Mine eyes have seen the glory of the coming of the Lord;
He is trampling out the vintage where the grapes of wrath are stored;
He hath loosed the fateful lightning of His terrible swift sword;
His truth is marching on.
Glory! Glory! Hallelujah! Glory! Glory! Hallelujah!
Glory! Glory! Hallelujah! His truth is marching on.
Battle Hymn of the Republic — Julia W. Howe
Link to modern rock video version
During the civil war, Major General William Tecumseh Sherman of the Union Army took the city of Atlanta and proceeded to march to the city of Savannah destroying everything in his path (Sherman’s March to the Sea.) He ordered his troops to burn crops, kill livestock, consume supplies, and destroy civilian infrastructure along their path. This ancient warfare technique is know as scorched earth. This policy is often also referred to as total war.
There is a class of warrior operating in our housing market: flippers. I say they are warriors because they are at war with regular families, coming in to buy any property perceived to be of value. They will be glad to sell the property to a regular family — after a significant markup. The market has ways of dealing with flippers: its own scorched earth policy. It is called a bear market.
We have been profiling many flips recently. Some are REOs where the intention is not profit but loss mitigation, but many have been flips purchased by speculators. One of the memes floating around the MSM is that speculators have left the market. We have plenty of evidence to the contrary.
Actually, I rather like it. If I were going to pick two categories of property owners I would most like to see end up as bagholders for the decline over the next few years, it would be flippers and lenders.
Asking Price: $729,000
Purchase Price: $611,000
Purchase Date: 3/28/2007
Address: 24 Atlanta, Irvine, CA 92620
Beds: 4
Baths: 2.5
Sq. Ft.: 2,011
$/Sq. Ft.: $363
Lot Size: 3,870 sq. ft.
Year Built: 1978
Stories: 2
Type: Single Family Residence
County: Orange
Neighborhood: Northwood
MLS#: S488429
Status: Active
On Redfin: 90 days
From Redfin, “BLOWOUT PRICE!Great double CDS location withing walking distance to al l Northwood facilities. Open, spacious 4 br floorplan w/ new remodeled kitchen and baths. Right out of Metropolitan magazine. .. !Impressive trio of schools, convenient central Irvine location ! GREAT VALUE!!Reduced. .. .BEST price home in Northwood.”
BLOWOUT PRICE! — BS.
GREAT VALUE!! — BS.
Right out of Metropolitan magazine. — LOL!
.
.
At almost 90 days on the market, I don’t think this flip is working out as planned. They still have room to lower their price and get out before this becomes a loser. They are going to need it.
.
They call him Flipper, Flipper, faster than lightning,
No-one you see, is smarter than he,
And we know Flipper, lives in a world full of wonder,
Flying there-under, under the sea!
“BLOWOUT PRICE! Great double CDS location.”
Hmm. I wonder if this is some kind of Realtor ™ code wording for “great double credit default swap super leveraged, hedge funded special financing because you can’t get a jumbo mortgage anywhere else for this location” deal that ALWAYS goes up?
—–
“Lot Size: 3,870 sq. ft.”
Detached condo?
Actually a pretty nice looking place. However, the driveway is too small and the wood roof needs to be replaced.
If I was buying this place, I would demand it be tented for termites.
450K
Geepers Creepers……………it is hard to believe that some of the paultry sales volume in 2007 is still a result of flippers trying to make a fast buck………..these “homeowners” are “screwed”.
Countrywide Cut by Merrill; Bankruptcy Seen Possible (Update2)
http://www.bloomberg.com/apps/news?pid=20601087&sid=a.z7iz3TxD4M&refer=home
About two years ago there was a news story or two of how coutrywide was clearing space in its building for handling new forclosures. This was way before there was any measurable uptick in forclosures. My bet is that Mozilo is a pretty smart guy, with lots of banking experience, and that he will be able to ride out the storm. Of course the company may have 1/10 of the employees it now has.
Credit Crisis Hits Small Lenders
Mortgage-Loan Backlash Spurs Halt in Operations; Bigger Rivals Swoop In
http://online.wsj.com/article/SB118713766031197962.html?mod=hpp_us_whats_news
Off topic, but I read a plausible legislative plan to try to help homeowners in the event of the predicted onslaught of foreclosures, which was to mandate that foreclosed homeowners be given the ability to rent their home for FMV unless and until the bank was able to sell. Thus giving the homeowner somewhat of a soft landing as opposed to eviction.
Got this from the comments on CR. Other posters seemed to think this was a win-win as the lenders get some money during the sales process and get (presumably) a party willing to maintain the property while the homeowner has less disruption for a certain period of time. It’s also a plan that doesn’t use taxpayer dollars to bail out the irresponsible.
Any thoughts on what, if any, implications this could have on the secondary markets – would lenders potentially become landlords to ride out the next 5 years?
Funny Flipper pic/song IR. Made me laugh.
Last night I was watching a show on HGTV called “First Time” or something like that, where a couple was looking to buy their first home. Every time they looked at a house either the realtor or the husband would make some kind of comment about what they could do to “build equity”. So this is a newlywed couple looking to buy their first house, and eventually start a family, but “build equity” is all they can think about?
I like the idea, but my only thought is the problem of liability. In this day and age of lawsuits, think about the position a bank would be in being landlord to thousands of people.
Trip and fall, sue the “owner” for medical expenses….etc.
How about the presence of mold…or other things that are wrong with the house that were never fixed by the first homeowner (faulty wiring, leaking roofs, etc….) I can only see them being bitter and demanding the new “landlord” fix these problems or risk a lawsuit.
My .02 cents.
This person is not a flipper just another want a be. A true Flipper would have not have brought a property at 80 cents on a dollar, then hope and pray that it would sell for a profit.
Also, the problem of “tenants” not wanting to show the property, and not leaving upon sale…causing a lengthy and costly eviction process.
If I were a potential buyer of a house occupied by the former owners, I’d demand that they were out prior to my closing. Do you think the “renters” will be cooperative ? Who knows…
Existing Home Sales Fall in 41 States
http://biz.yahoo.com/ap/070815/home_sales.html?.v=7
If lenders want to rent at FMV to defaulting borrowers, they can do so now. Why force them to do so? If it was in the lender’s best interest, wouldn’t they already rent at FMV? If it is not in their best interest, would not the gov be forcing them to lose money or do something that the lender decides is not in their best interest? Does the lender need the gov to decide for them what is in their best interest? If renting at FMV is not in the lender’s best interest, is this not stealing from the shareholders?
Good point awgee.
um..That’s a house from 1978 – In Irvine, not Santa Monica.
what’s people’s opinions on the new show Flipping Out, do you think the “star” of the show is a flipper that tries to add value through his flips, or just a no-value-added flipper like all the other flippers out there?
Great site guys. Ive been lurking here for a while now, and finally decide to throw in my 2 cents from now on.
I think there might be issues under current banking laws which make it very difficult for banks/lenders to act as landlords on a large scale. This might be why this legislation was conceived/proposed. On the other hand, I believe a shareholder of any lender became a shareholder because he/she wanted to invest in a financial intermediary. The invested company (the lender in this case) must do what it’s good at in order to be efficient, which means stick to its clearly defined business model. If a shareholder/investor wishes to be a shareholder of a large scale landlord, there are plenty of REITs to choose from, that are good at this and been doing this for a long time.
My vote: it won’t fly (with shareholders)
When Buyers Snub Sellers
Valuing Debt Holdings Turns Tricky as Funds Struggle to Find Market
http://online.wsj.com/article/SB118713803111597956.html?mod=todays_us_nonsub_money_and_investing
How to do so is open to debate, and in some cases the methods may be pretty unpalatable for managers dealing with the turmoil now gripping markets. One answer is that everything has a price — if it is low enough. That is tough for many managers to swallow if they think the long-term value of a holding isn’t impaired. Trading at such a price is also a difficult prospect if a manager wants to avoid selling into a distressed market. The key point with BNP, for example, was the use of the word “fairly.”
But if there are no buyers to be found, there may be an even worse alternative. “Then the price is zero,” says Jack Ciesielski, editor of the Analyst’s Accounting Observer newsletter. “If there’s a bid out there, then there’s a price. Take your pick.”
Humor: Cartoon
Cartoon – How are we Paying off our Subprime Mortgages?
http://www.theonion.com/content/statshot/how_are_we_paying_off_our
There is a discussion in the forums regarding this show. Check out the forums…
Bombs away….
http://money.cnn.com/2007/08/15/news/companies/countrywide.reut/index.htm?postversion=2007081515
When the percieved value of an asset is much higher than the market will pay, then there is a recapitalization required. As an example Lucent stock was not woth $70.00 per share in 2001, it was really worth $1.00. The revaluation process is very, very painful.
To all the sellers in Irvine that believe, think, hope, wish, pray, and dream that thier homes are worth north of $400.00 per square foot……got news for you. In about 3 years you will be looking at about $225 psf, because that is all that buyers can actually aford.
Painful, but the truth.
My girlfriends uncle became very sick about six months ago. He was put on life support and was beeing fed from a tube. Finally, the decision was made to take him off life support. Guess what, it took him 3 weeks to die without food.
It may take the the housing market a year to fianally die in OC, but now that the food, the flow of easy money is gone, it will die. It is only a matter of time.
That is the most god-awful thing I’ve ever heard. But unfortunately it is a wonderfully accurate analogy, Nano.
People will start dipping into their savings initially and then start using their HELOC to pay their first mortgage payments. This is much more common then what you’d think. You can only rob Peter to pay Paul for so long until eventually that dreaded 30 day late shows up. Someone who has had stellar credit for 20 years can make one late mortgage payment and they are instantly subprime for the next 12 months.
No Prime or Conforming Bank will refinance a borrower with a late a mortgage late within the last 12 months. Even ALT-A requirements were based off clean mortgage history.
I think the investors have freaked out and over-reacted without thinking about the ramifications. By turning off the spigot all at once they all but guarantee defaults on the loans that they already purchased. By cutting off the ability to refinance, they have sealed the fate of the loans already in their portfolio. If you think that defaults and margin calls are already high, just wait until this time next year.
It’s going to be insane my friends….
with jumbo rate surging in the past two weeks, Irvine homes over 417K has to come down dramatically to account for the rate hike
in terms of the total amount of loan ressetting, in Feb. and March 2008, there will be as much as this year so far.
imagine home owner facing interest rate hike of 4.5 to 8.5, no equity left would make it just dead end.
the game is getting more interesting
Hedge funds are unregulated and so are private equity funds. Many trillions floating around, many invested in CDOs — it should be interesting to watch all this unravel. Lots of money will dissappear. No bonuses on Wall Street this year, I imagine.
This initiative sounds like it is designed to support the prices paid by the foreclosure victim, so that the bank will get out clean.
It sounds like it will mandate that the foreclosed owner will be able to stay in the house by renting at “FMV” until the bank gets the right price for the house, that is, the face amount of the loan at least.
Aside from the rampant injustice of it, it simply won’t work, only drag out the suffering that much longer.
Disturbing info from a large prime wholesaler. Signed docs and they may not fund the loan because it is unsaleable according to the Wall St banks like Goldman or Bear.
http://thegreatloanblog.blogspot.com/
I’m curious…what happens if a buyer is in escrow, has a loan locked at a reasonable rate, and the lender goes under? Assuming the buyer can get other financing but on much worse terms, does the buyer have a valid reason to get out of the purchase?
It depends on how the purchase contract is structured. This is why I always shudder when I hear a client tell me that he/she wants to do the purchase financing through a broker.
Brokers don’t lock rates, submit loans to “correspondent lenders” or other REITS and not necesarily Banks, and bait & switch. If you have earnest money on the line and are at the siging table with the sellers and notary, you don’t want any surprises. Many people sign anyways because they don’t want to lose the home or their earnest money. Brokers know this and can get away with bait & switches. Purchases have no 3-day right to rescind.
More often than not, they buyer is screwed. That’s why I laugh when people call me for a pre-approval letter and don’t want credit pulled. They say…”I just got one from a broker and he didn’t need to pull my credit report.” I then tell them that the “approval” isn’t worth the paper it’s printed on. They get all pissed.
I know several people at Countrywide involved in managing these risks. Surprisingly for a large firm, they were deeply against hiring tons of people that they would have to lay off in a couple of years. They just didn’t like hiring and dumping. The Company has some exceptionally talented people hedging their risks. You don’t run into a lot of exceptionally bright people in real estate and consumer lending, but they have some of them.
I think the bankruptcy type rumors are probably crap. These people paid vastly more attention to modeling, analyzing, and dealing with their risks than most. Buying banking and insurance operations were part of their plan to handle the risk.
Lower income soon? Sure. Bankruptcy, not likely.
Damn you IR….I’ve been humming that FREAKIN’ Flipper song all day now.
Trooper
Same here. I think IR did it on purpose. 🙂
Just off topic. If I have CDs + Saving at Countrywide Banks, if in the article above, said CFC might go Brankrupt, do I have to worry about my accounts in C.Banks (even those are under FDIC, but I think will take time to recover my money)?
Please help me to answer my question. Thank you all.
If you think 100% mortgages will result in a “scorched earth” real estate market, than what to think about the consequences for the investment markets? The methods of financing those mortgages will make your head spin:
“First, you take a bunch of shaky and risky subprime mortgages and repackage them into residential mortgage backed securities (RMBS); then you repackage these RMBS in different (equity, mezzanine, senior) tranches of cash CDOs that receive a misleading investment grade rating by the credit rating agencies; then you create synthetic CDOs out of the same underlying RMBS; then you create CDOs of CDOs (or squared CDOs) out of these CDOs; and then you create CDOs of CDOs of CDOs (or cubed CDOs) out of the same murky securities; then you stuff some of these RMBS and CDO tranches into SIV (structured investment vehicles) or into ABCP (Asset Backed Commercial Paper) or into money market funds. Then no wonder that eventually people panic and run – as they did yesterday – on an apparently “safe” money market fund such as Sentinel. That “toxic waste” of unpriceable and uncertain junk and zombie corpses is now emerging in the most unlikely places in the financial markets.”
http://www.rgemonitor.com/blog/roubini/210688
(Hat tip to Atrios)
lendingmaestro – How long will $11.5 bil fund Countrywide?
I don’t know the answer, but why risk it? If it were me, I would take my money out.
Embattled Countrywide Financial, the nation’s No. 1 writer of mortgage loans, was forced to tap an $11.5 billion line of credit Thursday to address its looming liquidity crunch, and it said it is toughening the underwriting standards on the home loans it will make going forward.
At the same time, SEC filings show the company’s chairman has made a $13 million profit in the past month selling a stock on the decline.
Yeah, that Mozillo, he is a class act.