Less than 5% of homes offered for sale as short-sales end up as bank-approved transactions. Most end up going to foreclosure.

The featured property is a high-end 4/3 in Northwood II sporting a 29% discount. Is the high end crumbling?

27 Torrey Pine Kitchen

Asking Price: $950,000

Address: 27 Torrey Pine, Irvine, CA 92620


The Waiting – Tom Petty and the Heartbreakers

The waiting is the hardest part
Every day you see one more card
You take it on faith, you take it to the heart
The waiting is the hardest part

Do you get the feeling the entire market is collectively holding its breath to see what is going to happen next? Anyone who pays attention to the real estate market knows the ARM resets are coming. Some people contend that the low interest rates will make this pass like the Y2K scare. I contend that the ARM Problem is very real and it is going to flatten the high end of the market. In the interim, transaction volumes are very low, and prices are not moving — much.

The only signs we get of the scope and scale of impending doom comes from these strange short-sale listings. Just as miners used to keep canaries in the coal mine to warn them of gas buildup and potentially lethal explosions, our real estate market has short sale listings. Short sale listings rarely end in transactions. There are so many barriers to completing the deal that the vast majority never come to be. The closing rates have been improving lately as banks are becoming desperate not to add to their burgeoning inventory of REOs. Even with improved motivation, few short sales avoid the foreclosure process. They are foreclosures-in-waiting.

At this point, lenders use the short sale listing to gauge the strength of the market and try to estimate what they will get for the property after foreclosure. You would think they would just take the highest bid during the short-sale listing period, but experience has show that isn’t what they are doing. It is easier for lenders to sell REO because they no longer have to deal with the borrower as an owner. Also, they may get better bids when the property is REO because so many people are hesitant to bid on short sales. Of course, this is a self-fulfilling behavior.

No matter what their reasoning is, lenders do not allow many properties to sell as short sales. Therefore, these listings tell us a great deal about the future of the real estate market. Right now in Irvine, inventory is very low, particularly when you consider that much of the inventory is short sales that are not really for sale. If you did want to buy right now, there isn’t much available to purchase. This is also why prices have not been going down yet.

When you look at the ARM reset chart above, you see the big dip in the middle that corresponds to late 2008 and 2009. This is the respite between the waves. If you shift this process ahead 6-18 months for the default and foreclosure process to runs its course, you see that we are in the middle of this lull. The foreclosure process has as its first stage the period of default where the borrower does not make their loan payments, generally after their ARM has recast to the fully-amortized payment. It is during this default period when people list their homes as short sales. To get an idea of how many foreclosures we will be seeing 6 months from now, all we have to do is look at the short sales today.

Foreclosure Alley — KCET

This does not mean that the total number of foreclosures will match the number of short sale listings today. Many people do not bother to list their homes as short sales because it is so pointless. As the “trash out” video above demonstrates, many people do not prepare for foreclosure in any way. Some simply get in their cars and leave with the clothes on their backs on the last day. In reality, the number of short sale listings is a small fraction of the total number of foreclosures we will see. In case you haven’t looked on Redfin lately, there are a large number of short sale listings.

Today’s featured property is a Northwood II short sale. It is being offered for 29% off its peak purchase price. My personal opinion is that this property will fall to around $700,000 when the dust settles, but its $950,000 asking price is significant progress from the $1,335,000 that was paid for this property at the peak.

27 Torrey Pine Kitchen

Asking Price: $950,000


Income Requirement: $237,500

Downpayment Needed: $190,000

Monthly Equity Burn: $7,916

Purchase Price: $1,335,000

Purchase Date: 8/8/2006

Address: 27 Torrey Pine, Irvine, CA 92620

Beds: 4
Baths: 3
Sq. Ft.: 3,100
$/Sq. Ft.: $306
Lot Size: 4,330

Sq. Ft.

Property Type: Single Family Residence
Style: Tuscan
Year Built: 2004
Stories: 2
Area: Northwood
County: Orange
MLS#: S562709
Source: SoCalMLS
Status: Active
On Redfin: 1 day

New Listing (24 hours)

Gourmet Kitchen Award FORMER MODEL HOME in gated Northwood II. Fabulous cul-de-sac location
with no homes behind! Open floor plan featuring: Foyer, MAIN floor
bedroom and bath, Great room, Gourmet kitchen, Master suite w/sitting
area and a studio w/private entrance over the garage. Upgrades include:
plantation shutters, custom paint, newer upgraded carpet, hardwood,
granite counters, SS Viking appliances, vegetable sink, ceiling fans,
intercom system, custom built-in, beamed ceilings, closet organizers,
custom lighting and fixtures, crown molding and fully finished garage.
Backyard features custom water feature and mature landscaping.

This property was purchased on 8/8/2006 for $1,335,000. I cannot verify the first mortgage amount, but since there is a recorded second for 20% of the purchase price, it is safe to assume this was an 80/20 loan with no downpayment. Since they bought right at the peak, there are no additional refinances.

If this property sells for its asking price, the lender stands to lose $442,000 after a 6% commission. IMO, that is a great deal of money.

The sale probably will not happen. This is a foreclosure-in-waiting.


Oh baby don’t it feel like heaven right now
Don’t it feel like something from a dream
Yeah I’ve never known nothing quite like this
Don’t it feel like tonight might never be again
Baby we know better than to try and pretend
No one coulda ever told me ’bout this
I said yeah yeah

The waiting is the hardest part
Every day you see one more card
You take it on faith, you take it to the heart
The waiting is the hardest part

Well yeah I might have chased a couple women around
All it ever got me was down
Then there were those that made me feel good
But never as good as I’m feeling right now
Baby you’re the only one that’s ever known how
To make me wanna live like I wanna live now
I said yeah yeah

The Waiting – Tom Petty and the Heartbreaker

40 thoughts on “Foreclosures-In-Waiting

  1. Gindy

    It’s off the market according to Redfin, which is too bad. I did so want to see what the inside looks like.

    1. IrvineRenter

      I guess these sellers changed their minds quickly. If anyone can find this listed somewhere else, please provide a link.

      1. Aquagirl

        It still shows active in the MLS, but the status is “hold do not show” which is usually a temporary hold rather than a true “off market” status. It also appears the owner may be a RE agent.

      2. Mike7

        It’s up on just copy and paste the address.

        ZESTIMATE®: $828,500

        A Zestimate home valuation is Zillow’s estimated market value. It is not an appraisal. Use it as a starting point to determine a home’s value.

    2. Newport Beach Renter

      Irvine Renter-
      I am very glad to see this post on short sales. I am currently looking for a home in Tustin and have come to the conclusion that short sales are a waste of time. It appears the listing agent randomly comes up with a price that means nothing. I know several people who have unsuccessfully attempted to purchase short sales. I don’t even look at short sales and stopped considering them an accurate indicator of current pricing. That being said, I am surprised on this site we still look at them as real listings. This is something I’ve been wondering about for awhile now.
      Thank you, loyal reader.

  2. granite

    That “Trashout” video is sobering. One wonders what it was like the last day before the family left. Where did these modern day Okies go?

    Not Irvine.

  3. Modguy

    I’ve commented about Option Arms before, and that chart is scary with the big Option Arm bump on the horizon. I’d like to see more detailed analysis on these loans because of the various ways they can blow up. How do they figure the “resets” will be clustered in 2010-2011? How MANY loans are we talking about – because when they reset I believe the VAST MAJORITY of them WILL go into default (some people can’t even really afford the “minimum” payment).

    1. Making the “minimum” payment (at a teaser rate effective to about 1-2%) adds the unpaid interest to the loan balance, BUT the balance can only go so high – usually 110%, 115% or 125% of the original balance. Once that ceiling is reached, the loan automatically recasts to a fully amortizing principal and interest payment at the fully indexed rate (index + margin) of probably 6-8%… doubling or tripling the payment.

    2. Others have written in the note a set time period after which period the optional “minimum” payment goes away (usually 5 years).

    Either way, at some point, these people will be paying fully amortizing payments on loan balances up to 125% of the original loan – as values have dropped by up to 40%.

    Someone needs to put together a complete analysis of these loans and what’s to come… the housing crisis won’t be over until these loan are gone.

    1. IrvineRenter

      The chart above was the most recent attempt to do what you describe. These loans are extremely difficult to model. I believe the original reset chart was based on the mandatory reset based on term. The updated chart is based on projections assuming people making minimum payments and hitting their caps.

      There is a grey are in between of those who cannot afford the escalating payments between the cap and the mandatory reset. As you noted, many cannot afford the minimum payment, and these payments are scheduled to increase periodically to close the gap between the teaser rate and the charged interest rate.

      Then there is the group that can make the payments and choose not to because they are underwater. Nobody knows how big this group is.

      80% of loan originations in 2005 and 2006 in California were interest-only or Option ARMs. A full 32% of loans in 2006 in Orange County were Option ARMs. This is all originations including refinances. Only 20% of originations during this period were purchase money mortgages. That means 80% were cash-out refinances. Many people spent their homes.

      1. mav

        In Obama’s stimulus plan discussion(s) yesterday he hinted at the following happening:

        + Refi’s would be allowed regardless of LTV
        + Interest rates would need to be kept low
        + Bankruptcy law changes would allow cram downs

        The devil is always in the details.

        1. TheNumbersNeverLie

          The sense of entitlement by some Americans stemming from the fallout of Alan Greenspan’s great economic collapse is sickening.

          Check out the story of these “victims”…

          Instead of renting like the rest of us, these pigs think they deserve our money so they can stay in their house. Two things stand out:

          0:36 – Look closely at the “bling” this guy is wearing as he wipes away the tear. Sure, it’s probably a wedding band and a cheap watch – but he certainly doesn’t look like he is sacrificing everything in order to stay in his house.

          2:12 – Wow, a panel TV. Wish I could afford that, but I am saving my money so I can someday put 20% down for a house.

          The lack of accountability is entering a new age, one mandated by the federal government to protect the idiocracy.

          1. mav

            The end game in all of this is most frightening.

            My take is that our economy has pawns and benefactors in a giant circle jerk. The pawns are the debtors who essentially have a socialized life style based on debt purchasing and low minimum payments. The benefactors are the wealthy who receive the debt printed money.

            The music stopped at the start of the credit crunch. The stimulus plan is trying to restart the music…. and allow the benefactors to continue the gravy train and/or escape with their wealth. The tax benefits to re-stimulate debt spending will be paid for by our children. This is truly criminal.

        1. IrvineRenter

          80% of all originations were refinances. I don’t have the exact figure for the percentage of those that were cash out, although most were. Some people were just refinancing to get better terms, but all of them were offered cash out, and most took it.

    2. tazman

      Doctor Housing Bubble has great analysis on the option arm issue. Highly recommended reading.

      BTW, the issue with option arms aren’t the resets, it’s the recast. option arms are doubly toxic over a regular ARM loan.

      Here’s an example:

      You take out a 100% option ARM loan that has a 5 year intro period for 500k. You are cruising along when all of a sudden the bubble bursts and you have hit your negative amortization cap in the 3rd year. Now, all of a sudden, you’re interest rate resets AND you have a new fully amortizing loan, with a new loan period of 27 years (not the original 30 years you may have thought)! The longer you could get away with paying the minimum payment, the worse this loan gets in terms of payment shock. If you get all the way to the end of your 5 year intro period, you now have a 25 year loan with a balance that could be 20% higher than when you started.

  4. IrvineRenter

    I am trying to help a reporter with a story on the walkaway phenomenon. If anyone reading this would like to tell their story to a reporter for the Christian Science Monitor, please email or call:

    Dan Wood


    This is the real thing. If you or someone you know could help and would be willing to tell their story, please contact this reporter.

    Thank you.

      1. maliburenter

        If 15% of all sales are short sales, and even if half of all listings are short sales, then 15/50=30% of short sale listings are being approved and sold.

        However, the portion of short sale offers being accepted could be much lower. It could be an issue of price, creditworthiness, etc. A number of those offers might also die on the vine because the lender takes too long, and has to restart with a new potential buyer later at a lower price.

        I looked for, but did not find, a matched set of listings and sales #s for short sales.

  5. alan

    Even though the listing is off market, the bottom of redfin posts 3 apprasials from online services. Theses apprasials ranged from $610k to $1.1 million with zillow at $850k.

    So the appraisals are all over the map. That means no one know what these properties are really worth. When we get closer to bottom, the apprasials will start to come closer together. Like comparing BCS polls at the start of the season vs late November

    1. maliburenter

      I have typically found quite a range of appraisals. Recently, I have found Cyberhomes to be the most accurate. For the homes I have been looking at, they are also the most frightening to homeowners. Usually they are the lowest, and they show the fastest recent depreciation.

  6. Walter

    I had heard the bank will only collect on the PMI if the property goes to foreclosure. This may explain why they reject some short sales.

  7. Lisa

    “If this property sells for its asking price, the lender stands to lose $442,000 after a 6% commission. IMO, that is a great deal of money.”

    With the bad bank scheme, who will pay the money ?

  8. SD Kate

    My lender has asked me about a short sale, but I’d have to list it at a price that I could afford to keep it at. Plus, with only few short sales being approved, and my credit already trashed due to non-payment and other issues with my divorce, I don’t have a strong motivation to list.

    I have been in contact with my lender, sending them boatloads of paperwork, not receiving responses or contradictory responses, but it’s extremely frustrating. Right now I just plan to stay until they kick me out, unless they give me another option.

    1. Perspective

      That sounds like a good plan (staying for free). Try to keep any separate debt service current so that your credit score’s rebuilt more quickly.

      1. SD Kate

        Yeah, when my husband moved out, I figured out that even if I stopped paying all my other bills (including utilities and HOA fees), I still couldn’t pay the mortgage. So I’m keeping everything else current, and am actually still hoping for a work out. I’d pay as much as they’d get for a short sale or at foreclosure auction…

        Also, if I leave, I lose the ability to qualify for some programs…

  9. phil

    The 4330 sq ft lot size on this property is so ridiculously small. That’s one reason we won’t be looking in NW II or Woodbury regardless of price.

    1. ockurt

      That’s what I was thinking…couldn’t they make the house a little smaller so they could have a decent yard? I mean, jesus, who in the hell really needs 3,100 sq. ft.? Maybe one of those multi-generational families.

  10. diogenes

    IrvineRenter –

    Thanks for posting the link to foreclosure alley. It really put this entire crisis, and what it is doing to California especially, in a whole new light.

  11. Laura Louzader

    IR, you have posted so many upper-middle and upper bracket properties whose owners are buried by HELOC abuse, that you have to wonder if HELOCSs and 2nd mortgages are perhaps the biggest debt sink we have.

    No comprehensive numbers are available, but we have to wonder if this form of credit abuse was perhaps THE reason for so many middle, upper-middle, and high income home owners being deep underwater.

    And if that’s so, we really are deeply buried for quite a few more years beyond your original projections.

    On another subject, I’d respectfully like to correct you on just ONE little historic fact:

    Marie Antoinette did NOT say “let them eat cake”. Never. These words were actually spoken, in less insensitive language, by another member of the royal family, but not that way. The words were placed in the queen’s mouth by her many enemies among the aristocracy.

  12. oc bear

    Foreclosure is the best measure of a home’s wholesale value. Unfortunately Barney Frank does know want us to know the true value of housing. Let’s see who knows best. The Market or Barney. I’m going with the market.

  13. Laura Louzader

    You’ll notice that nobody at these hearings is asking the right questions, so of course they’re coming up with the wrong answers.

    They’re asking: how do we get credit moving again. But they’re not asking, why should we get “get credit moving again” when that’s what caused the problem to begin with.

    They’re asking: how do we prevent foreclosures and keep people in “their” homes. They’re not asking: why should we support values, and why should we keep people in homes who should never have bought these homes to begin with. They’re not asking, how do we keep the unemployed in their homes and how can we contain the damage instead of attaching it to the national debt, and putting the entire system at even greater risk.

    Frank and other members of Congress impresse me as individuals who mean well, but who are utterly clueless on matters economic and financial, which is all the more reason our officials should never have been mucking about in them to begin with. This debacle was caused, not by “free enterprise” but by Crony Capitalism:the unholy partnership between well-meaning but financially and economically illiterate government leaders, and the top business leaders who own them. Every socialized housing and lending program, which are the true cause of this debacle, was promulgated for the benefit of the housing and lending industry, and has done nothing but distort the market and shift responsibility for failure to the taxpayers.

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