Declining home values are a source of great aggravation to homeowners, but it is even more aggravating to the lenders. The lenders are the ones really losing in the deal. At one time, I had believed that the pain of loss might actually put and end to the crazy beliefs of kool aid intoxication. Unfortunately, since it the lenders who are enduring most of the pain, the general populace may continue to believe these crazy notions. The fact that the lenders are absorbing these losses rather than the people will create a massive moral hazard. All of the gains went to the individuals while all of the losses were absorbed by someone else. The seeds of the next bubble are being sown today. Perhaps the enablers at the lending institutions will not allow another bubble to be built, but I rather doubt it. Institutional memory is short, and as long as the infrastructure is in place without any significant regulatory reform, we will create another bubble as large and as painful as the one we have just witnessed. I suppose I am OK with that as long as I buy at the bottom and sell to some fool at the next peak...
Today's featured property is a large condo in Woodbury breaking down below $300/SF. This is the next tier of the housing market showing distress. It will get worse.
Filtering out the bad that holds us back... Take hold of what is true to your hunger A hunger that will not go away Plans for tomorrow, they will remain
I have a parable for you today:
A weary traveler was on a
quest to satisfy his deepest longings and desires. He traveled from
place to place, but no matter where he went or what he tried, nothing
would quite satisfy him. One day, exhausted from his search, he
happened to sit beneath a magical wish-fulfilling tree. He thought to
himself, "Perhaps it is not so good to desire so much. It has not
brought me any lasting satisfaction, but I am tired, and I could use
something to eat and drink..." No sooner had he thought this when
delicious food and drink appeared for him to enjoy. "Wow," he
exclaimed, "this is fantastic, but it would be nice to have someone to
share this bounty with." As soon as the thought occurred, a companion
appeared to enjoy the feast. His desires replete for the moment, he
thought to himself, "This is very strange. Everywhere I have traveled I
have wanted and found no satisfaction, and here at this tree, I can
have anything I desire. I wonder if there is something magic in this
tree? I wonder if it is inhabited by some spirit? I wonder if it is a
goblin that will consume me?" And, as soon he had this thought, a goblin
appeared, and consumed him.
HELOCs enabled people to satisfy
their hunger for vacations, consumer goods and the like and live well
beyond their means. This went on for an astonishingly long time. Many
of these people became accustomed to living off the extra "income"
coming from their houses. Like the goblin in the parable, the magic
wish-fulfilling house consumed them, and now they have lost their
house, their credit and themselves.
Whenever I hear the Beatles song, Penny Lane, I think of Irvine. An idyllic little world of perfectly manicured landscapes, and perfect little houses beneath the blue suburban skies. I have written before about the English neighborhood in Northwood that is a particular favorite of mine. If there is a "Penny Lane" environment in Irvine, you will find it here. Today's featured property is located in this little enclave, and it now the private Hell of Washington Mutual.
Each new low sale or asking price lowers neighborhood values. As I discussed in Financing in a Declining Market, everything within a 1 mile radius of a low asking price becomes very difficult to finance. All of the short sales we have been seeing advertised do nothing for the would-be seller, as they rarely result in a sale; however, they do serve to obliterate the neighborhood comps as these low asking prices sit on the market. In fact, I would say that attempted short sales are doing more damage to the market right now than foreclosures because the foreclosures simply disappear into the black hole of lender holdings whereas short sales stand out in the market signaling a new lower pricing level. Today's featured property is a nearly new property in Northwood II asking $240/SF. It is an astonishingly low price in today's market.
There are no pictures on the MLS, but the pictures below are of the identical property at 39 Secret Garden offered by a neighbor for $240,800 more (WTF?) Let's just say this neighbor can't be very happy about this short sale.
Here are a few fragmented excerpts on Countrywide's thirst for quantity and increasing lack of quality.
As for Countrywide being a great place to work -- as Jonas Roth
(the head of the trading desk at Countrywide) and others might testify
to -- Betsy Bayer (VP of compliance at Countrywide) wasn't so sure. "It
was a sweatshop," she said. "They had these posters all over the
office. They were 'work/life balance' posters, like they were concerned
about our well being. What a load of Bullsh*t. It was a sweatshop."
Even though many of Mozilo's senior executives had been with the
company 20 years or more, the Countrywide she worked for had a high
turnover rate where many employees would leave before two years was
out. "That's a fact that never gets published," she said.
Managing wholesale compliance, she -- and others -- learned the
idea was to produce as many loans as humanly possible. Bayer, being the
company's "rules person" for loans brought in through its broker
network, didn't think compliance was being taken all that seriously by
Mozilo and his senior management.
Mozilo, for his thirst for market share, had followed Arnall's
company (Ameriquest and Argent) into the business of originating
stated-income loans (where home buyers state their incomes and the
lender believes them as long as their FICO score checks out).
Stated-income loans came in two types: prime and subprime. But when it
came to the "A" paper credit quality stated-income loans, Fannie Mae
and Freddie Mac (for the most part) wouldn't touch them because of the
lack underwriting. Countrywide also followed the crowd in originating
another popular loan of the 2004 to 2007 period: payment option ARMs
(adjustable-rate mortgages) (POAs), a product where the consumer was
offered four different payment plans each month. One of these payments
artificially low by delaying large interest payments each month, thus
adding new debt onto the loan amount. It was what some lenders called
an "I'll worry about it tomorrow" option. By 2006 Countrywide was the
largest pay option ARM lender in the nation, originating $11 billion
worth a quarter.
"When you go for quantity, quality is what you give up," said
Bayer. "To get volume, you lose quality -- that's what they did." When
she arrived in 2004, the company's compliance department was in what
she called "complete turmoil." When pressed further, she said
Countrywide wasn't doing its homework when it came to underwriting.
"They were relaxing credit guidelines."
She said that inside the company compliance staffers had a word
for stated-income loans: "liar loans." Bayer said the only ones in the
company who called them that were members of the compliance staff. No
one in the firm used the phrase, at least not within earshot of the
production chiefs.
I find HELOC abuse stories fascinating in a train-wreck sort of way. I like to try to imagine the thought processes and belief system that would allow someone to do something so incredibly foolish. Spending your home equity is not a one-time event that could be the result of a single, rash decision, it is the cumulative effect of numerous bad decisions made over a long period of time. Each refinance or equity extraction was the result of a rational thought process with some deliberation. The fundamental belief must be that house prices always go up, therefore additional equity will always be available to spend. If you didn't believe that, you might pull the money out to screw the lender, but you wouldn't do it knowing it might cause you to lose your house. The second fundamental belief must be that interest rates and payments will always decline. When you take on more debt, you have to make larger payments to service it, unless of course, you continually refinance with an adjustable rate mortgage in a declining interest rate environment. It is possible some of these people believed their income would rise to make the larger payment as well, but the overriding belief had to have been that low interest rates and serial refinancing would always be available. All of these beliefs are wrong, and the market is driving this point home (literally) right now.
It is the end-game planning I can't quite get my head around. When was this supposed to end? If people are perpetually spending their equity increases as income, when they finally sell the home, they have no equity. I suppose if you really believed house prices always go up, the house could serve as a perpetual breadwinner that would provide income for retirement and beyond. I guess it really doesn't make much sense to rent when you can buy a house for no money down and live off the appreciation forever. Did people really believe that was possible? If you look at the behavior of HELOC abusers like today's featured property owners, you would have to conclude they believed all of those absurd things, and so did a great many others in California as well.
The old adage in real estate is location, location, location. During the Great Housing Bubble, location and quality really didn't matter much. It all came down to financing and the options it created. 100% financing gave all buyers a "Call" option on real estate. If the price went up, they got to keep all the money, and if it went down, the losses were passed on to the lender. 100% refinancing gave all owners a "Put" option on real estate. If the property went down in value, they had already extracted all their equity, so again the risk was passed on to the lender. Of course, the real bonanza for speculators was the Option ARM. This gave speculators a way to drastically reduce the carrying costs on their speculative investment. Many could even rent the property out for positive cashflow, particularly if they used a 1% teaser rate like today's speculator. With all the incentives favoring speculative betting in the housing market, it is really any wonder people got a bit carried away? Is it any wonder lenders are now expected to lose $1,600,000,000,000? (That is $1.6 Trillion.)
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I find HELOC abuse stories fascinating in a train-wreck sort of way. I like to try to imagine the thought processes and belief system that would allow someone to do something so incredibly foolish. Spending your home equity is not a one-time event that could be the result of a single, rash decision, it is the cumulative effect of numerous bad decisions made over a long period of time. Each refinance or equity extraction was the result of a rational thought process with some deliberation. The fundamental belief must be that house prices always go up, therefore additional equity will always be available to spend. If you didn't believe that, you might pull the money out to screw the lender, but you wouldn't do it knowing it might cause you to lose your house. The second fundamental belief must be that interest rates and payments will always decline. When you take on more debt, you have to make larger payments to service it, unless of course, you continually refinance with an adjustable rate mortgage in a declining interest rate environment. It is possible some of these people believed their income would rise to make the larger payment as well, but the overriding belief had to have been that low interest rates and serial refinancing would always be available. All of these beliefs are wrong, and the market is driving this point home (literally) right now. 
