’s per house for infrastructure costs and schools.
Most of the developers built the roads for the developments. Now the Cities get to keep the cash, and there’s no one there to have to service.

Comment by joeyinCalif
2007-12-07 09:02:42

i don’t quite follow you..
Although there may not have been fraud involved, all the people who bought contributed to artificially inflated prices.
So, exactly who is supposed to be upset about it?

Comment by Tim
2007-12-07 09:23:34

Yes. The buyers were the one’s that artifically inflated the prices, so they should blame themselves. Yes, funny money and appraisals were thrown at them, but there is no way in freaking hell that you can pay 2, 3 or even 4 times more than the previous owner did a few years ago, and for much higher amounts than would allow the property to cash flow profitably, and think you were getting a bargain. They were all too willing “victims.” They selected their own offer price and interest rate. It was all what they wanted.

Comment by cami
2007-12-07 10:10:42

While all the people who bought contributed to artificially inflated prices, there are likely some people who didn’t realize that everyone else was scamming the situation. My point was that if you suddenly realize that the home you’re paying for is 20, 30, 50k less than you thought it was even without all of the other mess (foreclosures, etc.) you aren’t going to be all that exciting that you might pay less in property taxes. And you might be even less inclined to hang in there. It’s kind of like when everyone else knows about the joke except you.

Comment by Tim
2007-12-07 10:38:31

Yes. They should let it go into foreclosure and leave homebuying to ppl that understand rent/income/mortgage ratios, cash flows, etc., and stay renters. Even when prices were going up, the realtors, brokers and wall street ppl were laughing behind their backs in 2005 when they were in bidding wars to pay more than asking on already over inflated prices. They just were not educated enough to enter into a high dollar game. And dont for get the sellers that planned to retire to a low cost area or rent with the profits. They were laughing the hardest.

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Comment by Housing Wizard
2007-12-07 13:04:12

If the lenders made a bunch of loans to people /speculators etc. who didn’t really qualify pursuant to liar loan application and cash back fraud or based on push the value appraisals ,its a false market value wise because those loans default if real estate doesn’t continue to go up . So , the property taxes were based on a false market that will crash . People were charge higher taxes based on fraud or the fact that mass crime was committed in pushing up the values and making liar loans . In some cases long term owners had to sell their house because they couldn’t afford the increased property taxes that exceeded normal appreciation rates . California has prop 13 ,but many state property taxes are based on current values or cities ability to raised the mil rate .

Where I live ,in spite of property crashing 15% so far ,the city only agreed to lower the tax by ,01 % based on comps from I don’t know where .Also ,another problem is that the market is so dead that in some locals they haven’t even had enough sales to determine to new decrease in pricing so they are using comps from a year ago .

It’s a really a big mess when you have a bubble ,especially when that bubble was based on a lot of fraud in lending and appraisal and lending was based on real estate going up . Wall Street and all the people that supported this crazy bubble should be thrown in jail . I have never seen something so crazy as the concept of justifying fraud in lending based on passing on the fraudulent notes to someone else or basing risk on real estate going up .

Regarding old lending standards ,a loan became less risky with time because the borrower started paying equity down and the borrower had skin in the game to start with . This new age lending cycle was based on the risk going up with time because of neg. amortizing ,and no skin in the game by borrowers ,but what the hell ,real estate always goes up .

Prices are crashing ,not because of job layoffs ,but because the market was a false bubble ,with now a huge surplus of excess building and foreclosures and people just wanting to sell coming down the pike ,with fewer qualified buyers with down payment money . It’s the biggest mess I have ever seen .

Comment by Tim
2007-12-07 13:44:49

Yes. Everyone with a brain new it was a false market, and either benefited from it, and thus closed their eyes, or like me, was wondering where the fed and Bush Administration were. Rates should have been raised dramatically and regulations should have been put in place. As I posted numerous times, housing appreciation over 5% per year is constructive notice to all that there is a serious problem that needs to be curtailed immediately. Instead, they got on their dancing shoes. Its going to be really, really bad. I have little sympathy for anyone caught in the mania though as numerous resources such as this site were available. If you go into high dollar transactions blind, you deserve to be slaughtered. Also like I said before, those that danced didnt really realize their heads were next on the block. Houses of cards fall. Thats what they do.

Comment by Chip
2007-12-07 09:13:51

Apologies if this was already addressed somewhere in the blizzard of posts about Teaser-Freezer: has anyone seen an absolute dollar limit on a mortgage that will be “protected?” Is it less than $1M? Up to $10M? No limit?

Comment by Vermonter
2007-12-07 09:26:52

I haven’t seen one yet but that’s one of many that would need to be worked out if this thing were to ever work.

There is an affordability tie-in which may create caps as a side-effect.

Comment by simplesimon
2007-12-07 09:14:42

“‘I would venture to say in talking to some of these folks that they probably don’t even think they have committed a crime. It’s a business transaction: You use my credit, you give me money, and we’re all happy,’ Alvarez said. ‘The fact of the matter is that’s fraud. Being a straw buyer is a fraud. Inflating property values is a fraud. Creating documentation is a fraud just to obtain a mortgage———————Poppycock..too late imo

Comment by Housing Wizard
2007-12-07 09:47:54

The government is pushing for this bail-out to avoid class action lawsuits against the lenders/appraisers /Wall Street money lenders /rating agencies ,and God knows who else that has liability . Faulty lending or fraudulent lending with hit the mark appraisals would carry a liability issues with it ,and they are letting the borrowers off the hook also . Contract law is enforceable as long as fraud isn’t involved IMHO . The whole damn RE market was one big fraud .

Comment by exeter
2007-12-07 10:29:31

“The whole damn RE market was one big fraud .”

But instead they’re attempting to pin it on those at the retail level and allow those that allowed this to go on go scot free.

Comment by reuven
2007-12-07 12:24:17

Yes! And the defrauders are

*the banks AND the borrowers*

and the victim is

*the 4-5% of Americans who have savings accounts and pay taxes*

Nearly everyone (except here) gets it wrong! They see it as the “Evil Lenders” against the poor victimized borrowers.

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Comment by Zebediah
2007-12-07 09:32:58

The solution is to let house prices decline to an affordable level. There are buyers out there, but they are in holding pattern.

Comment by Mike in Miami
2007-12-07 09:38:34

“…we’re No. 1 in fraud in the U.S…”
“What’s more, Bush’s proposal is focused on preventing a national foreclosure crisis and not meant to aid individual states, such as Florida and California, that are leading the housing bust after the boom of 2000-2005.”
We are # 1 in fraud, so we should get the most help from the government. We have a lot of fraudsters and specuvestors that are counting on the American tax payer to bail them out.

Comment by Housing Wizard
2007-12-07 09:49:16

The government needs to keep those fraud values up don’t you know .

Comment by NeilT
2007-12-07 11:18:54

True. Otherwise the primes will default. They aren’t so worried about subprime as they are about prime.

Comment by diogenes (Tampa)
2007-12-07 12:13:37

“…we’re No. 1 in fraud in the U.S…”

This is Miami. How is this NEWS ???

Comment by zeropointzero
2007-12-07 09:52:41

For another thread, maybe ….

Illinois developer goes bankrupt, leaves “ghost town”,0,4198997.story?coll=chi_tab01_layout

Comment by crisrose
2007-12-07 11:29:50

That is one of the ugliest neighborhoods I’ve ever seen - no trees, gray houses, tiny windows…It looks like a Soviet Housing Development.

Anyone who bought into this development deserves to lose everything they own for degrading the landscape.

Comment by diogenes (Tampa)
2007-12-07 12:17:08

“That is one of the ugliest neighborhoods I’ve ever seen - no trees, gray houses, tiny windows…It looks like a Soviet Housing Development.”

this is near Chicago, which has some of the highest levels of “public housing’ in the nation.
What do you expect? This looks “normal” to those folks.

Comment by AndyInJersey
2007-12-07 13:33:05

Actually, I’m seeing these types of homes in S. Jersey and Delaware. Notice the attractive “window menagerie” on the rear of the house just to the right of the Tyvex on the house in foreground (that is the house behind the house behind the guy). What kind of an ass thought of a tight grouping of windows on a SFH like that. Makes it look like an apartment complex, which is what it’ll become.

I’m assuming those houses have full basements too. Mind you, these are McMansions, but they’re not the coveted Deluxe McMansions. This is where the pompous Target Managers of the world live. Those house are like 2.5 times the size of my 1956 Cape Cod style house. And my house is plenty big. Insane. You’d need a Garmin GPS just to locate your family and navigate from the bedroom to the kitchen.

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Comment by exeter
2007-12-07 10:26:24

“‘If we’re No. 1 in fraud in the U.S., then there’s a problem with overvaluation of properties,’ said task force chairman Glenn Theobald, legal counsel to the Miami-Dade Police Department. ‘Everyone’s taxes have gone up because of these knuckleheads doing fraud.’”

In other words, the new bad guys on Main Street are those on the retail end of it. The scumbag real-turds, appraisers and lenders had nothing to do with it.

Here we go again with the demonizing.

Comment by Michael Fink
2007-12-07 11:43:15

Although the fraud makes me very angry, the reason that everyone’s taxes went up is not because of fraud. Let me make it VERY clear for you.

The reason everyone’s taxes went up is because the taxing bodies did not ADJUST THE MILL rates when prices when up 2-4X in 5 years.

The fraud pushed the prices up, that’s true. But higher prices do NOT mean higher tax burdens. That’s a FL construct; and one that certainly is NOT true in the rest of the country.

Comment by kirisdad
2007-12-07 13:57:19

Good point Mike, it also brings in more tax dollars and the politicians get to say ” I didn’t raise taxes” come election time.

Comment by A.B. Dada
2007-12-07 10:31:56

It’s time for all of us to start a new service agency: The Foreclosator. Like a Realtor, but we only take 3% commissions, split between buyer and seller agents.

Banks would hire us quick.

We could start our own database: The MUFF: Multiple Unit Foreclosure File

Comment by Otis Wildflower
2007-12-09 15:20:06

“Local buyer Mike Hock has been deep in the MUFF, searching for bargains..”

Comment by Dan
2007-12-07 10:37:37

The “teaser freezer” stuff is the last resort for the holders to recover something,a ntyhing from the people who’d just walk away otherwise.

However, the gubment’s involvement means that the investors would have to be apprehensive about buying anything that’s generated in the US (OK, the Euros aren’t much better at it) and that’s not going to help the lending industry and the economy as a whole.

BTW, with regard to Florida, the new beachfront buildings maintenance fees run ~ 40 cents per square foot, so your average condo speculator is stuck with $500-$800 monthlies over and beyond his loan payments.

This beings up another angle - with many of these new high rises 50% empty, someone has to pick up the slack for this. If 100 units pay $50,000/mo in association fees, then 50 occupied units still have to do the same and pay for the 50 unoccupied ones as the amounts are very hard to bring down.

That makes sales of these semi-empty buildings even harder.

Comment by txchick57
Comment by Ex-Californian
2007-12-07 10:48:57

Is this legal?????

Wow, just when I thought I’d seen it all…

Comment by exeter
2007-12-07 10:52:52

Welcome to last year. It was a topic of discussion on this blog quite a while back.

Comment by Blano
2007-12-07 10:53:55

The credit score companies supposedly had this fixed by not allowing “authorized” users access to other’s credit for score reporting purposes; is this company getting around it by actually adding someone as a “joint” cardholder??

Comment by packman
2007-12-07 11:08:56

Something like that was discussed a few months ago on the board - I think it was determined that a scheme like that just wouldn’t work, e.g. because there wouldn’t be enough suckers with good credit scores (somewhat mutually exclusive) willing to risk lowering their score when the clients went bad on more loans, or even just having their score lowered by having too much credit tied to their name.

That is if it’s not outright illegal anyhow - i.e. credit fraud akin to identity theft. I’m pretty sure identity theft is illegal even if both parties approve. E.g. you can’t use your friend’s credit card and present their license as your own ID, even if your friend approves.

Comment by In Colorado
2007-12-07 10:52:17

“‘A lot of people think…[mortgage fraud] is just a way of making money, that it’s a business, it’s an industry. But they are going to find out very differently,’ Alvarez said at a news conference. ‘If you’ve done it, you might be in trouble.’”

This is why I know we are finished. Even the Joe Nobodies have no problem with being crooks. Honest work is for chumps.

Comment by climber
2007-12-07 11:43:14

Of course they were SO concerned about mortgage fraud on the way up. They have been looking out for the taxpayer all along haven’t they.

Comment by Dan
2007-12-07 11:22:22

I got this in my mail box from Cato:

“Mortgage investors and mortgage servicing companies have agreed on streamlined guidelines for a refinancing and loan modification process, Treasury Secretary Henry Paulson said [yesterday], so that investor lawsuits should not be able to block a new aid program for struggling homeowners,” Forbes reports. “‘With the investor community on board and as a clear beneficiary of this approach, the risk of litigation should be manageable,’ Paulson said at a news conference following President George Bush’s announcement of the foreclosure prevention plan.” —

So, as I said a day ago, the gub’ment is here to give the legal cover against some not-so-happy investors.

Comment by Salinasron
2007-12-07 11:35:23

Hey here in CA the SFH mortgage rent control plan could work out well for the illegal or low income buyer. First get the five year freeze. Then move somewhere across country and rent cheap while renting out your rent controlled property to multifamilies for twice your monthly payment. There are people here in Salinas in subsidized property renting out rooms and making money on the property and it’s tax free as well.

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