WOT 3-1-2008

This is the end

Beautiful friend

This is the end

My only friend, the end

Of our elaborate plans, the end

Of everything that stands, the end

No safety or surprise, the end

Ill never look into your eyes…again

Can you picture what will be

So limitless and free

Desperately in need…of some…strangers hand

In a…desperate land

Lost in a roman…wilderness of pain

And all the children are insane

All the children are insane

Waiting for the summer rain, yeah

Theres danger on the edge of town

Ride the kings highway, baby

Weird scenes inside the gold mine

Ride the highway west, baby

The End — The Doors



I have been looking more carefully at the Adjustable Rate Reset chart to determine when these resets will hit the market.

ARM Reset Schedule

It takes at least 300 days from the time of mortgage reset to the time the REO is listed on the open market. This process can drag on much longer if the borrower attempts to make payments on the new schedule. Borrowers may drain other resources such as credit cards or retirement savings to postpone default.

ARM Reset to Final Sale

Once the property becomes REO, the lender may not quickly and efficiently prepare it for sale. Most lenders do not have sufficient staff to deal with the large number of REOs they currently have, and the numbers are growing daily. Plus the loss mitigation procedures often demand higher prices for 90 days before the price cuts get more aggressive. Basically, it will take at least one year between the reset and the final sale in the open market, and 18 months is probably a more realistic timeframe. So what does this mean? It means the REOs we are currently seeing are not being caused by the resets shown in the now-infamous Credit Suisse chart. The current REO pool is composed of those who gave up even before their loans reset. The huge number of resets and ensuing foreclosures is just now starting to hit the market. Today, we are beginning month 15 on the chart, but the impact on the market is at best in month 3 and more realistically, it is just now starting.

January 2008 foreclosures

We have all seen the ugly Notice of Default and Notice of Trustee Sale charts. It will take 6 months or more before these turn into sales on the resale market, so there is a major lag between what you are seeing in this chart and when the problems show up in the market. Just eyeballing the chart says there will be twice as many REOs on the resale market six months from now than there are today. This is not conjecture, these are foreclosures in the pipeline. Some of these people will avoid foreclosure, but the rates at which NODs and NOTs have been becoming foreclosures has been getting steadily worse as well.

There is a chance we may see a brief bear rally this spring. Interest rates are low, and sales volumes are picking up from their record low levels. Do not be fooled into thinking there is any realistic chance we are currently at the bottom. Prices are still greatly detached from fundamentals, and the tidal wave of foreclosures has not hit the market yet. Any momentum the market may build this spring will be reversed by the onslaught of REOs later this year and throughout 2009.



43 thoughts on “WOT 3-1-2008

  1. Jeffrey

    The next update, i request as a music theme for the post “I Dont Care Anymore” by Phil Collins. This can be used in all sorts of ways!

  2. former_irvine_renter

    I think that one will be most appropriate when the jingle mail really starts up in full force.

  3. CapitalismWorks

    You need to get an updated ARM Reset chart. The one you keep posting is now more than a year old. I wonder what the updated chart looks like reflecting current data?

  4. Irvine Soul Brother

    Well, I don’t think a huge amount of variable rate stuff hit the market recently. So, you just have to shift the chart over on the x-axis to get an idea of what’s reseting now. Although if the whole REO procedure drags on for a year plus itself, that makes a chart that started just over a year ago pretty poignant, I’d say!

  5. Land of Delusion

    It’s often mentioned how people can stop making payments on their house and essentially “live in it for free.” With the banks inundated with REOs, the former-owners could conceivably continue living there for 3, 6, maybe even 9 months before the bank gets around to taking any real action on the property.

    But I wonder what percentage of distressed owners are actually aware of that and are savvy enough to game the system.

    The smart people would stay for as long as they could, save up some security deposit/rent money, and leave only when forced to. But perhaps some people get a cathartic satisfaction from walking away and never looking back once they know they’re toast. Why draw out the anxiety?

    I, for one, would be petrified of the Sheriffs Department busting in, tossing all of my worldly possessions on the lawn, and giving me the boot in front of my neighbors.

    Another thought: If an owner vacates the property immediately after the NOD, would that speed up the process for the NOT (and therefore the entire REO process)? Or is it 90 days for NOD, 90 days for NOT, 21 days for REO regardless of if the property is occupied?

  6. No_Such_Reality

    I haven’t seen an updated chart. The key thing I always notice is everybody talks about subprime, but the Option ARMS which is what is impacting the foreclosure rates in SoCal IMHO, aren’t scheduled to reset until month 36 thru 60.

    That’s the reset date on the rate based on people making more than minimum payments. Typically, it was out 5 years but when minimum payments are used, it get’s pulled into about 27-29 months.

    Essentially, that smaller bump of Option resets on the chart out at month 36ish really started reseting in or around month 8. The bulk of those Option ARM resets ere geared in a few markets like California, Florida, etc. That puts us about 12 months in from the Option ARM foreclosures hitting the market for resale which means the front wave of that hump is showing up now and anther 6 months away from really dragging the market down as the Option ARM reset foreclosures accelerate and slog through the market.

  7. mav

    I wonder what interest rates are going to be by then?

    If the fed raises them to fight off inflation then the mass foreclosure cycle could continue.

    If the fed keeps them artificially low then inflation will run rampant and our dollar will evaporate further, potentially forcing China to sell off the dollar.

    There is no goldy-locks solution here.

  8. zoiks

    “Basically, it will take at least one year between the reset and the final sale in the open market, and 18 months is probably a more realistic timeframe.”

    In Costa Mesa, the process seems to be recently, ~3months before NOD, ~4months before auction, ~3-9 months after auction to sale. That adds to ~13 months. So, fine, I’d say you’re in the ballpark.

    “Today, we are beginning month 15 on the chart, but the impact on the market is at best in month 3 and more realistically, it is just now starting.”

    I disagree for two reasons. First, there are plenty of people who default long before their first reset. Some because they can’t even make the teaser payment, and others simply because they’re underwater and just walking.

    Second, even if payments are kept current, many of these properties hit the market even before the first NOD is filed. Since you are defining “impact on the market” as how long it takes for the property to get listed and sold as an REO, you are correct, but the fact is the property’s going to “impact the market” when these properties hit the listings before the foreclosure process has taken place. Plenty of people list before the NOD, is what I’m trying to say.

    Yeah, sure the market’s tanking and will for a while, but you can only drag it out into the future so much for the stuff based on the CS reset chart, which is itself a little dated. I might add that new waves of foreclosures may not be directly related to ARM resets per se.

  9. TurtleRidgeRenter

    I have a 20-something friend who, along with his wife, bought a new condo in Murietta in 2006. They had a combined income of about $70,000, but being young, didn’t have a down payment saved up. He said: “they noticed I have a pulse, and said okay, here’s 100% financing.” These are not extravagant people. Forget the granite and travertine. It was a $200,000 condo, shouldn’t have been beyond their means to live there.

    Then his wife lost her job, and he was in a car wreck (sleep-deprived from taking so many overtime shifts and commuting to his job 50 miles away).

    At that point, the reality hit him that they weren’t going to make it when the big invoice on the condo came due. He saw that there were 30 other identical properties for sale on his street, none of them selling. So he gave it back to the bank last fall, way before notice of default. He hadn’t even skipped any payments. They had been in that condo a little over a year.

    He said the bank was really nice about it, acted like it was no big deal.

    Last time I saw him, they both had jobs in Orange County and he was giddy with relief to be renting an apartment in Costa Mesa.

  10. zoiks

    IR, an interesting topic you could address is the perception people have that their neighbors/peers make tons of money. Personally, I think it’s just Kool Aid. I know lots of Irvine residents making below the published median ($84k/HH, $104k/family for 2006), but here in the Irvine Poseur Factory, we get a lot of “Nobody *I* know in Irvine makes less that $100k” and “Lies, damned lies, and statistcs”, etc., etc.

    I think it’s important because it’s fundamental to the bubble psychology. “My home is worth XXX because my neighbors, peers, or anyone interested in homes like mine are all making big bucks.” It’s a convenient justification, but as a collapsing fallacy, it’s going to play an interesting role in the current “readjustment”.

    In fact, I’d give it better than even odds that median incomes in 2008 will be *lower* than 2007 or 2006, if for no other reason than the decimation of jobs in real estate sales and finance. (Speaking of which, how exactly does OC lose 3% of its job base and unemployment only goes up by 0.1%?)

    Where I live in nearby Costa Mesa, the median household income rose from $51k to $54k (according to city-data.com) from 2000 to 2005. That’s 0.6% per year wage inflation. And you can only blame so much of it on the cheap illegals: less that 1/3 of the population is Hispanic in 2005, according to census data. Yet, Costa Mesa has no shortage of people saying the income is exploding and we’re on some sort of verge of a housing shortage to handle the influx of people who want to live here, near the beach, etc. etc.

    In short, I think people are seriously deluded about what their compadres’ income is. It’s convenient to think that they’re all making bank, but not necessarily true. IMHO, it’s just one of the ingredients of the Kool Aid we’ve been chugging.

    Of course, I could be wrong. I would welcome proof of being wrong.

  11. No_Such_Reality

    “but the fact is the property’s going to “impact the market” when these properties hit the listings before the foreclosure process has taken place. Plenty of people list before the NOD, is what I’m trying to say.”

    That impact may be self cancelling. The increase volume on the MLS creates competition, but the massive volume of Wishing Price inventory is self reinforcing. If you look at an MLS for your neighborhood and see a dozen homes between $1.1M and $1.4M and 4 homes between $1M and $1.1M and only one SFR below $1M, you think the market is above $1M even if none of those homes are selling. That is what is currently happening in the market.

  12. Lost Cause

    Perhaps it is time to factor inflation into these home price estimates. The dollar is certainly worth less than it was. When we predict that the $1.4 million dollar half a duplex is really worth $599, we are not taking into account the the dollar has dropped 40% I mean, this is why gas is going up to $4 a gallon, right? It is becoming a meaningless exercise to estimate the bottom in terms other than, say, year 2000 dollars. We are really having a currency crisis — just look at the price of a barrel of oil or an ounce of gold.

  13. zoiks

    Approach the inflation topic with a degree of caution. Some points I’d add:

    1) Let’s look at asset prices. Home prices, stock prices, and bond prices are all on the decline. That’s not inflationary.
    2) Wage inflation has been quite low. Wages right now are not keeping up with the headline inflation figures. What’s worse, unemployment is growing which tends to depress wage prices in the future.
    3) Energy is going through the roof. While that *is* a form of inflation, it isn’t necessarily the form that includes wage inflation which makes up for increased housing costs. You could easily have skyrocketing cost of energy and zero wage inflation, simply because of an increased demand worldwide for a limited resource.
    4) PMs are going through the roof. I can’t tell you for sure that’s speculation, but it does have some features of a bubble, and it is also fed by increasing fears of inflation. Gold right now is increasing faster than the cost of energy to mine it, the cost of land to access it, and the cost of labor to dig it up. I’d take PM pricing with a grain of salt.
    5) The dollar relative to other currencies is tanking. This is at least partially a result of the Fed’s loosey goosey policy. It’s also the result of many years of a serious trade imbalance, and also the government’s addiction to its credit card. A potential problem is that the correction of these imbalances and bad behaviors tends to be deflationary.

    I’m not going to come in and tell you whether or not there’s inflation. But I will tell you it’s not as simple as “let’s take inflation into the mix.” The reality right now is people’s incomes are beginning to stagnate, and this does not translate into increased demand for housing in order to help prop up prices.

  14. no_vaseline

    Which blows out the inland empire being affordable to median income couples.

    If you can’t afford a condo in Tememcula where can you afford to buy?

  15. George8

    What you describe is stagflation. The misery index is becoming double digits and rising rapidly.

  16. Formerbanker

    There is a 90 day period after the NOD is filed during which the borrower has the legal right to cure (i.e. pay all amounts delinquent), after which the trustee can publish the notice of trustee’s sale. The sale is usually set for four weeks after that (you could probably do three weeks but with notice requirements per CA civil code, that’s pretty tight). Note: a lender doesn’t have to wait until the loan is 90 days past due to file an NOD…aggressive lenders used to file much earlier than that (sometimes 45 days after payment due)…but they are so busy now days, they are probably filing more slowly.

    Also, in the not too distant past, lenders would be able to list foreclosed property as REO within mere weeks of taking the properties back (you always wanted to get the REO listed ASAP because time is money). But right now, there are so many problem assets to deal with – and you’ve got the bulk of the country’s mortgages serviced by the behemoths like Countrywide, instead of hundred of banks/servicers handling a smaller # of properties each as was historically the case- well, it doesn’t appear that the big servicers are yet processing efficiently. they are slow!

    You comment that “The smart people would stay for as long as they could, save up some security deposit/rent money, and leave only when forced to.” – I call them the ‘unethical’ people, not the smart people, but that’s just me.

  17. Major Schadenfreude

    “…by the onslaught of REOs later this year and throughout 2009.”

    That will really be “when the music’s over…”!!!

  18. TurtleRidgeRenter

    Exactly. My friend and his wife are the last people you’d ever think would run into trouble. Classic young marrieds with decent entry-level jobs buying their first home. Arrowed!

  19. George8

    Public auction – guess how much this 2003 3116 sf will get in 03/15/2008 auction?


    Mission Viejo, CA 92694
    Price: $429,000
    Buy with Redfin and Save $8,580*
    Beds: 4
    Baths: 3
    Sq. Ft.: 3,116
    $/Sq. Ft.: $138
    Lot Size: 6,000 Sq. Ft.
    Property Type Detached, Single Family Residence
    Property Style: Spanish
    Year Built: 2003
    Stories: 2 Level
    View: City Lights
    Area: Out of Area
    County: Orange
    MLS#: H08027830
    Status: Active
    On Redfin: 5 days

    ???Property to be sold at public auction event March 15th at the Pomona Fairplex. List price is the starting bid for this home, subject to a reserve price and lender confirmation. You may bid at the auction, or via live internet web cast, or via absentee bid (written offer) submitted in advance of the auction. No offers will be accepted prior to auction. Homes open for inspection from 10am to 4pm on Sat and Sun March 8th and 9th. For property and auction information contact listing broker???

  20. Food

    If a bank has foreclosure insurance and forecloses on a property, what is the time period that this bank can enjoy the insurance payment each month and sit on this foreclosed property turning down offers? Indefinitely?

  21. ozajh

    Or maybe “Jingle Bell Rock”?

    Let’s see now;

    Jingle Mail, jingle mail, jingle mail rock
    Jingle mail swing and jingle mail ring
    To manage the damage is no kind of fun
    Now the jingle mail has begun

    Jingle mail, jingle mail, jingle mail rock
    Jingle mail time is not just subprime
    Owners are moaners in jingle mail street
    Now they sense defeat

    (* Errrr, I don’t know the rhythm of the rest of the song *)

  22. lawyerliz

    Oh, I dunno, these people are at least keeping the copper strippers and addicts and bums out of the house.

    However, the anxiety of living in the house would get to me. I would want it to be over with.

  23. ex-tangelo

    “Lenders blocking refinancing”

    [quotes heavily edited for length. Read the actual article linked below]

    Everybody wants to help keep people in their houses and out of financial stress and foreclosure, right?

    Robert Whittaker, who bought his house four years ago, attempted to refinance his interest-only adjustable rate mortgage that was scheduled for a hefty rate increase. All that was needed was approval by National City Corp., the lender holding a second mortgage for $70,000.

    It was denied.

    The change at National City illustrates how declining market conditions are having unanticipated side effects on borrowers with second liens.

    Bottom line here: If you’ve got a second mortgage and need to refinance, qualify for a new first mortgage big enough to pay off the second.

    In a declining market, that could be tough.


  24. tonye

    The Chinese can not afford to sell off the dollar. Their currency is tied to the dollar. If they let their currency float or if they raise it then they make their labor pool more expensive and they lose their global productivity advantage.

    The Chinese can not lose than until they build up their internal consumer market so they are self sufficient.

    This is what is really worrisome. The Chinese are using the US as the source of funding for their build up. Until such time as they are self sufficient they can not get rid of us… we’re their opiate.

    Hence, what our polity is doing at this time, devaluating the dollar and hence repatriating profits is gonna kill the Chinese. The Europeans won’t be their financial patsy because they have populist governments that won’t allow that.

  25. tonye

    Bogus my man. My neighbors are all professionals and both husband and wife work At the very least you figure 70K per person… most likely 90K and plus.

    Of course, the youngest ones in my area are 40 somethings.

    The retirees may be the ones that make the least, but their mortgages are paid off.

    All in all, I concur that the median price in Irvine is dragged by the students at UCI. The meaningful are the ones by zip code and those show that the distribution of income in Irvine is not uniform.

    It is you who is making city wide generalizations that are useless. You have to look at the median income within the villages in the City.

    Truly, there are statistic and lies.

  26. tonye

    In this market, it is idiotic for the holder of a 2nd mortgage not to go along. Otherwise when the home goes into default the value of the 2nd will go to zilch, nada, kaputski.

    Why would National City -in this instance- deny the refinance?

  27. lawyerliz

    Banks are stupid. Banks are stupid.

    Also someone would have had to make a decision.

    A lot of people who work for banks don’t even understand the difference between a note and a mtg. You can bet your booties that most don’t understand about lien priority.

    And they don’t understand that if the homeowner is reducing his payments their loan becomes safer.

    They were asleep at the switch when these loans were made and they are still asleep at the switch.

    Anybody who did understand these things was downsized or outsourced, or just gave up and went to work at an industry with less stupidity.

  28. zoiks

    Why do people like you react negatively to statistics you don’t like, instead of trying to speak intelligently to them?

    I’m sure some drag exists from UCI students, at least those who are actually residents of Irvine. Two-thirds of the 25,000 students are commuters, which means less than 10,000 actually live in Irvine. Will that skew median statistics? Sure, to a small degree. But it will skew the family income statistics much less, since the vast majority of student residents of UCI are not in family households.

    *Nobody* has said or implied that Irvine income distributions are uniform. But the fact is, that taken as a city, it has a median, and that median is a knowable quantity. Other knowable quantities are the 90 percentile household income (last I checked it was near $200k), the percentage of residents who rent, and the median home and rental prices.

    (Or do you think these are lies as well? Maybe any piece of information received from an “authority” should be rejected as lies instead of discussed rationally. What do you think?)

    I don’t see a problem with using village statistics. Problem is, accurate numbers for these are harder to come by. But the city-wide data is meaningful, too, no less so than county, state, or national statistics.

    I don’t see why you have to react so negatively to my post. Unless, of course, you are just trying to prove my point.

  29. zoiks

    Here are two potential explanations:

    1) Maybe NC was thinking if FC was going to happen they’d rather have it now than later. National City is also known for having produced gloomy estimates of how over-priced various cities in the US are.

    2) NC could also be using this as a bargaining chip. “Hey, you want to help the poor FB by refinancing? Then buy us out, too. Or else. Don’t waste our time repricing the first without cutting us in.”

    Both of these are legitimate possibilities. Granted, their claim that their strategy is “proprietary” might be BS, but it also might not be. I fail to see how it’s “idiotic”.

  30. No_Such_Reality

    Correct me if I’m wrong but…

    If you first finance with a 1st and 2nd.

    Then refinance just the 1st.

    Doesn’t the prior 2nd now become the senior 1st mortage and the refinanced 1st, technically the 2nd mortgage?

  31. ex-tangelo

    The article sadly doesn’t say, but it sounds like what you are saying is right. That may be why the loan couldn’t go through — neither National Cities nor the refinancer would allow their mortgage to be the second lien.

    I don’t know for sure, though.

  32. lawyerliz

    The first will never, ever allow the second to become the first. The second stays the second by virtue of a “Subordination Agreement”. This is done all the time in commercial mtges.

    Can’t say as I’ve ever seen it done in residential mtges. That is because some thought is required.

    The second should be willing to do this if it’s not in a worse position, i.e., behind a bigger mtg with a higher interest rate, or with a higher payment.

    Seems like a little bargaining is required. Say, we’ll pay you 5 or 10 grand to do this and it’ll come out of the new first, so you’ll be behind a slightly higher mtg, but at least you’ll get some money. And the payment will stay the same, so it’ll amortize faster.

    It’ll never happen.

  33. IrvineRenter

    To refinance only the first mortgage, you would need to get the second mortgage holder to subordinate or the first will not go through. That is probably what is happening here.

  34. itsagrind

    can irvinerenter discuss relists?

    this house was on the market for almost a year and just recently barely dropped their price down to $443/sq feet. and when they did re-list, they didn’t even bother to change the price. wtf are they thinking? $443/sq feet in westpark? there a few of these overpriced/overvalued homes in westpark where the realtors are idiots. they let the homes sit there and wonder why its not selling. maybe rather than changing their wording to useless persuasive direction like “live the urban life”, drop the price.

  35. zornundo

    So you know for a fact that ALL your neighbors are like that? And it’s a median figure, so half make more, half make less. Since you’re living in a house, I assume, you may be among the higher than median folk. Go find the cheaper rentals and whatnot, and I’m sure you’ll see all those less than median people. Unless you live in Lake Woebegone, where everybody is above average…

  36. Sam Huff

    ‘The day the music died drove my Toyota to the levee but the levee was dry”

    Bye Bye Ms. Armerrica pie.

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