Lay awake at night, Oh so low, just so troubled. Can't get a job, Laid off and I'm having double trouble.
Financial markets have no mercy. They take no prisoners, except maybe those that are now imprisoned in their homes. The financial markets do not care what the prices mean to you or to anyone else for that matter. If falling house prices costs people money, ruins their credit, and forces them into bankruptcy, well, that is what can happen when people speculate in financial markets. There are likely many people losing sleep over their losses in real estate and the stock market while simultaneously worrying about their job. These are not carefree times.
This too shall pass. Despite all the turmoil, the sun will rise tomorrow, and it will be another beautiful day in Southern California. People will meet, fall in love, get married, start families, and look to buy a house. Hopefully, they will chose to rent for a while instead.
Enjoy the new Suzanne Researched This video, now with subtitles.
They say life is so much sweeter through the telephoto lens of fame
I wanted to remain anonymous. If it were not for the book, I would still be hiding in the shadows. When I first started writing for the IHB, I had a great deal of pent-up energy for getting the word out about the Great Housing Bubble. I wanted people to know how prices got to where they were and why prices were going to fall. It saddened me to see people lose everything to the market (it still does), and I wanted to save as many people as I could. As the IHB grew from around 500 visitors a day to 3000 visitors a day, I knew my words were having an impact on people's lives, and I found that very satisfying (I still do). By staying anonymous, and writing to help people without regard to fame or fortune, I was seeking a purity of purpose that would keep my writing honest, truthful and free from bias. I hope that I can maintain that purity now that my identity is no longer a secret.
Like most of you, I have met a few famous people, but there is one experience that sticks out in my mind when I think about how fame impacts people. I used to work in the golf course development industry, and I was the project manager on a golf course being designed by Greg Norman. One day, he made a site visit, and I got to spend about 6 hours with him. What is fascinating about spending more than a few moments with someone very famous is that you get the opportunity to observe everyone else around him. Famous people are treated differently than the rest of us. People give them special attention and admiration. People want to be near them and feel like they are part of the aura of fame that surrounds them. As an observer of fame and part of the entourage, I saw how the experience impacted me and the others present, but I had no idea how it felt to be famous. It was something outside of my experience. Wednesday, I had my 15 minutes of fame, and I got a taste of what celebrity feels like.
I made the front page of the Turnertown Gazette
My day started with appearing on the front page of the OC Register. I knew a story was coming out, but I had no idea I would be featured on the front page. My wife called me early in the morning and told me that my son's teacher was jumping up and down and exclaiming, "Your husband is on the front page of the newspaper!" My day of fame had begun. Later that morning at work, I got a call from KPCC public radio asking me to do an interview. I think it went pretty well (MP3 link).
At 6:30 that night, we had our IHB gathering and book signing party. It was a tremendous success. I signed books for 2 1/2 hours before I had a moment to take a break. It was thrilling. The greatest satisfaction I get from writing for the IHB is the many "thank yous" from the readers. I got to meet face-to-face nearly 100 people who all came to express their gratitude for the work I do. I had a satisfaction overdose.
What I found particularly interesting was meeting the many lurkers who came out. I know by the statistics that this blog has many readers, but the number of posters represents maybe 5% of the readership. There is a silent majority: that large group of people who are touched by the blog that I never see. It was wonderful to meet so many of them. It opened me to a whole world of readers with whom I had previously only had a one-way relationship.
I want to thank all of you who came out that night. It was the pinnacle of fame. I knew at that moment what celebrities feel like when everyone around them treats them like someone special. It was an amazing experience.
Hey words gonna get around Everybody dies famous in a small town
I know I am not famous, and I really have no desire to be famous. I am a small fish in a small pond in the grand scheme of things, but I wanted to share with you what it was like for me to have my 15 minutes of fame. Wednesday, November 12, 2008 is a day I will remember for the rest of my life.
I exceeded my quota of "thank yous" on Wednesday, so please don't thank me more in the comments on this thread.
If any of you want to share your stories of fame, I would enjoy reading them. If any more lurkers want to come out of the shadows, introduce yourself and tell us how you found the blog and how long you have been reading. Also, anyone wanting to share their experiences of the IHB party, I would like to know what was happening in the rest of the room. I was too busy to pay much attention. It looked as if a good time was had by all.
They say life is so much sweeter through the telephoto lens of fame around here you get just as much attention cheerin' at the high school football game
I dreamed of going to Nashville Put my money down and placed my bet But I just got the first buck of the season I made the front page of the Turnertown Gazette
Every last one, route one, rural hearts got a story to tell Every grandma, in law, ex girlfriend Maybe knows it just a little too well Whether you're late for church or you're stuck in jail Hey words gonna get around Everybody dies famous in a small town
I dont care what you say We never played by the same rules anyway.
There are some listings where you can tell the owner just doesn't care anymore. Put yourself in his shoes: the house you own is worth far less than you paid and far less than you owe. There is no way you can sell it for enough to get any of your money back, and your credit is shot. Why would you care?
There was a time when people purchased houses because they wanted to provide a home for their family. They took on debt they could reasonably afford, and they made payments until they sold. If they made a little money in the transaction, that was a bonus. Once prices started going up, and people saw that could make a great deal of money by owning, the profit motive started to creep into their thought process. Once prices really went up a lot, and did so very quickly, profit became the primary motivation for buying real estate. The fact that they could live in the place while they were making a fortune was a bonus. That is still the psychology dominating our real estate market, and it is the primary motivation behind the continued activity of knife catchers buying at what are still grossly inflated prices locally.
In time this psychology will change. Lenders are no longer going to enable speculation with 100% financing and liar loans, and worse yet, they are actually going to require people to pay off mortgages. Serial refinancing is over. Oh the horror of it. Can you imagine what will happen to prices when people start believing they will actually have to pay off the debt from their wage income? The Ponzi scheme of ever-increasing debt where each buyer was more leveraged than the last has come crashing down. It is only the few knife catchers who believe they will get to pass this debt on to someone else who are willing to buy in this market. We should probably thank them. Someone has to absorb the losses between today and the eventual bottom.
Wonder why things are going so well You want to know why?
cause Im a liar, yeah, Im a liar
Remember all the fun speculators had with stated-income loans? Loan documentation is
usually a routine part of obtaining financing. Lenders ordinarily
require a borrower to provide documentation proving income, assets and
debt. However, during the final stages of the Great Housing Bubble,
loan documentation was seen as an unnecessary barrier to completing
more transactions, and loan programs which circumvented normal
documentation procedures flourished. In short, liar loans were everywhere.
So are these people getting their comeuppance? No. In fact, they are getting a second chance, and this time they get to lie about income in the other direction. Let me explain.
So you stagger back home and wait for nothing But the solitary refinement of your room spits you back onto the streets
Everyone is doing loan modifications now: Citibank, the GSEs, everyone. They must. You saw in yesterday's post how destructive the upcoming wave of ARM resets is going to be, and the lenders know this. They will do every loan workout they can to avoid more foreclosures. Part of the loan workout requires the borrower to demonstrate they are unable to make payments, and their income is going to be used to figure out how much principal reduction and other loan terms the bank will adjust to accommodate them. I think you can see where this is going... All the people who exaggerated their incomes to obtain more house than they can afford, are now trying to look as poor as Church mice to get the biggest mortgage principal reduction they can: the reverse liar loan. They lied to get in, now they get to lie in order to keep it. We have a great system in place, don't you think?
The problem is even bigger than that. The whole loan modification process has built-in moral hazard that is going to burn lenders on a grand scale. I received an email from a realtor friend (yes, some realtors actually like me) that had this story to tell:
A
friend of mine from college purchased a new home in Victorville for
around $450,000. At the same time many others in his neighborhood
purchased as well. My friend and his neighbor were both paying their
mortgage. However, his neighbor called his mortgage company requesting
a loan modification. The mortgage company explained that he is not in
default and therefore they will not complete a loan modification. My
friend’s neighbor decided to quit paying his mortgage while he
continued to make payments on his four-wheeler, quad, and other toys
and make trips to the desert weekly. He called the mortgage company
back a couple of months later and received a principle reduction of
circa $100,000. My friend, a very smart person, math thesis of the year
award winner in college, with a masters degree in math, vice principle
at a high school making excellent money, expresses to his neighbor that
he is upset that his home is worth $100,000 less than he paid for it,
however his neighbor then explains that he received a $100,000
principle write down by not paying his mortgage and negotiating a loan
modification. Stopping by his house a few weeks ago on the way back
from Las Vegas my friend explained this to me and said he thinks that
he is going to get a modification as well.
These loan modifications are going to cause a chain reaction through entire neighborhoods and communities. Are you going to be the only one in your neighborhood who didn't quit making payments in order to get a loan modification? It is really that simple: stop making payments, and you will get a loan modification. Keep making payments, and you will not.
What is the morality of this? Is this wrong? The holder of your mortgage is offering to give you a great deal of free money if you stop making payments. You are not forcing them; they are freely offering the loan modifications to anyone who qualifies. By not making a few payments, you qualify. If Uncle Sam said to you that you must pay your full tax bill by April 15th, but if you are 90 days late, we will knock 1/3 off. What would you do? Is it immoral to take the discount?
The government's and the lender's response to this financial crisis is evolving from an irritating curiosity to a complete WTF-are-you-doing series of terrible missteps. How much more wrong could they be? How much more damage are they going to do by trying to solve the problem? How much is this going to end up costing the rest of us? Is this where our $700,000,000,000 is going? Let them eat cake.
Today's featured property is a typical Irvine rollback. The owner bought at the peak with an Option ARM, and now he is giving up and letting the property go. Perhaps he should just do a loan modification and get $200,000 knocked off his mortgage...
I would like to welcome readers of the OC Register to the Irvine Housing Blog. We provide analysis of market trends and profiles of properties in Irvine, California. Today we have an analysis post, like many that can be found in our analysis section, and we also have a property profile showing the distress in one of Irvine's newer neighborhoods. Thank you for stopping by.
but you tell me over and over and over again my friend, ah, you don't believe we're on the eve of destruction.
There has been plenty of conjecture about the impact of adjustable-rate mortgages (ARMs) on the future of our housing market. Some people believe that if interest rates remain low that the upcoming ARM resets will not cause many foreclosures. This is wrong. Today's post examines what will happen when these resets occur, and it will demonstrate why this problem is so big.
By now, most of you have seen the ARM reset schedule shown above. But what does it really mean, and why is this a problem? ARMs became very popular in the bubble rally because they allowed people to finance huge sums of money with smaller payments. In time, it became the only viable alternative for financing. There are two types of ARMs: interest-only and negative amortization (Option ARMs). A typical ARM has a fixed interest rate for a brief period, then the interest rate adjusts and the payment is recast. Option ARMs tend to me more complicated. They have more frequent adjustments -- which are almost always to higher rates and higher payments -- and they have the option to pay less than the interest-only amount which results in negative amortization (a fancy way of saying your mortgage balance goes up). There are two terms that are important to understand with respect to ARMs: reset and recast. A reset is a change in interest rate being charged on the loan. These loans are all scheduled to reset at different times, and depending upon changes in the underlying index rate, the interest rate may go up or down. When the interest rate changes, or when the amortization method changes, the payment is recast which means it changes. Any change in payment is technically a recast, but the dreaded recast, the recast that causes all the problems, occurs when the amortization changes and the loan must be repaid.
It is not the interest rate reset that is the main problem, it is the recast to a fully amortized repayment schedule that causes dramatic payment shock.
Don't you understand, what I'm trying to say? Can't you see the fear that I'm feeling today?
At some point, a loan must be paid off. All loans eventually revert to fully-amortized loans requiring the borrower to pay back both the interest and the principal. During the bubble, people believed they could refinance continually from one ARM to another in a process known as serial refinancing. Most borrowers have come to believe mortgage debt is something you perpetually service and never retire. The collapse of mortgage lending that caused the bankruptcy of the subprime industry and the government to take over the GSEs has put an end to serial refinancing. Now people are going to have to pay off their debts. Most can't afford to.
Let's look at a typical example. During the bubble, there was a significant increase in allowed debt-to-income ratios. People who were eager to get rich on real estate stretched themselves to buy houses. This was not a passive result of high prices, this was the driving force of the price rally. As a result, many people are putting 40% or more of their gross income toward housing. Assume a borrower who was making $120,000 a year decided to take out a 5-year fixed, interest-only adjustable rate mortgage with a 40% DTI. They would be putting $4000 a month toward their housing payment, and with a 5% interest rate, they could finance $960,000. Does borrowing 8 times income seem impossible? It was not uncommon.
Let's assume this borrower has been making this $4,000 a month payment, since 2005, and their 5-year fixed period is coming to and end in 2010. What is going to happen? Let's look at the scenario people envision where this will not be a problem. Let's say interest rates are still extremely low in 2010 (something that is not very likely) and that the interest rate reset does not change the borrower's interest rate. At the end of the 5-year period, the mortgage recasts to a fully amortized payment schedule over the remaining 25 years of the loan. The payment which was $4,000 a month goes up to $5,612.06. The borrower was already putting a crushing 40% of their income toward their housing payment. How are they going to afford a 40% higher payment? Is it likely that their income rose 40% in 5 years? Can they afford a 56% DTI? You see, the problem with the interest rate reset is not the change in the interest rate, it is the recast to a fully-amortized schedule. Keep in mind; this is the best-case scenario where mortgage interest rates are still at historic lows seen during the bubble. If mortgage interest rates go up, which seems likely if risk is properly priced into them, then the payment shock at reset/recast is even worse.
So why can't the borrower just refinance into either another ARM or a 30-year loan? Remember the credit crunch? Loan terms have gotten much tighter. Lenders are requiring 20% equity, and the allowable DTIs are falling. Did the property go up 20% in value? No, values have declined. Did the borrower save up enough money to pay down the mortgage? No, they were putting all their money toward their interest-only payment? Did the borrower's income rise 40% or more over the last 5 years? Possible, but given the current state of our economy, it is not very likely. In short, the borrower is screwed. They will not be able to refinance, and they will not be able to support the new mortgage payment. They will end up in foreclosure.
If the button is pushed, there's no running away, There'll be noone to save with the world in a grave,
This is an enormous problem. Eighty percent of loan originations in 2005 and 2006 in Orange County were interest-only or negative amortization. This isn't just a few loans that will result in a few foreclosures. This is the bulk of our financing. You can see what these resets do to home prices by looking at the areas dominated by subprime. Santa Ana, Riverside County, Stockton, and many other markets that were dominated by subprime have been blasted back to 2001 pricing more than 50% off the peak. This did not occur because these neighborhoods were less desirable, it occurred because their loans reset in 2007 and 2008. The loans in Irvine and the more desirable areas in Orange County are set to reset from 2009-2011. The problems for the high end are in front of us, not behind us.
People who were buying or doing cash-out refinancing during the bubble were betting on 4 things: 1. Interest rates would stay low. 2. Loose loan terms would be available. 3. House prices would keep rising. 4. Incomes would keep rising. If any one of these four things did not happen, they were going to lose their house. It would only take one of these four conditions to change for disaster to occur. In the real world, all four of these things did not happen, and now we are facing a foreclosure crisis rivaling the Great Depression. Most people were not aware of the risks they were taking on, and many who were aware of them really believed everything would work out in their favor. They were tragically mistaken.
