The ARM Problem

Eve of Destruction — Barry McGuire

Yours truly is featured in the newspaper, again. Check out the OC Register story here.

I would like to welcome readers of the OC Register to the Irvine Housing Blog. We provide analysis of market trends and profiles of properties in Irvine, California. Today we have an analysis post, like many that can be found in our analysis section, and we also have a property profile showing the distress in one of Irvine’s newer neighborhoods. Thank you for stopping by.

but you tell me over and over and over again my friend,
ah, you don’t believe we’re on the eve of destruction.

There has been plenty of conjecture about the impact of adjustable-rate mortgages (ARMs) on the future of our housing market. Some people believe that if interest rates remain low that the upcoming ARM resets will not cause many foreclosures. This is wrong. Today’s post examines what will happen when these resets occur, and it will demonstrate why this problem is so big.

By now, most of you have seen the ARM reset schedule shown above. But what does it really mean, and why is this a problem? ARMs became very popular in the bubble rally because they allowed people to finance huge sums of money with smaller payments. In time, it became the only viable alternative for financing. There are two types of ARMs: interest-only and negative amortization (Option ARMs). A typical ARM has a fixed interest rate for a brief period, then the interest rate adjusts and the payment is recast. Option ARMs tend to me more complicated. They have more frequent adjustments — which are almost always to higher rates and higher payments — and they have the option to pay less than the interest-only amount which results in negative amortization (a fancy way of saying your mortgage balance goes up). There are two terms that are important to understand with respect to ARMs: reset and recast. A reset is a change in interest rate being charged on the loan. These loans are all scheduled to reset at different times, and depending upon changes in the underlying index rate, the interest rate may go up or down. When the interest rate changes, or when the amortization method changes, the payment is recast which means it changes. Any change in payment is technically a recast, but the dreaded recast, the recast that causes all the problems, occurs when the amortization changes and the loan must be repaid.

It is not the interest rate reset that is the main problem, it is the recast to a fully amortized repayment schedule that causes dramatic payment shock.

Don’t you understand, what I’m trying to say?
Can’t you see the fear that I’m feeling today?

At some point, a loan must be paid off. All loans eventually revert to fully-amortized loans requiring the borrower to pay back both the interest and the principal. During the bubble, people believed they could refinance continually from one ARM to another in a process known as serial refinancing. Most borrowers have come to believe mortgage debt is something you perpetually service and never retire. The collapse of mortgage lending that caused the bankruptcy of the subprime industry and the government to take over the GSEs has put an end to serial refinancing. Now people are going to have to pay off their debts. Most can’t afford to.

Let’s look at a typical example. During the bubble, there was a significant increase in allowed debt-to-income ratios. People who were eager to get rich on real estate stretched themselves to buy houses. This was not a passive result of high prices, this was the driving force of the price rally. As a result, many people are putting 40% or more of their gross income toward housing. Assume a borrower who was making $120,000 a year decided to take out a 5-year fixed, interest-only adjustable rate mortgage with a 40% DTI. They would be putting $4000 a month toward their housing payment, and with a 5% interest rate, they could finance $960,000. Does borrowing 8 times income seem impossible? It was not uncommon.

Let’s assume this borrower has been making this $4,000 a month payment, since 2005, and their 5-year fixed period is coming to and end in 2010. What is going to happen? Let’s look at the scenario people envision where this will not be a problem. Let’s say interest rates are still extremely low in 2010 (something that is not very likely) and that the interest rate reset does not change the borrower’s interest rate. At the end of the 5-year period, the mortgage recasts to a fully amortized payment schedule over the remaining 25 years of the loan. The payment which was $4,000 a month goes up to $5,612.06. The borrower was already putting a crushing 40% of their income toward their housing payment. How are they going to afford a 40% higher payment? Is it likely that their income rose 40% in 5 years? Can they afford a 56% DTI? You see, the problem with the interest rate reset is not the change in the interest rate, it is the recast to a fully-amortized schedule. Keep in mind; this is the best-case scenario where mortgage interest rates are still at historic lows seen during the bubble. If mortgage interest rates go up, which seems likely if risk is properly priced into them, then the payment shock at reset/recast is even worse.

So why can’t the borrower just refinance into either another ARM or a 30-year loan? Remember the credit crunch? Loan terms have gotten much tighter. Lenders are requiring 20% equity, and the allowable DTIs are falling. Did the property go up 20% in value? No, values have declined. Did the borrower save up enough money to pay down the mortgage? No, they were putting all their money toward their interest-only payment? Did the borrower’s income rise 40% or more over the last 5 years? Possible, but given the current state of our economy, it is not very likely. In short, the borrower is screwed. They will not be able to refinance, and they will not be able to support the new mortgage payment. They will end up in foreclosure.

If the button is pushed, there’s no running away,
There’ll be noone to save with the world in a grave,

This is an enormous problem. Eighty percent of loan originations in 2005 and 2006 in Orange County were interest-only or negative amortization. This isn’t just a few loans that will result in a few foreclosures. This is the bulk of our financing. You can see what these resets do to home prices by looking at the areas dominated by subprime. Santa Ana, Riverside County, Stockton, and many other markets that were dominated by subprime have been blasted back to 2001 pricing more than 50% off the peak. This did not occur because these neighborhoods were less desirable, it occurred because their loans reset in 2007 and 2008. The loans in Irvine and the more desirable areas in Orange County are set to reset from 2009-2011. The problems for the high end are in front of us, not behind us.

People who were buying or doing cash-out refinancing during the bubble were betting on 4 things: 1. Interest rates would stay low. 2. Loose loan terms would be available. 3. House prices would keep rising. 4. Incomes would keep rising. If any one of these four things did not happen, they were going to lose their house. It would only take one of these four conditions to change for disaster to occur. In the real world, all four of these things did not happen, and now we are facing a foreclosure crisis rivaling the Great Depression. Most people were not aware of the risks they were taking on, and many who were aware of them really believed everything would work out in their favor. They were tragically mistaken.


34 Honey Locust Front 34 Honey Locust Kitchen

Asking Price: $799,999IrvineRenter

Income Requirement: $200,000

Downpayment Needed: $160,000

Monthly Equity Burn: $6,666

Purchase Price: $1,141,500

Purchase Date: 9/19/2006

Address: 34 Honey Locust, Irvine, CA 92606

Beds: 4
Baths: 4
Sq. Ft.: 2,770
$/Sq. Ft.: $289
Lot Size: 4,505

Sq. Ft.

Property Type: Single Family Residence
Style: Colonial
Year Built: 2006
Stories: 2
Area: Columbus Grove
County: Orange
MLS#: S523732
Source: SoCalMLS
Status: Active
On Redfin: 254 days

Unsold in 90+ days

Gourmet Kitchen Award

Absolutely beautiful single family home in the master planned community
of Columbus Grove. Family room with fireplace and media niche. Hardwood
floors. Gourmet kitchen with GE Monogram appliances and granite
countertops. Preparation island. Breakfast nook. Master bedroom with
fireplace and jetted whirlpool tub. Oversized walk-in closet with
organizers. Laundry room with storage space and sink. 2-bay expanded
garage. Porte cochere. This home has everything!

This property was purchased on 9/19/2006 for $1,141,500. The borrower used a $910,428 first mortgage, a $227,608 second mortgage, and a $3,464 downpayment. (It still amazes me that lenders were allowing people to occupy $1,000,000+ houses with less money in the transaction than a modest security deposit). If this property sells for its asking price, and if a 6% commission is paid, the total loss absorbed by IndyMAC — I mean taxpayers — will be $389,500 minus the whopping $3,464 downpayment. The taxpayers are absorbing 99% of the loss on this property, and the owner who bought this property on speculation of making a fortune is absorbing the other 1%.

The asking price of this property is 30% off its peak purchase price.

{book}Eve of Destruction

The eastern world it tis explodin’,
violence flarin’, bullets loadin’,
you’re old enough to kill but not for votin’,
you don’t believe in war, what’s that gun you’re totin’,
and even the Jordan river has bodies floatin’,
but you tell me over and over and over again my friend,
ah, you don’t believe we’re on the eve of destruction.

Don’t you understand, what I’m trying to say?
Can’t you see the fear that I’m feeling today?
If the button is pushed, there’s no running away,
There’ll be noone to save with the world in a grave,
take a look around you, boy, it’s bound to scare you, boy,
but you tell me over and over and over again my friend,
ah, you don’t believe we’re on the eve of destruction.

Eve of Destruction — Barry McGuire

92 thoughts on “The ARM Problem

  1. Forbear


    Great article in the OCR, that should awake some masses.

    Yesterday while driving up Culver I seen some cheeseball with a magnetic sign on his car advertising mortgage repairs, he’s probably got a huge customer base of people he sold this crap to. I’m sure will start seeing more of these crooks.

  2. AZDavidPhx

    A 3500.00 down payment, that is just unbelievable.

    That is less money than I had to put down on an 80K condo in Tucson, AZ.

    1. buster

      Great, the taxpayers inherit a toxic property. And I DO mean TOXIC. The Realtard forgot to mention that, when buying, you must SWEAR in writing (and I’m not making this up):

      1) Never plant a garden;
      2) Never plant a fruit tree;
      3) Don’t let the kiddies dig more than six inches in the back yard.

      Why — they dumped 6″ of clean topsoil over a highly toxic superfund site. Eat a carrot grown in the backyard and you’ll likely be rushed to emergency.

      A friend of mine was working at the Marine base and said they dumped all kinds of toxic solvents and poisons right on the ground. They even had a “burn pit” where they dumped hundreds of gallons of raw aviation fuel into a dirt hole and burned it to practice firefighting.

      So now the taxpayers inherit this toxic pit? Maybe we completely forgive the loan and make the borrower live on this toxic waste dump.

      1. ockurt

        In addition to the toxic soil you get to be near major cross-streets and an industrial site that includes a waste dump. I get a nice whiff every time I drive down Warner.

        Scary thing is, 2-3 years ago I was looking at some open houses over here on my morning jog and couldn’t believe all the people looking at these places. There’s a model that’s over 3,000 sq. ft. that went for nearly $1.3M. I was thinking who in the hell could by this? I should have figured it would end badly.

        1. ockurt

          Sorry should have been “buy” not “by”.

          The spelling Nazi stands corrected.

          I’ll try to stop by JT Schmid’s tonite to say hi and have a beer.

      2. Laura Louzader

        Your post is very scary, and is a wonderful reminder of how our failure, as a society, to protect the environment is directly endangering every single one of us.

        How many houses are being built on poisoned land across the country? The unlucky buyers of such properties will learn the hard way that environmentalism and pollution controls are not just some leftist-statist-eco-fascist-control-freak things designed to make life miserable for entrepreneurs.

        The lesson will really hit home if it becomes necessary for people to press their yards into farm service in order to put food on the table. Given the push for ethanol production, we could reach a pass where food and fuel are in hot competition with each other, and people will need their home gardens desperately.

      3. Jwinston2

        Anyone have a list of the regions/areas that had houses built on dump sites? I would love to have a list or know which areas not to buy a house in. Thank you.

      4. Goofy

        “when buying, you must SWEAR in writing (and I’m not making this up)”

        – You are indeed making that up. It is completely untrue. That area has been base housing for decades, never a dump.

        – Do you really think that ANYONE would sign paperwork swearing to the above? Just because you write “i’m not making this up” doesn’t make it any less BS

        – The maps are available online that show the range of pollution, which are on the OTHER side of Jamboree near the hangars and runways. There was no pollution or cleanup or dumping in the area of this house.

      5. Jack Falstaff

        There were several popular anecdotes about the Tustin Air base when I was a young Marine helicopter mechanic stationed there. Firstly, one of the two hangars that you see before you today originally burned down (this from my grandfather who was a photographer for bell and worked in the other hangar). Howard Hughes(the financier) had the remains torn down and buried close by, then rebuilt to what you see now. The timbers that were buried, were treated with toxic chemicals for preservative. It was said that the old base housing area (now where the new houses are) was where the timbers were buried. So…confiscate those sand shovels folks…

        I do know this for a fact, having seen it myself thousands of times. Each time one of those huge helicopters started up or shut down, it would dump at least a gallon of hydraulic fluid mixed with jet fuel directly on the ground. This helicopter effluent would then either evaporate or soak into the pavement. We sure werent cleaning it up.

        About 16 years ago, I was in irvine Science and technology books off culver. There were posters for sale of the tustin air base taken from a russian spy satellite. The fuel and hydraulic stains were used as the central focus of the optics from space…

        This is why we did not buy there…this and the crazy asking prices…But….if they were a little cheaper, perhaps we could excuse a few chemical sensitizers and skin lesions…

  3. granite

    Good article in the OC register. Lookin forward to the book signing at JT Schmid’s. Many moon’s ago I worked at Boyle Engineering – closely associated with The Irvine Company. I remember doing plan checks on the irrigation systems at Vista Filare in Northwood. I even did the design of the drip irrigation systems of asparagus fields for Irvine Ranch which were later developed into what is now called Woodbury.

    How about a reminder on time and place this evening?

      1. MalibuRenter

        I see that the book-signing info was in the article. Wonder if any realtors will be there? Maybe an owner or two whose house has been profiled?

  4. Gray

    “If any one of these four things did not happen, they were going to lose their house.”
    You hit the nail, IR. Yes, this shows how hypnotized those real estate believers were. Normally, only very desperate people with nothing to lose would place such bets. After all, even basic combinatorics shows us that there is only one chance in sixteen that all events will come true at the same time (I know that this is to simple, because the events are not really independent, and the chances are not even, but it gives a good impression of the low odds). It doesn’t really take a genius in math to see that it was very unlikely that the bubble would srurvive long enough for the gamblers to make a profit. After all, who would be able to buy all those houses if the prices continued to increase at this pace? There simply aren’t enough multi-millionaires to sustain the demand side.

    Long odds, indeed! And yet, millions were willing to bet on it. Shocking.

    1. mav

      “People who were buying or doing cash-out refinancing during the bubble were betting on 4 things: 1. Interest rates would stay low. 2. Loose loan terms would be available. 3. House prices would keep rising. 4. Incomes would keep rising. If any one of these four things did not happen, they were going to lose their house. It would only take one of these four conditions to change for disaster to occur.”

      I would add 5. Rents would keep rising.

      Also, all 5 of these are corelated. The probability that they would be wrong on all 5 was 100%. The only question was whether they would be able to sell before the economic devestation and subsequent social devestation occured.

      IR, thanks for the service you provide here. This blog and Calculated Risk have saved people (and made people) hundreds of thousands of dollars.

      At this point I think liquidity is more valuable than purchasing at current rental parity. I believe fundamentals are being re-written. We need to try to understand the new basis of housing fundamentals post deleveraging. (rents, incomes, DTI, etc)

    2. Alan

      ” … After all, who would be able to buy all those houses if the prices continued to increase at this pace? There simply aren’t enough multi-millionaires to sustain the demand side. … ”

      I think that the concept was that since they didn’t need to be millionaires to buy the place, the people who would buy them out at even higher prices would just go on using the same technique. After all, you don’t have to be a millionaire to come up with a $3464 down payment, even forgetting all of the others we have seen who bought with no down payment at all, or recovered whatever they did put up with a HELOC within months of the purchase.

      What they did not take into account, as with any Ponzi scheme, is that eventually you run out of players. That’s where the hoped-for idiot foreign buyers were supposed to materialize. Of course in this scheme, there were other factors that IR points out that could also bring the house of cards down. Amazing really that it could go on as long and as high as it did.

  5. dafox

    Eighty percent of loan originations in 2005 and 2006 in Orange County were interest-only or negative amortization.

    So it begs the question: how many of the homes in OC have these? My guess is if we can find the total # of sales for 05-06, you can get an idea of the percentage of homes in OC that have these homes. Anyone got those numbers?

    1. Perspective

      It wouldn’t be just sales (or purchase money mortgages). It would also include refinances (homeonwners taking cash out).

      1. Matt

        Right, but the math doesn’t have to be that complicated.

        SOMEBODY generated that 80% of loans number (I don’t know whether IR has that data himself or got that from someone else). All you need to do is go back and back out the numerator.

        Put that over the total number of homes in OC (which census is nice enough to provide for us), and voila, % of homes in OC that had toxic loans issued on them.

        Of course, SOME of those will have sold by now. People die and people sell and people refinance, even in these down times.

  6. MJ

    The amazing thing is the asking price. $799k? Is that a deal? I don’t think so. It’s been on the market for 250+ days, and not one price reduction.

    Maybe a knife catcher will step up, but not at that price.

    1. lowrydr310

      Call me crazy, but this is a house where you could touch your neighbor’s house from your bedroom window. It doesn’t look like there’s much of a yard. I’ll pass on the $799K price tag (even if I was able to afford it)

      1. cara


        Normally it’s called your trade-in. That’s if you’re not so cheap that your old car is 12 years old, didn’t cost that much to start with and now is worth next to nothing. In that case they make you put in your own cash.

        What’s really amazing is the truly under-water car buyer of recent vintage, who was not only under water through depreciation, but who had rolled their unpaid car debt from their last car into their new loan.

        Who knew you could do that? Too bad, gone now.

  7. Gindy

    A 3500.00 down payment, that is just unbelievable.
    That is less money than I had to put down on an 80K condo in Tucson, AZ.

    That’s less money than I had to put down on my CAR in 2001!!!!!
    WTF were they thinking?

  8. Lee in Irvine

    I remember looking at these models several years.

    I wonder if the buyer of this house had to ask family for assistance in the downpayment ($3,464). I still shake my head and ask, how is it possible for someone to leverage at a multiple exceeding 329 on a very small piece of Irvine … WTF? I cannot believe the banks were this stupid.

    One thing is certain, the banks are not going to loan money like this out again in our lifetimes.

    1. Walter

      “One thing is certain, the banks are not going to loan money like this out again in our lifetimes.”

      There are people still alive that I am sure heard those very words after the great depression. I admit, banks will be tight for some time, but once fear recedes and greed is back, I expect to see another round of stupidity by the brightest our financial system has to offer.

      1. Lee in Irvine

        The Great Depression was 2 to 3 generations ago for many of us that read and post in this venue.

        Maybe I should have said:

        The banks are not going to loan money like this for at least 50 years.

  9. AbroadThankGod

    I’m exhausted. My well of schadenfreude has finally run out.

    I rarely post on this blog because I don’t live in Irvine and I’m not a real estate professional. The only times I’ve posted in the past have been to take stands against trolling insanity.

    That said, I’ve enjoyed the site since it was first noted in SLATE maybe 16 months ago. The reason I have found this site so compelling is because it strikes a powerful chord for me – there must be accountability.

    Yet as the months have rolled on and the financial disaster has grown, there has been very little accountability. As IR mentioned yesterday, so far there has been little advantage to taking personal responsibility with one’s own finances.

    At this point I just want it all to be over. And yet I have the distinct feeling that the majority of Americans as well as Congress just see this as a bump in the road and no reason to start getting crazy and talk about sacrifice. Until this attitude changes we will not see real progress.

    Here’s my fear (I’m hoping someone on this site will mitigate it with some sound knowledge and logic): America simply can’t take this kind of de-leveraging and we are headed toward a dramatic devaluing of the dollar, massive inflation and/or default on our debt.

    If we owe 10 trillion (it’ll be 11 by next year) and tax revenue is something around 2.5 trillion, how can we hope to keep up with interest payments, let a lone paying down the principal? This isn’t like owning a home. We can’t commit 40 percent of our yearly tax revenue to debt servicing. Can we?

    At what point does the house of cards collapse?

    This is all to say that I’m simply spent. My hope for rational economics (which was originally sparked by this site) is completely deflated

    1. TiredandWeary

      I have reached this point as well AbroadThankGod. I just don’t understand how the American public does not get this.

      I hate to be a doom and gloom type of guy but similar to the housing crisis I see a much bigger currency crisis on the horizon and I can do nothing about it.

      Does anyone have suggestions about how we can inform people or prepare ourselves for what will be the worst economic crisis in my lifetime?

      -Tired and Weary

        1. Kirk

          If you want to knock off about $1.5 trillion of that $11 trillion debt, then push interest rates up to 20%. But, before this is done, we have to be running budget surpluses so that the government can start buying back treasuries. We don’t want to issue new treasuries at 20%.

          Why would jacking up interest rates cut the debt by 13%? Because, in order for existing treasuries to match the new market yield of 20%, the price of existing treasuries has to fall – 10 year notes are currently hovering around 4%. When the price falls to match market yield then the government can buy up the treasuries and retire its debt at a discount.

    2. Mertland408

      There is a book that came out in 1991 titled “The Coming Economic Earthquake” by Larry Burkett. It essentially predicted all the economic woes that are happening today, due to the overwhelming growth of debt.

      He stated that we keep whipping our horse (the economy) to avoid the Indians chasing us (the debt). We realize if we keep inflating the economy at this pace it will collapse. But we also know that if the economy stops for any period of time, the debt will overwhelm us. So what does our government do? They keep whipping our horse and hoping for a miracle.

      1. Schadendude

        Pick up a book by Peter Schiff, who discusses this in detail. The guy certainly has a grasp on the macro, even if he doesn’t always get the sequence or the timing correct (which is nearly impossible). Keep in mind he does run a brokerage firm, so there’s some incentive for him to put you in some form of equities (foreign in the case of Euro Pacific), which lately have been absolutely abysmal performers. The essesnce is this:

        To hedge against US hyper-inflation, which seems like an ever-more likely consequence of monetizing all this debt we’ve accrued, purchase precious metals and foriegn, dividend paying equities in infrastructure-based producer nations. Reduce your exposure to dollar-denomiated assets.

        The theory is sound. I think over the long run, the investments I’ve made through his firm will be winners, but if I had it to do it over again, I’d have gone completely cash last year as I was considering, anticipating the markets reaction to the consequences of the credit crunch. The inflation part, that I’m currently hedged against, I now know would be a consequence of the markets crashing, as the fed tries to pump liquidity into the system to prop it up and further monetize our debt to domestic and international creditors.

        I still firmly believe, as Peter does, that savers will pay the most through inflation in the coming years. I’m just really glad I’m not retiring any time soon. It might be wishful thinking to assume I’ll ever retire the way things are going.

          1. DeathToSinan

            Are any of you worried that we’ll have our assets confiscated by the government in the name of “patriotism” and “for the greater good”? Argentinians have had their private retirement savings grabbed by their own government. All it takes is for enough poor, desperate non-savers to vote this into law. The responsible people will be completely outnumbered.

    3. Major Schadenfreude

      “Here’s my fear (I’m hoping someone on this site will mitigate it with some sound knowledge and logic): America simply can’t take this kind of de-leveraging and we are headed toward a dramatic devaluing of the dollar, massive inflation and/or default on our debt.”

      Allow me to assuage your fear…

      The solution is simple; tell your living abroad homies to buy more American SUV’s! Its ridiculous! You go to Europe and everybody is driving tin boxes. You guys need to experience the luxury and convenience of driving your 50 pound kids to shcool (2 blocks away) in 3 tons of steel! Plus, you’ll look cool!

      1. Robert

        America’s not in this alone–everyone owns U.S. debt and stocks and… as we’re seeing during a crisis… wants U.S. tresuries. With this mind, everyone will do everything to keep us (and therefore themselves) afloat.

    4. alan

      Sounds like you’ve been reading or listening to Peter Schiff (author ‘dollar collapse”). He’s been on MSNBC all last week screaming that these bailouts will destroy the dollar and are insane. Very scary stuff.

  10. MalibuRenter

    By the way, I’ve always wondered why there isn’t a tip jar here at IHB. Calculated Risk has one.

  11. MalibuRenter

    “Eighty percent of loan originations in 2005 and 2006 in Orange County were interest-only or negative amortization”

    Where did you get this info? Is it available at a finer level of detail, like zip code or city?

  12. Dave

    The property tax and HOA fee add up to more than $1650 a month. I wonder how many people here pay less for just their mortgage or rent.

    1. DiscretionaryIncomeRenter

      1650$ That’s under my rent/ bills/ drinking problem while living Irvine. If i wasn’t such a sucker for sushi on tuesdays, a porterhouse on fridays and a weekly Ducks game I’m pretty sure i could live off that. The real fun is that pretty soon we’ll all get to see what we can live off of. I’m guessing it’ll surprise most people, present company excluded.

      Irvine Renter love the blog. Though its my first post i’m a daily reader. I’ve used your sites analysis to save 2 friends as well as start planning my own triumphant entrance into home debtership circa 2012.

  13. nefron

    Be ready to yell your heads off at your elected officials about their legislation. We cannot be silent – be silent at the risk of getting screwed all over again. Take five minutes now to tell your elected officials that they must address this problem in a responsible manner. Include a link to this blog – they all need to read it!

    1. idrnkurmlkshk

      The elected officials don’t listen to us. They listen to the lobbyists and special interest groups.

      1. DeathToSinan

        That’s right! We taxpayers could scrape up a few bucks and hire our own lobbyists. Instead of making individual campaign contributions to any political party, we’d get better bang for the buck by hiring our own bribe-peddlers.

  14. Alan

    As for today’s featured house, it looks like it has never been lived in. Pure speculation play … I wonder if the bailout plans will be well enough written to at least preclude this guy from getting anything?

  15. randy

    Look like government baled out of bailing out troubled asset. How is this going to impact the housing price?

  16. trrenter

    IF they can get the same interest rates today for that loan.

    Wells fargo has 30 year fixed rate jumbo loans at 9.25%. That would make the new payment close to $7,900 per month. At 6.5% the payment would be a little over 6k a month.

    I would concur with you IR “In short, the borrower is screwed.”

  17. Quail Hill Renter

    Can’t wait to meet you all tonight! I’m so curious to see the faces behind the regular commenters.

    1. idrnkurmlkshk

      I agree.
      It will be interesting to see the age demographic.

      Although I’m pretty ugly, so beware. ; )

  18. mav

    what is the official name for these newer Irvine House / Condos?

    Hondos? Houndos? I never understood the idea behind building these things, the ultimate in the Irvine illusion.

  19. DAve

    Ha ha!!!

    Now with 30% more baity-switchy goodness!!!

    About the notion of complaining to your “representatives”…

    Look who just got elected President? The KING of the credit-card mentality!
    “We’re so far in debt, let’s send out a fresh round of stimulus checks, raise spending, and lower taxes for 95% of “folks”!!!”
    So there you are- the people HAVE made it clear to the politicians in this country what kind of economic leadership they desire and will support.
    Look around- the people vote for MORE of the bubble mentality. By God they don’t want anyone to kill their buzz-

  20. IrvineCommuter

    Wait, the most important part of the article. . .

    IR you make $100 a month running this site? Where are my royalties? J/K

    Congrats on the book!!!

  21. Joe33

    Hey IR, your comment that there are 2 types of Arm’s, I/O and Neg Am is not accurate. I had a 5 year Arm that was fully amortizing. Originated in 2004. I am not sure how prevalent this is.

    Also you can take me off your chart of expiring arms as I just closed last week on a re-fi into a 30 year fixed.

    1. ockurt

      Me too…mine originated in 2004 as well and I pay principal every month. Mine expires in ’09 so I’m guessing I’d still pay principal but my interest rate would go up?

      We discussed this a while back. I think there’s a few of us out there (not you anymore!) that had these conventional ARMs, but I think most that are expiring are the unconventional variety.

  22. granite

    “…there must be accountability.”

    We’re all waiting for this. However judging by the selling prices of distressed properties there is still way too much belief that bailouts will keep prices up. I was told exactly this by a real estate agent showing me houses for lease.

    No accountability until … well… it’s over.

  23. Orangetimes


    I saw your article in OCR. In fact i was expecting one before or after Book Signing party. Congratulations! If i were you, i would feel sense of entitlement. Do you?

    You make only $100 a month from Ads on IHB? That’s great social service.

    As regards today’s featured property, it has been profiled on 03/14/2008 under
    REO Clearance Sale
    for 899K.
    I am following it since than. But I lost interest when I learnt that it is on Superfund site.

    Will try to meet you in the evening at The District.

  24. Andrew

    IR: Great piece in OCR!

    Will you have books on-hand for us to purchase and get an autograph? I hope so!

    See y’all at the book signing.

  25. happyheart

    HELP!!! If the dollar is going to collapse, and we are to have massive inflation, etc., then what do the smart people do before all of this occurs? In other words, if I have a good sum of cash saved do I buy physical gold, or diversify into other foreign currencies or what? I feel panic every time I think about my hard earned dollars being near worthless, and since I’m not an economics major I don’t know what to do.

    1. happyheart

      I read Mr. Schiffs book, Crash Proof, and agree with everything he wrote.
      I was buying gold when it was in the $900/oz range, and watched my investment lose value, so I’ve become discouraged with that.
      My regret is not selling all of my equites last year and going to cash. Oh how hindsight is 20/20. At the time I just couldn’t imagine that things could or would get this bad, plus I didn’t want to pay the capital gains tax. Now, I haven’t opened my statement for the past two months because I don’t want to go into cardiac arrest. Sometimes it’s just better not to know.
      So, savers like me are going to get hosed. Do I go buy stuff? My car is 9 years old…I’d like to have new furniture…could pay off the abode which is the only debt we have????

      1. Schadendude

        I know how you feel. I did the same thing. In retrospect, I should have anticipated the market would implode before the hyperinflation scenario Peter warns against. Hang on though happy. I think that investment will bear fruit in the medium term.

      2. cccovered

        There is a huge imbalance right now with a complete lack of physical gold coins and the paper price of gold on the comex. Just try buying a 1oz gold coin anywhere right now. They are all selling for at least 30% premium on ebay and craigslist. In professional gold trading circles there is a substantial minority of traders who believe the comex is going to default on its December delivery. If that indeed does happen the price of gold will double overnight.

      3. Mckenzie

        I wonder if Peter Schiff wishes he would have picked another name for his book. My hubby has followed him for quite some time and finally talked me into investing some money with him. It was a big mistake for us. I recommend reading Peter Schiff Hugely Right, Enormously Wrong as Hard Landing Hits China by Mike “Mish” Shedlock. I only wish the hubby had read the article before we had invested with Schiff.

    2. idrnkurmlkshk

      The so called “economists” don’t even know what to do. I don’t think there will be any kind of complete safe-haven.

      Gold is not the end-all-be-all. In fact I wouldn’t recommend buying actual gold. The gov’t outlawed owning it once. They will do it again if it comes down to it.

      Just get out of debt. Don’t stress yourself out.

      Invest your money in yourself, your business, family, or anything you believe in or value.

      Because in the end, value is only determined by what we all agree upon.

  26. DAve

    Ha ha part deux

    So I’m watching kcal9 right now and someone calls in the “money man” and sez that she has a house payment of $2500/mo. now which will go to $7500 next year and sez she tries to renegotiate but the lenders are “uncooperative”…
    Anyone feel like bailing her out?
    Which is more awesome, the house she must live in or her sense of entitlement???

  27. Mooser

    I was rather alarmed by this comment at the newspaper site:

    trebuchet wrote:
    Mr. Roberts is schill for the Irvine Housing Blog which in turn is a schill for Redfin. Redfin got in a load of trouble for abuse of the MLS in Seattle and had to unplug their housing blog. Enter Irvine Housing Blog and Mr. Roberts, a tiny minded schmuck whose prejudices led him to his conclusions for all the wrong reasons. As long as people buy into his disinformation the real reason for the credit crunch and the failure of the mortgage industry and others will remain covered up. As far as I’m concerned the IHB and Mr. Roberts have been doing damage control for the The Guys That Got Us Here by getting people to buy into their phoney “Fundamentals” arguement. If people do not wake up and recognize this as a con by some well place Wall Streeters, Hedge Fund Managers and dealers in CDS then you are just setting yourself up for another fall when they figure a new scam to run

    This does not at all seem to be a realistic view, and I fear for the stability of the person who wrote it.

      1. Mooser

        Who or what is “Redfin”? And does it have any connection with IHB? And the “phoney Fundamentals arguement”

        Must be some kind of parody, or satire. These days it’s so hard to tell.

        1. Mooser

          “Dealers in CDs”? Certificates of Deposit? There’s a scam connected with those? Or does he mean the round shiny things which replaced records? I agree, the price is too high. But they do last a long while.

          No, Mr. trebuchet’s point surpasseth my understanding, anyway. He seems to confuse telling people about something with advocating that they do it. Perhaps he will explain himself, some day.

  28. Laura Louzader

    I really wish I could be at the book signing tonight, but I’m a half a continent away from most people here.

    Hope you all have a great time.

    IR has earned the house of his dreams just by the amount of money and misery his insights and warnings have saved readers of this blog, and the people they connect with. I hope you get your place soon, and at just the right price, IR.

  29. Mooser

    What on earth is “trebuchet” trying to say? It’s so unclear but at the same time so vaguely libelous. This blog is making big money but not selling houses? Ho-kay!

  30. idrnkurmlkshk

    I think trebuchet is just another Zionist conspiracy theorist. You would not believe how many of these kooks are out there.

    This is what happens to these guys, eventually everyone becomes an enemy.

    1. Mooser

      You are so probably right. Zionists see enemies and conspiracies everywhere. And even the smallest suggestion that Israel follow the international law (which gave it life in the first place) they regard as anti-semetism. There’s not much you can do about it, it was bound to happen.

  31. Matt

    I do like the house, though. Not the location or the yard or the proximity of the neighbors or the price.

  32. zoiks

    Ho ho, you iz teh r0x0rz IrvineRenter man! Just remember to pass down some love to zoiks when you are fabulously rich and on the cover of People Magazine!

  33. Mike Toreno

    I have an ARM myself, I did a cash out refi in 2003 in which I took out $11,000, thereby increasing my loan balance to 95% of what it had been when I took out the loan (I made large excess payments the first year of the loan). My loan is an amortizing loan and resets in July 2010. I wish now that I had gotten a 30-year fixed loan, but I did save about a point of interest compared to a 30-year fixed and if I were to refi right now it looks like I would get about the same rate for a 30-year fixed as when I got the loan.

    One significant way in which I differ from the typical ARM borrower discussed here is that I made massive, massive payments for the first 4 or so years of the loan so that by the time the loan resets I will owe about 40% of what it was originally. So when my loan resets, my payment will go DOWN. I differ, too, in that I have enough cash to pay off the loan right now. One thing that’s sort of tempting is taking out an HELOC and using that to pay off the mortgage. I could get an HELOC at even a lower rate than my loan is at now. Too dangerous, though.

    I got offered an ARM and actually applied for it because I didn’t understand what I was hearing when the guy called me on the phone and talked to me about it. The guy talked about a 1% rate and then something or other happened in 5 years which I don’t remember because I was planning to pay the loan off by then, taking advantage of the lower rate to increase the amount that was going toward principal. I got the papers and took one look and said what on earth is this? I didn’t pursue it further and didn’t think about it because I had no idea there were people crazy enough to do that.

    ARMS can be OK if they have a longish fixed rate period and if they fully amortize. Although, a fixed rate loan would have been better for me, I now realize. But even so, if everyone with an ARM had handled it like I handled mine, we wouldn’t be looking at the problems we’re looking at.

  34. WaitingToBuyByAndBy

    IrvineRenter, another awesome analysis post.

    One minor point, I didn’t see any mention about the acceleration of the schedule for negative amortization loans due to the max neg-am limits being reached early because folks are only making the minimum payment.

    Or maybe your point is simply that the timing is not as important as the magnitude of the impact.

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