California man losing nine homes in mortgage mess

[Lloyd Bonafide]

http://www.reuters.com/article/bondsNews/idUSN0952458820080511

LOS ANGELES (Reuters) - A California man who has defaulted on nine homes and expects banks to foreclose on all of them, forcing him into bankruptcy, says he now considers it a mistake to have invested in the real estate market.

Shawn Forgaard, a 37-year-old software company project manager, bought one home for his family to live in and nine more as investments. He stands to lose all the investment houses in the mortgage meltdown but says he has come away wiser from the experience.

Forgaard bought a house in Santa Cruz, about 60 miles (100 km) south of San Francisco, in 2000. Four years later, using $800,000 in stock options, he began snapping up investment properties, putting 10 percent to 40 percent down on negative amortization loans -- in which payments do not cover the interest so that a borrower's balance grows over time.

It was those "neg-am" loans, which include triggers causing payments to balloon if the debt reaches a certain percentage of the original balance, that would come back to haunt him.

"I knew I was sitting on time bombs," Forgaard said. "I knew the market was going to go soft and I knew that property values would decline. But I figured that I had enough equity to survive the storm and sell or take the loss and refinance.

"I didn't anticipate a downturn of epic proportions such that home values are 40 percent less than they were," he said.

Forgaard bought his first investment home in the booming housing market of North Las Vegas in 2004, followed in the next two years by eight others in such hot markets as Phoenix and Palm Springs, California, before he realized in 2006 that the situation was worse than he had feared.

"I knew that the market was soft but at that point I'm realizing that this could really get ugly," he said. "At that point I had a bad feeling in my stomach."

Forgaard thought he still had enough equity in the homes to "take a huge hit," possibly losing most of his investment, but thought for a while that he could still ride out the storm.

"It really wasn't until five months ago that I realized, 'Hey, you know what? Not only am I going to lose everything I have invested but this is going to force me into bankruptcy," he said.

"I'm going to lose my car and my primary (home) and we're not going to be able to live in Santa Cruz, where I was born and raised, and live by the beach. And that was pretty tough to take."

 

[Pamela Crowley (Florida)]

Gambling. Someone will win, someone will lose.

 

[Metamorphic]

How many people want to bet he lost a big chunk of change in tech stocks too?

 

[Randolph Kinney]

Even the stock market requires 50% margin to buy stock on credit. The stock is marked to market and if the value of the stock drops, a margin call is demanded where you either put in more money to cover the margin requirement or you are sold out.

So this guy's problem was not understanding markets, financing, and cash flow. How many like-investors are there that bought homes? These investors are like dominoes; one falls pushing value down, pushing the next domino down and so forth.

Couple that problem with renters that bought homes with "affordability" loans and no down payment.

Now couple all that with a substantial change in loan programs and credit standards to get a loan. Less demand. And couple that with the revocation of home equity lines of credit.

It is going to get more bloody with house prices declining rapidly.

 

[Terrel L. Shields]

he has come away wiser from the experience.

Someone will win, someone will lose

He comes away smarter...the taxpayers who bail out the banks loses.

Even the stock market requires 50% margin to buy stock on credit.

Unregulated hedges / derivitives have a 10% margin...right?

 

[Randolph Kinney]

He comes away smarter...the taxpayers who bail out the banks loses.
Unregulated hedges / derivitives have a 10% margin...right?

Don't know about these new derivatives, but I think private equity hedge funds are unregulated. However the Federal Reserve is the regulatory power supreme who can proclaim what the new margin requirements are at any time, just like bank reserves.

Just think of the panic that would ensue if the FED announced on Monday that margin requirements for hedge funds originating here are even 10%.

New security instruments have to be approved by the Treasury and SEC to be marketed here. That was the problem for the CDO type and SIV type instruments; very lose regulation under this administration.

 

[Blueprint]

Ignorance is bliss, at least for a little while in Forgaard's case.

 

[Cigar]

but I think private equity hedge funds are unregulated.

Randolph:

Wasn't it you who posted a link once to an article which stated that some of the unregulated hedge funds are leveraged as much as 100 to 1?

 

[Randolph Kinney]

Randolph:

Wasn't it you who posted a link once to an article which stated that some of the unregulated hedge funds are leveraged as much as 100 to 1?

Yes, that was me. Private investment companies that do not solicit the public, buy or sell to the public are not regulated by the public regulators.

 

[Terrel L. Shields]

Volcker argued that it was the margin rates not the interest rates that should be changed. I trust Volcker. Until he took over the Fed, the situation was swinging out of control. "The Maestro" Greenspan was lucky enough to dance the dance during his tenure by alternatively upping and lowering the interest rates. Many blame him for the shallow recession during the Bush I administration and it was obvious he wasn't going to do that under Clinton or Bush II's reigns...but he could have raised margin rates

some of the unregulated hedge funds are leveraged as much as 100 to 1?

That is a cheap bet to make and that is the reason why oil prices are more likely to reach $200 than they are to drop to $60 a bbl anytime soon.
At some point however, the tipping point is reached.
In 1973, gas consumption dropped by 30% over the space of less than 2 years. I recall 72 model cars averaged a dismal 12 mpg but by 1975 you had V-6 engines with vacuum guages or 'fuel economy' guages that signaled the driver that they were consuming more or less fuel. I wouldn't mind seeing those gauges return (I understand some have returned, at least on Dodge Pickups). And, of course, people simply drove less. But Americans today have barely shave 2% off consumption and, if fact, total oil consumption (about 500,000,000 gallons per DAY) in the US has increased over 3 years ago. (for reference, ethanol makes up maybe 12,000,000 gallons per day max...maybe 1 weeks supply of fuel and its BTU content is about 2/3rd that of gasoline.)

If we could cut our fuel consumption by 20% over the next 6 months, however, that production would be shifted to China where the demand is only stemmed by price. The truth is we have to stop buying from China to slow the Chinese economy enough to stop this hemmoraging.. The Global Market is here and the idea that it was going to be a win-win for the U. S. and totally painless was a huge falsehood. Further, it is not a case where there are winners and losers within the U. S. Market..most everyone is a loser at this point.