100% Financing Failure

Part of the bearish argument for a dramatic drop in prices is predicated on an infusion of “must sell” inventory to the housing market. Sellers won’t sell at a loss unless they have no choice. This is why prices generally are sticky in a housing market decline.

Foreclosures and short sales are by their nature must-sell inventory. For this must-sell inventory to be forced onto the market people must be unable or unwilling to make the payments on their mortgage. The “unable” part will come from reseting ARMs with higher interest rates; the “unwilling” part will come from people walking away from 100% financing deals when market prices do not continue to rise.

It is this latter category of unwilling homedebtors that is unusual in this market. In previous bubbles, lenders were not so stupid as to offer 100% financing, so there were not as many people who utilized “jingle mail” as they went underwater. It is my opinion that jingle mail will be epidemic as this bubble unwinds.

Today’s property is a typical short sale. The seller overpaid with 100% financing and now is going to walk away.

Van Buren Front Van Buren Kitchen

Asking Price: $390,000IrvineRenter

Purchase Price: $410,000

Purchase Date: 3/20/2006

Prior Purchase or Refi: 10/17/2005 — $405,000

Prior Purchase or Refi: 6/3/2005 — $395,000

Address: 10 Van Buren, Irvine, CA 92620

Beds: 2

Baths: 2

Sq. Ft.: –

Lot Size: –

Year Built: 1987

Stories: 1Rollback

Type: Condominium

County: Orange

Neighborhood: Northwood

MLS#: P579283

Status: Active

On Redfin: 53 days

From Redfin, “Lower Unit w/ Front Patio. 2 Bedroom, 2 Bath CONDO. Great Opportunity for First Time Buyers. This is a SHORT-SALE. Sales Price, Terms, Conditions Subjet To Lenders approval of Short Sale. Very clean Unit includes, Range, Microwave, Dishwasher.”

Did you spot the misspelled word?



The bank is going to lose money. Depending on how much commission they pay (they don’t like to pay 6%) and how much more this unit is discounted, they stand to lose between $20,000 and $80,000. I would guess it will be closer to the bigger number.



Kay Kyser

– words by Frank Loesser, music by Joseph J. Lilley

I got keys that jingle, jangle, jingle

As I go ridin’ merrily along

And they sing, “Oh, ain’t you glad you’re single”

And that song ain’t so very far from wrong

Link to amateur singing Jingle Jangle Jingle

49 thoughts on “100% Financing Failure

  1. No_Such_Reality

    “Great Opportunity for First Time Buyers. This is a SHORT-SALE.”

    Is it a great opportunity because it worked out so well for the previous guy?

  2. rkp

    Why do people even bother advertising a possible short-sale? Do they need to act like they really tried selling before walking away from the house? Or is it because they hope to preserve their credit and not do a true foreclosure?

    It seems to me that this owner will foreclose and just walk away with ruined credit.

  3. SDChad

    Right now it seems that a lot of people still have an opportunity to get out from under their overpaid-for homes, but as they drop and if they drop rapidly, what affect will this have on others who can barely (but can) make their housing payments? It seems to me that in the past things dropped by small enough amounts that they could still come to the table with $10-20k and get out of their homes, but now we are seeing drops of 10 times that. So this leaves a lot of underwater people with 2 choices if they can still afford their mortgages: walk away or stick it through. Because of the large and rapid drops in prices I think a lot more people are going to be stuck in their present homes for a long time that would have been able to sell in past drops.

  4. SoCalwatcher

    Did anyone listen to the Federal Reserve hearing today? The FED is going to severely tighten lending screws and the mortgage party is o-v-e-r. They will be working with lenders to help FB’s rewrite their loans so they can avoid foreclosure and short sales and stay in their homes. They have been studying the market for the last 3 years (it took THAT long???) to see that the TILA tightening needs to be instituted for mortgages, just like credit cards were a few years ago.

    All in all, the FED is late and the damage done. They said the situation will get worse before it gets better.

    The bubble popped this morning.

  5. buster

    A short sale is when the owner tries to sell the property for less than the outstanding mortgage. Generally, the lender has previously agreed to take the whacking on the difference between the amount for which the property sells and the outstanding mortgage. The amount of the beating is kind of in flux, but the lender knows at the beginning there will be some kind of loss.

  6. Darin

    for those that don’t know what “jingle mail” is – it’s mail that jingles because the homeowner sent the keys back to the lender and walked away.

    It was very prominent in Texas in the early 90s where a combination of housing decline and oil decline made for some ca-razy stories.

  7. Darin

    patience2007: This is likely NOT a *true* short sale though. Lenders do not willy-nilly let borrowers off the hook. Typically, the house has to be on the market *at least* 90 days. Price cuts have to be made and a record of no offers. The agent and borrower have to contact both the 1st and 2nd lien holders (if a 2nd exists). Typically the 2nd kisses it goodbye and the 1st puts the agent/seller through the paperwork ringer. If, after all that, the 1st agrees to sell it short, then the seller can close escrow.

    So if you see short sale and you’re interested in buying,

    1) make sure it’s been on the market more than 90 days
    2) there’s been price reductions
    3) and they have a paper from the lender that says it’s okay. There is a name for the paper, but it escapes me.

    If they don’t have the above 3, my 2 cents is to stay faaaaaaar away from the transaction

  8. No_Such_Reality

    The bulk of “short sales” out there are BS and the sellers haven’t approached their lenders. The 2nd lien holders also aren’t kissing it good-bye, they don’t let go and force the 1st into the expense of forclosing or splitting the loss. They have nothing to lose.

  9. IrvineResident

    easy money is still available to non-subprime borrower. that’s one of the reason high end homes are pushing median price higher

  10. SoCalwatcher

    Only to people with spotless credit histories. The rest are getting some new underwriting guidelines and disclosure stuff coming. It won’t stop predatory lending, but it will curb it.

  11. Genius

    Nice link. Looks like we’re heading into 1991 all over again by the looks of that data.

  12. Sue

    Oh, playing with the link further, you can get local price indexes.

    Click on “Metropolitan Statistical Area (MSA)”, then look “Santa Ana-Anaheim-Irvine, CA ” in the dropdown box

  13. Bkshopr

    To achieve a SHORT SALE the owner should at the very least stage the kitchen properly. The cluttered kitchen shown indicates the lack of counter space. The first thing is to remove the huge rice cooker in the foreground (The owner is obvious a very short Asain). The second microwave on the countertop is an indication that the vent/microwave combo above the electric stove is too high and not within easy reach by the occupant.

    Asians hate electric stove. The wok’s round bottom wobbles all over the flat glass top and heat distribution is very poor. 35% of the home shoppers would pass on this one. It is very important to provide the right spec in appliance.

    Get rid of all the things on the counter that indicate an inadequate kitchen.

  14. NanoWest

    As the income of real estate agents continues to fall through the floor they will need to demand concessions from sellers….my suggestion is:

    a) 8% comissions ——- 50/50 split with buyer-seller agents.

    b) Lower price of property 5% per week until it is sold.

    If a seller will not step up to these terms, they are not really serious about selling. In the early 90’s this type of deal was common for a real estate agent to take on a home.

  15. Mr Vincent

    The sale history for this place tells me that people can’t wait to get in, and then can’t wait to get out.

    I would never buy a place where someone is living above or below. I have a feeling that this has something to do with the high turnover rate.

  16. patience2007

    Darin, is there some listing of price reductions available, or is that something a RE agent would have to find out?

  17. patience2007

    haha. It took me a few minutes, but I did manage to figure out what he meant by that when I saw the picture next to the comment.

  18. awgee

    Please excuse me if this seems contradictory or confrontational, but I do not mean it to be such. I do want to give my opinion and some information.Neither Bernanke nor the Federal Reserve can do squat about lending laws. The Fed can make suggestions and give guidelines, but that is all, and the lenders do not have to follow those guidelines, nor is there any penalty for them not doing so.
    Wall Street or the free market determines lending standards. If someone will buy it, it will be written. If no one will buy a certain type of mortgage, the lenders will not write them.
    The only reason lending standards are tightening presently is because the trashiest mortgages are no longer selling. Bernanke is running off at the mouth to pretend like he is doing something and to try and pretend that the Fed has control over a situation it does not.

  19. Mo

    On an unrelated note, check out this house in Ladera Ranch,



    3 Bedrooms
    2 Full | 1 Partial Bathrooms
    1,900 Est. Sq. Ft.

    Listing # P589564

    I checked Zillow and its estimate is $734000. Is is a sign of things to come. there are more than 5 houses for sale just on this street. Unbelivable.

  20. Darin

    Start with Redfin. It is linked by Irvine Renter at the start of the description. There have been realtors (TM – want to make sure they take credit) who have been gaming the MLS. Additionally, there are MLS (read: Los Angeles) that are only allowing agents to find the days on market (DOM). There are other services available, some free, some for pay.

  21. patience2007

    Cool site. I ran the numbers for Ventura county and then plotted the graph in Excel. Click my name for a link to my graph. Looks like another drop in Q2 2007 and the past 3 years will be the biggest fall off in the past 30 years.

  22. SDChad

    Isn’t a short-sale more of a problem than someone with loads of equity who can simply lower their price? Once you are into a short-sale I would think that it would be much more difficult to negotiate since there are additional parties involved.

  23. eek

    I had a feeling one of these days IR would feature a condo from where I live. I am a few units away from the one featured, happily renting.

    The HOA is not $190 anymore. I signed another lease with my landlord 2 weeks ago and he said they upped the HOA from $190 to $228 or so.

    That unit is across the street from the park, where lots of people use until 10pm at night. So it can get noisy and the street parking is taken up so your guests would have to walk far. Well, park noise is nothing, since the whole place is built next to the 5 freeway. $390k for an old condo built next to the freeway..lovely.

  24. gepetoh

    That makes no sense. I need to lower my prices every week so that the house will be easier to sell, and ALSO give them more commission? For what? I should be giving them less commission if they can’t sell my house at a price I want. They’re already overpaid with 6%, doing not much of anything. If they’re putting in an effort worthy of $30-40K of pay by finding creative ways to sell my house, I will be more than happy to give them the commission. What I notice is that most do not.

  25. EvaLSeraphim

    Yes and no. I believe that you are correct that the Federal Reserve Bank cannot impose regulations. That said, the Office of Thrift Supervision, FDIC, and other governmental entities can, as Congress. Heck, the FDIC shut down Fremont’s residential lending arm for, among other things, not following the FDIC’s year old “guidance” on lending standards.


    It makes my day to see these idiots loose their POS condo.
    Clearly a 2 bdrm C O N D O wasn’t meant to be sold for 400K.

  27. graphrix

    True the FDIC can make changes to lenders who are depository lenders or lenders who take deposits. Lenders like New Century, Option One and Accredited do not take deposits so they are still free to do whatever loan the street is willing to buy. Right now that is nothing unless it is at a serious discount.

  28. awgee

    The FDIC? Hmm-m-m, I think it is the SEC which actually can impose lending regulations, which they rarely enforce.

  29. Bonita Canyon

    The subject of “Jingle Mail” has been on my mind for some weeks.
    If Irvine renter is correct about an OC price correction of 50% plus
    we are in for interesting times.

    Can we expect the high income (150K ) plus house holds to walk as well?
    For example, a 3 million dollar Newport Beach home after the new loan guidance
    might cost around 24K per month. A 1.5 Million dollar home will cost around 11K
    per month.

    I live in Newport Beach. I had a demographic study pulled on my neighborhood “Harborview”.

    1481 households
    31% household incomes over 200K
    48% household incomes over 150K

    Who can pay for Harborview with new loan guidance? I figure a minimum household income of 300K. Can the high income bag holders of expensive homes hold on or will they
    need to move out?

    I think we will see a new trend. Wealthy home owners who can pay will walk. They will rent back in the same area for great savings. in 4-5 years they will buy back at 50% off.

  30. EvaLSeraphim

    Who was it that developed Regulation Z (i.e., the Truth In Lending Act)? I believe that it applies to all lenders, whether they are banking institutions or otherwise.

  31. EvaLSeraphim

    Oh, never mind. I googled my own question. Here’s the rundown:

    “The Truth in Lending Act (TILA) of 1968 is a United States federal law designed to protect consumers in credit transactions by requiring clear disclosure of key terms of the lending arrangement and all costs. The statute is contained in title I of the Consumer Credit Protection Act, as amended (15 USC 1601 et seq.). The regulations implementing the statute, which are known as “Regulation Z,” are codified at 12 CFR Part 226. Most of the specific requirements imposed by TILA are found in Regulation Z, so a reference to the requirements of TILA usually refers to the requirements contained in Regulation Z as well as the statute itself.

    The purpose of TILA is to promote the informed use of consumer credit by requiring disclosures about its terms and cost. TILA also gives consumers the right to cancel certain credit transactions that involve a lien on a consumer’s principal dwelling, regulates certain credit card practices, and provides a means for fair and timely resolution of credit billing disputes. With the exception of certain high-cost mortgage loans, TILA does not regulate the charges that may be imposed for consumer credit. Rather, it requires a maximum interest rate to be stated in variable-rate contracts secured by the consumer’s dwelling. It also imposes limitations on home equity plans that are subject to the requirements of Sec. 226.5b and certain higher-cost mortgages that are subject to the requirements of Sec. 226.32. The regulation prohibits certain acts or practices in connection with credit secured by a consumer’s principal dwelling.”

    Source: http://en.wikipedia.org/wiki/Truth_in_Lending_Act

  32. Nars

    Your chart is misrepresentitive. You need to decompound your numbers. Using the Santa Ana data, there was a 3% drop in Q1, which is large, but not the “biggest fall off in the past 30 years”.

    I agree that prices are headed south, but when data is messed with, it drives me crazy.

  33. NanoWest

    My bet is that your analysis is absolutely correct……many people in all income levels are going to wake up with a big hangover and look for any way possilbe to get out of the horrendous dept that they took on.

  34. awgee

    My experience and my conjecture is that most folks who buy homes for more than $1.5 mil will only borrow up to $1 mil and will pay for the remainder with cash.

  35. Major Schadenfreude

    “Wealthy home owners who can pay will walk. They will rent…”

    Historically, the wealthy were easy to identify because they were robust in stature and had land. Wealth allowed them to eat aplenty and own property while the malnourished skinny masses just got by.

    Recently, however, obesity has been associated with lower incomes. Start from the coast and keep driving inland for proof.

    The new twist is that in the coming years you won’t find the wealthy paying high debt-to-income ratios for a roof over their heads. As loans reset to exorbitant rates you will find many of the physically fit both physically and financially driving their modest (or perhaps not!) cars home to their rentals. Once a month they will be sending a small check to their over-bloated landlords.

    Who could have fathomed this situation?

  36. Nars

    You have a list of year over year numbers. You can’t compare them without accounting for the overlap of quarters. You really are hoping to do a quarter over quarter comparison. You need to start by making an “index” level in the 70’s and follow through to today. You can’t compare the 2007 Q1 YOY return to the 2006 Q4 YOY return they way your chart indicates. If you “decompound” the numbers and make an index, you’ll see that the normalization of prices has only just begun. OC prices are still 30-40% above the trendline, which includes bubble prices.

  37. Trooper

    “Very clean Unit includes, Range, Microwave, Dishwasher.”

    Um, nope. Looks like the dishwasher has taken a walk (as will all of the other appliances if this place doesn’t sell )

  38. Major Schadenfreude

    They just forgot the word “alcove” after dishwasher, that’s all. A small oversight. 😉

  39. lawyerliz

    On Miami Beach they held an auction for 20 units of
    a big high rise, 1/1 to 3/2s. The 1/1s had sold for as much as
    360, the 2/2s and 3/2s in the 600,000s.

    Happy buyers bought 1/1s for 181-ish, and a 3/2 for $357,000.
    10% down.

    Don’t know the square footage, but the units are directly on
    the ocean and new.

    What are the people who bought in the $600s going to do.

    This is a mark down of just a bit over 50%. I think with all the
    overbuilding of condos, prices will go down even farther. And
    instead of mothballing current construction, more condo towers
    in the works, NOT overlooking the ocean, NOT in such good
    areas. What make down will they have? 60% 70%?

    Last time around, in the 80s rich speculators had to hang on
    or lose their credit; the banks wouldn’t accept the keys:
    the rich speculators didn’t want to lose their credit. The ones
    who hung on (for 10 years!) did make a bunch of money.

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