This one went back to the bank on 2/4/2008 for $616,250.
Our house, in the middle of our street Our house, in the middle of our Our house, was our castle and our keep Our house, in the middle of our street Our house, that was where we used to sleep Our house, in the middle of our street Our house, in the middle of our street
Beds: 4 Baths: 3 Sq. Ft.: 2,344 $/Sq. Ft.: $299 Lot Size: 5,940 sq. ft. Type: Single Family Residence Style: Other Year Built: 1972 Stories: Two Levels Area: Northwood County: Orange MLS#: P595176 Status: Active On Redfin: 37 days
From Redfin, "This house features 4 bedroom plus a bonus room, 3 full bath, remodeled kitchen with new appliances, granite countertop and travertine backsplash, dual panel windows and located close parks and tennis courts, schools, restaurants, shopping centers and easy access to I5 and most of all a motivated seller."
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You have to admit, this is an impressive rollback. The asking price is a full 20% under the purchase price, and this property was purchased before the 2006 peak. If the seller manages to get their full asking price, they still stand to lose $211,094.
Realistically, this one is headed to foreclosure. This was another 100% financing deal, so the seller is motivated to walk. The bank will foreclose before they take a hit on their first mortgage, so any loss in excess of $173,800 will not get approved. The second mortgage holder... well, that is probably going to be a total loss. These are big numbers. How many of these can the banks absorb?
BTW, all the "moderates" who think we are only due for a 10% to 15% correction should be rejoicing. This must mean we are at the bottom.
You know, it doesn't look or feel like the bottom to me...
Through me the way to the city of woe,
Through me the way to everlasting pain,
Through me the way among the lost.
Justice moved my maker on high.
Divine power made me,
Wisdom supreme, and primal love.
Before me nothing was but things eternal,
And eternal i endure.
Abandon all hope, you who enter here.
Housing market bulls must abandon all hope. We are witnessing a collapse of house prices not seen since the Great Depression. There are no signs of bottoming or even a slowing of the decline at this point in time. The secondary mortgage market is in shambles; despite the best efforts of the Federal Reserve, mortgage interest rates are rising; credit is tightening; sales volumes are anemic; if it were not for the persistent talk of government bailouts, there would be no hope at all.
We need hope. Hope is as essential as food or water. Presidential candidate, Barack Obama wrote about "Hope in the face of difficulty. Hope in the face of uncertainty. The audacity of hope!" We all want a bright and hopeful future, and for people renting and saving their money, the collapse of house prices is reason to hope; however, for those who speculated on real estate; for those who are overextended on their mortgage obligations needing to refinance; for those who are depending on their home equity for a comfortable retirement; for those people, the market reality is pretty bleak, and denial and hope is all they have left.
During the Great Depression, the last time the nation witnessed house price declines on the scale we are seeing now, America turned to a new president for hope. Franklin Roosevelt gave radio addresses known as "fireside chats." He used these chats to outline his policy programs (many of which made the depression worse,) but the primary service President Roosevelt provided the nation was the dispensing of hope. There was not much the President or anyone else could do about the problems of the Great Depression, just as there is not much anyone can do about the Great Housing Bubble. Franklin Roosevelt's chats during the Great Depression and Ronald Reagan's speeches during the worst of the recession of the early 1980s gave Americans comfort and hope. If we are in a deep recession at election time (which seems likely,) our next President will be called on to do the same. The election will become less about issues and intellectual competence and more about inspiration and emotional comfort. People vote for emotional reasons; people want to believe in their leaders and be inspired by them. When Barack Obama wrote "The Audacity of Hope," he hoped to inspire a generation with his words. Given the sorry state of our national economy, Americans may turn to this man, not because he is the best qualified to be President, but because is the best at dispensing hope.
Great corner unit with private balcony above garage. Spacious and large living room. Custom paint, Berber carpet, & paneled flooring. No one above or below with only one shared wall. Parks and all recreation just steps away. 2-car tandem garage with lots of storage.
Love those tandem garages...not!
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Look at this rollback -- 15% off a 2004 price. If this isn't hell for homeowners, I don't know what is. Price declines of this magnitude certainly cannot be inspiring much hope.
This unit was purchased in September of 2004 by a flipper using 100% financing through Accredited Home Lenders. The loan was sold off to a CDO managed by the Bank of New York Trust Company. Our flipper walked away, and the property went into foreclosure on July 12, 2007. The trustees paid $457,854, and they have been trying to sell it ever since. Apparently the trustees are not skilled at disposing real estate because we are 8 months later and this property has seen two listings and six price reductions.
Date Price
Original List $535,000
Jul 03, 2007 $519,000
Sep 27, 2007 $499,000
Sep 28, 2007 $495,000
New Listing
Dec 25, 2007 $469,900
Jan 23, 2008 $460,500
Feb 15, 2008 $439,900
Mar 20, 2008 $399,900
It is difficult to say exactly how much the CDO will lose on the deal. The trustees managing the CDO have likely been accumulating unpaid interest and fees associated with this property and added this to their basis. In other words, they probably have upwards of $550,000 tied up in the property that collateralized the original $470,000 loan. Let's assume they have a $535,000 basis based on their original asking price back in July of 2007, although it is likely much higher. If the trustees gets their asking price the total loss to the CDO bond holders will be $159,094 after a 6% commission.
Remember, this is on a 2004 purchase. When the lenders start losing this kind of money on loans they made in 2004, imagine the losses they will take on loans made later at higher prices. What is going to happen when all the 2004, 2005, 2006 and 2007 buyers -- who are currently underwater -- start walking away from their properties? This is what the people who manage our economy fear most, and it is probably what is going to happen. The losses to the lenders and to those holding their toxic waste are going to be staggering.
Prepare yourself for financial Armageddon.
That concludes another week at the Irvine Housing Blog. Come back next week as we continue chronicling ‘the seventh circle of real estate hell.’
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Razors edge
Outlines the dead
Incisions in my head
Anticipation the stimulation
To kill the exhilaration
Close your eyes
Look deep in your soul Step outside yourself
And let your mind go
Frozen eyes stare deep in your mind as you die
Close your eyes
And forget your name Step outside yourself And let your thoughts drain
As you go insane... [go] insane
Inert flesh
A bloody tomb
A decorated splatter brightens the room
An execution a sadist ritual
Mad intervals of mind residuals
Close your eyes
Look deep in your soul
Step outside yourself
And let your mind go
Frozen eyes stare deep in your mind as you die
In the era of 100% financing, speculation was widespread. Why not, speculators had nothing to lose other than their credit score, and if prices had gone up, they would have reaped a huge windfall. We have documented case after case of this behavior right here on this blog. Are we flagellating the equine after it has already perished? Perhaps, but until this behavior is seen for what it was, lenders will not learn their lessons, and they will do it all over again. Realistically, the only thing that could save housing prices would be a return of 100% financing and the elimination of lending standards like we saw during the bubble. There is only one problem with that: people cannot afford the payments -- They have proven that much. The continued use of 100% financing through 2007 was the only thing delaying the crash. Now that the FED is lowering interest rates, they are hoping this will translate into lower borrowing costs and help knife-catchers finance the huge sums necessary to afford today's pricing and slow the decent of prices. There is only one problem with that: as the FED lowers interest rates it increases inflation expectations, and mortgage interest rates go up. Hmmm... It is really quite a quandary.
The low interest rates we are experiencing now may prompt a few sales in 2008, but the FED will not be able to keep interest rates low for long or inflation will get out of control (anyone remember the 1970s?) If the FED starts raising interest rates later this year to curb inflation, mortgage interest rates will again rise -- not because of inflation expectations but because base rates will have increased. Mortgage interest rates hit the floor in 2004. The Federal Funds rate was 1%, inflation was low, and risk premiums were artificially low because investors in mortgage backed securities did not recognize the risks. 5.8% is as low as interest rates on a 30-year fixed-rate mortgage can get. Higher inflation and more rational risk premiums will prevent interest rates from getting that low again. It seems very unlikely mortgage interest rates can get any lower than 5.8%. We will not see 4% mortgage rates to prop up prices.
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Have you noticed when the real estate market bulls are proven wrong, there is always some unforeseen outside factor to blame? David Lereah had the nerve to claim nobody saw the subprime crisis coming despite the fact warnings about subprime lending were widely known and reported. Remember that you read this here: Mortgage interest rates are going to rise. You will probably not see mortgage interest rates on 30 year fixed rate mortgage below 6% again in your lifetime. Sometime in late 2008 or early 2009, the federal reserve will start raising interest rates, and mortgage rates will rise with them. This will be blamed for the big drop in prices and it will be held up as the reason for the faulty forecasts of bullish realtors. If it wasn't for the FED, trees really would grow to the sky, right?
One of the primary functions of the FED is to provide a stable financial system. Once the Federal Reserve begins to see economic growth and liquidity in the debt markets, interest rates may rise as quickly as they fell in order to stop hyperinflation from occurring. The FED does not want to see its member banks receive worthless currency in return for the loans it made; although I suppose this is better than receiving even less currency in a default.
Mortgage Interest Rates 1972-2006
When a country knowingly devalues its currency, it causes a severe recession as the prices of imported goods and raw materials increases dramatically. Perhaps a severe recession and price inflation is preferable to an economic depression like the one of the 1930s in America, but it is certainly not desirable. There will be some benefits to a devalued currency. A less valuable currency is a boon to exporters. The United States has run a chronic trade deficit for many years, and much of the recent deficit has come from inexpensive goods imported from China. The trade imbalance may correct itself with currency devaluation. Of course, this rebalancing of trade will come at the cost of more expensive imported foreign goods and a commensurate decline in spending power from US consumers. Also, prior to currency devaluation, wages in the United States were so high that jobs were being outsourced to foreign countries where people can be paid much less. Wages could not rise significantly from where they were without devaluing the dollar to prevent wage arbitrage from moving jobs overseas. The devalued currency provided some room for wage increases, and these wage increases could theoretically provide additional support for housing prices. If the FED does chose hyperinflation, there needs to be wage inflation to go along with it or the economy will experience a very deep recession due to the steep drop in consumer spending (It may anyway.) If wages rise, houses become affordable again. I wouldn't mind paying today's prices if my salary doubles.
Put today's problems in perspective: the Federal Reserve is being forced to chose between stagflation and depression, house prices are crashing, and homeowners are being foreclosed on in record numbers. This situation is the result of declining home prices; the declining home prices are a direct result of the unsustainable price levels created during the bubble rally; the unsustainable price levels were created by widespread use of 100% financing and the elimination of lending standards, so this is important stuff worthy of daily exposure on blogs like this one. In today's 24 hour news cycle, it is easy to focus on the sensational and forget about the root causes of our problems. The roots are here in properties like this one and in borrowers like this one who used 100% financing to speculate in the real estate market at the expense of our banking system.
6 bedrooms total - 4 bedrooms upstairs, 2 bedrooms, 2 dens downstairs, with 2.75 baths. Wood flooring downstairs. Remodeled kitchen with double ovens, flat top cooking surface, large pantry & newer cabinets. Leaded glass front doors, plantation shutters, newer central A/C, newer tile roof, 8 ceiling fans and recently painted in & out. Large backyard. Close to park and community pool.
$241 / SF is real progress.
The price will have to be reduced for the cost or repainting. The pink and green colors are truly ugly.
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This property was purchased less than one year ago, and if the short sale is approved, and if the seller gets their asking price, the lender (NBGI Inc.) stands to lose $207,400 after a 6% commission. There have been some comments on my equity burn calculation where I take 10% of the purchase price and divide it by 12 to get a monthly equity loss on the property. How much was this lender's equity burn? $17,283 per month. If this flipper had any of his money in the deal, that would have been his loss, but since it was the lender...
Anyone looking to buy in today's market really should pay attention to the equity burn number. In today's market, borrowers have to put money down. It is their money evaporating into the ethers. The phenomenon is real, and it will continue for the foreseeable future.
It is a good time to be a renter.
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Tonights the night well make history, honey, you and i
And Ill take any risk to tie back the hands of time
And stay with you here tonight
I know you feel these are the worst of times
I do believe its true
When people lock their doors and hide inside
Rumor has it its the end of paradise
But I know, if the world just passed us by
Baby I know, you wouldnt have to cry
The best of times are when Im alone with you
Some rain some shine, well make this a world for two
Our memories of yesterday will last a lifetime
Well take the best, forget the rest
And someday well find these are the best of times
These are the best of times
There are many ways to become a millionaire. You could find oil on your property like Jed Clampett from the Beverly Hillbillies, or you could have your property could go up in value $1,000,000 like today's owners did. What would you do with $1,000,000? Some people would take the money and invest it and make even more money; some people who hit the lottery spend it all and are poor again in a few short years. Today's sellers are in the latter category.
Find your home in Woodbridge's Landing tract with this entertainer's dream home. Enjoy this home's downstairs bedroom (currently used as office) and bath as well as a versatile upstairs bonus room, which can double as an oversized additional bedroom. The kitchen is a cook's dream, with French noire cabinets and an expansive cookspace. The kitchen opens to a warm family room with coffered ceilings, a custom dual-fireplace and wet bar. A large living room with vaulted ceilings adjoins to the formal dining room. This model has a the perfect floorplan for entertaining, whether inside or in the expansive backyard with the built-in granite BBQ and custom-built patio coverings. The front walk, driveway and rear are paved with Bouquet Canyon stonework. Featuring award winning schools and community amenities. Finishing details such as custom crown moldings, plantation shutters and ceiling treatments complete the look. Just steps to South Lake, tennis, pools and spas.
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Just when I think I have seen the worst HELOC and refi abuse imaginable, I keep finding more (actually Brittney finds these -- thank you, Brittney.)
Today's sellers owe more than $1,214,500 on a house they purchased in 1981 for $265,000.
Can you believe that? After 27 years of ownership, they should have almost completely paid off a 30-year fixed rate mortgage and be looking forward to having a $1,000,000 for their retirement. Instead, they have nothing, nada, zero. They have refinanced themselves into oblivion; either that, or they are have exercised their mortgage "put" option.
Today's sellers first step to the Dark Side came in 2002 when they refinanced for $450,000. Apparently, the lure of free money was too much for them so they refinanced again in 2006 for $1,175,000. Finally, their journey to the Dark Side was complete in 2007 when they took out an Option ARM for $1,000,000 and a stand-alone second for $214,500.
Even if these sellers get their sales price (this is borderline WTF,) they get $1,221,060 after a 6% commission. Anyone want to guess what the outstanding loan balances total up to? It sure looks like they will sell for a $1,000,000 gain, and they will not get a penny at the closing table. Amazing.
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Chart of the day:
Inflation adjusted projections based on S&P/Case-Shiller Indices for Los Angeles 1987-2013
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I'm not a bad person,
I don't drink, and I don't kill.
I got no evil habits, and I probably never will.
I don't sing like Elvis Presley,
I can't dance like Fred Astaire.
But there's one thing in my favor,
I'm a millionaire!
CHORUS:
And I got more money,
Than a horse has hairs.
Cause my rich old uncle died,
And answered all my prayers!
Having all this money,
Is going to bring me down.
If you ain't with me honey,
To help me spread it around!
I could get myself a nose job,
I could diet for a year.
But I'll never be Robert Redford,
Cause I'm much to fond of beer.
Please don't misunderstand me,
It's not love I'm trying to buy.
It's just I got all this here money,
And I'm a pretty ugly guy.
CHORUS
I don't mind if you love me for my money,
If you love me for whatever else I got.
But 'cept for all this stuff, I'm a lonely Fort Knox,
I don't guess I'm doing all that hot.
All methods of predicting future price action rely on the same basic premise: prices are tethered to some fundamental value, and although prices may deviate from this value for extended periods of time, prices eventually return to fundamental valuations. This premise has been reinforced by market observation; in fact, many estimates of fundamental value are based on market action. Since many market participants believe in buying and selling based on fundamental values, there is also an element of self-fulfilling prophecy contained therein. The efficient markets theory is based on this idea, and although the behavioral finance theory is needed to explain the wide deviations from fundamentals real-world prices exhibit, both theories share the same notion of an underlying fundamental valuation to which prices are ultimately based. The challenge to market prognosticators is to select a fundamental valuation to which prices will return, and then extrapolate a period of time in which the return of prices to fundamental valuation will take place.
Notice of Defaults and Trustee Sales as a Percentage of Total Sales, San Diego, CA 1990-2007
The timing of the decline is the most difficult parameter to evaluate and estimate. House prices are notoriously “sticky” during price declines because sellers are loath to sell at a loss. The timing of a decline is impacted both psychological and technical factors. The motivations of sellers based on their personal circumstances and emotional states will determine if there is a heightened sense of urgency to sell which would push prices down quickly. During the price correction of the coastal bubble of the early 90s, prices declined very slowly as unmotivated sellers held on and waited for prices to come back. The market experienced denial and fear, but there was not a stage of capitulatory selling that drove prices down quickly as is typical in the deflation of a speculative bubble. The primary technical factor impacting the rate of price decline is the presence of foreclosures and real estate owned (REO.) REOs are a form of must-sell inventory (as are new homes.) If there is more inventory of the must-sell variety than the market can absorb, prices are pushed lower. The more of this must-sell inventory there is on the market, the faster prices decline. If the pattern of the early 90s is repeated, the price decline of the Great Housing Bubble may drag out slowly while fundamentals catch up to market pricing. In fact, this probably what will occur on the national market unless the foreclosure numbers and resultant REOs overwhelm market buyers. In the extreme bubble markets like Irvine, California, the combination of high foreclosure rates and general market panic will likely push prices lower much more quickly. Even though the percentage decline in house prices is projected to be double the decline witnessed in the bubble of the early 90s, the duration of the decline may be similar as capitulatory selling pushes prices lower at a faster rate.
Projected NODs and Trustee Sales as a Percentage of Total Sales, San Diego, CA 1990-2012
The importance of the foreclosures cannot be overstated: sellers will not lower their prices voluntarily. Prices will not drop quickly without massive numbers of foreclosures to push them down. The entire “soft landing” argument boils down to one supposition: the number of buyers in the market will be able to absorb the must-sell inventory on the market. If this is true, prices will not drop. If this is not true, prices will drop until enough buyers are found to purchase the foreclosures. There will be a number of buyers on the way down, some will be long-term homeowners who are present in any market, but many will be speculators betting on the return of appreciation. These people will be few in number, but there may be enough to them to buoy the market if there are not many foreclosures. If foreclosure numbers really spike, prices will fall until Rent Savers and Cashflow Investors enter the market and absorb the excess. If current trends continue, the number of foreclosures will be too great for long-term owners and speculators to absorb. Foreclosures also control the depth of the decline to some degree. Once prices fall down to their fundamental values, new buyers enter the market and begin to absorb the inventory. If there are not enough buyers at this price level to absorb all the foreclosures, prices could overshoot fundamentals to the downside; in fact, this does tend to happen at the bottom of the real estate cycle.
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WELL-APPOINTED BELLA ROSA HOME IN THE EXCLUSIVE GATED COMMUNITY OF NORTHWOOD II. PRIME INTERIOR LOT LOCATION OFFERS GREAT CURB APPEAL, CUSTOM LANDSCAPING, UPGRADED TEXTURED CARPETS, DARK WOOD FLOORING, CUSTOM PAINTS, CUSTOM WINDOW TREATMENTS, STAINLESS APPLIANCES, WINDOW CASINGS, UPGRADED CABINETRY, RECESSED LIGHTING, HUGE MASTER SUITE W/ SITTING AREA, WALK-IN CLOSET, AND DUAL VANITIES. MAIN FLOOR BONUS ROOM MAY BE CONVERTED INTO 4TH BEDROOM. UNIQUE FLOORPLAN. ONLY 2 HOMES IN DEVELOPMENT WITH THIS FLOORPLAN. CONVENIENTLY LOCATED NEAR THE IRVINE SPECTRUM, SHOPPING & DINING. AWARD WINNING IRVINE UNIFIED SCHOOL DISTRICT.
TURN OFF THE CAPS LOCK.
UNIQUE FLOORPLAN. ONLY 2 HOMES IN DEVELOPMENT WITH THIS FLOORPLAN. I thought "unique" meant one-of-a-kind? I guess 2 copies is as unique as an Irvine tract home gets.
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This property is priced 17.6% below its 2004 purchase price. This isn't 17.6% off the peak, it is 17.6% off a 2004 price. As properties like this one set the comps in Northwood II, it is becoming apparent that the entire neighborhood is now selling for less than its purchase price.
The seller of this property originally purchased with 5% down utilizing a $737,935 first mortgage, a $138,363 second mortgage, and a $46,202 downpayment. In September of 2006, they refinanced $800,000 in a 1% Option ARM and simultaneously opened a $100,000 HELOC with Greenpoint Mortgage Company. I don't know if they have tapped the HELOC, but what would you guess? If this property sells for asking price, the total loss on the property will be $208,100 after a 6% commission. It is difficult to determine how the parties are going to split this loss as it depends on how much of the HELOC has been taken out. I would surmise that nobody will be happy with the outcome.
In all likelihood, this will not sell as a short sale because of the inherent difficulties that process entails. This will probably end up as a foreclosure and become REO adding another story to the statistics shown in the graphs of this post. Each one was the shattering of someone's dreams and hopes for the future.The huge numbers of foreclosures all have a story, and we will tell those stories here: one property at a time...
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Hear the sound of the falling rain
Coming down like an Armageddon flame (Hey!)
The shame
The ones who died without a name
Hear the dogs howling out of key
To a hymn called "Faith and Misery" (Hey!)
And bleed, the company lost the war today
I beg to dream and differ from the hollow lies
This is the dawning of the rest of our lives
On holiday
One of the more interesting phenomenon observed during the bubble was the perpetuation of denial with rumors of homeowner bailouts. Many homeowners held out hope that if they could just keep current on their mortgage long enough, the government would come to their rescue in the form of a mandated bailout program. Part of this fantasy was not just that people could keep their homes, but that they could keep living their lifestyle as they did during the bubble. What few seemed to realize was any government bailout program would be designed to benefit the lenders by keeping borrowers in a perpetual state of indentured servitude. With all their money going toward debt service payments, little was going to be left over to live a life.
All of these plans had benefits and drawbacks. One of the first problems was to clearly define who should be “bailed out.” The thought of bailing out speculators was not palatable to anyone except perhaps the speculators themselves, but with regular families behaving like speculators, separating the wheat from the chaff was not an easy task. If a family exaggerated their income to obtain more house than they could afford in hopes of capturing appreciation, did they deserve a bailout? The credit crisis that popped the Great Housing Bubble was one of solvency, and there was no way to effectively restructure payments when a borrower could not afford to pay the interest on the debt, and this was a very common circumstance. None of the bailout programs did much for those with stated-income (liar) loans, negative amortization loans, and others who are unable to make the payments, and since this was a significant portion of the housing inventory, none of these plans had any real hope of stopping the fall of prices in the housing market.
The main problem with all of the plans is the moral hazard they created because those who did not participate in the bubble and behaved in a prudent manner would be penalized at the expense of those who were careless with risk. In one form or another either through free market impacts or direct subsidies from the government paid by tax dollars, these bailout plans all asked the cautious to support the reckless.The moral hazard involved and the moral outrage from those being asked to pay the bills prevented any of these plans from being implemented.
Many of the bailout plans called for changing the terms of the mortgage note. This might have been easy in the days when banks held mortgages in their own portfolios, but it was nearly impossible once these mortgages were bundled together in collateralized debt obligations and sold to parties all over the world. Even if it would have been possible to easily change the terms, the resulting turmoil in the secondary mortgage market would have caused higher mortgage interest rates. When an investor faces the risk of the government changing the terms of their contract, and these changes would not be in their favor, the investor would demand higher returns. Higher investor returns means higher mortgage interest rates which would raise the cost of borrowing. This was the opposite of what the government bail plans were trying to accomplish.
Hope Now?
The first of the numerous bailout programs was “Hope Now” introduced in October of 2007. As the name suggests, Hope Now was sold to the general public as a reason for them to hang on and continue making crushing payments for as long as possible. It was a false hope, but even false hope gave homedebtors a little emotional relief, and it provided a few more payments to the lenders. According to their website, “HOPE NOW is a cooperative effort between counselors, investors, and lenders to maximize outreach efforts to homeowners in distress.” The plan was to streamline the process of negotiating workouts between lenders and borrowers to keep borrowers making payments and ostensibly to stop them from losing their homes. The emphasis was on making payments and maximizing investor value in collateralized debt obligations. Very few people benefited from the program, despite government claims to the contrary, and no rights or benefits were conferred to borrowers that they did not already contractually have. There was much fanfare when it was first announced, but the program did far too little to have any impact on the housing market.
The next bailout was aimed directly at the lenders with the Super SIV program introduced in November of 2007. An SIV is a special investment vehicle is an off-balance-sheet investment designed to hold investments a company (usually a lender) does not want to show on their own balance sheets. It is a smoke-and-mirrors device used primarily to get around regulations intended to stop lenders from taking excessive risk. The Super SIV program was intended to purchase assets from the troubled SIVs and provide liquidity for lenders who desperately needed it. The problem with the Super SIV was simple: nobody wanted these assets. Moving bad mortgage paper around was akin to rearranging the deck chairs on the Titanic. Few in the general public knew what this program was for, and even fewer cared. Most wanted to know their government was doing something to solve the problem, and the Super SIV announcement provided them with much wanted denial.
In December of 2007, the government offered a more direct homeowner bailout plan. The proposal was to freeze the interest rates on certain loans for certain borrowers for five years. This was greeted as a panacea by all parties, and the beast of homeowner denial was fed once again. As with the Hope Now program, few people qualified, and it did nothing to hold back the tide of increasing defaults and foreclosures. The denial was short lived, and this unnamed bailout plan quickly fell from the headlines.
In the Savings and Loan disaster of the late 1980s, the government was liable to investors for their losses through the Federal Savings and Loan Insurance Corporation (FSLIC.) The government had no choice by to compel taxpayers to cover the costs of the industry bailout. The Great Housing Bubble had no such government liability. However, in February of 2008 Congress and the President signed the Economic Stimulus Act of 2008temporarily increasing the conforming loan limit for Fannie Mae and Freddie Mac, the government sponsored entities (GSEs) that maintain the secondary mortgage market. This had the ominous prospect of putting the government in a position where they may step in with taxpayer money to bail out the GSEs, even though the GSEs are explicitly not backed by the assurance of government assistance. The GSEs provide insurance to mortgage backed securities, and by raising the conforming limit, the GSEs were able to insure large, so called “jumbo” loans. This enabled the holders of jumbo loans who were unable to sell these mortgages access to capital in the secondary market. The secondary mortgage market behaves as if the GSEs are government backed, and if they were to fail due to losses from the insurance they provide, the government may have had to step in to back them. All of this was seen as another reason for homeowners in severely inflated bubble markets to hope the government was going to rescue the housing market.
Forgiveness of Debt
Perhaps the most outrageous suggestion put forth was the suggestion by the FED Chairman Ben Bernanke when he proposed lenders forgive mortgage debt in early 2008. The moral hazards were obvious. Would people stop making their payments to make sure they qualified? Would more people buy homes they could not afford then appeal for debt relief? Rational people became frightened when they heard the head banker in the United States propose massive debt forgiveness as they realized this meant the entire banking system was in peril. The implications of this proposal were lost on the typical homedebtor who only saw how they might benefit from it. Debt forgiveness was the ultimate fantasy of every homedebtor. They could be relieved of their financial burdens and get to keep their houses and their lifestyles. It did not matter to the financially troubled that the proposal made no sense and had no possibility of happening, the thought of it would motivate them to hang on a little longer to see if maybe they could hit the jackpot.
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Do Nothing
It is difficult not to become cynical about all the various bailout programs, and the proposals outlined were not the only ones discussed in the public forum. There was a steady drumbeat of public plans and announcements that were never substantial, and their only purpose seemed to be to foster denial among those who needed it.
At the time of this writing, no substantive bailout program has been implemented, and that is a good thing. There is no possible bailout program without the commensurate moral hazards and unfair benefits they would contain. The best course of action would be to ease the transition of people from overextended homeowner to renter and not to attempt to manipulate the financial markets for the benefit of a few. There is nothing that can be done to prevent of the collapse of a financial bubble. The solution lies in easing the pain of their deflation and in preventing them from inflating in the future.
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Rescue me, oh take me in your arms
Rescue me, I want your tender charm
'Cause I'm lonely and I'm blue
I need you and your love too, come on and rescue me
Come on, baby, and rescue me
Come on, baby, and rescue me
'Cause I need you by my side Can't you see that I'm lonely
A couple of weeks ago, I wrote a two part analysis post on Structured Finance and the CDO market. There was one item of import that needed clarification, so I thought I would take this weekends open thread to do it.
I hope you are all enjoying the free preview of my rough draft for The Great Housing Bubble (or whatever the publisher may want to call it.) Vetting this rough draft in the open forum of this blog has been invaluable to me. The thousands of fact-checkers who read the blog each day have forged its message. I can't thank you all enough. The daily inundation of analysis posts will end soon as I am getting close to completion of the draft manuscript, so we will be getting back to our daily dosage of schadenfreude soon enough.
Mortgage Default Losses
There is risk of loss in any investment, and losses in collateralized debt obligations arise from the difference in the book value of the underlying mortgage note and the actual resale value of the collateral on the open market, if this collateral is subject to foreclosure. There is an important distinction that must be made between the default rate on a mortgage loan and the resultant loss incurred when a default occurs. High mortgage default rates do not necessarily translate into high mortgage default losses and vice-versa.
Subprime loans have had high default rates since their introduction. When subprime mortgages began to capture broader market share starting in 1994, the rate of home ownership in the United States began to rise. The increasing use of subprime loans and the subsequent increase in home ownership rates put upward pressures on house prices. As house prices began their upward march, the default losses from subprime defaults began to fall because the collateral was obtaining more resale value. This made subprime lending, and its associated high default rates, look less risky to investors because these default rates were not translating into default losses. As time went on and prices continued to rise, subprime lending established a track record of investor safety which drew more capital into the industry; however, since the relative safety of subprime lending was entirely predicated upon rising prices, it was an industry doomed to fail once prices stopped rising.
Take this phenomenon to its extreme and its instability becomes readily apparent. Imagine a time when prices are rising, perhaps even due to the buying of subprime borrowers, and imagine what would happen if 100% of the subprime borrowers defaulted without making a single payment. It would take approximately one year for the foreclosure and relisting process to move forward, and during that year, the prices of resale houses would have increased. When the lender would go to the open market to sell the property, they would obtain enough money to pay back the loan and the lost interest so there would be no default loss. What just happened? Lenders became de facto real estate speculators profiting from the buying and selling of homes in the secondary market rather than lenders profiting from making loans and collecting interest payments. This profiting from speculation is the core mechanism that disguised the riskiness of subprime lending. When these speculative profits evaporated when prices began declining, the subprime industry imploded and its implosion exacerbated the decline of home prices.
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There are no lyrics, but I am a long-time fan of Native American flute Music. Carlos Nakai is awesome.
Hurry on down to Columbus Grove and get a sweet deal on a honey of a property!!! Over 20% off!!! Wow!!! GOURMET kitchen, PERGRANITEEL, this ONE is TURNKEY!!! This one will not last!!! Hurry!!! Buy now or you will miss your chance!!! These prices will not last forever!!! Real estate only goes up!!!
Sugar,
Oh, Honey Honey.
You are my candy girl,
and you got me wanting you.
Honey,
Oh, Sugar, Sugar.
You are my candy girl
and you got me wanting you. Sugar, Sugar -- The Archies
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Are you catching the fever of the spring rally yet? Sellers like this one hope you will. I imagine they would rather someone else lose the next $250,000 in depreciation on this property.
Absolutely beautiful single family home in the master planned community of Columbus Grove. Family room with fireplace and media niche. Hardwood floors. Gourmet kitchen with GE Monogram appliances and granite countertops. Preparation island. Breakfast nook. Master bedroom with fireplace and jetted whirlpool tub. Oversized walk-in closet with organizers. Laundry room with storage space and sink. 2-bay expanded garage. Porte cochere. This home has everything!
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Did you notice how close the power lines are to this property? One of our regular readers did, and he sent me this song.
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If this seller gets their asking price, Indymac stands to lose $295,440. I know we profile these daily, and after a while you get used to it, but sometimes you have to wonder, "what in the hell were these lenders thinking?" How do you loan someone over a million dollars when the borrower has put less money into the deal than many of us have put down as a rental deposit? (I suppose in some ways it really was cheaper to buy than to rent.) There has been much discussion here and on other blogs about the willingness of borrowers to walk away from their obligations. The obviousness of it becomes apparent when you imagine yourself in the various circumstances.
Imagine you are today's homedebtor/bank renter/whatever you want to call him. You have put a modest security deposit ($3,464) into a property, and it has declined in value about $300,000. This property is costing you twice as much as a comparable rental, and it will be many years before resale values would provide you any profit. Wouldn't you stop renting from the bank at that point and go find a cheaper rental? Of course you would; why wouldn't you?
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That concludes another week at the Irvine Housing Blog. As you may have surmised, I am making progress toward completing my book on the Great Housing Bubble. You will likely be treated (or you will have to endure) more of the combined analysis and property profile posts in the future. Come back next week as we continue chronicling ‘the seventh circle of real estate hell.’ Have a great weekend.
During the Great Housing Bubble, many speculators tried to make money through trading houses. The vast majority of these traders were not professionals but amateurs who thought they could be professionals. Most amateurs ended up losing money because they did not understand what it takes to be successful in a speculative market. The first and most obvious difference in the investment strategy between professional traders and the amateurs in the general public is their holding time. Traders buy with intention to sell for a profit at a later date. Traders know why they are entering a trade, and they have a well thought out plan for their exit. The general public adopts a “buy and hold” mentality where assets are accumulated with a supposed eye to the long term. Everyone wants to be the next Warren Buffet. In reality this buy-and-hold strategy is often a “buy and hope” strategy — a greed-induced, emotional purchase without proper analysis or any exit strategy. Since they have no exit strategy, and since they are ruled by their emotions, they will end up selling only when the pain of loss compels them. In short, it is an investment method guaranteed to be a disaster.
There is plenty of evidence houses were used as a speculative commodity during the Great Housing Bubble. Since the cost of ownership greatly exceeded the cashflow from the property if used as a rental, the property was not purchased for positive cashflow, and by definition, it was a speculative purchase. Confirming evidence for speculative activity comes from the unusual and significant increase in vacant houses in the residential real estate market.
National Homeowner Vacancy Rate, 1986-2007
If markets had not been gripped by speculative fervor, vacancy rates would not have risen so far above historic norms. If houses had been purchased for investment purposes to make money from rental income, the houses would have been occupied after purchase and vacancy rates would not have gone up. A rise in vacancy rates would have resulted in downward pressure on rents, and the investment opportunity – if it had existed initially (which it did not) – would have disappeared with the declining rent. There is only one reasonable explanation for increasing house prices and increasing rents during a period when house vacancy rates increased 64%: people were purchasing houses for speculative gains and leaving them unoccupied while the owners waited for prices to rise.
When house prices stopped their dizzying ascent, many speculators found themselves with large monthly debt service costs and no income to offset expenses. Many chose to quit paying their mortgage obligations and allowed the property to be auctioned at foreclosure. Many chose to rent the properties to reduce their monthly cashflow drain, and they became accidental landlords. In the vernacular of the time, they became floplords – flippers turned landlords.
Becoming a floplord was fraught with problems. First, they were not covering their monthly expenses, so the losses on the ”investment” continued to mount. This was a convenient form of denial for losing speculators because they believed they were buying themselves time until prices rose again allowing them to sell later either at breakeven or for a profit. Since they bought in a speculative mania, prices were not going to recover quickly and the denial soon evolved into fear, anger and finally acceptance of their fate.
Another problem floplords faced was their own inexperience at managing rental properties. Most had never owned or managed a rental property, and none of them purchased the property with this contingency in mind. They often found poor tenants who did not reliably pay the rent or properly care for the property. This created even more financial distress and greater loss of property value as the property deteriorate through misuse.
The problems of renting were not confined to the floplords. Sometimes the renters were the ones who suffered. Many floplords collected large security deposits and monthly rent checks from tenants and failed to pay their mortgage obligations. This situation is called “rent skimming,” and it is illegal in most jurisdictions, but this crime is seldom prosecuted. Most of the time, the first indication a renter had that their rent was being skimmed was finding a foreclosure notice on their front door. By the time of notification, several months of rental payments were gone and the renters were evicted soon after the foreclosure. Renters seldom recovered their security deposits.
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Valuations in Northwood for homes 2,000+ SF are still bubbly. Recently we featured a floplord looking to cover about 2/3 of his ownership cost (or ask 50% more than the property is worth depending on your point of view.) Today's post features another floplord in the neighborhood with Secret Gold. The property is going to be a big loser for the owner, and since you can rent an identical property for $3,900, it doesn't make much sense to spend around $5,500 a month to buy it, unless of course, you like the $7,400 a month equity burn on top of your oversized payment.
WOW!! Take a look at this Beautiful home in Desirable gated commmunity of Northwood II. OUTSTANDING SCHOOLS, PARKS, POOL AND CLUB HOUSE. ! Beautiful quality upgrades. Gorgeous gourment kitchen with cherry cabinerty, stainless appliances includes, wine refrigerator. Island breakfast bar, beautiful granite counters. Prestine wood floors, upgraded carpet, window coverings. French doors lead to relaxing patio with soothing waterfall. Short distance to shopping, library and the NEW GREAT PARK IN PROGRESS. Move-in condition. Low homeowner association fee.
WOW!! This realtor can't spell commmunity, gourment, cabinerty, or Prestine. I am not a stickler about spelling, and in fact, I am not a great speller, but when the computer puts a big red line underneath it, I have to go out of my way to ignore it. Please, someone at the MLS needs to get spell check software.
What does the Great Park have to do with anything?
Interesting that $120 a month for an HOA fee is considered low.
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This property was purchased at the peak, and now if they get their asking price, the sellers stand to lose $245,280 after a 6% commission. This is their best-case scenario. If they become a floplord and hold the property all the way to the bottom, they will lose close to $500,000. Of course, they could always hold it until prices come back... in 2030.
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Let your arms enfold us
Through the dark of night
Will your angels hold us
Till we see the light
Hush, lay down your troubled mind
The day has vanished and left us behind
And the wind, whispering soft lullabies
Will soothe, so close your weary eyes
Let your arms enfold us
Through the dark of night
Will your angels hold us
Till we see the light
Sleep, angels will watch over you
And soon beautiful dreams will come true
Can you feel spirits embracing your soul
So dream while secrets of darkness unfold
Unsold in 90+ days