2760 Sacramento #6 is a Below Market Rate (BMR) one-bedroom condo in Pacific heights which was purchased for $211,500 in February 2003 with restrictions limiting its future resale value and pool of buyers.
Despite the aforementioned restrictions, the owner refinanced the condo with a $272,013 first mortgage in 2005 to which a second for $50,000 was added in 2006 and a third for $390,001 was added in 2008.
With a total debt of $712,014, the 1,220 square foot Below Market Rate unit at 2760 Sacramento was taken back by Wells Fargo and is now back on the market and available for a restricted $250,765.
Cash out of $500,000+. I’d guess they aren’t “low income” anymore!
That owner is my hero! If the bank is too DUMB to check restrictions on the property, then they should have to eat the costs. Normally I don’t agree this type of action, but my heart doesn’t bleed for Wells. At all.
With 100K/Y extracted, at least they had a small chance at keeping up with the Joneses. In Alta Plaza that doesn’t come cheap.
I hope they’ll never pay any taxes on that. Both the government and the bank need to be punished for this idiocy.
Seems to me someone was committing fraud, which makes that person a criminal, not a hero.
Amazing that the banks would be willing to loan so far beyond the the legally mandated maximum sales price of this home. Or maybe they figured that the owner was going for a 30 year hold.
During a refinance there’s always a few thousand dollars of costs incurred by the bank which is ultimately billed to the owner. Supposedly you’re not paying $2000+ just for a bunch of office drones to photocopy docs. You’re supposed to be paying for the bank’s due diligence efforts to ensure that the refi is done appropriately. Have the banks been ripping us off along with these high charges without doing the corresponding research ?
I read that some “low income” people that bought BMR units in Marin City did the same thing and got huge cash out loans on their BMR units.
I don’t understand why the city just makes Real Estate Developers have BMR units. Why not make Gary Danko have a BMR table, the Symphony have BMR seats and the high end salons on Maiden Lane have a BMR chair?
ok, this one takes the cake. of all the years i have been reading socketsite, this out-dos them all.
Wells Fargo=WF or is it WTF?
Pretty crazy. Sadly, the whole BMR thing will prevent this from establishing a legitimate comp / sale. 1200 sqft for 300k would be a sweet deal. Especially if the crook that stole all that money from the bank invested some of it back in the property.
As far as government regulations go, the BMR program is about as good as it gets. It’s a much better policy than the pro-bank neoliberal policies that led to the housing bubble; it’s much better to limit housing prices and tie it to income levels rather than subsidizing a financial bubble that benefits the elite while preying upon the general public.
It would be interesting to see the stats, but I’m confident that fewer BMR owners did cash-out refinancing than market rate owners did during the downturn. In fact, as I showed on the Candlestick Park BMR thread a while ago, BMR owners suffered much less because they usually had more equity in their homes, they had better debt to income ratios because of the stricter underwriting, and because the price was lower to begin with they suffered far less from the drop in home price drops.
And this article is more an indictment of our banking institutions than anything to do with the BMR program. Really, how could this loan be approved? Isn’t the price restriction on the Deed itself? One would think they would at least read the documents. On the face of it, I cannot see how any bank could have approved this loan. If this was sold in a security or posted as collateral with the Fed or insured by the government, that just proves that our government and the banking elite are criminals.* No wonder they want to whitewash the crimes and move forward, and not backward.
And BMR is not low income. In fact, depending on how one defines “low income”, low income folks probably wouldn’t qualify because the bottom 35% or so probably don’t have the down payment. BMR goes up to ~ 125% of the median income so it’s better described as a middle class program. I would be interested to see the median BMR owner but I bet it’s right around median income.
*I’m less concerned with the buyer’s purported fraud. Who knows, maybe there was, but this activity was encouraged by the banks and their accomplishes in the real estate and mortgage community, and they preyed upon basic human desires. If one faces financial difficulty, most people naturally turn to any asset they have as a way of raising funds–which is often their real estate. People do not make rational decisions when their world falls apart and most people think they will earn their way out of the problem if they can just buy some time.
Dan, presuming the owner presented the bank with the original Deed, how is this fraud? What misrepresentation do you speculate that the buyer made?
Plus, isn’t the owner still on the hook for the loan anyway (since he refinanced and the anti-deficiency statue doesn’t apply)? The bank simply didn’t get the collateral they thought they were getting.
I don’t see why the BMR status means the bank was any dumber than the millions of other dumb refis during the bubble. The refi loan was not covered by the anti-deficiency statute so the bank could foreclose and still go after the borrower for any shortfall. I understand that the sale price restrictions mean that a foreclosure is necessarily not going to cover the loan balance, but that was the case with many (most) refi loans made during the bubble and was apparent to all unless you had your eyes firmly shut.
I agree this was a stupid loan to make. I just don’t think it was materially more stupid than the millions of other stupid loans made during the bubble.
lol wrote:
You’re assuming that Wells-Fargo held these loans on their books and didn’t securitize them, no? If it did, then the only punishment is going to be delivered to the buyers of the securities.
If it didn’t, well, I down own any Wells-Fargo stock, but hey…currently $2.21 earnings per share and paying out a small but nevertheless present dividend. I don’t quite understand the logic of trying to default on a mortgage and “hurt” a bank holding company that has access to the Fed’s discount window.
The practical bottom line is that what this person did was pretty reprehensible. Perhaps the borrower was a radical Objectivist who did this in a deliberate attempt to sabotage the BMR program since it’s existence is such an affront to The Free Market, the only perfect thing in existence and from whom and only from whom all good things flow. Like monkeywrenching, except from the right.
Maybe if the borrower gets indicted for mortgage fraud, we’ll find out. I’m not going to hold my breath waiting on the U.S. Attorney’s office.
A.T.
A competent assessor and a title search would have made the issue obvious.
Plus, the case that there were many other like these is moot. A bank doing a refi in 2006 would probably have foreclosed and resold that house without losing much the same year, even making a few bucks. It’s because people were paying any amount for anything at the time. Therefore the banks were crazy to fuel the bubble on the buy side but were justified to do the refis they did based on the market. It’s just that they had so much trust that they became blind idiots on that kind of deal.
But a mortgage broker got his commission and a smart fellow got something for nothing.
The underwriters on the second and third loans should be fired. They are the ones who ultimately failed here.
The Milkshake of Despair wrote:
Proper loan underwriting procedures went out the window circa 2005 when the demand for loans to fund mortgage-backed securities became so strong that it was outstripping the supply of mortgages. This was described in fine form, accessible to non-finance geeks, in the NPR special entitled Giant Pool of Money that was broadcast on This American Life in 2008. I think if you search around you can listen to it as a podcast.
Unclear if this is fraud or not, because I’m not sure how the BMR program works exactly. I assume it’s based on deed restrictions, so the bank screwed up here if that’s the case.
I wonder where that $500K went. This example is yet another reason why the forgiveness act should not forgive more than $50K in cancellation of debt income. Instead, our misguided policies allow people to have $1M of debt wiped out without penalties.
BMR units are one of many policies around here that raise the cost of housing.
Fraud? The owner forced banks to give them loans? Pretty neat trick, I’d like to learn how it’s done.
I don’t believe the MFDRA covers cash-out money. i.e. I think that you can still get cancelation of debt income for forgiven cash out money.
I stand corrected, re: what tc_sf said. I knew it didn’t apply to non-recourse, but here’s what the IRS’ guidance says.
“The Act applies only to forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes.”
http://www.irs.gov/individuals/article/0,,id=179414,00.html
A bankruptcy filing will end that obligation for $1500.
I’m not sure if this is the appropriate forum, but this guy I know’s house is going to the court house steps and he just asked for my advice. Normally, I’d just say walk away, but he has like 800 kids and seems just despondent over losing his house. Are there any reputable organizations that advise people during this process?
“A bankruptcy filing will end that obligation for $1500.”
I believe that there is some waiting period before tax debt can be discharged in BK. i.e. I don’t think you can incur a tax debt and then immediately wipe it out in BK.
I don’t think this is a situation where there is any canceled debt. There is a deficiency and the lender may or may not sue on it. The borrower still owes it.
If he were to file for bankruptcy it would presumably be wiped out and there would be no tax liability to wipe out either.
Denis,
Have him call the San Francisco Bar Association to get a consultation from an attorney.
Unless people have heard of banks “canceling” the debts instead of pursuing the deficiency. I know that banks often don’t pursue a deficiency in these situations but I don’t know what the normal procedure is as far as “canceling” the debt versus writing it off as a loss. Does the borrower have to agree to the debt being canceled?
Another example: say the statue of limitations for pursuing the debt runs without the lender suing, will the banks then issue 1099s and cancel the debt years into the future?
Be interested to hear anyone’s experience.
If you google something like “1099 foreclosure” you’ll see that it’s fairly common for banks to cancel some mortgage debt and then issue a 1099. I’m not 100%, but I think that the bank can make this decision unilaterally without consulting the homeowner. I think the bank is legally required to issue a 1099 if canceling recourse debt. But even if they do not, I think the borrower still owes the tax.
Not sure what happens if a debt is rendered un-collectable by lender negligence.
I believe that you are correct that if the lender chooses to pursue the debt and then the debt is wiped out via bankruptcy then there is no tax liability.
This is how we rob the stagecoach in Texas…
Contra what I wrote above at 12:20 PM, perhaps lol was on to something, if not the means by which it would be delivered. From Bloomberg, dateline 6:36 PM EST today, Wells Fargo Says Mortgage Probe May Trigger Enforcement:
Wells Fargo says it doesn’t expect litigation costs to have a “material adverse” impact on its financial position, so of course the stock closed up 3.1%.
Tip of the hat to The Chronicle’s Andrew S. Ross for the link.
Yeah banks did repackage. But they still did have enough bad mortgages on their books to merit many $100B in bailouts.
The bad loans have been mostly moved to the Govt’s balance sheet, and I hope there’s going to be a punishment harsh enough to prevent another meltdown. One can always hope. It’s not like anyone is going to give the keys of his manse in Montauk if that happens.
After all, the main goal of much of the WS giga-bonuses is to monetize paper profits before the government figures out whatever fraud or semi-fraud was perpetrated. Once the ploy is figured out the moneys have already been disbursed to private parties who are sitting on a pile of cash and who will pass the buck to the investor/sucker. Very few will ever give back a bonus for malfeasance, it’s almost a given.
I can’t believe you fools who blog support for this fraudster. He should be punished severely. The government is basically us so we pay for it. The idiotic BMR program is at fault here for driving up valuations and allowing for this type of fraud to occur. If you define a bizarre socialist program in a free economy, you’re on the ball to enforce it. Wells Fargo obviously held the primary loan so they’re not the underwriters of the second and third loans. Those are likely the fly by night mortgage banks, wholesale banks and subprime lenders we are currently all paying a piece of our future for. If you create idiotic policies fraught with loopholes, you’re just asking for the criminal element to come in and exploit it. Didn’t you guys read the books following the S&L crisis regarding organized crime’s involvement.
Unless the homeowner was also the appraiser, where is the fraud? The homeowner came in and promised to repay a loan and pledged his home as collateral. It was up to the bank to determine whether that was a good deal or not and to price the risk accordingly.
Was it the fault of the homeowner that there wasn’t an honest appraiser to be found? Any honest appraiser was immediately kicked to the curb by every bank in town in favor of one who could hit the number. This appraiser hit the number. That was the homeowner’s fault? I don’t think so.
The homeowner likely properly documented his income and the bank hired an appraiser. And if the income matched that required for a BMR unit, the bank cheerfully gave him 10 x his income, with a total debt payments to income ratio that was likely above 100%.
Who cared? A pension fund who had promised an 8% return probably needed a loan that had an interest rate of 8% and some ratings agency blessed it as AAA.
This is why I know prices are going to fall for years: this guy just now got kicked out. Someone loaned him enough money to make the payments from 2008-2011 and he still didn’t bother. Anyone who really needed money up to Q1 of 2008 could get as much as he needed. How many others got enough to make the payments for years but have no way of paying when that money runs out? Lots.
They should just kill this whole BMR notion. It was a bubble-era concept whose time has passed.
Here is a BMR now listed as a short sale at 15% below its 2004 price. So much for that idea of a toe-hold onto home equity.
http://www.redfin.com/CA/San-Francisco/95-Ora-Way-94131/unit-301F/home/1689199
A.T.,
The BMR program helped that owner out. He fared much better than the market priced owner of a similar unit during that period.*
THIS ANALYSIS HOLDS TRUE EVEN IF THE BMR CONDO IS SOLD SHORT OR EVEN IF THE FMR OWNER PUT ZERO DOWN.
The hostility to the BMR program is indicative of the level of neoliberal propaganda that our culture spews out. I can’t think of a better way for the government to regulate housing than than tying housing prices to income levels and requiring greater underwriting.
Let’s look at the numbers that the crony-capitalists don’t want us to look at.
The BMR condo A.T. mentions sold for $199,500 on 4/30/2004 (per Zillow), near the peak of the bubble. The average 30 year rate at that time was 5.96%. So, with $382 HOA dues, a 30 year mortgage, 10% down, and a tax savings of 15%, the current owner’s (and prospective seller’s) cost of ownership is $1,461 per month and his monthly payment is $1,072 (the HOA fees are a substantial part of his cost of ownership).
The market rate owner of a similar unit would pay substantially more in monthly costs–even if they put zero down. I can run the numbers if anyone wants, but surely it’s got to be north of $2,000 a month.
So, the BMR owner has a lower cost of ownership than a FMR owner. . . now let’s look at what would happen if the BMR owner sells at asking–which is $30,000 less than he purchased the property for 3 years ago (or ~15% off). Let’s assume a responsible BMR homeowner as well as a responsible FMR owner** for these purposes (which MAY not apply here because the owner is short when he “shouldn’t” be–but not by much). Using standard financing, assumed above, the current owner has (or should have) about $150,849 on the mortgage outstanding.
So, if the BMR owner sells at asking, he would lose his down payment of $19,950, plus $10,000 in realtor fees. Over the course of 7 years, that adds $356 a month to his cost of ownership. So, even with a pretty major slide in the price, this BMR owner’s cost of ownership will be about $1,817 a month. This is better than the FMR owner I assume, who puts nothing down, and loses the house to foreclosure after 7 years. If the FMR owner put 10% or 20% down, then the difference is even more substantial.
So, if there are minimal underwriting rules (like a down payment requirement and no negative amortization), the BMR program is much more stable because it results in a lower cost of ownership because the home price is lower. Plus, if the BMR owner did not face financial stress and was able to make payments on a traditional 30 year loan he would not be short unless the house sells for under $160,000. This system allows for a significant downturn and does make it less likely that people will let their homes go into foreclosure. This is better for the taxpayers, unlike the “free market” system, that the Masters of the Universe devised, where the opposite happened.
*A renter I’m not sure about . . . it’s probable a renter would pay less than $1,800 a month so it’s possible a renter would have made out better than the BMR owner or a FMV owner during the years 2004 to 2011.
**I understand that both BMR and FMR owners “cashed-out” during this period. Likewise, I understand that many FMR owners paid only interest or interest plus a small amount of principal. Both scenarios are hopefully an anomaly of the Great Housing Bubble so it’s better to assume minimal standards when comparing the two systems.
“the BMR program is much more stable”
Providing no government guarantees for any loan that is more than 3x verified income would also create stability.
SFHawkguy, the bottom line is that this BMR owner would have been far better off by renting. And you’ve omitted insurance and any maintenance costs not covered by the HOA. With the upside limited by the BMR rules (but not the downside), this program really only makes some sense in a fast-appreciating market. Which we will not have for many, many years.
You are also neglecting to factor in the taxpayer expense of running this program — how many million a year is that?
I’m fine with the govt subsidizing rent, and we have a lot of existing programs for that. But this foray into pretending to provide owner upside is ill-conceived. FMR prices are not that different from “BMR” anymore, so let’s kill this.
I flubbed the last paragraph a bit.
The gist is that the BMR system does give owners a “toe hold” onto equity, contra A.T.’s statement. The typical buyer is more invested in his home and less likely to let the home go. His example actually proves my point. This owner is selling short, it appears, rather than letting the home go to foreclosure. If he is only a few thousand short (because of missed payments because of financial stress, for e.g.) then there is a good chance he will be able to sell and the bank won’t lose much money. That’s even after a 15% decline. A 5% decline wiped out many FMR buyers. Even if the canceled debt from this short-sale resulted in income taxes, it would not be much and this seller is probably more likely to stick around and see it sold to the next person . . . unlike the equivalent fair market seller who probably lived rent free for a year or two and then flew the coop for the taxpayers to pick up the tab (which is really the banker’s fault and not the FMR buyer’s fault).
Diemos,
That’s pretty much what the BMR program does. It ties the house price to income. I agree that the federal government should adopt some of the BMR rules–such as not insuring any mortgage that is over 3X income.
A.T.,
I do assume a .15% of price homeowner’s insurance ($25/month in this case) and a $22/month for “other (e.g. private mortgage insurance)”. I use the calculator at http://www.idealhomebrokers.com/calculator/
I agree that renting is probably the better option during this period. Renting was pretty much a better option for all housing in San Francisco during this period and the BMR units are about the only close calls where owning may have been better (for such units as the Berry St. properties, etc.).
I disagree that the analysis only applies during the Great Neoliberal Housing Bubble. Even under “normal” appreciation, the lower house price results in a lower cost of ownership. It will be a closer call in that environment, but not a sure thing. Plus, what is the gurantee that the next 10 years will have “average” appreciation, or even beat 3%? There is less risk with BMR ownership and if we have another 5% decline over, say, 7 years, the BMR owners will be better off.
SFHawkguy,
The FMR owner wouldn’t have extracted as much equity, as he would have paid probably twice the price of the BMR owner.
The BMR owner could have gone to the bank and say “I bought this for 200K, it is worth 600K, please give me 400K”, whereas the FMR owner could have extracted way less. This can affect your calculations quite a bit provided the BMR owner had found the proper loan offi-sucker.
And I did include maintenance costs of .25%, or $42/month, in this case. Those are the standard assumptions on the calculator I linked to. Plus, it’s newer construction and the owner bought new so it probably didn’t cost him much. And he had a pool and a hot tub!
lol,
We’re not assuming any cash-out refinancing in A.T.s example. I understand that is the case in the original post and was rampant during the Great Neoliberal Bubble. I really doubt if it was common for BMR owners to do cash-out refinancing–although who knows, maybe the mortgage brokers and banks targeted them.
As noted above, when the loans were originated they were much more stable. See this graph from the WSJ for the trend during the Neoliberal Bubble: http://online.wsj.com/article/SB10001424052748703312904576146532935600542.html
Even San Francisco had a zero down payment average! BMR owners were one of the few groups that were putting something down and were not leveraging the homes like crazy (at least at origination).
I misread the listing and it appears it was not bought new in 2004. So I don’t know if the maintenance/reserve of $42/month is appropriate–but it can’t make that much of a difference. And I think the HOA covers the upkeep of the pool and hot tub.
Fair enough.
Neoliberal? I don’t know what that means. This bubble was inflated by Neocons. The Bush clique had no economical know-how whatsoever. Quite a bunch of incompetent retards.
lol, “neoliberal” in this context seems to refer to the cabal of economic advisors that held sway during the Clinton Administration. I don’t quite agree with SFHawkguy that the hostility to BMR programs is driven by neoliberals, or that the bubble was inflated by neoliberals, but people like Robert Rubin, Larry Summers, et. al. can fairly be categorized as “neoliberal”.
We can argue about when the bubble “inflated”, but I think it’s well established by now that the seeds of the recent financial crisis were planted by the The Gramm–Leach–Bliley Act which was signed into law by Clinton, and with the support of his economic advisors, even though the bill’s sponsors, Sen. Phil Gramm, Rep. Jim Leach, and Rep. Thomas J. Bliley, Jr. were all, IIRC, conservatives.
In an interview in 2009, I believe, Bill Clinton said that legislation was the one he regretted signing the most.
If you’re interested in the ideology in theory and practice, you can’t beat A Brief History of Neoliberalism by David Harvey.
lol,
A neoconservative is pretty much the same thing as a neoliberal. Neocons are a subspecies that are a bit more openly bloodthirsty (although in practice they spill the same amount of blood). Both believe in the deregulation of markets and want all markets privatized. Both serve the interests of the rich at the expense of the people. Both decry “socialism”, even when said socialism works better than capitalism, like with Social Security or things like San Francisco’s BMR program.
And that’s a great book recommendation by Brahma. Here’s a great 11 minute video of Harvey about the “Crisis of Capitalism”: http://www.youtube.com/watch?v=qOP2V_np2c0
Wow. A cabal? Really?
We’re in 2011 and some have already forgotten the reckless 2000-2008. The bubble is Bush’s. The deficit is Bush’s (giant tax cuts lead to huge deficits, whoocoudanode?). The crisis is Bush’s.
The hypocrisy of the Neocons is now in plain sight. Now their Tea Party buddies try to push it even further: defend the “little people” while playing for the rich guy team. Privatize everything is sure going to help retirees! “Keep the government’s hands away from MY Medicare!”
I remember the old 2001 joke “I blame Clinton” everyone was doing when caught red handed.
I didn’t know Republicans were still playing playing that card.
^^^ That was for Brahma
And my question was rhetorical. I know what neoliberalism stands for, just that suddenly we are forgetting the Bush years during the bubble was incepted, inflated, and ultimately burst. Going back before 2001 is idiotic. The Y2K bubble was similar to the late 80s bubble, and it should have been allowed to deflate properly. But Bush wanted to push his agenda of squeezing the middle class down 2 notches while still winning elections. He invited everyone to borrow recklessly and pull equity out. People fell for it, mistook credit for income and everyone but the top 1% lost in the end. Inflation will now make permanent the downfall of the American middle class if nothing is done to rebalance the equation.
I ran the numbers for a potential market rate buyer in 2004 for the property A.T. mentions above, and assumed a FMR of $300,000. I assume the same loan terms except for a zero down payment. The monthly cost of ownership is $2,024, which is less than the cost of ownership for the BMR owner, even if he sells for a loss at 15% below his purchase price.
Of course, if the FMR owner suffered a 15% downturn in his price he would be much less likely to stick around and try to sell the property short.
“That’s pretty much what the BMR program does.”
Negative. The BMR program creates a favored class of people that the supes can distribute largesse to. Income limits would apply evenly to all citizens.
Diemos,
The “pretty much” in my statement was intended to cover the nit you are picking. I was noting that your policy prescription has a lot in common with the BMR program–it adopts the leverage limitations inherent in the BMR program and applies it to a larger group of people (your policy prescription doesn’t cover everyone either–just people that qualify for government loans).
And if you are worried about politicians “distributing income” to a favored “class” of people, I suggest you bark up a more relevant tree than BMR owners (I do detect a whiff of that neoliberal propaganda referenced above).
Here’s a relevant joke I just saw:
A unionized public employee, a member of the Tea Party, and a CEO are sitting at a table. In the middle of the table there is a plate with a dozen cookies on it. The CEO reaches across, takes 11 cookies, looks at the tea partier, and says, “Look out for that union guy, he wants a piece of your cookie.”
Don’t get me wrong, I’m not a Republican and I don’t hold George W. Bush’s administration harmless in all of this, he had his own cabal who of course did nothing to address the problem until it metastasized into a crisis. It’s ironic, but with their actions or lack thereof during the period 2007-2009, Hank Paulson and Ben Bernanke probably did more to delegitimize market capitalism in this country than Ralph Nader did in most of his career. From wikipedia’s page on Paulson:
Paulson doesn’t even come off as sympathetic in his own memoir, On the Brink. Maybe if I hadn’t read it after finishing both Andrew Ross Sorkin’s Too Big To Fail or Johnson and Kwak’s 13 Bankers…
As far as the borrower on 2760 Sacramento #6, I’d love for some enterprising journalist to track this guy or gal down and ask them what happened so we don’t have to speculate that the person just had a crack or gambling habit that caused them to run through half a million dollars in the space of five years. It’d also be interesting to find out who gave him a third mortgage in 2008; that must have happened before September.