More gain from the pain

A couple of years ago, Guambat noted how some savvy financial types were using derivatives and other financial products to bet against the subprime market. These were more macro plays on the big picture. Guambat has also mentioned John Paulson who made billions on a similar bet, and others like him, in another post earlier this year.

Now the stories are getting down the the nitty-gritty on the ground. From the macro view to the man-on-the-foreclosure-street view.

The WSJ provides a guide, a "how-to" if you will, for the average Joe who may or may not be a plumber:

How to Buy a Foreclosed Home

For anyone wanting to take advantage of today's buyer's market, distressed properties offer the best chance to make a killing. But you need good credit or ready access to cash, and a taste for the hunt.

Here are some tips to get started: [Read the story if you're really interested to know]

But on the same date, in its own fair and balanced way, the WSJ also shares the pain that comes with that gain in :

California Home Sales Revive, But Not Without Intense Pain

Investors and first-time home buyers are snapping up foreclosed houses here, with the number of local sales up almost fivefold from this time last year. Across hard-hit California, sales volumes rose 65% in September compared with a year ago, said MDA DataQuick, a San Diego-based real-estate information service.

The bad news is that the latest round of sales is unleashing another round of pain in cities such as Los Banos, a commuter community in California's Central Valley.

In 2005, one local builder was selling three-bedroom homes for $300,000 -- more than three times what it asked for a similar design in 2000.

Claudia Pedroza and Veronica Banuelos were among the home buyers. In 2006, the sisters and their husbands bought new houses next door to each other in a subdivision surrounded by fields just outside Los Banos. Ms. Banuelos paid $350,000 and Ms. Pedroza paid $375,000 for similar four-bedroom homes with three bathrooms and cavernous living rooms.

Property records indicate that the Pedroza and Banuelos families took out loans for nearly 100% of the price from Bank of America Corp. In the Pedrozas' case, the bank worked with the national nonprofit Acorn Housing Corp. as part of a program to help first time home buyers. The home builder, Hovnanian Enterprises Inc., funded $12,000 or more in closing costs for each home.

A California state housing agency also chipped in a $11,200 loan toward the Pedrozas' purchase. Ms. Pedroza figured that with her husband bringing home $3,200 a month as a house painter, the family could afford the monthly mortgage payment of about $2,000. Ms. Banuelos, a college student, said the payments were affordable for her husband, who also had ample work as a house painter.

Ms. Pedroza lost her home to foreclosure when her husband's painting jobs vanished and the couple fell six months behind on their payments. The Pedrozas are now paying $750 a month to rent a two-bedroom apartment in downtown Los Banos, where their 10-year-old daughter and 11-year-old son share a room. Ms. Banuelos's husband also took a cut in house-painting hours, and the couple stopped paying their mortgage four months ago.

Mr. Knoff's house has traveled the arc of the local market. Built on vacant land in 2002, it sold for $280,000. Its original owner unsuccessfully tried to sell it in 2006 for $450,000. Mr. Knoff bought it out of foreclosure in March of this year for $320,000. Today, based on local sales, he figures the house is worth about $220,000.

"I am one of those troubled borrowers not making any mortgage payments," Mr. Sherman said. The 61-year-old shipping and warehouse supervisor refinanced his house in Los Banos two years ago for $365,000, spending much of the new loan on home renovations. Now, he figures, the house is worth $140,000.

Mr. Sherman said that while he can afford his payments, he had planned to sell the house in a year or so to supplement his retirement income. But now, he figures, he couldn't afford to live there as a retiree. So four months ago he stopped writing mortgage checks, setting the cash aside in his retirement savings. He says he's waiting for his lender to kick him out or to reduce his loan amount. He'd also be happy for the government to modify his loan.

"I don't deserve a bailout," Mr. Sherman said. "Will I take one? You are darned right I will."

Republican presidential candidate Sen. John McCain has proposed the Treasury spend $300 billion to buy up troubled mortgages and reduce the principal on the loans to reflect current values. Sen. Barack Obama opposes using taxpayer money to intervene in the housing market, advocating instead that the government pressure lenders to alter mortgage terms and change bankruptcy codes to allow judges to do the same. Congress has already passed the Hope for Homeowners program, which aims to put 400,000 borrowers in more affordable loans.

Where many see ruin, some sense opportunity. Michael Arpaia, an officer with the California Highway Patrol, just bought a foreclosed four-bedroom house -- valued at $400,000 two years ago -- for $160,000. He spent $25,000 to replace linoleum floors, carpeting and landscaping. He's renting the house to a local couple who lost their home in foreclosure.

With stocks falling, Mr. Arpaia is counting on the property's cash flow and appreciation to supplement his retirement nest egg. "My financial adviser says residential real estate is the safest investment right now," he says.

While local homeowners and world markets wait for resolution, Larry Frontella can't believe his fortunes.

Mr. Frontella grew up on a dairy farm here and worked for three decades as a local deliveryman. In 1993, he bought a new house in the established part of town for $163,000. Two years ago, he refinanced with a $376,000 loan, property records show. His mortgage was written by a unit of Golden West Financial, which was later acquired by Wachovia Corp.

Mr. Frontella paid off credit cards, paid for his wife's funeral and prepaid his own burial. He bought a $17,000 Harley Davidson. "I worked all those years, and felt like I had won the lottery and could take care of everything," he said.

But several months ago, Mr. Frontella fell behind on the $1,800 payment on his interest-only loan. The bank also demanded back payments that pushed his total bill to $2,400 a month. The 68-year-old said he figured he wouldn't live to pay off his home.

Foreclosure and eviction loomed on Sept. 30. But late last month, a local businessman stepped in and signed a contract to buy the four-bedroom house for $170,000. Wachovia will take the loss on the value of the original loan, according to people with knowledge of the home.

The buyer, who declined through his real-estate agent to be interviewed, let Mr. Frontella remain in the home. Mr. Frontella's new monthly rent is $1,100, well below what he paid as an owner.

Speaking from the driveway of the home he once owned, Mr. Frontella says he feels lucky. "I'm not saying it's not my fault," he said. "Now I'm a renter. What the heck."

As Jon Friedman says in his Media Watch column at MarketWatch,

Pearlstine [former WSJ editor] stressed the idea that the best narratives contained ample contradictions and conclusions (and the Journal still does it better than any newspaper today).