Shadow Inventory in Orange County

What Lenders and Our Government Don’t Want You to Know

The Big Lie of 2009

Brace For Impact

I couldn’t decide on a headline…

With a little data and some complex analysis, it is possible to get an accurate picture of the shadow inventory in Orange County. Today, we will explore this catastrophe in the making.

141 Arden 71   Irvine, CA 92620  kitchen

Asking Price: $769,000

Address: 141 Arden #71 Irvine, CA 92620


and I am not frightened of dying, any time will do, i
Dont mind. why should I be frightened of dying?
Theres no reason for it, youve gotta go sometime.
i never said I was frightened of dying.

The Great Gig In The Sky — Pink Floyd

The inventory coming to our market is going to cause a catastrophic collapse of house prices. It will pound them back to the stone ages and wash away any illusions of equity.

Are you frightened? As Yoda would say, “You will be… YOU WILL BE.” I will ask you again at the end of the post.


Some say the world will end in fire,
Some say in ice.
From what I’ve tasted of desire
I hold with those who favor fire.
But if it had to perish twice,
I think I know enough of hate
To say that for destruction ice
Is also great
And would suffice.

Robert Frost

In order to discuss Shadow Inventory, we must define it. Shadow Inventory is the total of Preforeclosure Inventory, REO and some other sources. Preforeclosure Inventory includes all mortgages currently 60 days or more behind on their payments that are likely to become foreclosures but not yet REO. To understand these distinctions, review the foreclosure timeline below.

When a mortgage holder gets 60 days behind, they become part of the preforeclosure inventory. Once a property is in preforeclosure inventory, there are two possible outcomes: (1) cure or (2) foreclosure.

Curing the deficiency involves one of three possible methods: (1) selling the house — something that doesn’t happen often when the owner is underwater — (2) paying off the deficiency in cash, and (3) loan modification. The first method used to be the most common, but now with so few mortgage holders with any equity, very few people are curing by a sale.

Few people ever pay off a deficiency in cash because if they had cash, they probably would not be in default.

Despite rumors to the contrary, loan modification programs have been completely ineffective. Very few people actually get the modifications, and most of those people re-default and end up in foreclosure anyway. If these programs were effective, it would show up in high cure rates; 6.6% is not very high.

There should be only five or six months between missing the second payment and a property being auctioned as foreclosure. Properties are not supposed to be warehoused as preforeclosure inventory, but with the various foreclosure moratoria, there is now a significant backlog of homes held in limbo. Preforeclosure inventory is market pergatory.

Mortgage holders are defaulting in large numbers. The current default rate is 10.7%, but it is projected to hit 14% by the end of the year. If you do a little math, you can calculate the number of homeowners currently in default in Orange County.

Number of OC Homes Delinquent on Mortgage Payments

Orange County
Housing Units


OC Home Ownership Rate


Total Owned Housing Units


Percent With Mortgage


OC Homes With Mortgage


Current OC Delinquency Rate


OC Homes Currently Delinquent on Mortgage Payments


(Links to source material provided above.)

Look at how devastating a delinquency rate of 10.7% really is.


If there is any headline from the mainstream media you should take note of, it is the extraordinarily high delinquency rate. It is central to the calculation of Shadow Inventory, and it is the tsunami many here have been waiting for.

The rest of the analysis is built around this calculation.

Cure Rate

When a mortgage holder gets behind on payments, they often “cure” the deficiency — well, at least they used to. The cure rate in early 2007 was 45%; It recently fell to 6.6%.The cure rate is the ratio of the number of loans cured divided by the number of delinquent loans in the system. It is a measure of the percentage of loans each month that leave Shadow Inventory. It is a direct measurement of one of the methods of exiting the system — the other being foreclosure. When a property goes delinquent, what isn’t cured is a foreclosure.

Cure rates are very low right now because there is so much shadow inventory in the system that has no chance of curing. This makes the denominator of the calculation larger than it should be (Loans Cured / Total Delinquent) because delinquent loans are not becoming REO on time. There are about 15,000 loans in Preforeclosure Inventory that should be REO but due to foreclosure moratoria and other policies, Shadow Inventory (Preforeclosure Inventory plus REO) has been growing. This is consistent with anecdotal reports I have heard.

Shadow Inventory Calculation

With a little more math, you can calculate the the number of these defaults that are going to become REO.

OC Homes Currently
Cure Rate 6.6%
Brought Current
Properties Heading to REO 43,214

Note the above calculation determines how many will become REO. To calculate our current Shadow Inventory, the future REO must be shifted six months to allow for processing time. Our current Shadow Inventory is sourced from the projected REOs of six months ago — a time when delinquency rates were lower and cure rates were higher. Six months from now, things will be much, much worse.

I am projecting the delinquency rate to peak at 16% in the second quarter of 2010 about the same time unemployment peaks. It will remain elevated for some time as the lingering effects of unemployment take their toll. Shadow inventory will peak in December of 2010. With the ARM resets coming, peaking in 2010 requires massive capitulation (defaulting before the reset). Orange County may not capitulate on schedule, but the statistics suggest capitulation is already occurring.

Shadow Inventory

Shadow inventory is not the peak of foreclosures, it is the peak of the supply of properties in the foreclosure pipeline. How and when these properties are moved through the foreclosure process is anyone’s guess. When the crisis is finally over, a whopping 40% of all properties with mortgages in Orange County will go through foreclosure. It is the 175,000 pound pig moving through the snake, or the equity tsunami building building strength; you pick the analogy. It is bad.

Projected REO Shadow Inventory

This is the number I am least sure of in this analysis due to the assumptions in the calculation. It should take 10 months for a property to go from being 60 days delinquent to an REO sale in the marketplace (360 – 60 = 300 = 10 months). Lately it has been taking much longer. To calculate the REO total, I have added every 12th month together to avoid double counting. I am assuming it takes on average 12 months to go through the system. If it only takes 10 months, then the total REO number is larger than 175,000, and if it takes 18 months, it is about 33% smaller.

The next step is to calculate REO Inventory and Preforeclosure Inventory. Graphrix was kind enough to obtain data on REO inventory and sales since January of 2007. With that data and the calculations above, the table below was generated.

REO Inventory and Preforeclosure Inventory

REO inventory is not mysterious; it is the sum of all properties that have entered the system minus those that have been removed through final sale to its new owner. When you run the calculation, you discover that REOs have been building up in the system for quite some time (I started with zero in January of 2007 which isn’t accurate. In short, my number is understated.)

If you know Shadow Inventory, and if you know REO inventory, everything left over is Preforeclosure Inventory. Below are a table and charts parsing this data.

The chart above shows the increase in REOs and REO sales over the last two and one-half years. Lenders have been consistently behind in processing REO causing a buildup in the system.

Change in REO Inventory

In 2009, lenders became more serious about selling its REO, and REO inventory has been holding steady at about 6,000 units all year. For the last year, foreclosures have been selling at the rate of about 800 a month in Orange County. This sales rate keeps prices stable, but it is too low to satisfy demand. This rate could increase some without hurting prices too much, but it will take a significant increase in REO sales to work off the inventory on its way.

REO Inventory

The stabilization of REO inventory should be a good sign for the market; however, stabilization occurred by falling behind on the foreclosure process and by creating an enormous Preforeclosure Inventory.

Preforeclosure Inventory

How do we clear the market?

There are so many houses that must go through foreclosure, it is hard to imagine how to dispose of all of them. I tried to create a projection where nearly 100% of a normal sales volume were REOs to see how quickly they can be pushed through the system. I recognize this is not realistic, but it is the best-case scenario for clearing out the inventory problem.

Future REO Inventory and Sales

Even with this aggressive scenario, the foreclosures still haven’t fully worked through the system by the end of 2013. Realistically, this problem will be with us until 2017. Lingering effects will last much longer.

The good news is that kool aid should be fully purged from the system by then….


This is the part of The Great Housing Bubble that still makes me
angry. The powers-that-be know how big this problem is, and yet our
policies and our public relations are all geared toward getting knife
catchers to jump into the equity meat grinder. They know they are
encouraging others to take on the losses the lenders cannot absorb, and they do not care how that impacts you.

Your Government is complicit with the Federal Reserve in an effort to make you pay for their mistakes.

141 Arden 71   Irvine, CA 92620  front 141 Arden 71   Irvine, CA 92620  kitchen

Asking Price: $769,000

Income Requirement: $192,250

Downpayment Needed: $153,800

Purchase Price: $777,000

Purchase Date: 9/25/2003

Address: 141 Arden #71 Irvine, CA 92620

Beds: 4
Baths: 2.5
Sq. Ft.: 2,100
$/Sq. Ft.: $366
Lot Size:
Property Type: Detached, Condominium
Style: Contemporary
Stories: 2
Year Built: 2002
Community: Northwood
County: Orange
MLS#: H09093480
Source: MRMLS
Status: Active
On Redfin: 1 day




Today’s featured property is another 2003 rollback.

Are you frightened?

Consider the following very carefully:

I know many of you reading this are active in this market right now. If
you are not prepared to be underwater on your purchase for 7-10 years,
you should consider waiting another year or two for the clearing
process to take prices down to fundamental valuations.
I will be.

172 thoughts on “Shadow Inventory in Orange County

  1. rkp

    How many of the pre-forclosures are people who can afford the mtg and trying to get a loan mod? I know 3 friends that are doing this so I imagine its a decent chunk. Also, modguy shared some crazy mods happening now so between increasing the number of mtgs cured and taking out the fake pre-forclosures, the cure rate goes up substantially.

    1. MalibuRenter

      Since the great majority of mods don’t reduce principal, the owners who get mods are still underwater, but with a lower payment. With a lower interest rate, they will amortize a bit faster, but will still be underwater for a long time.

      This means the owners will still be immobilized for a while.

        1. OC_Boston_Bay

          not if they lose their job and can’t make their mod payment. If they need to move for a new job, and have neg equity guess what? They get added to the supply side.

      1. LC

        Not good for the economy, to have all of these people trapped. Can’t sell, can’t move to Texas to get a job.

  2. Dan in FL

    IR, I don’t get this calculation, can you explain it to me?

    Orange County Housing Units 1,029,603
    OC Home Ownership Rate 61.4%
    Total Owned Housing Units 632,176

    Isn’t the ownership rate the number of homeowners/population, not number of homes owned/number of homes.

    In that case, shouldn’t you be using the full 1.029M number for your calculations. Your current table makes it look like 632k homes are owned, and 370k homes are unowned.

    So, if OC has 1.029M homes, and 68.4% have a mortgage, then 704,248 homes have a mortgage, which makes the numbers look even worse.

    Am I off somewhere?

    1. winstongator

      You can check through the census figures
      The other homes are not unowned but rented. Census lists 5% of OC homes as vacant. IR estimates 432,409 OCHWM while Census says 473,163, within 10% – not bad.

      Rentals can get FC’d also, especially specuvestment rentals. From what I’ve seen those can work through the system faster and the give-up time is quicker.

      Going beyond this post, but the FC problem will hit some areas disproportionately. I think new construction that came out in 06/07 will see very high default rates. otoh, the prevalance of heloc/refi and its influence in foreclosures could spread the pain.

      It will also take time for people to realize that 03-06 was not normal real-estate activity. The current state of many areas having reo making up a huge percentage of sales is not normal either. Normal will be sales volumes much lower then during bubble times, in effect even lower liquidity in RE. That will be a factor for people to consider in the rent-v-but equation. Rental parity is fine if you can sell fairly quickly. If conditions necessitate a move and you can’t sell the property for 6 months, your pre-decision rent-v-own math breaks. Are we headed for a period of increased or decreased economic stability?

      1. MalibuRenter

        “Are we headed for a period of increased or decreased economic stability?”

        1. I think we will continue with instability in the real estate market for 3+ years in bubble areas.

        2. Renters will have the highest stability. They will also have the best opportunity to take new job offers. Renters who had the money to buy a home but chose not to will be in an excellent position.

        3. People who purchased near the peak, or did HELOC abuse, will be in really unstable positions. To stay in their homes, they usually need both incomes to stay stable, and not to relocate. Their spending will probably be way down from 2006. This is also the group most likely to delay having more kids.

        4. There is another group which is in an odd position. People with equity who are having difficulty with their payments. If they sell soon, they come out ok. If they hang on, they will probably get pulled into negative equity and poor job mobility. If I was in this position now, I would sell. Most other people won’t. This group even has the option of selling to investors and renting their house back.

      2. Dan in FL

        Those are only the owner occupied units with a mortgage. You will notice the census numbers only have 140k units (again, owner occupied) without a mortgage.

        473k owner occupied units with a mortgage is only part of the problem. What about rental units with a mortgage? That doesn’t show in the census numbers.

    2. IrvineRenter

      I believe my calculations match the methodology used by the census bureau. The home ownership rate that I used is from 2000, so there will be some minor fluctuation from today. The total owned housing units will be off by 10,300 per 1% of change. If the home ownership rate has gone up by 3% over the last 10 years, then the number will be understated by 30,000.

      The home ownership rate ran up significantly around the nation, but it has held relatively steady in OC.

      The home ownership rate is currently declining, and it will probably revert to its pre-bubble norms.

    3. buster

      These, of course, are rentals. And I would presume (although I have not hard facts) that underwater investors are much more likely to give up their rentals to foreclosure than their personal residences.

  3. MalibuRenter

    As I’ve said before, one of the biggest long term worries for CA is outward migration. Within CA, much of the migration will be toward better neighborhoods and the beach. If all real estate prices drop by more than half, remaining people with jobs will tend to move closer to the beach.

    As you get 3-5 years out, if unemployment in CA is still much higher than the rest of the country, there will be a big migration to other states. If unemployment stays high throughout the US, there will be a moderate amount of migration to other countries. H1 visas are an example. Not as many be requested or renewed. Not as many foreign students will find jobs in the US.

    In areas outside of Irvine, the more noticeable difference will be fewer undocumented low wage workers.

    If there is long term outward migration from Irvine itself, then there is no price bottom. If Irvine’s population stays steady while CA drops, Irvine home prices could have a bottom. However, that would still be more than half off peak prices.

    1. Geotpf

      I doubt very much that California’s population will decline any time soon. Now, more people move out of California to other states than people moving from other states to California, but that is more than outweighed by positive numbers in more foreigners moving in vs. people moving overseas and more births than deaths.

      Foreigners will continue to move to California, with all it’s ethnic enclaves as support, as opposed to places like North Dakota with lower unemployment.

      Plus, you are overly pessimistic on the long term state of the economy. I imagine the recession (overall) has already ended or will by the end of the year, and the unemployment rate (a lagging indicator) will fall significantly next year. Now, that doesn’t mean that housing will neccesarily recover as well (I personally believe prices will be close to flat for years).

      1. MalibuRenter

        California had a slight net loss due to migration in the early 1990s. It was composed of 2 million people moving to other states, and slightly fewer people moving from outside the US to CA.

      2. CapitalismWorks

        You are flat wrong on unemployment. Even the Fed, one the more optimistic voices on this subject doesn’t predict improvement in the job market in the near term.

        This will be a JOBLESS recovery remember.

          1. mav

            Come on there are still going to jobs in the depression….. they will just be few and far between and for less money….. don’t be so pessimistic about this depression…. hope is contagious….

        1. Geotpf

          Define near term. I’m saying the unemployment rate will start to go back down no later than the 4th quarter of 2010. It will continue to rise at least through the rest of 2009, though.

          The Fed agrees with me:

          The graph on the right says that the Fed thinks unemployment will be between 9.8 to 10.1% in 2009, 9.5 to 9.8% in 2010, and 8.4 to 8.8% in 2011. Maybe it won’t drop “significantly” until 2011.

      3. Jwinston2

        I disagree.

        The recession will not truly end until consumer spending recovers. Consumer spending will not truly recover for quite a while. Savings and paying off debt is the name of game for most people not excessive spending.

        1. priced_out

          … but if consumer spending was 10% predicated on HELOC abuse, then it will never recover to what it was before. Banks won’t hand out HELOCs the way they did while the bubble was inflating. The spending those HELOCs produces cannot be matched without some serious GDP gains elsewhere.

          The bubble didn’t inflate just housing prices, it inflated everything.

      4. matt138

        Geotpf, this sounds like a lot of belief and imagination! Am I completely missing your sarcasm? It almost feels like headfake talk.

        What factors do you attribute to ending the recession?

        Where are these new jobs coming from? – the boom jobs are gone til the next boom.

        What has changed fundamentally with our economy?

        Why do you believe house prices will stay flat?

    2. Sam

      It’s already happening. Me and many of my friends got the heck out of dodge as fast as we could after grad school. Insane housing prices (even after the current readjustment), horrible taxes, rapidly declining public schools, an aggressive liberal legislature that ignores the public, … What more cause do you need?

      California is crumbling, and lots of people who are not born and bred there can see it.

  4. cara

    The powers that be don’t care about Irvine. They’re crafting policy for the whole country. Most of the country did not have the bubble the size you did. Most of the country wasn’t starting from a base of 4x income as “normal”.

    The size of the REO problem, the extent of the negative equity situation make all the difference in the world. Once the weak-hands from post 2003 and the HELOc’ers are purged, REO’s will dry up elsewhere. The problem in Irvine as you’ve outlined it is that the purging will take until 2013 or longer.

    I think the assumption is that the cure rate will get better from here. If banks understand what that inventory will do to the equity in all the loans they hold, they have a strong incentive to improve the cure rate. Which is kind of what they’re doing by keeping “pre-foreclosures” in the process for as long as they can. Expect to see 30-year I/O balloon loans as the new norm for mods. Forbear the principle on half the loan for the 30year life, amortize the rest of it at a teaser rate that caps at 5% and demand the full amount after 30 years. No principle right-down to take now or book as a comp. Just let people die in their homes according to their own fates. Spread it out further, to long after the investors who own the loan have given up on it being worth anything, and 30 years of inflation make that balloon payment not quite so huge.

    1. Naive Resident

      Interesting idea for mods. However, one issue is that MBS are owned by many different investors and some of them are now suing banks that manage the loans and agreed to the mods.

    2. Craig

      “Most of the country wasn’t starting from a base of 4x income as normal.”

      More like 8x income — the average house here was going for $720K when the average income was $90K.

      Now prices have dropped almost to 6x income. Look out below….

  5. IrvineRealtor

    [b]Updated MLS Irvine Closed Sales through [color=red]August 2009[/color][/b] at [b][url=][/url][/b].
    (previous years are at tabs at the bottom)

    – I show 175 closings for August, resale (5.65/day).
    – Mortgage info has been updated through June. There was a drop from 44% to 42% average down payments.
    – August median price for Irvine is in at $585K, back up from $550K in July.

    As a refresher:
    [b]Yellow[/b] is still unconfirmed (no data reported yet)
    [b]Blue[/b] is “suspicious” even though it is recorded.
    [b]Green[/b] is confirmed.

    Closed lease info has been updated through August, as well. 257 leases, prices dropping to $1.53/sqft. average.

    More floorplans have been added…
    I hope to get one or two more neighborhoods added this month. Almost complete. Still need Deerfield, Oak Creek, El Camino, CG (can’t find these!), Northwood, and Woodbridge.

    Thank you, and happy hunting,

  6. NickelDime

    As you state, the entire analysis is based on a set of assumptions — predictions, really — about macro and micro economics, plus two huge uncontrollable variables: policy and lender behavior.

    i doubt the numbers will be as dire as you suggest, but agree they will be much worst than they are today.

    1. no_vaseline

      I think you could make a compelling argument that IR’s projection could not be bearish enough. It still assumes a 6% cure rate. Does anyone really think that number is going to improve any time in the near future? I’m of the opinion it will contine to get worse!

      1. NickelDime

        If you’re the bank, wouldn’t you do everything in your power to work with the loanowner you’ve got, esp if the gov is going to back up the paper?

        the cure rates are going to increase – the main drivers holding them back are banker hesitation and unemployment.

        1. CapitalismWorks

          It depends on the owner. If he is unemployed there is not much the bank can do. If the actual income of that homeowner is so far below the fabrications that allowed for the original underwriting, there is not much the bank can do. If the homeowners credit has deteriorated substantially due to the overburden of carrying too much mortgage, and the likilihood of future default has increased substantially, again, probably not much the banks can do.

        2. Modguy


          there is an interesting new piece to the cure rate puzzle that is part of Obama’s mod plan: the net-present-value test.

          While the stated goal of his program is to keep homeowners in their homes, once the affordable/modified payment is calculated, the lender runs a bunch of numbers through a complex formula (not just based on present value, but also localized data) to determine if the investor would make MORE money modifying the loan (curing the default) or liquidating today (FC).

          This is going to shock some people that were holding out hope for The Obama Plan, and to answer your question: working with a homeowner to cure/modify the loan is NOT always going to be their first choice.

          1. NickelDime

            Fair point, modguy. I suppose “the anecdotal evidence agrees with my twisted reality” as I like to say, but the latest mods I’ve seen have gotten sweeter and sweeter over time.

            A close relative short sold his IE place last year and simultaneously bought an FC. He has a 24% DTI with cash in the bank, fully employed.

            He is current.

            Lender sent him 2 letters offering to lower the rate to 5% on his conforming first (from 6.125%) via an FHA plan. The plan allows refi to 105% LTV (!!). He closed on the new loan 3 weeks ago.

            They are modding loans before they are delinquent, perhaps to stem delinquency.

            I look at this, and the examples at work of folks ruthlessly defaulting to get better terms – and doing it successfully – perhaps I’m running in the “wrong” crowd, but these folks aren’t getting FC’d. They’re right where they were, but with a lower payment. Sure, they’re underwater, but sitting with a 3-4% intererst rate and kids in school – they’ve effectively hedged their housing payment, which sometimes bears a premium.

            the next few years will likely be that premium.

          2. Geotpf

            I imagine that calculation will favor loan mods most of the time. There are a lot of costs involved in foreclosing on a house, plus the amount the bank would get if it sold it will be less than the amount owed (in some cases, signficantly less, as in 50% less or more). If, say, somebody owes $400k on a house but the house is now only worth $150k, of course it will be in the bank’s interest to at least attempt a loan mod.

          3. IrvineRenter

            If you look at the projections for future loan delinquencies, you can see why they are trying to modify loans before people get in trouble. Unfortunately, they only help those that do not need it. Perhaps that will reduce the ruthless defaults by essentially paying off underwater homeowners to stay put.

          4. Perspective

            Wow, NickelDime’s story makes me wonder if I should make a phone call!?! Our DTI is 24%, so I’ve assumed a mod wasn’t available unless we suffered income disruption. I’ve hoped that if prices really dropped far here, that an attractive mod might become available so as to reduce the probability of a voluntary walk-away.

          5. NickelDime

            It probably depends on your loan amount. If you are eligible for an FHA, I would definitely look into it.

            I’m sure my relative was targeted because he is in the IE, though.

          6. freedomCM

            This, as graph says, is not a loan mod per se.

            It is the bank moving its exposure to the market off its books and onto the FHA’s back in order to minimize its risk in an imperiled market, the IE.

          7. NickelDime

            Call it what you want: the lender is changing terms at no cost to the buyer and re-writing the paper.

            In effect, all loan mods are “refinance.”

            I agree that writing down principal is another story, but that is generally a last resort to the lender.

          8. tonyE

            Heck, we’re at 17% DTI, 50LTV, $490K loan, 5 1/8% 30 year fixed. Money in the bank. Solidly employed. Credit Cards paid.

            Everyone is lowering our credit cost. BoA MC went down to 1%, AMEX raised our limit (pay off every month), Credit Union is offering to lower the interest rate on our car loan (only one loan).

            Maybe I should call the bank and tell them to lower our rate?

            Hmm, I think a 2.25%, 40 year fixed sounds good to me. I can always prepay it.

  7. Soylent Green Is People

    There may be some measure of double counting. Assume that’s the case if you will. That still means a whopping number of homes yet to come.

    I believe this will become a “orouboros” market – The image of a snake that is eating itself, a circle of failure as in: one foreclosure, a nearby home debtor also decides to walk, new buyers refuses to move into a failing neighborhood, banks begin to neglect their growing REO inventory, more foreclosures start, et al.

    The only good news out of this is the simultaneous cull of the ‘tard population. We can only hope….

    My .02c

    Soylent Green Is People

    1. Dean

      Based on this assessment, will Kurt Russell soon be filming a third installment of “Escape From …” in the OC?

      “Call me Snake.”

      1. scott

        Escape from New York was released in 1981, which pretty much coincided with the end of the steep downturn NY was in got (generally & bumpily) better. So Escape from Irvine when released will be the buy signal!

  8. Geotpf

    If I was a bank, especially a smaller one, I would want to foreclose on my properties as fast as possible to get them off the books before everybody else does and reduces prices. As you said, there is definitely more demand than supply currently.

    It looks like you are predicting that the flood will peak in winter 2010/11. Should be interesting to see if it actually plays out that way.

    I still think loan mods are more of a wild card. The banks are still ramping up their newer programs-the number of people who get loan mods may increase significantly in the coming months. The banks seem to be anticipating this, hence the reason they are holding back on foreclosing on a lot of properties. Now, it may well play out that few mods actually happen in the end, but I don’t think that that is a given yet.

    1. graphrix

      Again, if you were a small bank you would have capital ratios to worry about. Keep reading up on capital ratios. One day I think you might get it.

      1. Geotpf

        Simple question: Does a property in default have to be revalued for captial ratio purposes? That is, is a property with a NOD “worth” significantly more for capital requirements than that same property as an REO, maybe the same as that property with a current loan? Or is it the other way around, and a property with a NOD worth the same as a bank owned? Or somewhere in between? Google is failing me here.

        1. graphrix

          It’s a little more complicated than that. An NOD and an REO could have different values, but the point is they are marking them at what ever value they want to say it is worth. When if they were to foreclose as quickly as possible and sell the REO, they would realize a much bigger mark down on the asset. Think about it, if you have a $100mil asset pool of mortgages averaging a $500k balance per loan, 30-40% are in default, and you mark down the value of the assets in default by 20%, but really if you sell the REOs they will get $300k minus $50k in legal expense, then the true value of that asset needs to be marked down by 50%. If you are on the edge of capital ratio requirements, this would push you over the edge in a death spiral of being taken over by the FDIC.

          Why… why in world would you want to speed up that process?

          1. Geotpf

            I guess it would depend on how close to the wire your capital ratio is. If you are well capitalized in general, might as well get them out of your system. If not, it sounds like not foreclosing allows you to fudge a bit. Plus, you might as well attempt loan mods, even if a lot of them fail.

    1. IrvineRenter

      I don’t have this level of detailed information for Irvine.

      Let me ask you, “Do you think it is different here?”

      It may be marginally better, but Irvine can’t avoid the problems all around.

      1. villagepeople

        It’s not that I think it’s different here, but I am only looking to buy in Irvine (specifically Irvine within IUSD borders) so I could care less about prices outside of where I’m looking. That’s not to say I don’t think Irvine prices will not be affected by prices of the surrounding communities, but I believe (and i think you will agree) that there are places that will not be affected as much from REOs/Foreclosures because they have either more cash buyers, bought before the bubble, etc. So I’m trying to gauge the impact of your analysis above with the microeconomics of the area for which I’m looking to buy.

        1. villagepeople

          doh… need to fix… “That’s not to say I ‘think’ Irvine prices will not be affected by prices of the surrounding communities

        2. IrvineRenter

          I wish I had more detailed data to provide you an answer. I would like to know myself.

          The substitution effect does have an impact on real estate prices over the long term. I have not done the study, but the historic relationship between prices in nearby markets could be mapped out and historic relationships between the areas can be established. The pricing differentials now are extended because the crash has not been uniform. Either the low end prices must go up, or the high end must go down. I believe it is the high end that will go down.

    1. MalibuRenter

      Do this at your own peril. Your biggest risk is various forms of intervention.

      A professor I greatly respect showed how arbitrage opportunities often consume considerable cash for additional margin requirements before becoming profitable.

      If you do this, better be able to put up a lot of margin.

      I prefer to make money by finding mispriced bonds.

      1. Irvine5

        probably missed the best opportunity to short financials, the market already took out a good chunk of the speculative appreciation yesterday. good point on the margin requirements, Citi was a screaming short when it finally hit $5/share and allowed itself to be shorted with less margin. of course it was hammered down to $4.50 so you will have to wait.

        1. Geotpf

          The best time to short financials was early to mid 2008. 😛

          Ignoring the reverse stock split, AIG was worth $55.30 at the beginning of 2008, and 35 cents in March 2009, which means you could have turned $1,000 into $158,000 if you perfectly executed said short.

          1. WaitingToBuyByAndBy

            Seems to me if you put up $1,000 to sell short AIG at $55.30 (18.08 shares) and then covered later at 0.35 cents per share, you would net (18.08 * (55.30 – 0.35)) or $993.50 (almost doubling your initial investment).

            In the reverse case, if you purchased $1000 worth of AIG at $0.35 (2857.14 shares) and then were able to sell them at $55.30 per share, that would land you the $157,000 you’re talking about.

          2. Geotpf

            When you short a stock, you borrow the stock from somebody else who owns the shares (who charges you a fee to do so, which I didn’t include in my calculation), and then have to pay for them later. So it really is like the second scenerio you listed.

            Of course, there’s always the possibility that you could lose a very large amount of money. If you short the wrong stock, and it goes from a buck to a thousand, you are in deep doodoo.

          3. WaitingToBuyByAndBy

            My point was that for $1000 you could only borrow 18.08 shares, hence the first scenario.

          4. muzie

            Shorting the banks now is like to trying to steal the golden goose in the open, in broad daylight, with guards standing around it, with bells attached to your ankles. Seriously, I couldn’t think of anything that’s more Johny come lately than shorting banks now.

            That’s not to say they’ll never go down but you’re not trading on any kind of information the entire planet doesn’t know about. You’re just gambling on a random walk at this point.

          5. Irvine5

            it depends on the margin requirement – hence the reason that Citi became easier to short when it hit $5 was that brokerages have lower margin requirements for stocks trading at $5/share or more. Under $5/share shorting is considered riskier and thus the margin requirement is much higher.

          6. nomono

            The most you can profit from shorting a stock is 100% return — assuming that the stock is essentially worthless when you buy it back. The correct strategy would be to write bear call spreads every month (and keep the credit; up to 100% return every month), or buy puts instead (riskier, unless you bought leaps, but then the profit might not be as good, although it’s safer).

  9. IrvineRenter

    The top executives at the lenders who are screwing you are making a fortune:

    Options windfall likely for bailed-out bankers

    NEW YORK – As shares of bailed-out banks bottomed out earlier this year, stock options were awarded to their top executives, setting them up for millions of dollars in profit as prices rebounded, according to a report released on Wednesday.

    The top five executives at 10 financial institutions that took some of the biggest taxpayer bailouts have seen a combined increase in the value of their stock options of nearly $90 million, the report by the Washington-based Institute for Policy Studies said.

    “Not only are these executives not hurting very much from the crisis, but they might get big windfalls because of the surge in the value of some of their shares,” said Sarah Anderson, lead author of the report, “America’s Bailout Barons,” the 16th in an annual series on executive excess.
    Story continues below ?advertisement | your ad here

    The report — which highlights executive compensation at such firms as Goldman Sachs Group Inc, JPMorgan Chase & Co, Morgan Stanley, Bank of America Corp and Citigroup Inc — comes at a time when Wall Street is facing criticism for failing to scale back outsized bonuses after borrowing billions from taxpayers amid last year’s financial crisis. Goldman, JPMorgan and Morgan Stanley have paid back the money they borrowed, but Bank of America and Citigroup are still in the U.S. Treasury’s program.

    It’s also the latest in a string of studies showing that despite tough talk by politicians, little has been done by regulators to rein in the bonus culture that many believe contributed to the near-collapse of the financial sector.

    The report includes eight pages of legislative proposals to address executive pay, but concludes that officials have “not moved forward into law or regulation any measure that would actually deflate the executive pay bubble that has expanded so hugely over the last three decades.”

    “We see these little flurries of activities in Congress, where it looked like it was going to happen,” Anderson said. “Then they would just peter out.”

    The report found that while executives continued to rake in tens of millions of dollars in compensation, 160,000 employees were laid off at the top 20 financial industry firms that received bailouts.

    The CEOs of those 20 companies were paid, on average, 85 times more than the regulators who direct the Securities and Exchange Commission and the Federal Deposit Insurance Corp, according to the report.

    1. Anonymous

      Nice little 177% profit for the BAC execs in a little less than a year ….
      (16.65 – 6 = 10.65 10.65/6 = 177% profit).

      Jan 21, 2009, 7:54 p.m. EST
      Ken Lewis, chief of Bank of America Corp., bought 200,000 common shares in the giant lender on Tuesday, according to another regulatory filing. The shares were purchased at $5.98 to $6.06 each. Several other directors of the bank also reported buying more than 300,000 shares combined.

    1. Geotpf

      Yes, but that’s probably more due to a structual problem with the newspaper business in general (classified ads leaving newspapers for non-newspaper websites (Ebay, Craigslist,, etc.)) than the OC Register in general. There’s a lot of bankrupt newspapers throughout the country.

      1. WaitingToBuyByAndBy

        Yes, it does seem like the end of the road for print media is approaching.

        This saddens me though. As a kid, I worked as a paperboy delivering The Orange County Register in my neighborhood.

        As an adult, I have to admit I go to for my news articles although I have to stay away from their videos. I abhor all of their “news personalities”.

        Think I’ll try swapping out for for awhile.

  10. jesus

    I read an article hypothesizing the ARM loans reset shock may not be a big problem anymore since the interest rate is very low and the fed can keep it low if needed(which it seems so). secondly, many(how many? no real data) arm loans may already recasted early so there won’t be a huge shock later. the current market condition already weighted in the arm reset/recast shock partially. anyone wants to take on these two points?

    since end of 2008, bears predicted banks will dump huge numbers of REO into the market, b/c early out means less losses. this never happened, now the summer sale even created a temporary short supply. seems the fed is committed to work the problem using their money printers to give banks unlimited cash supply. the banks may just hold the REOs for 5 years or longer and wait the storm out. in unpopular view, the method does works because it keeps banks in business. I assume nobody wants to wipe the banks out and start the financial system from scratch right? there is no simple reboot for the problem.

    1. IrvineRenter

      The ARM Problem was not the change in interest rate at the time of reset as it is the change in payment at the time of recast.

      It is the early defaults that will change the impact of The ARM Problem. It isn’t an issue of whether or not people with these loans will default — most of them will — the question is will they default sooner rather than later. Either way, they will go through the foreclosure process.

      1. me.again

        sure understand that. but if the interest rate is low at the time of reset, wouldn’t that related to the payment jump at the time of reset? lower interest rate = lesser jump? yes, many only pays the minimum teaser rate before reset but how many in percentage? how can we be sure? are there any creditable data?

        1. IrvineRenter

          Go read the post on the ARM problem to understand the distinction between the reset and the recast. Amortizing ARMs will not have a significant payment shock as long as interest rates stay low. Unfortunately, most ARMs were not amortizing, and the interst-only and negatively amortizing loans all must recast to amortizing. This recast causes payments to skyrocket even if interest rates are very low.

          1. ok


            I would love to see some real world interest only and neg-am loans data. only the banks knows their real numbers.

          2. dafox

            IIRC, in 2006 80% of OC new mortgages were option arms.
            data suggests that 80% of option arm owners only pay the minimum.
            so, in theory, ~64% of those who bought in 2006 are neg am’ing their way into the deep blue sea.

  11. Effective Demand

    I enjoyed this post and thought you made many good points but I do not believe REO inventory is anywhere near that high.

    Assuming you are taking Dataquick quarterly numbers, you need to back out third party sales on the courthouse steps. For OC, Third party sales are extremely high. Here are the OC trustee sales :

    Also many of the remaining REOs are on the MLS, with the ones which aren’t usually in some form of pre-list stage (eviction, trash-out, bpo, etc).

    I count ~3100 third party sales (which would still get the trustee’s deed recorded and counted in DQ records) since Jan 2007.

    Clearly there is a massive number of defaulted properties in the hopper, how those ultimately get disposed of is how far down we go on the price scale. So far its been the kick the can strategy.. we will see if that ever changes.

    1. Lee in Irvine

      There are tens of thousands of delinquencies all over Orange County.

      I don’t follow conspiracy theories, but to say that the government, the banks and the debt holders, don’t have a vested interest in sweeping this problem under the carpet, is an understatement.

      There is a valid reason why the banks are closing and reducing available credit. There’s a valid reason why it is very difficult to get any unsubsidized mortgage. The banks know that the shit is about to hit the fan.

      The evidence of this Big Lie is becoming more apparent everyday. All you have to do is use your natural human instinct to THINK.

    2. graphrix

      The problem with that is the REO numbers from foreclosure radar roughly match up with DQ’s numbers every month, and FR excludes third party sales. I have run the numbers with the FR stats, and it comes out about the same, only slightly less than the DQ numbers.

      1. Effective Demand


        “and FR excludes third party sales”

        Assuming you are taking the numbers from the ForeclosureRadar monthly reports as linked to below, this statement is incorrect.

        They are reporting total trustee sales not back to bene trustee sales minus 3rd party trustee sales.

        Are we talking about the above reports numbers or are you getting them from querying foreclosureradar directly?

        1. Effective Demand

          I just reconfirmed that the FR report does in fact include third party sales. Looking at the top graph from my first post and matching it to number of sales for OC from the link in my second for July, you will see the numbers roughly match up. What you should instead see is a much lower number since my graph is showing the combined sales.

          1. graphrix

            I have the numbers that exclude the 3rd party sales from FR. It made a difference of less than 1000 from DQ’s numbers in the 3 years of data and FR doesn’t include all the foreclosures due to some technicalities. So, in conclusion, the number of foreclosures going back to the bank is roughly the same as DQ’s total numbers and FR’s back to the bene numbers.

          2. Effective Demand

            Weird. I’ll have to run the numbers in that DQ REO column you have here against the FR numbers I have when I have the time because something isn’t adding up and it appears to be a significant discrepancy.

          3. graphrix

            You’ll have to get the actual numbers from Sean himself. For some reason the numbers you can pull from FR and what he releases to the press (foreclosures to the bank only as well as 3rd parties) are off. When you do that the numbers align more with DQ’s numbers. If you just pull from FR the difference is about 1500.

          4. Effective Demand

            I can replicate the press release numbers exactly, are you saying these are the ones to use or to use the ones generated querying FR directly?

            I have both.

  12. Sean

    The assumption that I think needs to be rethought is the timeline from default to trustee sale and, most frequently, REO listing on the MLS.

    Lenders are certainly engaging in all manner of forebearance, mods, etc. following initial default but before initiating FC with a notice of default. This allows them to keep the loan on the books at face value and, assuming inevitable redefault by a high percentage, effectively delays the time from initial delinquency to notice of default. I think the actual average days from initial delinquency to NOD is not 90 days, but more like 120-150.

    Even after the NOD is filed, lenders are mostly dilly dallying, which doesn’t cost much since fed funds are 0% – so the time from NOD to NTS is at least 90 days, but probably more realistically 120 days. And then lenders keep postponing the Trustee Sale, so the actual FC sale often doesn’t happen until 180 or even 240 days after the first NTS. So now we’re talking about 21 months from initial delinquency to FC sale.

    Since 90%+ go back to the lender at the trustee sale, you then have the time from when it becomes REO to when it lists on the MLS. My observations in LA are that it is taking between 30 and 210 days, depending on the lender. So for a house that from initial delinquency to REO listed inventory, the process can take two full years right now.

    What does that do to your graphs?

    Even if we assume your supply graph is correct, at what point in time does the expected supply tip to the point of forcing down prices? I think that point is when actual inventory exceeds 10 months of current demand. What do you think, and when do you see that point being reached?

    1. IrvineRenter

      Changes in the processing time impacts the calculation of the total number of houses that will go through foreclosure. The calculation as set up will accurately capture the number of properties in Shadow Inventory. Slow processing times can make the inventory large simply due to the backlog. If the processing time is significantly longer than 1 year, then my estimate of total foreclosures is overstated.

      1. cara

        That sounds like the lynchpin to me. Can you run the numbers again assuming a 2 year processing time?

        The final answer you come to is just too implausible. It seems much more plausible to conclude that today’s low cure rate is in large part due to the denominator effect as you pointed out. If today’s delinquent borrowers are sticking around 3 times as long as 2008’s that would put the cure rate at 15% from 45% just from that effect alone, right? (I could be doing the wrong math). So then you only need to attribute about half of the worsening cure rate to the inability to sell your way out.

        I’d be interested to see how this works out when you do the cumulative math right as opposed to in my head (too lazy to get out the back of an envelope)….

        1. IrvineRenter

          You can calculate it by taking a ratio of the number of months I used (12) and divide by the number of months you think it is. This will give you a fraction to apply to the 175,000 number.

          For instance, if you believe it is 24 months, the ratio would be 12/24 = 0.5, and the number of total REO would cut in half.

          1. cara

            Which would make it 20% of all OC home owners with mortgages will go through foreclosure over the course of the next half dozen years. 1 in 5 somehow that sounds about right. Maybe that’s just because compared to 40% (which rounds in my head to half), 1 in 5 sounds manageable.

            I still like my crazy scheme where everyone who speculated then moves down the housing ladder into a home that’s affordable to them rather than the up they were expecting.

  13. Lee in Irvine

    Excellent work here from IR.

    I believe we are now at the beginning of the calamity many of us have talked about.

    There are now delinquent home-debtors all over The OC … in most neighborhoods … they’re everywhere. Even the older, more established, upper-middle-class communities like Laguna Niguel & Anaheim Hills are littered with defaulters.

  14. cara

    If your numbers are right I think it’s time to think outside the box.

    How about this, you’re in default with no chance of ever having any equity in the foreseeable future, but you’d like a place to live for 36% (I forget the number) of your monthly income. So, say that’s $1000 you can actually handle. The servicer hooks you up with a house that’s also in default who’s loan actually costs only that much at 5% APR 30 year fixed. You move to that house and assume that loan, and the servicer finds a new house for the other defaulter which that person can afford.

    Everybody gets an affordable house, as defined by their current income. No one gets to stay in their speculative purchase. And brokers who specialize in assumption transactions make a mint. The owners at the bottom rung get off scott free because someone higher up assumed their full loan amount. So, sure they have to find someplace to rent, but renting is cheaper than owning and their credit has less of a hit than it otherwise would have. The really underwater heloc’ers get the most screwed because no one will want to assume their loans for the home they’d be getting. And all the actual available inventory will only come out at the high end of the market, where all you avid savers will then be able to afford mansions.

    We’ll call it the reverse waterfall Ponzi scheme.

    1. IrvineRenter

      I think that idea has merit. In effect, that is what is going to happen with our without a program. People will first move from owner-occupied housing to a rental after the foreclosure, then they will eventually own again in a house they can truly afford. If there were a program in place, perhaps it could be done more efficiently.

  15. NewportSkipper

    The historic delinquency rate was never as low as 2%. It’s not even close. Try 5% or more. Loans aren’t cured by shortsale? Says who?

    1. sean


      Shortsales only cure default if they are successfully completed, which is becoming less and less likely as prices come down, because the 1st lienholder would do better through a foreclosure sale that wipes out any 2nd, 3rd or HELOCs. So many MLS listed “short sales” will in reality never close, but will instead become a foreclosed property at Trustee Sale, and then in all likelihood an REO listed property for sale. Eitehr way, they remain part of the actual inventory, not the “shadow inventory.”

      The shadow inventory are all those homes with nonperforming loans (i.e. homeowner who is delinquent in payment) but which the lender has not yet put into the foreclosure process or has put into the foreclosure process but has not forced to Trustee Sale (auction). It’s liquidation can be deferred but not prevented.

  16. NewportSkipper

    “When the crisis is finally over, a whopping 40% of all properties with mortgages in Orange County will go through foreclosure.”

    I’m sorry, this is silly.

    1. IrvineRenter

      That is perhaps the finest refutation of a long, carefully reasoned, data driven argument I have ever read.

      1. NewportSkipper

        Oh yeah? Then why was it so easy to halve the number produced from your long, carefully reasoned, date driven argurment by merely changing one assumption? Kindly, garbage in = garbage out.

      1. tlc8386

        I was just wondering if you did any kind of % data of how many homeowners took out heloc’s. If you match that up with foreclosures, short sells and reo’s I wonder how that would add up.

        Your number of 40% foreclosures would not be so silly then.

        True debt owed on these homes has yet to be published on each home per homeowner. And these totals have not been added up.

        Continued loss of high paying jobs will force this even further.

        So how many over spent I would assume it’s even higher than 40%, more like 75%.

  17. profette

    As a regular reader at IHB, I shouldn’t be surprised, but this trenchant analysis has left me nothing short of GOBSMACKED. Well-done, IR!

  18. RoseColoredGlasses

    Irvine is a unique market, and should be kept separate. First, the foreign investment factor can hardly be compared to anywhere else. Irvine is advertised in flyers in China, for example, and many rich foreigners can come here and buy cheap houses (cheap to them based on the exchange rate). They send their kids here for school in the “Safest City in America” no less. An additional factor is that Irvine has uber-high household income levels. Even the outdated census of 2000 shows that Irvine is near the peak of incomes. Lastly, many of Irvine’s residents aren’t even counted in the income levels of the census, because as we know, many business owners, execs, or some foreigners don’t report, nor pay taxes here. Just look at that neighbor you have down the street who drives a Mercedes and doesn’t seem to work a 9-5… There are always exceptions to the rule, and Irvine is clearly the exception.

    1. sean

      Or maybe that neighbor leases the Mercedes and pays for it with the refi-cash out or 2nd and 3rd mortgage or HELOC money that he stole from WaMu or Countrywide back in 2006 and 2007 and is now making only 1/2 of what he or she made during 2006 in whatever sketchy business he or she was in to start with. Like mortgage brokers for instance . . .

      1. awgee

        I have to disagree with you. Short sales are increasing. Banks are approving more and more short sales. I do not know how they are getting the 2nd holder to agree, but they are. And the servicers are becoming much better at dealing with the securitization, MBSes, of defaulting mortgages.

    2. nefron

      I tend to agree with some of your argument, but as an aside, one thing I just don’t understand: Why are all of these “rich foreigners” sending their kids to high school here when the U.S. school system ranks so far below most other 1st world nations’ schools, and even that of India and China? They want their kids to get second-rate educations and become tomorrow’s burger flippers for the world? Doesn’t make sense to me.

      1. nefron

        🙂 S’okay, I figured it out. They come to learn how to lie, cheat, game the system and give themselves gigantic bonuses for doing absolutely nothing productive.

    3. NOT


      IR from above: “Let me ask you, “Do you think it is different here?””… Clearly… Yes! Our sun is better than your sun! Our water is better than your water! Our waste is better than your…wait a minute!

    4. DarthFerret

      LOL, no Irvine is not an exception. Well, at least not THAT much of an exception. CdM, Newport Coast, Crystal Cove, yes, to some degree (although they are not completely immune either!). Irvine is nice, but it’s still a city populated primarily by working professionals. The overwhelming majority of the people work at a job and make a wage. This is not a city of the elite rich that will simply be supplanted by more elite rich if they fall down.


    5. nomono

      I’m not sure why people think “foreign investment” from China or Japan or whatever will save the US real estate market. Have you seen the SSE? Wealth is getting wiped out in China very rapidly, and there is some serious civil unrest brewing.

  19. Marc

    Sure, the rest of the OC is going to sink while Irvine has the only live vest. Hahaha.
    Is there some data on these mysterious foreign cash buyers? I think this is blown way out of proportion as some agents are trying to create “now is the time to buy” scenario.

  20. granite

    When I asked IR at a recent block party not to go soft on us, I didn’t expect to see this much hard hitting analysis. Wow!

    It makes me feel better about my decision to rent another year or more. Renting is not fun, but not being a debtor is better.

  21. WaitingToBuyByAndBy

    For those wondering how banks are handling the defaults in the pipeline, Calculated Risk recently addressed that question (at least for Bank of America). See

    I think the major point is government mortgage modification programs are delaying the foreclosure process. Obviously this is good for both the government and the banks, because (as Lee in Irvine has already pointed out) it kicks the can and makes things look better for the time being.

    As IrvineRenter has pointed out, while the process can be delayed, it cannot (in many cases) be avoided.

  22. EconRules

    Thank you IR for another informative and insightful analysis. I appreciate the time and effort you put into each post. Keep up the great work!

  23. WaitingToBuyByAndBy

    Hey IrvineRenter,

    The 6.6% cure rate is really bugging me. I realize this is the number reported by the press release from Fitch, so I guess my beef is with them except that you are using that number in your calcuations.

    The first thing that puzzles me, is how they say, “Recent stability of loans becoming delinquent do not take into account the drastic decrease in delinquency cure rates experienced in the prime sector since the peak of the housing market.”

    When did the number of delinquent loans stabilize? Perhaps they are comparing against the previous sub-prime carnage?

    However, the Calculated Risk article has an accompanying graph that plots an almost exponentially-increasing number of defaults from 2005.

    If the number of delinquencies is rapidly increasing, should that not pull down the cure rate?

    That could mean the cure rate might be artificially low due to this increasing denominator effect.

    Also, they quote a national statistic that you are applying to OC. You are using the cure rate to project the number of deliquencies that will become REOs here.

    I don’t believe OC is some magical place where statistics do not apply, but it is logical to believe the local stats for OC may differ from those at the national level, just as many of our stats do.

    While I get that the pre-foreclosure inventory table is courtesy of Graphrix, I didn’t see a reference to the source for your table that includes the cure rate. Is that table based upon OC data?

    Ideally, it would be great to know what percentage of delinquent loans in OC cure, but it does seem impossible to measure individual loan performance in a sea of delinquencies.

    1. NOT

      Very interesting question… I would imagine that this being the OC (IRVINE!), we have one-upped the rest of the country on how bad the cure rate is because have one-upped the rest of the country on how much we have HELOC’ed etc.

    2. IrvineRenter

      When I calculated the cure rate on the table, I interpolated between the 45% number mentioned in the article and the 6.6%. I originally plotted it straight-line, but that isn’t how it actually happened, so I introduced an escalating figure. My interpolation is only as accurate as my assumptions that may be in error.

      The national number is not the best, but it was the only one available. With the huge concentration of toxic financing in California, I really doubt Orange County would actually have a higher cure rate, but I suppose anything is possible.

      1. Geotpf

        The cure rate could be higher if the banks are still ramping up some of thier loan mod programs. It’s possible that part of the reason the cure rate is so low right now is that there are a lot of loan mods in process but not yet approved, and they won’t be cured until the mods are approved. We shall see in the coming months.

  24. Mark in Lake Forest

    Been renting an sf home like a mad dog since 2005, but Cal state and federal income taxes are just killing me.I need some form of relief/protection from the onslaught and owning a home was one strategy to explore.

    Just got done looking at sf homes in Lake Forest area (4bed, 3 bath) in the 550K and even 600K range. Realtors at open houses have been pretty smug that “they’re all gonna go fast”, “better make hay while the sun shines”, “buy now” yadadayada…

    Thanks for this detailed analysis about what lies ahead in OC. Now I’m more than sufficiently depressed. I’ve forwarded this linke to my better half for review.

    Man, she’ll be pissed. Thank you, I think..?

  25. Eat that!

    I think you’d also have to take into account demand from those people who managed to get FC’d on and then re-enter the market with a Fed program which I imagine will be the next program (if it is not already there). Maybe call it, “I’m a complete moron but I have a job program!” If it were me I’d let’em hang.

    1. WaitingToBuyByAndBy

      Will H.R. 2801 work for you?

      (If it passes) will extend the home purchase credit, remove the income limitation, remove the “first-time buyer” timeout period.

      So yeah, walk away today, and let the government help you buy your new house in the spring.

      1. WaitingToBuyByAndBy

        I was a little too quick to respond.

        Someone can walk away today, but I don’t see how they can expect to be financed next spring. The lender is going to look at that credit history.

        1. Eat that!

          There is simply going to be too many people who fall into this category to just let them rent. They’ll have to be brought back into the ponzi scheme somehow as a means of keeping it going.

  26. csl

    Great post. There is only one thing that I am trying to figure out that might be off with one of your calculations.

    You are stating that the OC delinquency rate is 10.7 based on the article you linked, but in the article, it states that the delinquency rate is 10.7 for all of socal as of 6/30. This would include ventura, LA, OC, san bernardino, and riverside.

    Later in the article, it mentions that San Bernardino county had a delinquency rate of 14.9 and Riverside had a rate of 16.5 percent as of 6/30. These would affect the overall socal rate of 10.7 percent so that OC should be significantly lower right? Maybe it should fall between 6 to 9 percent delinquency rate?

    1. NOT

      I am sure if IR had a better source for the actual delinquency rate in our respective zip codes, he would certainly use them. Do you have a better source? Why would Irvine have a lower delinquency rate than San Bernardino county or Riverside?

      1. NOT

        Maybe I am being too harsh. Sorry if I am. I am fairly sure IR stated that there are assumptions in this and that the numbers he used are the numbers he used.

          1. csl

            No worries. I didnt get any harshness from your post. Your 7% number looks about right, I was actually thinking around 8% or so.

            I just figured that if SB and Riv are around 15 percent and the overall Socal is 10.7 then the remaining counties would have to be significantly lower than 10.7 percent. Thats where i came up with somewhere between 6 to 9 percent delinquency rate. As for the actual number, your guess is as good as mine.

  27. no_worries

    As an engineer, I find it enlightening, when showing off rather unexpected or drastic data, to also show the results if one varies an assumption across a given range.

    People are likely to dismiss your 40% number because it’s just that scary. So they’ll question the 6% base cure or the given delinquency rate, or time to FC, as above.

    You might respond with a few “scenarios”, showing the sensitivity of your formula or graph to different values for those assumptions (as you did to an extent above as well).

    Say cure rate was 10%, not 6%. OMG look how bad the number STILL is. Ok, 18 months to FC. Jesus this number is still horrifying. Etc.

  28. Effective Demand

    The table will be confusing but here is a legend
    FR = Foreclosure Radar
    PR = Press Release
    DQ = Dataquick REO from the table in the top post
    REO = REO resales by Dataquick from the above post
    Back = Back to the beneficiary
    3rd = Sold to 3rd party

    The money shot is the last row of the last 3 columns. It shows a similiar calculation to the top post calculating REO inventory and the difference between FR and DQ. I then did the same calculation for FR just using the back to bene without 3rd party to show that REO inventory is much less.

    I think the discrepancy for FR/DQ is a bit geographic (this is a guess) and some time based. FR data is based off trustee sale posting companies at basically real time. DQ is based off the county recorder and trustee deeds can take up to 15 days to record (or longer depending on the trustee).

    I think it is clear DQ includes all trustee sales (since they are trying to show who is gone all the way through and get their house foreclosed) and does not back out 3rd party sales and therefore the REO inventory in the top post is overstated. But I have an email into “someone in the know” to find out 100%.

  29. Sam

    hi IR,
    the prices are already at the 2003-2004 level and are holding up in that range due to the large number of buyers in the market today. it is a hard argument that the prices will drop because new surplus is going to hit the market and increase supply, because the demand is high too. The prices in the 1999-2000 range were very low. In Anaheim Hills area homes were sold for like 250-270K in 1999 and resold in 2006 for 700-780k range. The prices are in the range 600-650k now, but it would be fantastic and affordable if they can drop in the range of 350-400K (still much higher than 2000 prices)

      1. Sam

        nah.. no NAR CAR can deviate it. Just check any distress sale in OC and see how many offers the home gets in one week.
        about NAR CAR, they have systematically created such a huge sham to make money that it is ridiculous. why do they call it buyer’s agent? Buyer’s agent and listing agents together are jacking up prices together effectively leaving the buyers to pay up the big bucks and make higher commissions. Check this out, even when the bank gives them a certain number to accept as net from the sale, the agents sell it for as high as possible in the market and share the extra money as commission among themselves. Buyer is openely told a lie that bank will only accept the higher price even when in realty bank may have already accepted the first lower bid.

    1. IrvineRenter


      Demand and supply are relative. We clearly have more demand than supply in today’s market, but this demand is not infinite, and in fact, it does not extend very far up the price scale. There is much demand below $500,000 because this is how much people can afford to finance. There is very little demand over $500,000 because people are not being given toxic loans — and they will not be any time soon, if ever.

      If you look at the amount of supply that has to be pushed through the system, sales rates have to increase significantly — which seems unlikely with so many unemployed. There is a finite amount of supply that can be absorbed each month or prices fall. The sales rate that preserves the status quo is too low to clear out the inventory in a reasonable timeframe. Banks are either going to lower prices to increase sales rates, or will be working off this inventory for a decade or more.

    2. matt138


      could you enlighten us as to where interest rates are currently and how that affects prices?

      could you also let us know how much lower rates can go vs. how much higher they can go?

      also, could you explain how each scenario affects monthly payments?

      Thank you.

  30. Joan J.

    For those hoping loan workouts will save the market here’s the scenario in CA:

    Loan amount $750k
    Home value $500k

    Bank to homedebtor:
    Hey we have a proposal to help you pay us the $250k you are upside down in your house.

    Homedebtor to bank:
    Why would I want to re-negotiate payment terms on a $250k loss I can simply walk away from.

  31. jonrent

    Nice !!
    Loved the asteroid impact thing.

    Really amped the anxiety level

    Had to go out and put my tin foil hat back on after seeing that.

  32. Astute-ier

    The article is DEAD ON. But the REAL question now goes WAAAAAAaaaaayyyy beyond simply “should I buy a home in one or two years” and instead becomes, “should I use my savings to GET THE FV^K OUT of this SINKING, CORRUPT shythole of a country”?

    And the answer -for me- is a resounding YES!

  33. CP

    What we are missing in the equation is to add those investor bought properties of today(2009 and onwards) that are reducing the REO numbers and will not able to fetch the profit as we go upto 2013.These properties will be recycled back into the pool on inventory.I think this is going to get much uglier than IR’s projections.Just wait until 2013.

  34. Daveinfo

    I think before any meaningful recovery in real estate prices can take root, we need to overcome three major obstacles…
    “Rebound Obstacle #1: Inventory Glut. Nearly 10% of all homes built this decade are sitting vacant, compared to a historical average of 2.2%. In total, we’re sitting on almost 10 months worth of inventory versus a historical average of four months. If we factor in the “shadow inventory” – the roughly 600,000 homes that banks are withholding from the market – the problem worsens. Excess supply always erodes prices.

    Rebound Obstacle #2: Loan Resets. Forget subprime. We’ve already worked through 80% of those resets and written down $1.47 trillion in the process. Now we’re facing a $2.5 trillion mountain of Alt-A loan resets. The first big wave hits mid-2011, with the peak expected to come in early 2013. So we’ve still got time, but the early stats hardly instill confidence. More than 20% of Alt-A loans are already 60-plus days late, up from an average of about 3% for the last decade. If interest rates creep up even modestly in the next two years – a near cinch given the likelihood of inflation – payments will increase notably. In turn, so too will default rates.
    Bottom line, another wave of massive writedowns looms on the horizon.

    Rebound Obstacle #3: Foreclosures. One in four homeowners are now underwater. If we break it out by loan type the picture gets worse – 25% of prime loans, 45% of Alt-A loans, 50% of subprime loans are severely underwater. Add in the 6.5 million Americans out of work since the recession began and it doesn’t take an Einstein to predict where foreclosures are heading. Credit Suisse estimates that we’re in store for a total of 6.5 million by 2012.Even the Mortgage Bankers Association (MBA) concedes the obvious in its first quarter update, saying, “Looking forward, it does not appear the level of mortgage defaults will begin to fall until after the employment situation begins to improve.” Since the rosiest prediction doesn’t expect unemployment to peak until early 2010, as the MBA acknowledges, “…It is unlikely we will see much of an improvement [in foreclosure rates] until after that.”
    The fact that the social stigma attached with “walking away” has been severely (and sadly) diminished over the past decade only adds to the foreclosure heap. And more foreclosures will inevitably push prices lower.”

    Read More:

  35. matt138

    Ponder this: the people leveraging in real estate right now might end up overpaying, but if the currency crisis scenario unfolds – they will be better off than a saver who will get wiped out.

    you can either be the steamroller or the pavement: don’t be on the wrong side of that equation. All the currency crisis bears have been laughed at for quite some time and now, more than ever, we should be listening instead of chuckling.

  36. LC

    Just take a drive down PCH. Look at all of the empty condos on PCH in HB. You get an idea as to how much shadow inventory there is when you can peek inside all of the windows, all in one place. There is one complex that looks almost vacant. (Why are all those businesses vacant on PCH in Newport Beach? Looks like ready for demo, but there are real estate signs on them.)

  37. Tom

    A friend of mine has been trying to find a worthwhile flip for the last four months. Had moved from TX back to home, CA.

    She has been focusing on multi units and the good deals move quickly, it seems.

    My colleague and I created a new site devoted to owner financed real estate,

    Seller financing can help make the deal close.

  38. newbie2008

    Irvine Renter,
    With about 10% of the loan in default, how many are housing units have one or more defaults on their loans? Can the 10% include double or triple counting. Primary, second and HELO loans (3 defaults for one property).

    Even without double counting, 10.6%*68.4%*61.4% = 4.5% of the houses for FC. Since the CA FC stalls and Fed stalls, created a huge back up of 6 to 16 months, the new monthly default rate could be much lower but raising.

    Will you have a Debt to Equity (DTE) and Debt to Income (DTI) density maps of different Irvine neighborhoods? Low DTE and low DTI houses will have less FC’s, but sales price in low DTE
    neighborhoods will be indirectly dragged down by forced sales (FC’s) in high DTE and DTI neighborhoods.

    What happened to the money from post-purchase loans (refinancing, HELOC, etc.)?

  39. NewportSkipper

    Let’s take a look at your long, reasoned, data-driven analysis:

    “Curing the deficiency involves one of three possible methods: (1) selling the house — something that doesn’t happen often when the owner is underwater…”

    Of the 18,555 closed sales so far in 2009, 3,398 of them were short sales and there are another 2,158 under contract.

    “Mortgage holders are defaulting in large numbers. The current default rate is 10.7%, but it is projected to hit 14% by the end of the year.”

    According to Loan Performance, a total of 6% of loans are 90 days late or worse. The actual default rate is well (maybe a point or two) under 6%, but your analysis hinges on it being 10.7%. You have overstated it by nearly 100% (or more).

    “OC Homes Currently Delinquent on Mortgage Payments = 46,268”

    Same answer as above. You have overstated this by 100%.

    “Despite rumors to the contrary, loan modification programs have been completely ineffective. Very few people actually get the modifications, and most of those people re-default and end up in foreclosure anyway. If these programs were effective, it would show up in high cure rates; 6.6% is not very high.”

    I agree with the other posters on the reasons this number is tainted as well.

    All in all, your data are not accurate. It is easy to halve your number at not one, but three different junctures. Therefore, your conclusions are not accurate.

    1. OOA

      Are you referring to the First American Core Logic graph on the OC Register page you linked to? The graph shows 6%+ as 90+ days delinquent, and 2%+ as in-foreclosure.

      IR’s 10.7% figure is for 60+ days, so apples and oranges (in your favor), but also includes in-foreclosure (in his favor). If I add the two numbers from your graph, I get somewhere around 8.5%.

      The problem with IR’s 10.7% figure is that (as csl has pointed out) it is for “the region including Los Angeles, Orange, Ventura, Riverside and San Bernardino counties”, rather than just OC.

      My conclusion: Your figure is too low, and IR’s is too high. Perhaps split the difference. 8.5% is the better number.

      Of course, both numbers are from June, so a couple of months out-of-date by now.

          1. NewportSkipper


            “Khater shared his historical data of 90-day delinquency rates for Orange County, as well as the foreclosure-in-process rates and rates of REOs, or foreclosures on banks’ books. The 90-day rate includes all outstanding first mortgages at least three months late but not yet foreclosed. The foreclosure rate is just first mortgages with a notice of default or trustee’s sale filing. (Previously the person who distributes the report for First American told me the two rates did not overlap, but Khater, who compiles the data, said they do.)”


          2. OOA

            Thanks for the reference. Too bad the technology to produce all of these pretty graphs doesn’t somehow help the creator properly document what they are displaying. Notice that the OC Register graphs don’t even have a title telling us that they are for OC.

            So, IR’s 10.7% is clearly 40% too high. The 10.7% link he provides clearly states that the figure is not for OC. The fact that the IE was listed with a higher than average rate pretty clearly indicated that 10.7 should never have been taken as an OC number.

            I call upon IR to update the data to reflect correct values. To leave this inaccurate presentation serves only to dispense misinformation to future readers.

  40. newbie2008

    Is the 6% of the loans with >90days late including the loans already in NOT sale or post Trustee Sale? I think about 2 years ago, the seriously late was at <2% without FC delays and many fixed by sale of the property.
    What's the rate for new loans entering into the >90 days late?

    1. NewportSkipper

      Yes, the 6% includes anything worse than 90 days late, but excludes completed REOs. The 2% does not need to be added to the 6% because they overlap. This was confimed by Matt Padilla.

  41. Loan Mods

    Can someone give details on the Loan Mod proccess? A freind had his Mortgage Moded from $2800 a month to $1800 but he found our 4 months later he owed $37k in some type of escrow back fees. I’m probably not saying this right as I’ve only got it second hand. Can anyone confirm something like this?

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