Will prices drop to 2002 levels? I think the real question is will they stop there…

Today’s featured property is quickly approaching its 2002 purchase price.

Asking Price: $295,000

Address: 407 Terra Bella, Irvine, CA 92612

{book}

Black Friday — Steely Dan

When Black Friday comes
I’ll stand down by the door
And catch the grey men when they
Dive from the fourteenth floor

People do not take kindly to market price drops. Most people do not have the slightest clue as to what asset valuations should be or what makes these values change. This is not a bad thing nor is it a criticism of the ignorance of the general public. Some things are best left to experts with specialized training. However, when these experts fail us, it does leave us rather angry–as it should.

Unfortunately, with the housing bubble, there were not any experts with specialized training providing impartial advice to would-be homeowners. The realtor and mortgage broker communities are not widely known for their high education levels, scrupulous sales activities, and impartial and learned advice (Yes, I know there are exceptions). The lenders, who are supposed to be the wise ones in the transaction (they are the ones with the most at risk), abdicated their responsibilities when they quit holding loans in their own portfolios. And of course the least qualified to render an intelligent opinion on real estate matters are those with the most to say on the subject: the BS artists hawking their get-rich-quick-in-real-estate programs, wannabe Donald Trumps building financial empires, and your average mom-and-pop specuvestor who thought to make a fortune in real estate. A great deal of ignorance and greed fueled by a great deal of Wall Street money was bound to be a disaster.

I have written about the bottom of the market on a number of occasions. Specifically, I wrote about it on September 13, 2007, in the post The Market Bottom, and again on October 6, 2008 in the post Fundamentals at a Market Bottom. The post from 2007 is a particularly interesting read for those who do not believe prices can actually trade below rental parity.

My prediction is for an Irvine median of somewhere around $400,000 at the bottom, assuming we do not have significant downside overshoot. None of the gyrations in Washington lead me to believe this will not happen. A $400,000 median would put us at 2002 price levels. I note that the Orange County and Irvine markets are different than the San Diego County market–not that it is different here–but the San Diego market has been 1 year ahead of us on the way up and on the way down. They will return to 2001 price levels which are comparable to our 2002 prices.

Today’s featured property was purchased in late 2002, so its purchase price is probably higher than typical 2002 price levels for a unit of its size and quality. However, the asking price is much closer to the bottom than to the top. IMO, this unit will bottom out in the $225,000 to $250,000 range, assuming an owner-occupant wants to live here.

Asking Price: $295,000

Income Requirement: $73,750

Downpayment Needed: $59,000

Monthly Equity Burn: $2,458

Purchase Price: $264,000

Purchase Date: 12/17/2002

Address: 407 Terra Bella, Irvine, CA 92612

Beds:	1
Baths:	2
Sq. Ft.:	950
$/Sq. Ft.:	$311
Lot Size:	–
Property Type:	Condominium
Style:	Mediterranean
Year Built:	2000
Stories:	2
Floor:	2
Area:	Northpark
County:	Orange
MLS#:	P675419
Source:	SoCalMLS
Status:	Active
On Redfin:	1 day
New Listing (24 hours)

gaurded? There are only Thirty-one words in that description, and he can’t spell them all correctly. Don’t get me started on the grammar.

Look at the size of that kitchen. I would just eat out every night.

• This property was purchased on 12/17/2002 for $264,000. The owner used a $211,200 first mortgage, and a $52,800 downpayment.
• On 6/16/2004 the property was refinanced for $258,750.
• On 7/12/2005 the owner HELOCed out $53,040.
• Total property debt is $311,790.
• Total mortgage equity withdrawal is $100,590.

This owner only took out $100,590. He is a small-timer by Irvine HELOC abuse standards. Think about that; a guy borrowed and spent $100,590, and he is conservative. Crazy.

I hope you have enjoyed this week at the Irvine Housing Blog. Come back next week as we
continue chronicling ‘the seventh circle of real estate hell.’ Have a great weekend.

🙂

{book7}

When Black Friday comes
I’ll stand down by the door
And catch the grey men when they
Dive from the fourteenth floor
When Black Friday comes
I’ll collect everything I’m owed
And before my friends find out
I’ll be on the road
When Black Friday falls you know it’s got to be
Don’t let it fall on me
When Black Friday comes
I’ll fly down to Muswellbrook
Gonna strike all the big red words
From my little black book
Gonna do just what I please
Gonna wear no socks and shoes
With nothing to do but feed
All the kangaroos
When Black Friday comes I’ll be on that hill
You know I will

When Black Friday comes
I’m gonna dig myself a hole
Gonna lay down in it ’til
I satisfy my soul
Gonna let the world pass by me
The Archbishop’s gonna sanctify me
And if he don’t come across
I’m gonna let it roll
When Black Friday comes
I’m gonna stake my claim
I’ll guess I’ll change my name

Black Friday — Steely Dan

Recently, I was emailed a link to a blog post written by an attorney who specializes in this area. It is the best explanation of the nuances of short-sale and foreclosure I have seen.

The featured property is a short sale (foreclosure-in-waiting) sporting a 36% discount from the peak.

Asking Price: $395,000

Address: 6 Gladstone #97, Irvine, CA 92606

Upside Down – Jack Johnson and Friend

I want to turn the whole thing upside down
I’ll find the things they say just can’t be found

Below is the post in its entirety:

The California Foreclosure Rules or “So What Happens If I Let My California House Go Back To The Bank?”

I get this question a lot. The answer is, IT DEPENDS. That’s a slippery lawyer’s response (someone called me that yesterday) but the outcome in your situation could be

1. You still owe the bank a big slug of money;

2. You have a big income tax bill with no cash to pay it;

3. You owe the bank a big slug of money and you have a big tax bill ; or

4. You owe the bank nothing and you do not have a tax bill.

Everyone wants to be the last case. A lot of my clients show up to my office as the third case. The good news is most people can be the last case, but only IF THEY PLAN CAREFULLY!!!

This brings me to Jim Cramer. I
like Cramer because he brings raw institutional investor insights to
the masses. He tells the brutal truth (as he sees it) and I respect
that. But I was screaming at the plasma screen when he cavalierly advised his fans to “walk away” from their houses. I don’t fault his economics: if your house is sucking all your money from you, why throw good money after bad on it? But you can really hurt yourself financially if you do not “walk away” carefully.

So I have set out below the Califronia rules
that you need to take into account when you let your house go. They are
really complicated and are too complicated for you to figure out on
your own so GET PROFESSIONAL ADVICE BEFORE YOU DO SOMETHING STUPID.

THE CALIFORNIA FORECLOSURE RULES

1. THE PURCHASE MONEY RULE:

In
California, a lender who loaned you money to BUY your home, which you
ORIGINALLY moved into as your primary residence, cannot do anything
other than foreclose. This means if the foreclosure sale
does not pay all “purchase money” loans, those lenders cannot sue you
for the unpaid balance. Most importantly, this includes second mortgages used in many 80/20 100% financing deals. If you REFINANCED any of these loans, or paid down purchase money HELOC and drew down on it again, this rule does not apply.

2. THE ONE ACTION RULE:

In California, a mortgage lender can only take one action against you: A non-judicial foreclosure, or a judicial foreclosure. The
result of a non-judicial foreclosure is just like the PURCHASE MONEY
RULE, a lender can only sell the property and pay the loan. If the sale does not pay the mortgage, the foreclosing lender cannot get the unpaid balance from you. However,
the lender can get the balance from you in a judicial foreclosure. The
good news is judicial foreclosures are too uncertain and costly for
lenders that they are almost non-existent. BUT, (pay attention, this is important) if a junior lender’s security interest is wiped out by a senior
mortgage foreclosure, the junior lender can obtain a deficiency
judgment for their unpaid balance because they have not had their ONE
ACTION against you yet (subject to the PURCHASE MONEY rule of course). This
situation is very common these days for that second mortgage you used
to remodel the kitchen and bathroom, or bought that Escalade, or
refined a previous second mortgage.

3. THE CANCELLATION OF DEBT RULE:

Both the IRS and California tax you for the amount of debt that is CANCELLED in any given tax year. Debt
is cancelled only when a lender has given up on its right to collect
the debt or they are barred by law from collecting the debt (think
PURCHASE MONEY & ONE ACTION rules).
HOWEVER, if the debt cancelled was a “Purchase Money” loan (see above)
the debt cancelled is treated as a sale of your residence, subject to
normal homeowner exclusions. This is because the loan is deemed to be
non-recourse and therefore nothing has been cancelled.

4. THE BANKRUPTCY & INSOLVENCY EXCEPTION.

Both the IRS and
California exclude cancelled debt from your income to the extent the
debt was CANCELLED in bankruptcy and you were insolvent; BUT ONLY TO
THE EXTENT OF YOUR INSOLVENCY!!!! You are insolvent when your debts exceed your assets. Assets include IRA and pensions. GET A CPA TO HELP YOU HERE. YOU WILL NEED IT! DON’T BE STUPID AND TRY TO FIGURE THIS OUT YOURSELF!

5. THE FIRST ACTION RULE.

Not to be confused with
the ONE ACTION RULE, this rule says a secured creditor must seek to
recover the secured property before suing you for non-payment. This
means a second or third mortgage will have to wait until the first or
senior mortgages foreclose before they can sue you for a deficiency.

So, you think you know the rules? Let’s try a few examples and see how you do. Answers & explanations are below.

Example 1: Mike borrowed
an $800k first and a $200k second loans to buy a beach condo he stays
at on the weekends and rents out occasionally. The first foreclosed (non-judicial) and paid off only $750k of the first loan. The second was wiped out. What happens?

A. Mike walks away without any debt to the first or second loans because it was “purchase money” debt;

B. Mike has income from the cancellation of debt of $50k on the first and all of the second;

C. Mike owes the second the entire balance and has $50k cancellation of debt on the first mortgage;

D. A&B

E. B&C

F. Mike can’t surf so it does not matter.

Example 2: Mike got a $200k first loan to buy his house and later took a $400k second to add a go-cart track and skate board ramp. The SECOND foreclosed (non-judicial) and just paid off the first loan. The second was wiped out. What happens?

1. Mike walks away without any liability to the first or second loans.
2. Mike has income from the cancellation of debt on all of the second loan;
3. Mike has no cancellation of debt income;
4. A&B
5. B&C
6. Mike can’t surf so it does not matter.

Example 3: Mike got an $800k first loan and $200k second to buy his home. The second was a HELOC that he paid off then borrowed against to buy land in front of a great surf break. The first foreclosed (non-judicial) and just paid off the $750k of the first loan. The second was wiped out. What happens?

1. Mike walks away without any debt to the first or second loans.
2. Mike has income from the cancellation of debt of the second loan;
3. Mike has no cancellation of debt income;
4. A&B;
5. B&C
6. Mike can’t surf so it does not matter.

Example 4: Same
example as three, expect that his first mortgage was refinanced and,
just prior to the foreclosure, Mike had (in addition to his house
debts) $10,000 in cash and no other debts. What happens?

1. Mike is taxable on the entire $50k CANCELLATION of debt from the first loan because he is not insolvent.
2. Mike is taxable on $10k of his CANCELLED debt;
3. Mike has no CANCELLATION of debt income;
4. Mike can’t surf so it does not matter.

Example 5: Mike buys an investment property with a $500,000 first mortgage and a $200,000 second mortgage. Mike gets in an argument with the second mortgage company because they say he cannot surf. So Mike stops paying the second mortgage when the property is worth less than the balance of the first mortgage. What happens?

1. The second mortgage forecloses and Mike has CANCELLATION of debt income.
2. The second mortgage sues Mike for non-payment;
3. The first mortgage company sues Mike for default;
4. Mike sues the second mortgage company for slander;
5. None of the above.

ANSWERS

1. C & F are correct. The
loans are “purchase money” but because Mike did not move into the condo
and make it his home when he got the loan, the purchase money rule does
not apply (WARNING Ask your attorney about the rare VENDOR RULE). The second can sue for the balance because it has not yet taken its ONE ACTION and is thus not CANCELLED. The
first is $50k short and it cannot sue Mike for the balance because it
took its ONE action so the debt is now CANCELLED and is taxable income. F is always true.

2. D & F are correct. The first loan was paid and thus there is neither deficiency nor cancellation of debt. The second loan was not a “purchase money” because the loan (although put to great use) was not used to buy the house. BUT, the second foreclosed so it used its ONE ACTION and cannot get a deficiency. Because the second cannot get a deficiency, the debt is now cancelled and is now taxable income. F is always true.

3. Only F is correct. The
first loan was used to buy the home and it foreclosed so both the ONE
ACTION and PURCHASE MONEY rules apply to prevent the first from getting
a deficiency for the $50k. But $50k of the balance is
CANCELLED, BUT it was non-recourse PURCAHSE MONEY debt so it is treated
as a sale of his home for $800k, subject to the home sale exclusion
rules. The second was not a purchase money loan because the second set of loan proceeds were not used to buy the home. The
second did not take an action so it can still sue Mike for a
deficiency. Because the second can still sue Mike, it is not CANCELLED
and thus not taxable income. F is always true.

4. C and D are correct.
Mike has CANCELLATION OF DEBT income because his first mortgage is not
purchase money but the ONE ACTION RULE prevents the lender from
recovering the $10,000 deficiency. However, Mike has $760k in
assets (house + cash) and $1 million in debt so his liabilities are in
excess of his assets and thus his income is excluded. Had
mike just had an $800k first mortgage, he would have been taxable on
$10,000 of the debt because without the forgiven debt, he would have
$10k in net assets. So the tax is excluded only TO THE EXTENT OF THE INSOLVENCY. D is always true.

5. E is correct. The
second mortgage is in default and can bring a foreclosure action
against Mike but it cannot sue Mike because the FIRST ACTION RULE says
they must move to recover the secured property first. They will not do this because the value of the property is worth less than the first mortgage. The first mortgage is still current so it cannot take any action against Mike. Truth is always a defense against slander so Mike cannot sue for slander.

There were several items I found interesting:

• If you used a HELOC as a purchase money mortgage, it is non-recourse, if you did not tap this HELOC later. Everyone who used a HELOC to buy, then went to the housing ATM, gave up their non-recourse protections.
• If you never lived in the property as a primary residence, the loans are recourse. As one might imagine, this is an area of enormous cheating and tax fraud. Nobody is going to admit that they never lived there as a primary residence. In fact, most will point to the lie they told on their mortgage application (everyone claims a property as their primary residence to get a better rate) as proof that they did live there. I spoke with someone who was doing a short sale, and his financial advisor told him to lie. I guess everyone figures they will not get caught.
• A second mortgage who was wiped out by the foreclosure on the first mortgage can still take action against the borrower. Most don’t bother, but they have the right.
• Just because the lender isn’t calling you trying to collect doesn’t mean they cannot or will not in the future. If the debt is classified as recourse, the lender will either give you a 1099 for the forgiveness of debt, or they will try to collect (or they will sell the bad debt to someone else who will try to collect.)
• In order to establish insolvency, you must prove you are broke. The assets you have in your ERISA protected retirement accounts must be counted. This is a strange exception because the IRS cannot get a judgment against your retirement accounts, but they will count these assets when calculating tax on forgiven debt. This could easily create a situation where a borrower has to declare bankruptcy to wipe out the tax burden or pay it out of their retirement savings.

I wrote about these issues in The Great Housing Bubble. I did not go into this level of detail (partly because I didn’t want to be accused of giving legal advice). I hope this post provides some clarity on these issues.

{book4}

Asking Price: $395,000

Income Requirement: $98,750

Downpayment Needed: $79,000

Monthly Equity Burn: $3,291

Purchase Price: $612,000

Purchase Date: 8/29/2006

Address: 6 Gladstone #97, Irvine, CA 92606

Beds:	3
Baths:	2
Sq. Ft.:	1,200
$/Sq. Ft.:	$329
Lot Size:	–
Property Type:	Condominium
Style:	Contemporary
Year Built:	1985
Stories:	1
Floor:	1
Area:	Walnut
County:	Orange
MLS#:	S563327
Source:	SoCalMLS
Status:	Active
On Redfin:	1 day
New Listing (24 hours)

strainless sink? Does it wash the dishes for you?

thru out? I wonder if the writer believes this is the proper construction of the word “throughout?”

subjec? landscapd?

What is Absolutely gorgeous? Is this the ultimate extreme of gorgeousness? Is there anything about this property that is not gorgeous?

{book3}

I feel bad for this owner. She is losing a lot of her own money. This property was purchased on 8/29/2006 for $612,000 (what was she thinking?). There is a $459,375 first mortgage and a $152,625 downpayment. Ouch!

If this property sells for its asking price, and if a 6 % commission is paid, the owner is wiped out, and the lender stands to lose $88,075. The total loss on the property will be $240,700.

I have a hard time imagining the lender approving a short sale because the discount is so large, and the loss on the mortgage is so small. I suspect they will hold out for $459,375 or take it in foreclosure.

One of the interesting subplots to this property is the behavior of the owner who sold at the peak.

• The previous owner purchased on 8/4/1999 for $231,000. He used a $184,800 first mortgage and a $46,200 downpayment.
• On 3/27/2001 he refinanced with a first mortgage for $189,500.
• On 6/2/2003 he refinanced again with a $232,800 first mortgage.
• On 7/3/2003 he opened a HELOC for $25,000.
• On 6/17/2004 he opened a HELOC for $100,000.
• On 10/24/2005 he refinanced with a $378,000 first mortgage.
• Total property debt was $378,000.
• Total mortgage equity withdrawal was $193,200.

The guy doubled his mortgage just like most homeowners I see. He got lucky and sold the place and paid off his debts. However, you have to think this pattern of behavior is going to continue in the future. He got to spend $193,000, and there were no negative consequences. Why wouldn’t he do the same thing on his next property? Unfortunately, the previous owners name is very common, and I could not locate the property he moved to. We will probably see it as a short-sale or foreclosure soon enough.

{book2}

Who’s to say
What’s impossible
Well they forgot
This world keeps spinning
And with each new day
I can feel a change in everything
And as the surface breaks reflections fade
But in some ways they remain the same
And as my mind begins to spread its wings
There’s no stopping curiosity

Who’s to say
I can’t do everything
Well I can try
And as I roll along I begin to find
Things aren’t always just what they seem

Please don’t go away
Please don’t go away
Please don’t go away
Is this how it’s supposed to be
Is this how it’s supposed to be

Upside Down – Jack Johnson and Friends