Upside Down

The middle of the market is back at 2004 or earlier prices; five years with no appreciation and losses after commissions.

23 Snowapple   Irvine, CA 92614  kitchen

Asking Price: $649,000

Address: 23 Snowapple Irvine, CA 92614

Upside down
Boy, you turn me
Inside out
And round and round
Upside down
Boy, you turn me
Inside out
And round and round

Upside Down — Diana Ross

Can you believe I have never used that song before?

Statistics show that people default at much higher rates once the go underwater. Very few people feel the need to struggle to support a depreciating asset — despite what their lending agreements might say. I came across these posts from ActiveRain yesterday: Are you crazy? Stop paying your mortgage is “strategic”?, and Are you crazy? Stop paying your mortgage is “strategic”? Part 2.

“So let me understand this. These folks are employed, have money and
live in a home that they apparently thought was king-dingalicious when
they bought it a few years back. But because the market slowed down
(like it always does) and hasn’t sped up (like it undoubtedly will)
according to their timeframe, they are just going to stop making
payments. Like children, they’re just NOT going to do it.”

Yes, he understands the situation very well, and so do the people who are walking away. Even with the financial consequences of walking away, the consequences of staying in some of these properties is even worse. I saw recently that Monterey County watched its median home price fall from $800,000 to about $185,000 — a 75%+ decline. If you bought at $800,000, and your property is now worth $200,000, what would you do? Would you really keep paying on that $800,000 mortgage?

I noted the following in Are Short Sales Moral?

There is a “strictly business” aspect to the decision that most often
points to walking away, and there is a moral aspect that never points
to walking away. This is a complex dilemma, and it is easy to moralize
when one is not in the dire financial straits a massive home debt can
bring about. However, people often find it far too easy to just walk
away and justify their immorality.

As more people go upside down on their mortgages, they will walk away. Whether you agree with their decision or not, it is going to happen because it still benefits people to do so.

23 Snowapple   Irvine, CA 92614  kitchen

Asking Price: $649,000

Income Requirement: $162,250

Downpayment Needed: $129,800

Purchase Price: $649,500

Purchase Date: 5/25/2004

Address: 23 Snowapple Irvine, CA 92614

Beds: 3
Baths: 3
Sq. Ft.: 1,571
$/Sq. Ft.: $413
Lot Size: 3,024

Sq. Ft.

Property Type: Single Family Residence
Style: Contemporary
Stories: 2
View: Park or Green Belt
Year Built: 1980
Community: Woodbridge
County: Orange
MLS#: S581936
Source: SoCalMLS
Status: Active
On Redfin: 2 days

Woodbridge Gem in Cottage Homes. Beautiful 3 bedroom with numerous
upgrades including totally remodeled kitchen with granite counter tops.
Ceramic tile flooring, recessed lighting and beautiful contemporary
track lighting. Epoxy flooring in garage. Secluded, extremely quiet
location in park-like setting. Close proximity to Blue Lake South Pool
and wonderful family friendly park. Access to all lakes, swimming pools
and parks in Woodbridge.

I want to compliment Debbie Podlas, the listing agent, for taking some great photographs (or having them taken professionally) and writing a clear and concise description that accurately captures the property. I wish all listings in Irvine could be displayed to this standard.

I like these little cottages. The neighborhoods are some of the finest in Woodbridge and perhaps all of Irvine. This is the kind of neighborhood where you would expect to make a profit after 5 years of ownership, but that isn’t how it is working out.

The owners of this property put down $250,000, and they never tapped their equity. Now they are going to lose at least a little due to commissions.

61 Reunion   Irvine, CA 92603  front 61 Reunion   Irvine, CA 92603  kitchen

Asking Price: $538,900

Income Requirement: $134,725

Downpayment Needed: $107,780

Purchase Price: $520,000

Purchase Date: 11/18/2004

Address: 61 Reunion Irvine, CA 92603

Beds: 3
Baths: 3
Sq. Ft.: 1,843
$/Sq. Ft.: $292
Lot Size:
Property Type: Condominium
Style: Mediterranean
Stories: 2
Floor: 1
View: Hills
Year Built: 2005
Community: Quail Hill
County: Orange
MLS#: L30369
Source: SoCalMLS
Status: Active
On Redfin: 3 days


This ALL CAPS description is not so good…

This property is REO, and the bank is hoping to get what was paid in 2004. This was a 100% financing deal (actually, the people put $350 down), and the owners defaulted. No HELOC abuse.

Five years gone by, no appreciation, and the market is still weak. This recovery is going to take a while.

86 thoughts on “Upside Down

  1. Sue in Irvine

    The Snowapple house has a great location. I think the house next to it is for sale too. There are very few on this street that are set off from the street and this is one of them. The neighborhood is beautiful with a lot of remodels. I just walked this area recently with the dog. it!

    1. mike in irvine

      I hate to say this but this house will sell within a week. I did not believe in the ‘pent up demand’ theory but over the past week i am convinced that Irvine has a significant population waiting on the sidelines with cash. A well priced house will sell immediately.

        1. mike in irvine

          I am talking about snowapple. We might look at a house in terms of sqft. Most dont.
          My understanding is that any decent SFR in Irvine priced below $650k will get a lot of traffic. Mr Joe Cashola Homebuyer has been following the downward spiral from 700k to 650k and suddenly 650k is a whole lot attractive in terms of the monthly payments. The spate of news items about the bottom will prompt him to make an offer.

      1. ockurt

        I agree with you that a well-priced Irvine house will sell immediately but I don’t know if this Woodbridge property qualifies.

        Seems to me they overpaid in 2004. Small house, small lot, and outside the loop.

        Maybe $600-625k.

      2. Major Schadenfreude

        I would say any house will sell immediately going forward if people are allowed to walk away from their homes with impunity.

        I’m going to see how this all plays out. If the government mandates forgiveness in any way, I will join the ranks of home owners and walk away if the home doesn’t appreciate according to my schedule.

        However, before I walk away, I will milk the system by not paying my mortgage for as long as I can get away with it.

    2. NOT

      OR, don’t buy it and wait until a similar house comes up for sale for 150k less that is twice as far from the 405? Just saying.

    3. NOT

      Did you notice that all of the comps, per Redfin, at the bottom of the listing are right next to the 405? That HAS to hurt. This place IS better than the 43 year old boxes of junk across the way.

    4. DarthFerret

      I disagree on the location. This narrow band between the loop and the 405 is NOT a place that you’d want to live. The freeway noise positively roars through that strip from Summerstone and Blue Lake S on the northwest end down to about Robinsong on the southeast end.

      I couldn’t find the article quickly, but IR posted a few months ago about the health, noise, and resale costs of living within 300 yards of a major freeway.

      Personally, I think that we should try to bury any roads that are more than 4 lanes in one direction. It would be costly, but I don’t think that it would be as costly as leaving them above ground.


      1. PlatinumRealtor

        This house is set far away from the freeway in such a quiet, secluded area than you don’t even hear the traffic from the outside. Have you walked past it at all? It is nestled in the trees one house away from the park and you feel like you are in the country. As far as the comment by NOT, you are correct. The comps are so inaccurate. You cannot compare a single family home in Woodbridge to a condo or SFR in University Park that is within throwing distance of the freeway.

  2. CA

    Am I really the first comment? I do feel bad for the owners on that first set, they essentially followed all the rules: large down payment, no MEW, lived in home at least 5 years…ouch.

    On the flip side, had they taken their dp and put it in the stock market, they would have been worse off, no?

    As for a strategic walk away, I say do it. It’s purely business–pulling emotion out of the process is something many readers of this blog have advocated. If banks plan for risk, have mechanisms in the contract itself for non-payment, and essentially monetize your credit score, you retain the right to trade in that score and do as you wish.

    Companies default and suffer the consequences, individuals similarly have that right.

    1. grabasnorkel

      “pulling emotion out of the process is something many readers of this blog have advocated”

      So I guess to you emotions and morals are interchangeable and/or equivalent? Sadly, I think many Americans and Californians agree. It’s too bad.

      1. CA

        I think what this mortgage crisis has done is that it has woken people up to the fact that their banks are no longer the banks of yesterday. It’s no longer the people down the street that care about you and will work with you.

        With the securitization of loans and the mechanical aspect of the way business is transacted, people have themselves changed the way they behaved as well.

        It’s like being cheated on by someone you’re dating, they dump you, and it’s time for you to come over and pick up your stuff.

        1. grabasnorkel

          That’s fine, but what I was remarking about was your implied equivalence between emotion and morals.

  3. NOT

    WOW, I am SECOND! … Anyhow, does anyone know what this person is smoking?

    From the article:
    “Brian Wesbury, chief economist at First Trust Advisors, got the ‘Tech Ticker’ crowd going on Wednesday, when he made a similar call, saying stocks are 50% undervalued and the Dow could hit 10,000 by year end. Lemonides’ call is even more bold: “I don’t think it would be surprising to see a 12,000 number [on the Dow] six months to a year out,” he says.”

    No wonder there is so much kool aid going around… Is it all because of this fallacy:
    “U.S. existing home sales rise in sign housing healing”

    1. mike in irvine

      I saw a show on TLC called Real Estate Pro’s. It was about a company in the Carolinas that used to flip houses during the boom. They are now changing their business model to purchase foreclosed portfolios from the lenders and flip them for profit.

      1. Geotpf

        I’ve seen lots of flippers-on the low end even-out here in Riverside. The prices are so low I can’t see the profit in it-it would make more sense to me to turn them into rentals.

        1. CA

          nice image, it’s a nice bit of propaganda to keep the working class content with their status in life. Reminds me of Brave New World.

          1. CA

            The “betas” (lower class) were made to listen to recordings overnight indoctrinating them to be happy and content with their status in life.

            This poster reminds me of something that would be told to the lower class to give them justification for a sucky just-over-broke existence.

            It’s not about working hard, it’s working smart…at least that’s my opinion of things.

          2. AZDavidPhx

            I don’t see that in the image.

            I see a bunch of people stepping all over one another chasing individual speculative wealth contrasted with a group of people cooperating with one another so that everyone prospers.

          3. CA

            hmm…I see the worker bees on the right thinking that hard work alone will make them rich. Then I see an exaggerated image on the left that North Koreans and Cubans might display to children in their classrooms that capitalism is bad (kind of like how “Death of a Salesman” is an accepted cultural import in China).

            I think most of us can argue that strictly hard work won’t make you rich…no risk, no reward. Granted, pure speculation and flipping aren’t effective retirement plans either.

  4. Irvine Tip

    I agree that the Cottage Homes neighborhoods in the South Lake area are among the best in Woodbridge. The interior walkways are absolutely charming. The houses have one of the best kitchen-family room setups I ever saw for a sub-1,600-square-foot house. The deal-breaker for me, when I contemplated buying one of these in the late ’90s, was the master “suite.” The average-size bedroom was acceptable, but the bathroom — a toilet, sink and stall shower — was the kind of thing you expect in your first one-bedroom apartment, not a home that — at the peak — you pay $700K for. Don’t know what the builder was thinking.

    1. buster

      I agree that the lot size is WAY too small. One of the benefits of living in So. Cal. is the fine weather. I just don’t see myself playing frisbee while having a BBQ in my 700sf back yard.

      I noticed properties in The Willows with 5,200sf lots and same size houses for sub-$500,000. You can do a very nice remodel with the $150,000 you save, and get a bigger house and almost twice the lot! Are The Willows that bad?

        1. buster

          The oldest part of Irvine, I think. Bordered by Yale / Walnut / Culver and RR Tracks.

          Small houses, relatively decent lot sizes 5,000+ sf, selling 3/4 bed, 2 bath in the mid-$400,00 to low $500,000 range.

          1. brea

            The Willows do not go all the way to Culver. Green Tree starts about half way from Culver to Yale.

            The Willows was the cheapest Irvine tract back in the early 70’s. I think California Homes, across Yale by the tracks, would be second cheapest. They were about 25K if I remember right. Definitely under 30K.

            At my 30 year reunion, someone said that she heard there were gangs in the Willows. Does a stigma exist? Once the poorest, always the poorest?

  5. winstongator

    I have to believe that 80% median drop is skewed by the mix of sales. The only things I’ve seen drop 80% are SoFla condos, mostly in the low-end.

    The greater one’s assets & ability to pay, and the amount lost to a foreclosure increases the likelyhood a bank will sue for some compensation on the foreclosure.

    I find the injection of morality into the picture interesting, because morality questions are present on the front and back end of a bubble.
    Was it moral to steer people into higher rate/fee loans when they qualified for lower?
    Was it moral to ignore forged documents?
    What about ignoring fraudulent transactions –
    Was it moral to pay huge bonuses based on short-term gains when long-term there were either no gains or losses?

    This is where I think regulation acts as a form of morality. People talk about free markets and the invisible hand, but what if Smith’s butcher makes higher profits on tainted beef, and the sickness takes a few years to manifest, and he may not even be held accountable for the problem – he gets to keep his profits. What would he do?

    Stronger regulation acts as morality on the front-end, where it can actually do more good. Banks can enforce morality on the back end by changing how a foreclosure affects your ability to get a loan.

    1. Geotpf

      Mix of sales is defintely a lot of it, but there have been individual properties with 75, 80, 85, 90% decreases in value. They are pretty rare, but they do exist.

      Here’s two examples:

      Tiny (876 sq ft) 99 year old house in a bad part of Riverside. Sold for $285k in 2005 and then sold for $40k in April (after 13 price reductions!), for a 86% drop in value.

      49 year old Palm Springs house that took over a year to sell, with almost as many price reductions as the Riverside house. Sold in 2006 for $450k, and then sold on the same day as the Riverside house for $32,500, for a 92.8% discount.

      1. winstongator

        Wow. The 450k -> $32k smells fishy to me.

        I’ve seen condo/townhomes that were in the $250k bubble drop to the $50k.

        I’d consider anything selling under $50k to be on the low end of almost any market.

        1. Geotpf

          No, I think it’s legit. It was on the open market for a year. Nobody wanted it.

          Note the crazy flipper action prior to the crash as well:

          Sep 22, 2006 Sold $450,000 28.4%/yr Public Records
          Sep 20, 2005 Sold $350,000 63.3%/yr Public Records
          Jul 30, 2004 Sold $200,000 89.0%/yr Public Records
          Oct 06, 2003 Sold $119,000 24.3%/yr Public Records

          Nice yearly game of musical chairs there, with three guys making bank ($81k, $150k, and $100k), with the last guy running out of chairs when the music stopped.

          (The $399,479 sale after this was the bank taking it back.)

          1. winstongator

            I don’t know about the last sale. There was large-scale fraud in FL and this run-up. It makes sense to have one party take the FC on their credit, and can end up splitting some of the proceeds on the sale.

            In that Palm Springs neighborhood, there are plenty of empty lots. Never built on, or tear-downs?

          2. Geotpf

            I dunno. It certainly is an older neighborhood. In any case, the $450k guy probably saw what the last three guys did, and thought he could flip it again for $550k in 2007. Morons.

  6. ockurt

    Quail Hill is kind of interesting area. Don’t go there often but it’s really scenic.

    Do you think this area is getting hammered because of the more recent buyers during the bubble or because it’s out in the boonies?

    1. IrvineRenter

      Quail Hill will rise like a Phoenix from the market ashes. The location is very convenient being near the Spectrum and many offices. The views from the upper reaches are great. There are only a few neighborhoods in Irvine where properties have views; Quail Hill is one of them.

      It will be crushed due to the loose financing and inflated prices from the time of purchase. The whole community will be upside down at the bottom. That may cause a huge overshoot unless cash buyers really step forward. Those cash buyers, if there are enough of them to create a bottom, will be rewarded when the market strengthens.

      1. ockurt

        IR, good point about the proximity to Spectrum offices…kind of like the new IBC I guess?

        I do believe the views will help values in the long run as it differentiates itself from other parts of Irvine.

  7. SD Kate

    I walked because I had no choice (divorce). I think we wouldn’t have walked had we still been together, but since the house was just in my name, in theory, we could have bought another one for cheap in his name, lowered our mortgage and got a much better house. As tempting as that sounds, I don’t know if I’d be able to do that, morally. But then I think that businesses do stuff like that all the time, because it is a business decision.

    Back in real life, supposedly my house was auctioned on May 20, but no title transfer has occurred according to the county clerks’ office, and I’m still there. My lenders STILL sending me “We can help you!” packets of info to fill out. I’ve reached my capitulation point, and am ready for them to take the house already! I’m at 10 months since I missed my first payment.

    1. IrvineRenter

      SD Kate,

      Thank you for your update, and thank you for the way you have shared your experience with us. It is sad how this has worked out for you, but there is always a better tomorrow. Enjoy your free rent, and save every penny, you will be glad you did. As a group we have probably been too hard on people, so I appreciate your courage in stepping forward with your story.

      1. SD Kate

        Thanks! I have never felt attacked by this group, and I think part of that is my willingness to admit we (my ex-spouse and I) made poor choices, and also the fact that I didn’t use my house as an ATM!

        I don’t think this group is too hard on people, I think we all here are frustrated by people’s lack of accountability for their actions, and the entitlement attitude.

        With the help of an attorney, I’m moving forward with relinquishing my house, I know the only way I could keep it is with a principal reduction of half, which won’t (and shouldn’t) happen. The stress of not knowing was taking a physical toll, plus, the sooner it’s done, the sooner I can start repairing my credit!

        The whole process has been a nightmare, but at least I’m here, learning what not to do next time!

        1. CA

          Yeah best of luck to ya! As long as you’re putting food on the table and you have a (rented) roof over your head, just know you’re doing a LOT better than others out there who have neither of those.

          Keep us updated, I remember your stories/situation from here a while back, thought I’d never hear an update.

    2. Blueberry Pie

      Probably building a nice little nestegg on the mortgage savings. I’d feel so rich if i had been putting my rent checks in MY bank account for the past 10 months!

    3. Major Schadenfreude

      “…in theory, we could have bought another one for cheap in his name, lowered our mortgage and got a much better house.”

      In theory, if the housing market was a “free market”, then the next lender would research records to see if this kind of activity had previously occurred. The market would know the truth and decide at what cost they would lend you money, if at all.

      Unfortunately, we presently do not have a free market, so the occurrence of this shenanigan is possible. On the one hand it helps keep house prices high which puts a smile on the faces of TPTB. On the other hand, it screws the lending institutions. The government’s present dilemma is how to find a sneaky mechanism by which the tax payer can be encumbered with the bad loan to save the lender and keep house prices elevated.

  8. longtime reader

    The most important thing in life is survival.

    I’m surprise that more people have not walked away.

    It is not immoral to walk away from an obligations once the variables have changed. It’s logical.

    If the bank brought a house for you, with you having to put no money down under the conditions that you will pay them back over thirty years and all of a sudden the value of that house drops 40% then it makes perfect sense to walk away. The bank has a duty to their investors that they will do their “due diligence” to protect not only the investors but themselves and the banks failed.

    To make this a morality argument is missing the point. Morality has nothing to do with walking away. Even if someone has the money, walking away is in the self-interest of the individual. Survival is a natural right of every individual.

    1. CA

      I agree, but the point of this post/the articles are that these borrowers aren’t facing the question of survival. It appears they are surviving just fine, but instead elect to default.

      I think most people would agree that, faced with putting food on the table or clothes on your children, walking away for financial reasons makes sense. It’s when the borrower is fully capable to feed/clothe their family that morality comes around.

      But now we need to define the word “afford.” That means many different things to different people.

      1. longtime reader

        Even if someone can afford the mortgage, walking away from a bad loan has nothing to do with mortality.

        Think of it as a business transaction. Individuals who own business set up corporations so that if there business goes under, debt collectors can’t come after there personal asset. So even if they can pay off there business debt with their personal assets they don’t have too. This is how capitalism works.

        1. CA

          Yeah, sounds like what I posted above. If there’s anything I’ve learned from this debacle…it’s to never make it personal.

          To the bank, I’m just a number, and a bank doesn’t have “morality” as it is a legal/corporate entity and not a person (a machine, even). So why should I reciprocate and give the bank the same morality and emotional thought that I give my friend who loans me $10 for lunch?

          IR said it correctly below, it’s just a business transaction with a machine, nothing more and nothing less. That’s one lesson I’m taking away from this whole meltdown, and it’s something banks should be concerned about going forward.

    2. IrvineRenter

      “To make this a morality argument is missing the point. Morality has nothing to do with walking away. Even if someone has the money, walking away is in the self-interest of the individual. Survival is a natural right of every individual.”

      I really enjoy reading the different perspectives people take when examining this issue. Think about the lifelong ramifications people will endure because of the choices they make both financially and emotionally. Whatever decision people make, they have to live with, and if the decision is in conflict with their own standards of behavior, they will not feel good about it. How they choose to evaluate the decision they made will stay with them for a long time — for better or worse.

      I agree with your point. Lenders and investors who fueled the Great Housing Bubble made a tragic error when they threw out lending standards, created unstable loan products and allowed asset prices to rise too high. Now that their Ponzi Scheme has collapsed, they want to appeal to someone’s morality to convince them to do something that is not in their best interest financially. Morality should be left out of this. Each person is exercising their contractual rights in an agreement; nothing more.

  9. avobserver

    Is there any rational reason for a severely underwater home debtor not to choose walk-away? Having people continue to spend disproportionate amt of their income on an over-priced property will only benefit foolish lenders, but no one else.

    I know quite a few people who bought back in 2005/2006 with large down payment and conventional 30-yr fixed loans. Almost all of them are now in a futile battle to get their lenders to reduce principle balance. They have too much skin in the game to walk away. These are actually highly educated, smart people (with decent jobs/income) who happened to get married or started a family around that time, and figured they should buy as long as they could afford, irrespective of the price. They are truly stuck now and are likely to keep paying until the house is paid off. By the time the housing market in their areas finally hit THE bottom in 2014 – 2015, they will have paid on their houses way too long and invested too much in it to walk away.

    But a real speculator who bought around the same time with $0 down, will have no problem abandoning the house. I think people who buy a mid-high end house in 2009 on average will be far worse off than those who bought in 2006, since they had to put down at least 20%.

    The worst part about having two back to back gigantic bubbles in the past decade is that they have turned a large number of our ordinary citizens into gamblers and speculators. The reward for hard working was largely absent if day-trading stocks or flipping houses could generate far bigger profits. Relentless pursuit of easy money and excessive consumption has become the dominant pastime in our society. And vast amount of economic resources and human creativities were squandered in keeping this cheap thrill (US economy as we call it) going.

    1. Geotpf

      I can think of a few reasons:

      1. Their credit score, and the fact they won’t be able to buy another house for many years.

      2. The emotional aspect of “this is my home”. This is a big factor-moving is a trying thing, emotionally and physically. They have a house, they know the neighbors, their kids have friends nearby and like the school, they’ve fixed up the place just the way they like it. To uproot all of that just because they have a paper loss is a big deal for some people.

      3. Their word. Some people consider breaking a contract to be immoral. I lean towards this. If you say you will pay x dollars a month, and you can pay x dollars a month, it is untrustworthy to renege on that promise. (It’s different if you lose your job or whatever and no longer can afford to pay x dollars a month, IMHO.) If I was in a business that gave out credit, and I saw somebody had a foreclosure (or any other similiar default, on a car loan or credit card), I wouldn’t give them credit. I wouldn’t give them a job or enter into a contract with them, either-they can’t be trusted to abide by the words of a contract, because they just broke one.

      1. CA

        I think the concept of social stigma with foreclosures has gone out the window. You have this glut of them such that the temptation is too great for employers/lenders/etc… to simply pass them off as unworthy.

        They’ll pay more in interest, maybe as a landlord you’ll charge more for security…and as an employer, once the economy comes roaring back, a spotless credit report on a skilled candidate save for a foreclosure black eye wouldn’t hold me back.

        In other words…after a few bumps, people will get over it. In the end, if it’s a good strategic walk away, the debtor will have traded a temporary 200-300 points off their FICO for several hundred thousand dollars after taxes & increased costs to borrow.

        If you really play your cards right, buy a new car and interview for a new job before you pull the trigger to mitigate the consequences.

      2. avobserver

        Under a normal market correction (10- 20% off the peak price) #1 and #2 may be enough to deter people from walking away. But this is not a normal correction, this is a total collapse. It won’t be far fetched to predict a 50-70% decline. People may swallow a mild loss because of credit score factor and sentimental value of the house. But these factors mean little in the face of a market crash. For average wage earners in OC the prospect of losing $300K-$500K in principal (plus interests) means a financial setback so large that it makes little sense to keep paying even when they can still afford to.

        As for the code of honor argument – again I agree under the normal circumstances. But how many people would honor their contractual obligation when facing financial catastrophe? And more importantly – what purposes would it serve to turn people into indentured debt slaves and in so doing delay the inevitable adjustment of housing prices to the truly affordable level?

        1. Geotpf

          I agree with much of what you are saying. And the third is qualified with assuming they can still afford the monthly payment. Many times people can’t, although sometimes (taking stupid bullshit loans that have the payment triple after three years) that was their fault. But sometimes it’s through no fault of their own (divorce, job loss, etc.).

        2. winstongator

          Working some example numbers.

          Let’s say the loss is 300k, on a home that sold for $600k in ’06. They ‘should’ have put 120k down. Was that their whole cash savings? Monthly payment of around $4k. For 25% mortgage dti, gives a reasonable income on the home of ~200k. Out of pocket expenses would be 180k which would take a long time to save.

          My in-laws have a house down the street. Sold new in ’02 for 389k. From what I heard, original owner sold to an ‘investor’ in ’07 for 684k and then rented it out. ‘Investor’ fc’d ’08 and reo sold for 326k 10 months after FC. Scaling the numbers it would have sold in ’02 for 341, 600 in ’06, and 286k in ’09 – now no longer a hypothetical example. In that case, you had 12-15% return for 4-5 years. Did the buyers in 06/07 expect that to keep up. Some did, some didn’t, but most in those regions expected continuous positive price increases ad infinitum.

          >10% price increases for multiple consecutive years should have raised eyebrows, it did mine. That’s actually a crappy statement because most observers barely blinked at those returns.

          Bank should probably negotiate a mod in the homeowner case. Businesses are cutthroat all the time, why shouldn’t individuals be too.

  10. Laura Louzader

    To avobserver,

    Per your post about friends who bought honestly and with a high down payment, and have too much skin in the game to walk: I feel for these people, as I do for all of the honest and prudent among us who were one way or the other injured by the housing rampage.

    But that does not mean they are entitled to a write-down of their principle. NO ONE, able to pay or not, is entitled to a write down of principle just because they made a bad bet. Your friends made a bad investment, pure and simple. They erred honestly, but it would be no more moral to give them a massive break than it is the home debtors who borrowed more than they could pay back. What of the renters who are paying taxes for the bailout of the financials who cannot deduct mortgage interest, and did not benefit in any way from the runup to this disaster, but who are nevertheless paying steeply higher rents because of the inflated property prices and RE taxes, and who are confronting job loss and dropping incomes like everyone else?

    The bailout is immoral in every way, and neither the borrowers nor the lenders ought to be getting our assistance.

    A better way to have coped with the fiscal emergency would have been to simply shelter all the “innocent” money- savings & checking accounts ,money markets, and fixed insurance and annuity contracts, then let the financial holding companies, banks, and lenders simply fail. Meanwhile, create emergency banks which would have a short lifespan and exist to make credit available to other businesses and industries, such as the food distributors who couldn’t get their shipments off the wharf and the factories that couldn’t ramp up to fill a large order for lack of credit due to the seizing up of the credit markets.

    This would surely not have been less painful than the bailout, but it would have cleared out all the crap and cleared a path to rebuild our financial system on a foundation of honesty and integrity.

    1. avobserver

      I am in complete agreement with you that principle write-down should NOT happen under any circumstances, period.

      The point I wanted to make is that those who bought at peak with 30-yr fixed & 20% down payment (if this would qualify them as non-speculators) should walk away NOW. They would lose their down payment and that’s it. But if they wait with the false hope that the market will quickly bounce back, or continue to pay under a sense of moral obligation, they will be losing 60-70% of the money they put in. All this moral persuasion and loan mod scams are just a sinister way to trap the non-speculators/gamblers bunch who had the bad luck of buying at bubble price (gamblers will always walk no matter what you say).

    2. HydroCabron

      No disrespect intended, but it’s “mortgage principal,” not “principle.”

      I usually try to read through these homonyms, but this particular confusion of words has become downright popular.

      1. IrvineRenter

        My principal concern is using the word principal as the principle it principally represents.

  11. CA

    I feel bad for those seeking advice from professionals (see active rain posts) and those “professionals” actively push the borrower away from a strategic walk-away for fear of liability and for “morality” purposes.

    I feel like they should at least get EVERY option available, even if it means walking away.

    You have to be pretty jacked up on kool aid to tell someone who’s 70% down and underwater that continuing to pay the mortgage is the best thing to do. Then again, they’re a bunch of realtors, what do you expect?

  12. T

    I don’t see it – the ask price is the same as the price they paid – and you said they put 250K down – so why is anyone feeling sorry for these people?

    Its a nice home, with reasonable hoa fees and at 650K is relatively affordable. It should sell very quickly – maybe for less than ask, maybe not.

    but I think I’m missing something. They’ve had very cheap accommodation costs – and now they are selling in a crappy environment, but the home they’ll buy is likely reduced in price – so what’s the problem?

    1. grabasnorkel

      “at 650K is relatively affordable.”

      You guys crack me up.

      Last I checked a HH income of 200k+, which a price like this would justify, represents only 5-10% of Irvine. That then begs the question, relative to what?

      1. AZDavidPhx

        And how many of those 200K households are the combination of two incomes? Very foolish to calculate your affordability under the assumption that two people will continuously be employed for the next 30 years.

      2. Geotpf

        I agree that 650k is not affordable to a lot of the population. Those people can be neighbors with me out here in Riverside, where you can get almost triple the lot size, more square footage, and no HOA fees for less than one quarter the cost.

        The definitely should be a significant difference in prices between Riverside and Irvine-but not that much. Maybe two or three times for the same square footage (and I’ll even ignore lot size in that calculation, and things like my place is a one story and this is a two-one stories are vastly superior for the same square footage-no climbing stairs, no wasted square footage for the stairs, no needing an extra bath downstairs for guests). The Reunion property is closer to this calculation, except for the very major fact that it’s a condo with at least two shared walls.

        This huge descrepency makes me think Irvine still has a ways to fall.

      3. witin4ever

        Also I think HH income of 200K+ deserves to have a bigger home with lot more features..

      4. T

        you did see the $1M+ homes routinely featured here?

        And yes – it is relatively affordable.
        there are 10s of 1000s of people who have a family income more than is required to buy this home in Irvine. You might not be one of them, in which case you can’t afford it so do everyone a favor and don’t. This is quite a nice home. I just don’t see why people feel sorry for the people selling it.

        Where does it say buy a home and you are ENTITLED to live free/make a profit? Get a beemer/lexus whatever from the ATM?. The froth to buy out there is amazing. Never mind the unemployment, buy now before you miss your chance. Or don’t. But do realize that lots of people are better off than you – its always true. And right now lots of people are mad keen to buy a home, preferably at rock bottom pricing.

        1. goatse

          there are 10s of 1000s of people who have a family income more than is required to buy this home in Irvine.

          Oh and I assume you have data to back up this claim?

  13. Perspective

    The raw numbers for our underwater situation might be ugly to many, but you must keep things in perspective. Our mortgage debt is currently around 10% greater than our home’s value. Of course, I expect that to increase over the next few years.

    The amount we’re currently underwater is equivalent to less than 30% of our annual income. Baring a decrease in our income, that amount isn’t sufficient to even consider walking.

    1. IrvineRenter

      You will be insulated from the worst effects of the fallout because you utilized such a conservative DTI when you purchased. Most people are far overextended compared to your situation. There really is no need for you to walk because you really can afford it — not just scrape-by afford it, but actually have-a-life afford it.

      It would be very interesting to see the correlation between % underwater and DTI ratio. I suspect that the higher the DTI, the less you will allow a property to go underwater before you walk; in a circumstance like yours with a very low DTI, far fewer people will walk unless they go way, way underwater — scuba levels.

      1. Perspective

        I thought we were pushing it with a front-end DTI of just under 28% at purchase, but good fortune with income increases has pushed that ratio down to below 24% today.

        I’m with AZDavidPhx when he repeatedly preaches about how ridiculous it is that people dedicate so great a percentage of their income to housing. It just doesn’t allow you any cushion for living a fun life when so much is already devoted to housing. It also does provide any cushion for the inevitable surprises life brings (job loss, children, etc.).

        1. AZDavidPhx

          Think about how much shopping everybody would be out there doing if only 50% of everybody owned their homes debtfree without a mortgage payment?

          By allowing people to pay off their homes and actually own them, you are giving them a feeling of security that will make them a lot more comfortable to go out and shop, eat, drink, consume, etc.

          I have never understood why it is in everyone’s best interest to be leveraging themselves to the hilt with monopoly dollars and then turning around and streaming all of their income back into a bank’s shell game so CEO’s can patronize high end prostitutes and order thousand dollar bottles of champagne.

          People should be outraged, but they are not. They roll over and do it because they believe in the system.

  14. Byronic

    I also think the Snowapple home will sell quickly. But not because it’s an especially attractive house (it’s nice but has a small lot and the noise from the 405 is awful)or a great bargain (at 413 a square foot? Please.) It will sell because its slim pickins out there and the kool aid runneth deep.

    1. AZDavidPhx

      Everybody is really excited over here. The local NEWS does a 5 minute HUZZAH! each evening for the increased sales at the bottom end. Lots of high-fiving and optimism flooding the airwaves.

      We have a long way to go here. Everyone thinks they are getting in early now just in time for the next bubble.


  15. BD

    IR and All –

    …wait until you see what 10+% mortgage rates do to housing. It is coming… the dollar is in serious trouble over the next 5 years. We moved from a commercial housing ponzi scheme back to our old favorite – the gov boring from our future and others to pay for things that are unsustainable.


  16. DarthFerret

    In my opinion, there absolutely NO moral obligation to keep paying on a loan, any loan. The borrower can, at any time, walk away for any reason. The argument otherwise is the same argument that tries to tell employees that they should be “loyal” to their employer or to their managers or that they have a “moral obligation” to “stick it out” for their “team” even when something better comes along. This is idiocy! “Loyalty” to a company is making a choice to be paid less (or treated worse) than you are worth in the job marketplace. If you are paid a competitive wage and treated as a human being, you don’t need to be “loyal”, because you are being adequately compensated for your services.

    Likewise, there is no morality in borrowing and lending. It is incumbent upon the lender to protect themselves against a non-paying borrower by securing collateral or otherwise mitigating their risks. If they fail to secure adequate collateral to protect their investment, then they made a bad business decision the same as the borrower who ends up losing their down payment and principal payments when they walk away. This issue would not be nearly as problematic if the lenders hadn’t had such loose lending standards over the past decade. If they had required down payments of at least 20% LIKE THEY SHOULD, fewer borrowers would walk away and fewer banks would need bailouts.

    Lenders in our society have attempted to further mitigate their risk at no financial cost to themselves by creating a cultural notion of “morality” in lending. This is very much like the jewelers that perpetuate the notion that the “proper” amount to pay for an engagement ring is 2 month’s salary, and the waitresses that matter-of-factly state that the “proper” tip amount is 20%. Phooey! I’ll decide what is the “proper” amount of my money to spend, and I’ll decide what “moral obligations” I have to a lender. Let them protect their investments some other way, because I’m not buying into their scams.

    I don’t borrow if I can at all avoid it, but when I do, it’s a simple business and financial agreement, and one recourse for me as a borrower is to return the lender’s collateral.


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