Most lenders are off their foreclosure moratoriums, and they are beginning proceedings in earnest. But there is another issue not getting much press coverage, and that is the number of REOs being withheld from the market. Today’s featured property was bought at foreclosure on 7/22/2008, and it is just now coming to market.
As I noted in Moratorium on Defaults Announced and Pent Up Supply, stopping foreclosures did nothing to stop people from defaulting on their loans. The tsunami continues to build strength.
The other little game being played in our market is the withholding of supply directly by allowing banks to hold their non-performing assets.Ordinarily, banking regulators require lenders to dispose of their non-performing assets in a timely manner. It certainly appears that these regulations are not being enforced. Could the collapse of WAMU really delayed the processing of their non-performing assets (REO) by 7 months or more?
Today’s featured property was a foreclosure back on 7/22/2008. It is next door to a neighbor I profiled back in July of 2007 (Weeping Desert Willow). In that post, I quipped, “This can’t be good news for the owners at 27 Desert Willow hoping to get $1,188,000 for their house, or the owners at 30 Desert Willow hoping to get $1,279,000? Once a similar property sells for $850,000, what chance to they have of getting their wishing price?”I think we have our answer; not much. Are you glad you didn’t catch that falling knife?
MAGNIFICENT SINGLE FAMILY HOME LOCATED IN THE MASTER PLANNED COMMUNITY
OF COLUMBUS GROVE * THIS RESORT STYLE HOME HAS IT ALL *HIGHLY DESIRED
NEIGHBOORHOOD * EASY CARE LANDSCAPING * GLASS DUTCH DOOR ENTRY * WOOD
FLOORING * GOURMET KITCHEN WITH GRANITE COUNTERTOPS * PREPARATION
ISLAND * MASTER BEDROOM WITH FIREPLACE AND MASTER BATH WITH JETTED TUB
* OVERSIZE WALK-IN MASTER CLOSET * DUAL SINKS MASTER BATH AND MARBLE
FLOORS * PLANTATION SHUTTERS * WATERFALLS, FLAGSTONE BARBECUE WITH
FIREPIT AND REFRIGERATOR * UPSTAIRS LAUNDRY ROOM WITH STORAGE AND SINK
* THANK YOU FOR SHOWING THIS PROPERTY!
Where do I start?
ALL CAPS
Asterisks instead of periods
HIGHLY DESIRED
NEIGHBOORHOOD? The price declines suggest otherwise…
I give up.
This property was purchased on 5/25/2006 for $1,235,000. The loan records have dropped off my database. If it sells for its current asking price, and if a 6% commission is paid, the total loss on the property will be $436,094.
This property is being offered for 31% off its peak purchase price. This one might hit 50% off before this is over.
{book4}
Alright I got something to say Yeah, its better to burn out Yeah, than fade away All right Ow Gonna start a fire Cmon!
Rise up! gather round Rock this place to the ground Burn it up lets go for broke Watch the night go up in smoke Rock on! (rock on!) Drive me crazier, no serenade No fire brigade, just pyromania, cmon
We lived outside Calcutta in a little wooden house I lived there with my family and 21 cows But now they all are gone and life is not so fun But what can you expect here in Tigerland
One of the first new communities in Irvine to start showing stress
as prices weakened was Northwood II. I first profiled the abundance of
listings in this small neighborhood back in March of 2007 in the post Bamboozled. I have also featured this neighborhood in Is fear gripping the market?, Bombs Away, and Bamboo Hoo. There is even a thread in our forums devoted to the observation that The gated Northwood II is getting killed.
In the first post, Bamboozled, I had this little chart:
Remember when prices used to look like that?
Toxic financing has already begun wiping out owners in this tract. At this point, only those who put more than 25% down are above water; every other homeowner in Northwood II is currently underwater.
Well, some are getting out. With little or no chance of appreciation–appreciation is why most of them bought here–there isn’t much point in continuing to pay the bloated mortgage on these properties, so the owners are bailing out.
There is plenty of distress in this neighborhood to go around. Check out these properties:
This well appointed Bella Rosa Home is located in the exclusive gated
community of Northwood II. This newer home is upgraded with granite
counter top, tile flooring, berber carpet, & very well landscaping,
Master bedroom in the downstair, and much much more!!! A must must
see!!!
How many times must I comment on the three exclamation point nonsense before realtors stop doing it? Let me put this in language every realtor understands: THREE EXCLAMATION POINTS MAKES YOU LOOK AMATEURISH!!!
The first 80% of this description is fine, then it concluded with “downstair, and much much more!!! A must must
see!!!” A misspelled word followed by realtorese and exclamation points. Stop! Please!
This property was purchase on 9/29/2004 for $789,000. The owner used a $630,848 first mortgage and a $158,152 downpayment.
On 1/25/2005 he refinanced the first mortgage with a $636,600 Option ARM with a 1% teaser rate and opened a HELOC for $78,850.
On 3/14/2005 he opened a HELOC for $150,000 and got out his downpayment.
On 2/21/2006 he refinanced the first mortage with a $792,000 Option ARM with a 1% teaser rate.
On 3/9/2006 he opened a HELOC for $100,000.
Total property debt is $892,000 plus negative amortization.
Total mortgage equity withdrawal is $255,400 including his downpayment.
If this property sells for its current asking price, and if a 6% commission is paid, the total loss to the lender will be $252,800 plus negative amortization.
{book4}
I live in Tigerland I’m an indiana man I’m used to walk around with a snake in my hand Dr Bombay is my name and my father has the same But everything it changed here in Tigerland
S O S the tiger took my father S O S the tiger took my brother S O S the tiger took my mother S O S the tiger took my family
We lived outside Calcutta in a little wooden house I lived there with my family and 21 cows But now they all are gone and life is not so fun But what can you expect here in Tigerland
REO pricing is starting to really pummel the bottom of the market. Today’s featured property is being offered for 50% less than its peak purchase price.
Now you’re running ’round talking looking like a fool I’d like to know what you goin’ do and now who’s laughing Jokes been played on you
I have my own emotional measure of progress toward affordability. I openly ridicule WTF prices whenever I see them because, quite frankly, they make me angry, and the ridicule is deserved. For a very long time, most of the listings were in the OMG price range, and much of the high end is still there. However, lately I have been seeing prices on properties that do not completely offend my sensibilities; these prices merely make me LOL. When I first saw today’s featured property, I did not think OMG; That is progress.
When I first predicted house prices would fall, this is exactly the kind of deal I believed we would see–just not this quickly. It is very unlikely that we are at the bottom, but we are making huge strides toward genuine affordability. Someone will buy this one and weather the drawdown that follows. Many of us who buy when affordability returns may experience the same outcome. I am not going to try to time the bottom tick of the market; although, I will wait to get closer than today’s pricing. Unless you are going to wait until a new uptrend is firmly established, there is a very good chance the property you purchase may be worth less than you paid for quite some time. I will be OK with that as long as I am saving money over renting. Unfortunately, we are not there yet.
BANK OWNED – REO SALE – PROPERTY SOLD AS-IS WITHOUT REPAIRS OR WARRANTY.
This property was purchased on 1/30/2006 for $488,000. The owner used a $390,400 first mortgage, a $97,600 second mortgage, and a $0 downpayment. The property went back to the bank on 1/23/2009 for $372,000. It has taken 3 months to get it on the market. If it sells for its current asking price, and if a 6% commission is paid, the total loss will be $257,794.
This is the first property I have seen in Irvine priced 50% off.
{book4}
You can’t blame me for hatin’ But it’s funny how you thought you can Let your little secrets pass by me And try to get them not to like me I was being good to you Now you’re running ’round talking looking like a fool I’d like to know what you goin’ do and now who’s laughing Jokes been played on you
Got me thinking about You make me laugh All the things you’re doing, trying so hard Just to ruin me but you can’t see You make me laugh, cuz you’re running around You make me laugh You try so hard to be down Talking ’bout me when I’m not around But you don’t get that you make me laugh
This time I made up my mind This time I’m back on my grind I know there’s things in my life That I’ma let go startin tonight I can’t live my life this way
Imagine living in a world without consumer debt. The first credit cards did not appear until after WWII. Prior to WWII, if you wanted to buy something, you needed to save money from your wage income until you could afford to pay cash for it. There was an absolute dependency upon wage income to provide a lifestyle; living beyond your means was not possible unless you had previously saved money, and it could not continue beyond the day you went broke. Times have changed.
With the invention of credit cards, it became possible to borrow from future earnings to live better today–better than people can currently afford. Credit cards make it possible for people to live beyond their means. However, there comes a point when the future is now and the bills come due, and when that happens, people must live within within their means, minus the payments on the debt. Or does it?
If a new creditor is willing to loan even more money to the debtor, the debtor can use the borrowed money to pay back the previous creditor and continue to live the good life. Borrowing from one party to pay back another is the essence of a Ponzi Scheme. This can go on for a very long time if new creditors can be found and if the debtor can afford the debt service payments (Federal Government financing is a great example of a long-term Ponzi Scheme).
The creditors have to walk a fine line. Like any drug dealer, creditors want to give them enough product to keep them hooked, but they do not want to give them too much product to cause an overdose and death. In the credit world, an overdose leads to insolvency and an inability to service the debt. Insolvency often leads to bankruptcy and the loss of lender funds. The goal of every credit card vendor in the modern era is to maximize the debt service they can extract from each addict without killing them with insolvency.
Many spenders in California have entirely abandoned the idea of saving in favor of personal Ponzi Scheme financing. The idea seems to be that if you can keep borrowing long enough, you can die before the bills come due and avoid the inevitable period where the debts must be repaid. Some even come to believe this is a sophisticated method of financial management; Ponzi Scheme borrowing is lunacy of the highest order.
The system might have gone on longer if creditors had not completely lost their minds. New creditors entered the consumer finance arena by tapping the source of consumer savings securely trapped in the equity of their homes. This permitted consumers to pay off their previous credit card vendors as well as find an enormous source of new spending money. The impact of this new source of spending money created a set of circumstances where home ownership became extremely desirable thereby causing consumers to bid up the prices of homes. The higher home prices meant even more equity was available to spend, so creditors increased their lending to consumers. This made houses even more desirable. This feedback loop is part of the cause of the inflation of the Great Housing Bubble, and it explains much of the residual kool aid intoxication still present in our real estate market (buyers incorrectly believe appreciation and HELOC spending are coming back soon).
The Great Housing Bubble was a grand experiment in financial innovation. Lenders sought to find ways to loan even more money to people through crazy manipulations of loan repayment terms with loan programs like the Option ARM. Unfortunately, The Fallacy of Financial Innovation demonstrates that the loan programs developed during the bubble were not sustainable, and the entire Ponzi Scheme collapsed in a massive credit crunch. The collapse of this Ponzi Scheme is the source of our current financial woes.
Examine the graphic above. The first column shows a graphical breakdown of the income of a typical homeowner. Total home related debt (including taxes, insurance, HOA and other monthly expenses) is limited to 28% of gross income. Consumer debt including all other debt service payments is limited to 8%. Taxes take up about 24% (depending on income and tax bracket), and the remaining 40% is disposable income to cover the other expenses of daily life.
The second column shows what happens as people start to stretch to buy a home in a financial mania (charts are below). The increasing home debt reduces the tax burden a little, but the increased consumer spending and home debt takes a big chunk out of disposable income. The recession of the early 90s lingered for so long here in California because the people who bought in the frenzy of the late 1980s found themselves with crushing debts and greatly reduced disposable income. Prior to the increase in housing debt, this disposable income would have been spent in the local economy; instead, this money was sent out of state to the creditor who made the loan.
The big financial innovation–if you want to call it that–of the Great Housing Bubble was the nearly unrestricted use of cash-out refinancing and HELOCs to tap into home price appreciation. The third column shows the impact this new source of credit had on personal income statements. HELOC money allowed people to pay off their consumer debt while only modestly increasing their home debt. Since this income was untaxed (borrowed money is not truly income), the extracted money was entirely converted to disposable income. This incredible influx of disposable income caused our economy to explode.
Unfortunately, as is documented in the post Our HELOC Economy, the loss of this HELOC income is having devastating effects on local tax revenues and our economy. When you examine the personal income statements of borrowers in column four, you see that home debt and consumer debt have now become so burdensome that there is no longer enough disposable income to cover life’s basic needs; borrowers are insolvent.
The only solution to the problem of borrower insolvency is a monumental restructuring of both home and consumer debt. Realistically, the only way this is going to occur is through foreclosure and bankruptcy. We are not going to re-inflate this Ponzi Scheme because when sustainable loan terms are applied to real incomes, people cannot raise bids to sustain or inflate home prices–even with 4.5% interest rates. Without home price appreciation and subsequent HELOC borrowing, the Ponzi Scheme does not work.
The implications of this are clear; we are going to experience an extended recession bordering on depression here in California that is going to linger for many, many years. During this extended crisis, a significant percentage of California homeowners are going to face foreclosure and personal bankruptcy.
The collapse of a Ponzi Scheme is never pleasant, and that is what we are facing. According to Arthur Miller, “An era can be said to end when its basic illusions are exhausted.” The unsustainable lifestyles and illusions of wealth created during The Great Housing Bubble are exhausted; the era has ended.
{book3}
You have seen these charts before, I want to remind you of just how burdensome home debt became as a percentage of personal income during our last two bubbles.
Debt-To-Income Ratio, California 1986-2006
From 2001-2006, the median home price in Irvine increased by an amount equal to the median income. I want to remind you what a massive economic stimulus this was:
Mortgage Equity Withdrawal 1991-2007
And Calculated Risk has a chart tracking the rising personal bankruptcy rate since the new bankruptcy law was passed in 2005:
This trend will continue. In fact, it will likely get much, much worse as the recession, unemployment, and foreclosures take their toll.
Fabulous ground level end unit three bedroom, two bath condo. Large eat
in kitchen with sliding doors out to a tranquil patio. Light and bright
home with neutral colors. Inside laundry and attached garage. All
pictures on the MLS are current.
Today’s featured property is a 2003 rollback.
The property was purchased on 9/2/2003 for $403,000. The owner used a $322,400 first mortgage, a $80,600 second mortgage, and a $0 downpayment.
On 6/22/2005 the property was refinanced with a $412,000 first mortgage.
On 4/21/2006 the owner opened a HELOC for $148,000.
Total property debt is $560,000.
Total mortgage equity withdrawal is $157,000.
If this property sells for its current asking price, and if a 6% commission is paid, the total loss will be $184,940.
For this owner, the Ponzi Scheme is officially over.
BTW, I would like to call your attention to the newest blog in town: Irvine Homes. Erika Chavez of the OC Register is now writing a daily blog on Irvine real estate, and she has an interview with me posted today. Go check it out.
{book1}
This time I made up my mind This time I’m back on my grind I know there’s things in my life That I’ma let go startin tonight I can’t live my life this way
We are the Irvine Housing Blog, and during the week, I focus exclusively on Irvine properties. However, the weekends I leave open for exploration. If I am particularly inspired (and ambitious), I will do more than provide an open thread. This weekend, I was inspired.
I am a superstar with a big big house and a big big car, I am a superstar and I don’t care who you are. I got fortune, I got fame, Love it when you say my name. Love to party, I am naughty, Prettier than everybody! I got muscles, I’m a stud, Jealous people kiss my butt,
On Thursday in the astute observations, someone known as “E” asked about the largest HELOC abuse case we had profiled so far. We have profiled a couple for around $1,000,000 (The Ultimate Post, Responsible Homeowners are NOT Losing Their Homes), but Irvine is not old enough or valuable enough to have truly spectacular HELOC abuse cases. In a series of emails and a long phone call, “E” told me about a property in Hollywood that makes the pretenders in Irvine look like the wannabes they really are.
The way “E” described this neighborhood, it is the home of many of the truly rich, the famous, and the “Joneses” that want to be. Many in Irvine are trying to keep up with the Joneses; the Joneses live in Hollywood, and they are trying to keep up with the rich and famous who live here. Today’s featured property belongs to the Joneses (not their real name).
The interesting part of the keeping-up-with-the-Joneses phenomenon is that the people at the top of the heap often do not care about impressing anyone or making the Joneses jealous. Many at the top are just living their lives and trying to keep a low profile. When you really are rich, you don’t care if anyone knows about it.
Back on market! Rare short sale in Hancock Park, accepting all offers.
Huge reduction to $3,675,000!! Property must be sold!! Harry Warner
Estate. Gorgeous Georgian Colonial. Huge corner lot of over 29,000 ft.
7 beds, 5.5 baths. Large over-sized pool, tennis court and detached
guest house. Original screening room used by Harry and many Hollywood
friends still in basement. An amazing property built for a Hollywood
legend. Please call listing agents for appointment.
Realtorspeak is alive and well in Los Angeles.
Do you like the siren song of the pretentious? “An amazing property built for a Hollywood
legend.” Wow, I wonder if it would make me cool if I lived where some Hollywood legend lived? Probably not…
So how do the Joneses really live? Well, if you are near the top
rung of the ladder, you own a house in the best neighborhood, you milk
that house for every penny it appreciates, throw opulent parties, and
try to make everyone on the next rung down the ladder jealous. It goes
something like this:
This property was purchased in the early 70s for around $150,000.
My data does not go back that far, but the total assessed value is
$346,592 which would account for the original valuation and the
proposition 13 adjustments since it was passed.
I do not know what the original mortgage was, but for the sake of
calculating MEW, lets assume it was $120,000 which is 80% of $150,000.
My records pick up in 1998. On 10/23/1998, there was a new first mortgage for $250,000. This point also
marks when the property went from being owned by a couple to being
owned by just a woman.
On 2/9/1999 the owner refinanced a $400,000 first mortgage.
On 7/2/1999 she opened a HELOC for $150,000.
On 3/31/2000 she opened a HELOC for $759,000.
On 2/16/2001 she opened a HELOC for $609,300.
On 3/1/2004 she opened a HELOC for $1,200,000.
On 10/2/2006 she refinanced with a $2,700,000 Option ARM with a 1.5% teaser rate.
On 10/2/2006 she opened a HELOC for $200,000.
On 3/12/2007 she opened a HELOC for $787,500.
Total property debt is $3,487,500. (which explains the current asking price).
Total mortgage equity withdrawal is $3,367,500.
I am speechless…
When I first saw this chain of refinances, I was utterly amazed.
Getting out of my Irvine bubble has made me even more bearish about
the high end. Armageddon does not begin to describe what is going to
happen. BTW, this house will not sell for its current asking price. A
nearly identical comp at 501 S. Lucerne Ave–two blocks away–just sold for 2,050,000.
I wrote about Southern California’s Cultural Pathology over
two years ago. I did not fully grasp how pathetic and sick the culture
in much of California has become. Something about seeing this property
and a few others around the neighborhood made be realize how deeply
embeded kool aid intoxication really is here.
The more you stretched to buy a house, the more rewarded you were with appreciation and HELOC money.
Think about that; buyers have been strongly rewarded for decades for
doing something very, very stupid. The reward came though a massive
binge with Ponzi Scheme financing. Nothing in our real estate market is
real. Valuations in every neighborhood in California are being set by
buyers so pickled with kool aid that they do not even realize the
poison they have ingested.
This price crash will be epic; it really will be the great unwinding.
Californians cannot afford their homes. Too many people have
borrowed too much money, and no amount of loan modifications are going
to provide terms that will keep them in their homes. Even if they could
get modified down to managable payment levels, most will walk away
anyway. These people stretched to get the HELOC money that is not going
to be coming. Once this is realized, once homedebtors realize the ATM
machine will not be turned on, they house they found so rewarding will
suddenly be seen for the crushing financial burden it really is.
Easy-money refinances and Home Equity Lines of Credit are the great
poison. They have created a pathology that will take years to cure.
Most buyers active in today’s market do not fully grasp what the end of
a Ponzi Scheme really means. Most assume lenders will re-inflate this
bubble again soon and they will be able to go back to living their
Ponzi Scheme lives. According to the IMF: Global Credit Losses Could Top $4 Trillion. Lenders are not going to lose $4 Trillion dollars and go right back to
the practices that lost them all that money. Even the moral hazard of
our government bailouts will not encourage lenders to be that stupid
again soon.
It’s over.
The lifestyle of excess financed by dumb money is over. All that is
left is for us to watch this slow motion train wreck and document the
excesses here. We may not experience the Great Depression II, but for
those people who became accustomed to the HELOC lifestyle, it will feel
like a depression.
{book6}
I am a superstar with a big big house and a big big car, I am a superstar and I don’t care who you are, I am a superstar with a big big house and a big big car, I am a superstar and I don’t care who you are. I got fortune, I got fame, Love it when you say my name. Love to party, I am naughty, Prettier than everybody! I got muscles, I’m a stud, Jealous people kiss my butt, I’m so fly I’ll make you cry, Cross my heart and hope to die.
