An option contract provides the contract holder the option to force the contract writer to either buy or sell a particular asset at a given price. A typical option contract has an expiration date, and if the contract holder does not exercise their contract rights by a given date, they lose their contractual right to do so. An option giving the holder the right to buy is a “call” option, and the option giving the holder the right to sell is a “put” option. The writer of an options contract is typically paid a fee or a premium for taking on the risk that prices may move against their position and the contract holder may exercise their right. The holder of an options contract willingly pays this premium to limit their losses to the premium paid if the investment does not go as planned. Most options expire worthless.
Mortgages took on the characteristics of options contracts in the Great Housing Bubble. Speculators utilized 100% financing and Option ARMs with low teaser rates to minimize the acquisition and holding costs of a particular property. The small amount they were paying was the “call premium” they were providing the lender. If prices went up, the speculator got to keep all the gains from appreciation, and if prices went down, the speculator could simply walk away from the mortgage and only lose the cost of the payments made, particularly when this debt was a non-recourse, purchase-money mortgage. Another method speculators and homeowners alike used was the “put” option refinance. Late in the bubble when prices were near their peak, many homeowners refinanced their properties and took out 100% of the equity in their homes. In the process, they were buying a “put” from the lender: if prices went down (which they did,) they already had the sales proceeds as if they had actually sold the property at the peak; if prices went up, they got to keep those profits as well. The only price for this “put” option was the small increase in monthly payments they had to make on the large sum they refinanced. If fact, on a relative cost basis, the premium charged to these speculators and homeowners was a small fraction of the premiums similar options cost on stocks. Of course, mortgages are not option contracts, and lenders did not view themselves as selling option premiums to profit from the premium payments; however, speculators certainly did view mortgages in this manner and treated them accordingly.
Today's featured property exercised her "put" option she obtained from her lender in December 2006 with a "strike price" of $645,000. This was a far better deal than selling the property. If she had sold it, she would not have probably obtained this price, and she would have had to give 6% of that money to a realtor. By getting a lender to give her 100% of this money, she comes out at least $38,700 ahead, and probably more than that when you consider the discount to move the property. It is a wonder more people did not do this.
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It appears as if she made two payments before stopping. I guess the intent to defraud is not quite so obvious if you make a token effort at payment? The notice of default was served in July for back payments of $19,943, and the property was purchased by the lender at auction on 1/11/2008 for $691.227. The additional $46,227 being lost payments and expenses.
Townhouse style condo, 2 attached garage with direct access to the unit. Fireplace in living room with sliding glass door to patio. Light & bright, vaulted ceilings & skylights. 2 balconies upstairs, with view of greenbelt. Spa tub in master bath.
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This property is one of the few stressed properties I have seen in Turtle Rock. A healthy market would absorb a few of these without much damage, but in a stressed market like ours practically devoid of buyers, a few of these properties set the comps, and values take a serious dive. Our market is as fragile as an egg, and these foreclosures are as violent as a sledge hammer.
This property is the tale of two parties. The lady who "put" this property to the lender made $116,000 on the deal. She will have to deal with bad credit, and if she has any of this money in liquid assets, the lender may go after it, but in all likelihood, she will get to keep her "profits" from the foreclosure. The lender will not do quite so well on the deal. Their basis is $691.227 plus whatever expenses they incur managing the property through disposition. If they manage to get this selling price and pay a 6% commission, the lender stands to lose $150,821. Let that one sink in for a moment. This lender made a loan, received two payments, and then proceeded to lose $150,000.
The "put" and "call" option features of mortgages during the bubble are the direct result of 100% financing. Speculators and homeowners have too little to lose to behave responsibly when 100% financing is available. Without increasing the cost to speculators through downpayments or a loan-to-value limit on refinances, speculators are going to utilize these mortgage products in ways they were not intended. There were many expensive lessons learned by lenders concerning 100% financing during the Great Housing Bubble.
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Wanna be's throwin' ones tryin' to show that they makin cash
Lookin' stupid than a mother all though it'll raise ya tabs
Cause the vehicles and jewelry we got is way mo' advanced
There's more colors in a watch than a set of jamaican flags
Pick it all up in bags the promoters like make it fast
Cause here comes another monsoon and these boys is goin' make it last
Y'all hit the club tryin' to act like ya poppin' tags
Hit the club and ya new clothes and you know you goin' take it back
I'm a fly rides owner ain't no need to take a cab
Cause the key ain't nothin' to me I got cars so just take the slab
Say you doin' it bigger it trip us so they can laugh
Cause I done ran threw way mo' numbers than student's can do in math
40 large in my pocket's is causin' my pants to sag
Still in love with my money like I use to say in the past
I feel sad for this child. This was some child's private world lovingly painted with beautiful clouds, dancing characters and the sun peaking through the window. The room looks joyous and happy. When these parents wished upon a star, I wonder if it was for mortgage relief so they could keep their house and their child could keep their special place. Alas, it was not to be...
Beautiful family home located in Irvine, home features 4 bedrooms, 2.5 bathrooms, the master suite has a walk-in closets, kitchen features center island and eating area, the family room has a cozy fireplace, a spacious living room and eating area, inside laundry and a two car direct access garage, property shows like 'NEW'
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I would comment that the lender is not doing well on this one, but since New Century is already out of business, it is a moot point. The trustees managing the portfolio of bad loans written by New Century are going to lose a total of $231,694 after a 6% commission. Another day, another quarter million dollar loss in Irvine...
My guesstimate numbers, from Friday, were pretty close. It seems my math is coming in low for the NODs, but it is still within a 10% error margin. I will experiment with a new calculation for this month, and see if it comes closer to the real numbers. Also, my number for foreclosures will always be higher than DQ's numbers, because I include the homes that are bought by someone, other than the bank, at the auction.
One quibble I have, is Matt stated "To be sure, foreclosures account for a small percentage of total housing stock in O.C., which has increased by tens of thousands of homes since the last downturn of the 1990s." This is not true when you do the math. The owner occupied (keep in mind, DQ’s foreclosure numbers are for owner occupied housing) housing stock at the end of 1996 was 560,753, and in 2007 it was 614,815. The record foreclosure month was October 1996, with 674, and now the record is 802.
That is…
1 foreclosure for every 832 homes in 1996.
1 foreclosure for every 767 homes in 2008.
Any way you look at it, it is bad, it is really, really bad.
And, for the first five days in February there has been 580 NODs recorded (116 per day), 229 NTSs recorded (45.8 per day), and 189 trustee deeds recorded (37.8 per day). Keep in mind, February has 19 business days compared to January's 21 business days. So, while the monthly numbers may not be higher, or the same, they are still increasing.
Today, 40 homes went back to the bank at the Santa Ana court house, and 2 sold. Here are the 5 homes in Irvine that went back to the bank...
And... the big news of the day, (insert awgee snickering here), Slade's home went back to the bank for $1,282,500. It looks like the zestimate of $3.15mil is a bit high. I guess Jo's singing career is not going so well. And, for those who think we at IHB are completely heartless, and kill a puppy for every home sale, I sincerely hope his kid it doing well. Just remember... don't buy stuff you can't afford. You never know what life will throw at you.
The first casualty reported by us in the Collage tract was 714 Timberwood. And yes, these are the actual pictures advertising this property. Kinda crappy huh? You really need to evaluate the smaller no-name real estate brokers/agents before you entrust them with your $500k+ sale.
On to the details:
Address: 1602 Timberwood, Irvine, CA 92620 (Northwood) Plan: 1267 sq ft - 2/2.5 MLS: S467201 DOM: 43 Sale History: 02/21/2006: $560,000 10/31/2003: $300,000 4/18/2001: $240,000 Current Price: $560,000
So what happened here? Well our flippers got in over their heads. They purchased in February 2006 for $560,000 using 100% financing. How common is this?!?!
What I find interesting here is that in the 2.5 years from the original sale in 2001 to the 2003, the price went up $60,000 (25%). And then in the next 2.5 years from 2003 to 2006, the price went up $260,000 (87%).
The buyer in 2003 put down about 27%. The flipper in 2006 put down 0%.
In a rapidly appreciating market (from 2003-2005), flippers used other people's money and made out like bandits. They were looked up to as 'real estate gurus'. My guess is the current seller wanted to get in on the game and not be left behind. Too bad for them. At the current asking price, they are facing a loss of about $33,000 (assuming 6% in selling costs). Oh wait! They didn't put anything down.. I suppose the lender (Fremont Investment & Loan) will be the biggest loser given that the private remarks state: "ALL offers need short sale approval from mortgage holder."
UPDATE #1 - February 5, 2008
Yes, it has been over a year since this property was featured. It looks like the property went back to the bank (La Salle Bank) on 5/25/2007 at a price of $484,358.
It was then listed as a REO on 6/5/2007 for $532,500. The price kept dropping over a few months and it finally sold on 12/27/2007 for $447,000 (~20% off the 2006 price).
For those who are forum members, then you are probably familiar with the foreclosure thread. For those that are not members, I recommend you join, as there are some great topics, even beyond housing. But, in that thread, I try to update it to show what is happening with the foreclosure numbers, both in OC as a whole, as well as Irvine. Anyway, the idea of sharing these stats on the main blog were suggested, and I will be posting them periodically. I would like to do it every day, but I can't say I will always be able to find the time. I will do these posts in the evening, so that everyone can enjoy the post of the day.
For those that are not familiar with the process, or the abbreviations, here are the basics...
NOD = Notice of default. This is the first stage, and it is recorded 90 days after the first missed payment.
NTS = Notice of trustee sale. This is the second stage, and it is recorded 30-90 days after the NOD. This is posted in a newspaper, like the Irvine World News, and lists the time and place of the auction, the address, the NTS amount, and various other legal info. It has to be published for three weeks.
Trustee sale/REO = back to the bank, or someone bought it at the auction. This is the final stage, and it is when the owner loses the house.
What a way to start the new year, but with record NODs and foreclosures!
NODs 2156, or 103 per day, and an increase of 18.7% from last month.
NTSs 1185, or 56.4 per day, and a decrease of -3% from last month.
Trustee sales 824, or 39.2. and an increase of 18.1% from last month.
Just how bad are the trustee sales? Comparing the worst month on record in 96, there was 1 foreclosure for 832 owner occupied homes in OC, and in 2008, it is 1 foreclosure for 746 owner occupied homes.
How about adjusting for household population? Will it look better that way? In 96, there was 1 foreclosure for 3903 people, and in 2008, it is 1 foreclosure for 3706 people. Well... it looks like it is worse than even the worst month on record. Considering NODs are double than what they were a year ago, and nearly double from the average of last year, then I suspect it will only continue to get worse. Since the ratio of NOD to foreclosure is about 50%, then 2008 could bring a month with a 1000+ foreclosures. This is starting to get really ugly, really, really fast.
Yesterday, 41 homes went back to the bank at the Santa Ana courthouse. Some of the lenders still do not get it, and they are holding tight to what the NTS amount is. However, there are many lenders that do get it. There are more, and more lenders discounting the minimum bid $100k-$200k below the NTS amount.
My favorite foreclosure of the week, went back to the bank for $1.65mil, with a NTS amount of $2.11mil, a $460k discount from the amount owed on the loan. I thought Newport Coast, and the high end was immune? This place is so new, that zillow only has one satellite photo of a completed home, and that is if you click on west.
There weren't any homes that went back to the bank in Irvine yesterday, but this one in Tustin Ranch did for $882k. It sold for $610k in 2001, and then someone shut off the ATM.
Today there were 22 homes that went back to the bank, and one condo on Fairview in Santa Ana sold for $102.5k, but it sold for less than half of the NTS amount of $211.5k. This must have been a scratch and dent lender, or an IB who bought a mortgage pool for $0.30 cents on the dollar, and they still made a profit.
This week two homes in Irvine went back to the bank. 16 Salton #65, for $545k, and 106 Kazan St., for $292k. Currently, there are 44 homes in Irvine scheduled for the auction, from Monday to 3/20/08. More will be added, and some will get canceled, but we will see how it goes. There are a bunch in Quail Hill, including a big one with an NTS amount of $1.5mil. Finally, there are four homes in Woodbury scheduled for the auction, including one on Rising Sun, just across the street from the pool.
I hope everyone enjoys this post, as well as those to come. Comments, questions, and suggestions are welcome...
