Expensive Education

The people who bought in The Plaza are taking full advantage of their Scholarship to the School of Hard Knocks.

8089 Scholarship   Irvine, CA 92612  kitchen

Asking Price: $702,900
Address: 8089 Scholarship Irvine, CA 92612

Run and tell all of the angels
This could take all night
Think I need a devil to help me
Get things right

Hook me up a new revolution
Cos this one is a lie
We sat around laughing
And watch the last one die

Im looking to the sky to save me
Looking for a sign of life
Looking for something help me burn out bright

Learn To Fly — Foo Fighters

Looking to the sky to save the values in the towers on Jamboree? I don’t think there will be pennies from Heaven — dollars from Washington maybe — but the market for these units will continue to crumble. I first documented the problems in The Plaza in the post, School of Hard Knocks.

The owner of today’s featured property is learning a tough lesson as well. When the foreclosure went through, he lost his $295,600 downpayment. That must have hurt.

Just Say Nothing?

When I wrote last Friday’s post Good Karma, it was astutely pointed out that for every buyer I saved I made life more difficult for a seller. This is true. In my defence, I note that the seller already made their decision when they bought previously. The decision to sell is about mitigating consequences. It is the buyer who is agreeing to take on the consequences of the decision anew, and they deserve good information to make that decision.

Does educating buyers to consequences make it good and right to sellers? It works for me. I will let you decide for yourself. Isn’t choosing to say nothing and failing to help when you can an action for which you must answer to yourself?

The astute observation points to a deeper issue; what should the Cassandra’s of this world do? The School of Hard Knocks is expensive education. Would you dissuade buyers if you thought they were making a mistake?

I received the following from an anonymous reader:

Hello IHB,

I’m a renter in the Bay Area. One of my coworkers recently announced he was going to buy a condo. It’s a new building, just recently thrown up, and he announced he was purchasing a unit, 1300 sq ft, a one car garage and a patio big enough for 2 chairs and no bbq allowed (but it’s got granite and stainless!) for the low low price of $400K.

I lived in this neighborhood for 2 years until last May. It’s awful. the 7-11 across the street routinely has vagrants drinking and sleeping in the parking lot. There is a light rail track that constantly stops traffic. And, as it turns out, the condo building is across the street from a halfway house where the state of California releases mentally challenged inmates that cannot be reintroduced directly into the community. The police used my driveway twice to conduct searches of cars they pulled over because they knew that we were not violent criminals and felt safe about using our space. My neighbor was attacked in broad daylight and his truck was stolen. Someone pulled a gun on my other neighbor at 7:30 AM, but then ran away, and the police assured us it was a mistake and the gang bangers had the wrong house (Oh, you mean they could have accidentally come to my house?)

My point/ question is, that when someone announces that they’re going to be homeowners, and especially first time homeowners, everyone oohs and aahs and congratulates and smiles. I was the only one who did not. I asked a coworker if it’s proper for me to pull him aside and think long and hard and tell him my experiences in that neighborhood. Everyone, including my mother, told me that would be rude and that it’s absolutely not my place to do so.

Anyway, on the day they signed the papers, they discovered the halfway house for mental inmates, which was buried in flowery language somewhere in the CC&R’s, and their second night their garage was broken into and all of my coworker’s prized musical instruments and lots of personal effects like good winter jackets, etc. were stolen.

I have also had other friends buy pointless, horrible property in other places and one has chosen foreclosure and walked away to live with her parents, destroying her and her husband’s credit for years after the condo they bought for $450 was appraised in the low 200s. Another is having their marriage dissolve after the wife nagged the husband into buying a house in a highly overinflated area at the peak, where the house has lost 50% of its value.

When is it proper for someone to speak up and stop the madness? Had I had the balls to tell my coworker not to buy there, I might be an a-hole raining on his parade, but he wouldn’t have lost $10K in musical instruments and be living across from a minimum security psych ward. Was I wrong not to speak up, put a fake smile on and congratulate?

How would you deal with this situation?

8089 Scholarship   Irvine, CA 92612  kitchen

Asking Price: $702,900

Income Requirement: $133,078
Downpayment Needed: $140,580

Purchase Price: $1,182,000
Purchase Date: 2/28/2007

Gain (Loss) after 6% Commission: -$521,274
Percent Change: -40.5%
Annualized Return: -16%

Address: 8089 Scholarship Irvine, CA 92612

Beds: 2
Baths: 3
Sq. Ft.: 1,790
$/Sq. Ft.: $393
Lot Size: –
Property Type: Condominium
Style: Other
Stories: 1
Floor: 8
View: City Lights, Mountain, Panoramic
Year Built: 2007
Community: Airport Area
County: Orange
MLS#: S588594
Source: SoCalMLS
Status: Active
On Redfin: 3 day

Super mountain, city lights and horizon views! Corner unit featuring a grand foyer and gallery. The kitchen has granite countertops, Viking appliances and beautiful cabinets. Floor to ceiling windows and wrap around balcony. Wood flooring throughout most of the unit, carpeting in the bedrooms. Fireplace in the living room. The building has a lobby entrance, two pools, jacuzzi, conference room, gym and more. On-site management.

They didn’t waste much time foreclosing on this guy.

Foreclosure Record
Recording Date: 04/17/2009
Document Type: Notice of Sale (aka Notice of Trustee’s Sale)
Document #: 2009000189064

Foreclosure Record
Recording Date: 12/26/2008
Document Type: Notice of Default
Document #: 2008000590159

It looks like he gave up about a year ago. It must have been tough to accept that he lost almost $300,000 in 18 months.

68 thoughts on “Expensive Education

  1. RogBoy

    It’s always difficult to let someone know they’re making a big mistake when they have their heart set on something, but I’d like to think I would’ve voiced my concerns. While the buyer of the property next to the mental home would be disappointed to be warned off, he should be rational enough to realize that he’d dodged a bullet and be grateful for that.

    If you warned the buyer off, there is a danger they react irrationally. People are like that sometimes; if that happens console yourself with the thought that they will soon make another mistake, and you won’t feel obliged to help that time!

    1. Walter

      “Had I had the balls to tell my coworker not to buy there, I might be an a-hole raining on his parade, but he wouldn’t have lost $10K in musical instruments and be living across from a minimum security psych ward.”

      Tough situation because unless they moved in, they would not have felt the full effect of the decision.

      Warn-offs because the prices are falling are a little easier because they just need to see the selling prices to know the bullet that was dodged. Issues of noise, crime, etc. might not be realized with out first hand experience and then they may resent the advice.

      Guess I would flip a coin on this one. Unless the buyer was a client. Then the rule is full disclosure.

    2. tazman

      You are right in that people often react irrationally in this situation. I say tough shit! I always err on the side of full disclosure. At the end of the day they will do what they will do.

      It’s like saving souls, you do it one soul at a time and you often don’t win… but the one you do save is worth all of the failures.

      1. norcal

        You’re right – the man would have had to live there to realize its true awfulness. So considering that he’s a coworker, is it worth being considered an a-hole and raining on his parade before he buys? Maybe if you’re ready to clip the newspaper articles about crime in the area and pass them on for about 6 months after the sale was avoided, he’d be a grateful friend/colleague instead of viewing you as a downer jerk.

        But it’s not really all about personal relationships. The NAR has a lot of mouthpieces spouting lies about the real estate market; shouldn’t there be balancing voices as well? If IR hurt some sellers, he’s helped heaps of buyers, whose interests are generally not represented in the media. It’s really about money, and the haves (or would-be haves) versus the have-nots. They should ALL be able to see both sides before they buy or sell. Full disclosure should rule.

    3. newbie2008

      I usually suggest they visit at night and weekends to check out the neighborhood and noise level. In your case wearing a bullet proof vest and sidearm may have been advisable :} Tell them where and what time to look. Let them make their own conclusion.

      Nothing worse that a bad crazy neighbor. When to one house with a 70 page disclosure — page 10 to 11 described midnight ringing of the doorbell and screaming, deposits of feces in the mail box and porch, drug usage, jumping out of the bushes and scaring the kids, etc. by an adult child of the next house. Lots of police visits to him. The house still sold.

  2. Gindy51

    One of my best pals had her husband bugging the crap out of her to sell their paid for condo in a country club community in Northern KY. His golf and poker buddies had all purchased huge homes in the same area and were showing them off. You can guess he felt a tad bit jealous about this and pushed his wife to put the condo on the market. She called me and asked me about it. I told her she was crazy at age 65 (he is 70) to sell their paid for HOME in order to ring up a huge debt on a big house they do not need. She knew her husband, who thinks women are not smart, would not listen to her so she consulted her CPA who laid out the facts for her husband.
    Did he really want his wife saddled with a huge debt to pay off when he died (he has blood cancer and yes, he knew this when house shopping!)? Did he want to move just to please his pals? Did he really want a bigger house or was he just trying to keep up with the Jones?
    The condo was off the market the next day and they still live there. Meanwhile all those golfing buddies with the new houses are underwater…

    1. norcal

      Nice to see a story where common sense prevails. I’m glad that man has a wife smart enough to overcome his stupidity.

    2. alan

      I’ve had cancer patients who know they have a limited time to live suddenly want to do gradiose remodeling or put in a pool. Their spouses just shook their heads and kept their mouths shut and nothing ever came of it.

  3. John

    It strikes me that warning someone off is the same, whether it’s a new house in a bad part of town or a bad news boy/girlfriend. In most cases, they’ll probably go ahead and do what they wanted anyway. If you lose the friend, you can take solace that you tried. On the other hand, if you don’t warn them, you can help when it turns to sh*t.

    1. Craig

      If you’ve dated the girl before, you have a duty to tell your friend she’s psycho, just like you have a duty to warn someone about a bad neighborhood if you’ve lived there.

      Of course, once someone falls in love there’s no talking sense to him (or more charitably, he’s willing to overlook her faults), but no one should ever fall in love with a house or other investment.

  4. cara

    I talked two people out of buying this year in DC. It hasn’t really fallen yet, just stagnating at peak prices, and inventory is high, but I still worry about having given them this advice, when I can’t guaruntee that things will be aby cheaper next year.

    But, one of them was new to the area, and I really think he should live in the neighborhood before buying in it. And the other just found a new rental for $500/month less than they were paying, only a block away bigger, but no view.

    So I haven’t done any harm, just not sure I’ve done any good (in terms of their eventual purchase price).

  5. Median Income Drops Right On Schedule


    Let’s go get ourselves some 30 year loans and throw a party for our future prospects!

    The lost decade
    Posted by Justin Fox Thursday, September 10, 2009

    The Census Bureau’s annual look at income and health coverage (based on surveys conducted in March) is out today. The rise in the poverty rate and in the percentage of Americans without health insurance got the headlines. But here’s a fact that for some reason the Census Bureau didn’t emphasize: The median household income in 2008 was $50,303. The median household income in 1999, expressed in 2008 dollars, was $52,748.

    You’ve got to figure 2009 will see another decline in income, in which case Americans will end the decade significantly less well off than when they started it. We’re not just treading water. We’re going backwards.

    1. fraidy cat

      Geez, David, just post under your name. You aren’t fooling anyone. Even the oddly bolded sentence fragments are the same…

  6. Muh Muh Muh My Cheronda

    Those wagon-circlers over at Wells Fargo sure did not waste any time doing damage control. No attempt to save their little MBA piggy whatsoever.

    I was thinking that a good excuse would have been that they were using the beach house to conduct their yearly employee ethics training seminars and thought it would be more sensible to hold the workshops at one of their bank owned homes rather than incur all of the overhead from booking a lavish resort. It would have made perfect sense to me.

    But no, they will let Cheronda take the fall while the rest of them pillage the coffers while the media is distracted.

  7. Lucky Victim

    Previously I had mentioned my golf buddy that just bought a starter condominium around san juan capistrano area. A two bedroom for mid 300 grand on a short sale. I didn’t have a chance to tell him about this website. And telling him after he bought it would be rude. If I was given the chance I would have at least told him about this website.

    I couldn’t care less what happens to the seller. I remember a girl that just dated me hoping I would buy a condo from her. The only thing that stopped me? She was dating another guy and once she sold that condo to the other guy she was a lot more harsh on my lazy attitude toward big ticket items. “Girls would be more interested in you if you ‘owned’ a house.” Yikes, I can still hear the whistle as the bullet just misses my head.

    1. tazman

      Thought I’d met a few loonie gold diggers on the dating circuit… man you are lucky you dodged that one!

    2. grabasnorkel

      They don’t call them realtwhores for nothing.

      (LOL Man, I have to be the one to say it? πŸ™‚ )

  8. Geotpf

    I wonder what percentage of peak purchases involved one half of a couple nagging the other half to buy until they finally give in, only to see the value drop 20, 30, 40, 50 percent. That’s a “I told you so” that can break up a marriage.

    1. RogBoy

      I’d bet the answer is “loads of ’em”. If the partners have a different attitude to risk, or expectations of the progress of the market, it can be a real problem. I’ve been in exactly this situation, back in 2007. My other half was desperate to buy property (her worry being we’d be “priced out”). OTOH, I’ve seen property prices crash before so I had the benefit of hindsight. I insisted we wait, and I reckon I was right (it might even have been worth all the trouble my instance caused).

  9. Kelja

    I keep my mouth shut. In the past, if I pointed out some of the negatives of buying, I was considered as negative.

    People make their own beds.

  10. thevendor

    Hello. I am a buyer in waiting.

    Reading IR’s insight as well as many others I see the argument for home prices still being overpriced.

    On the other hand, I speak to several close friends and associates who work in banking and they me that many areas of orange county and Long Beach have actually gone up in price. I have also been told that they (the banks) are holding onto foreclosed homes as to not flood the market and cause a significant drop in price. Basically doing everything they can to keep prices up.

    So as much as we are bears on the housing market, are going to be standing on the sidelines as home prices somehow recover much like the stock market has. Look at the market as there is no real reason for rally for the past several months. Jobs are still being lost in significant, alarming numbers yet stocks are steaming ahead up.

    Bears are crying “overbought! overbought!” yet the market continues to defy logic and go up.

    Sorry to be so long but I wonder is there a point at which you throw your arms up in the air and say forget it. No fighting the big institutions and their ability to manipulate the market (housing and stocks).


    1. Walter

      There was a graph show that in the last bust in the 90s, house price went up every summer and crashed every winter for 6 years. At least that is how I remember it. If I find it, I will post a link.

      Something to keep in mind.

    2. Serenity Now

      As a guy staring at the stock market with mouth agape, I too have wondered about the “throw your arms up in the air” dilemma. S&P 500 is at it’s highest point in last 11 months? Are you kidding me?! Is our economy healthier now than 11 months ago?!
      However, Spock was onto something with his old “that is illogical” disclaimer. Old pointy-ears had it right though… if a business opportunity in life makes you shake your head in concern and contort your face like you just took a deep inhalation from a garbage dump, you should walk away. Kicking yourself for missing out on short term gains is nothing like the smackdown you’ll administer to yourself if you make a huge commitment even after every instinct within you is telling you “you’ll be sorrrrrrrry”.
      The post by “Median….” up there about median income not changing has been my mantra these last few years. Nobody that I know has had a significant income boost over the last 9 years that was not related to equity withdrawal from their home or 401k. If getting into a house meant that I must sacrifice retirement savings, kids college savings, vacations not purchased on credit cards, savings for a new car someday, and an emergency fund for medical emergencies or job setbacks then I’d be a schmuck if I bought.

      1. mike

        “if a business opportunity in life makes you shake your head in concern and contort your face like you just took a deep inhalation from a garbage dump, you should walk away.”

        Good advice that few people listen to.

        Your head tells you the market is over priced, but your emotions tell you to buy.

        Most listen to their emotions.

        The good businessmen listen to their head.

    3. norcal

      Don’t worry – the Dow has “recovered” to the mid 9000’s – from its peak above 14,000. It’s not going up to that peak again any time soon, and neither should house prices.

      It’s employment and wags that determine house prices, ultimately. Hold fast!

  11. Passerby

    Saying something and potentially losing a friendship over it is a hard thing to do. I would still say something, but very carefully.

    One friend had seen that the market was unsustainable and knew that homes were being used as ATMs. He knew my feelings and why I continue to rent. After avoiding me for a couple of months, he calls me to tell me that he’s going to make an offer on a new condo and asks me if I’ve heard of the place. I told him flatly that I know the area to be infested with flippers and people who won’t be able to afford their mortgage terms.

    I asked him if he had done his homework on the area. He said that the guy in the sales office said that they didn’t sell to flippers and that it was nice looking. I encouraged him to dig a little deeper.

    A little bit of effort on my part turned up some serious problems. He didn’t bother and bought the condo. I haven’t said another word about the purchase, which has been nothing but problems for him. He even tried to sell it, with no luck. He’s stuck in a place with neighbor, structural, and enviromental issues.

    My experience is that when someone says that they have found a home they want to buy, they might as well be telling you that they’ve found the spouse of their dreams. Almost nothing can dissuade them. Proceed with caution.

  12. QH Renter

    Several years ago a friend told me that he was moving to Las Vegas in order to buy a house. I explained the concepts of the housing bubble to him and showed him some numbers. I told him to rent here for a couple more years and then he will be able to buy in the place he wants to live. He ignored my advice and did it anyway.

    Fast forward a couple of years and he calls me to say that he is doing a short sale. I mention that maybe it wasn’t a great idea to move to Vegas. He says that it easy to say that in hindsight and that “no one could have predicted this”. It is like the conversation we had before he moved never happened. I was dumbfounded because my friend is a pretty smart person. However, if you choose to remain ignorant and choose to follow the herd you will get slaughtered.

  13. IrvineRenter

    Anyone want to contact this person and ask if any friends tried to talk them out of buying?

    Bank is taking over/ all must go – $5 (Irvine)

    Must leave the house, bank is taking over
    Items for sale include
    Plantation shutters
    All bathroom fixtures, marble counter tops and faucets
    Glass sliding shower doors
    Sliding closet doors, mirrored and regular
    Doors with handles
    dishwasher ( black Frigidaire )
    Stove top microwave oven
    Ceiling fan
    3 ton air conditioning unit 4 years old
    All lighting fixtures, many to choose from
    4 ft 2 piece stone water fountain
    If you like item you must take items out yourself.

    Call me to set appt and see what you like
    Pricing will be low, too many to list.
    This is a house in excellent condition in Irvine

    Jess xxx-xxx-xxxx

    * Location: Irvine
    * it’s NOT ok to contact this poster with services or other commercial interests

    1. no_worries


      Come loot the house the bank now owns.

      Jess will make a couple hundred bucks and the house will immediately be worth tens of thousands less, looted.

      1. nefron

        Disgusting, it’s stealing, but typical of the mentality in today’s society. Screw calling the guy, I say get the address and call the cops.

        1. Gemina13

          Normally, I’d say screw the banks. But this is the behavior of an emotional child. “Waaaaaaaaaaahh!! You won’t let me keep my new toy, so I’ll break it!”

          And I say, in that case, a nice stay at the Ironbar Resort is just what’s needed. πŸ™‚

    2. Freetrader

      “Plantation Shutters”? hilarious. I would pay to see the scumbag try to pry those nailed-down psuedo shutters off the facade of the house. It would then leave a bit unpainted area on the stucco where the shutter used to be.

      “Toilets”? It used to be, if the house was being foreclosed on and you trashed the place, things could go very badly for you. I guess the banks have just given up. Too busy partying in Malibu, I assume.

      1. QuailHillTony

        This could be a scam to either cover up their stripping of the house, or to cover up their robbery of someone elses house

  14. HydroCabron

    A friend bought right at the peak in 2006. Mortgaged his ass off to get in. He told me he was about to make the offer, and I blurted out “Do not buy a house right now!” in front of several co-workers. Another co-worker was nearby, and also was about to close. Both are probably foreclosed by now. One went underwater within 6 months, and was unable to move to another office and take a better job.

    I could have been more polite about it, but I’m not sure anyone should ever bother. If you’re wrong, you’ll get well-deserved derision or dirty looks later on, and if you’re right, it’s not going to help the friendship if they don’t take your advice and then regret it later.

    Being right is no excuse. True prophets are tarred and feather with as much enthusiasm as false ones.

    1. RogBoy

      Good point. I suppose any enthusiasm you might have to help has to be tempered with a sound assessment of whether the prospective buyer is likely to take you seriously. If the buyer were a good friend, I’d still try to find a way to help them see the problem – as you say, a really direct approach won’t work if someone is really keen on a purchase.

  15. Alan

    If you have no bad experience or ill feelings towards this person, and especially if they are any sort of friend, I say no question but to warn them about what you know. From there on, it is their choice – if they want to dig deeper and understand your position then tell more, if they ignore it there’s nothing to be gained by picking a fight.

    OTOH, if this person has harmed you before, enjoy the schadenfreude.

    1. Lucky Victim

      Naa I don’t think thats a good use of schadendachsund. That’s more like a curse which isn’t very nice.

  16. Jeremy

    My personal rule is to only offer advice if directly asked. I find that my advice is invariably ignored, even if I exhaustively support it with data. The kool-aid is still very, very strong, and this summer’s bear market rally has only intensified the delusions.

    I’m still sitting on the sidelines, waiting to buy. One annoying thing about this historic housing bubble is that, if you were in your twenties when it got started and didn’t have any family money, you’re now in your thirties and a decade behind on the whole “building equity” thing.

    1. cara

      Nothing builds equity faster than a downpayment.

      I was checking out the 30 year amoritization tables, in the last two years my husband and I have saved up $60k for a downpayment, closing, moving, fixing costs. In the first four years of a 30 year mortgage, we’d only get another 11k of equity.

      If you want to jump in higher on the amoritization train get a 15 or 20 year loan. It looks exactly like the last 15 or 20 years of a 30 year payment schedule.

  17. Pwned

    When it comes to buying real estate, if you don’t tell people what they want to hear they won’t listen. I’ve preached the IHB gospel to many friends, family members and co-workers over the past few years. I cited data, anecdotal stories, did everything I could but still didn’t change any minds. Now everyone who did buy is hopelessly underwater. Even homeowners who could have made a lot of money selling at peak didn’t follow my advice to do that. They thought their houses would go up in value forever.

    I have a young cousin who bought a house in San Diego with her boyfriend after I practically begged her not to. I can already fast forward a few years in my mind and see them breaking up and financially upside down. I’ll continue to speak my mind – I just wish I was the kind of person who enjoys saying “I told you so” because that’s the only good it will ever do me.

  18. h

    I just don’t see how a condo with an $1100+/month HOA fee is ever going to be an attractive buy. It obviously wasn’t, even at the height of the bubble.

    Will this end up being an apartment building?

  19. Craig

    Isn’t it better to check up on the house every weekend with a large group of people, rather than leaving it unattended to possibly be vandalized?

  20. scott

    Does anyone think the couple below in this WSJ article was treated shabbily because the bank wanted 40% down on a 1.5 m home in Mesa AZ because the bank wasn’t sure 2 lawyers at a start up law firm could service a 1.1 m loan? I think the bank was right and if banks are beginning to act rationally again it is one sign of hope.

    Their backing means private lenders are assured of repayment — by the government, if not the borrower. The size of loan that can be guaranteed is capped in most parts of the country at $417,000, but can reach as high as $729,750 in high-cost areas such as parts of California, New York and Washington, D.C.

    Loans above those levels are hard to obtain. Steve Walsh, a mortgage broker in Arizona, said he recently tried to arrange a mortgage for a married couple who wanted to buy a $1.5 million home in Mesa. The couple offered a down payment of $400,000, but the lender wanted $600,000, or 40%, in part because the couple had opened a law firm and didn’t have two years of tax returns. That’s double what was considered standard before the boom. The pair walked away, said Mr. Walsh.

    1. Freetrader

      Jesus, I’m glad that idiot isn’t my lawyer.

      Anyone starting a small business — which is what a law firm is — in the middle of a recession and having no other source of cash flow — since wifey works there too — who then goes and takes out a million dollar + mortgage is a fool and a bad businessperson. Every if they are successful the firm would take a couple of years to just to get to break even. I can imagine the kind of legal advice he must give. It’s very refreshing to be able to ladle contempt on someone without having any qualms…I think that guy qualifies.

  21. IrvineRenter

    Toxic ARMs Loans Are Still Owned By Banks: Don’t Buy The Optimistic Banking Sector Scenario

    Option ARMs (adjustable rate loans) are the dubious name for a mortgage product which has caused financial destruction and will continue to do so for years to come. News Headlines about ARMs loans have faded over the past year but will soon be back in the limelight showing that they have not gone away. From late 2009 through 2012 the amount of ARMs loans resting will raise. These toxic mortgages allowed borrowers an array of payment options. Data released this week shows things are much worse than we had initially thought. In fact they should have been called minimum payment mortgages because over 90 percent of those who took out ARMs mortgages elected to go with the minimum payment option.

    These loans have default rates comparable to subprime loans… But one thing is certain and that is these mortgages are here for the next few years and will cause additional defaults and problems for already weak banks.

    Currently 46 percent of option ARM loans are 30 days late. And most of these loans were made by the likes of now defunct Washington Mutual in states like California, Arizona, Nevada, and Florida; the states hit worst by the bursting of the housing bubble. And 75 percent of all outstanding option ARMs loans are in those states.

    Of the currently $189 billion in option ARM loans outstanding, 70 percent will recast (reset) over the next two years. Some people wanted to believe that this problem was resolved by loan modifications but only 3.5% of ARMs loans have been modified. Fact is expectations for losses range from 35 to 45 percent assuming home prices do not decline in the areas where these loans have been made. If we assume the 45 percent loss ratio, we are looking at $85 billion in losses simply from option ARMs. And I would suggest the housing market has another 15-25% correction to go by 2012. So the losses from ARMs loans could exceed $100 billion in losses. The current banking scenario is just too upbeat for my liking.

    Banks are holding onto these mortgages as if they were at face value. Some banks have allocated loss reserves for these loans but nothing in the 45 percent + range. They are overly optimistic as usual but these loans are defaulting in mass, and will increase over the next two years.

    Another reason for the massive amount of defaults is the severity of their negative equity…

    The second mortgage disaster is going to hit in full force over the next two years, recovering anything from the second loan after the foreclosure process happens chances will be slim to zero.

    Banks are delaying foreclosure as long as possible. They are stalling hoping Washington can somehow artificially juice the market to unload these loans. Tax credits and other incentives are simply methods of creating an artificial market to unload this junk to the average American. Banks simply have not come to terms with the option ARMs which are sitting on there balance sheets. Loan modifications of 3.5%, is nothing especially if we consider that a loan modification constitutes extending the loan term.

    At least 90% of ARMs loans are negatively amortizing. In fact, as the home values have plummeted the mortgage balance has increased, a double whammy. Many buyers rushing into the hot 2004-2005 real estate market just assumed the market value of their homes would increase, this was not the case. When these loans will reset even with favorable interest rates thanks to the U.S. Treasury and Federal Reserve annihilating the U.S. Dollar, the typical payment will readjust to 63% higher than the original minimum payment. In many cases, it will double. Just imagine the scenario if the Federal reserve is forced to raise interest rates to fight out of control inflation, minimum payments could go up on average of 75% plus. This is an unlikely scenario the Fed will do its best to keep interest rates artificially low during this ARMs reset period 2009-2012.

    Only 12 percent of all outstanding option ARMs have reset so far. As we enter 2010, many of these vintage loans 3 and 5 year ARMs loans from 2004-2007 will start hitting their reset dates. Some have pointed out that Wells Fargo has some 10 year Pay Option ARMs but clearly that is a tiny part of the entire pool, as well as some 7 year ARMs. Bottom line is 70 percent of these loans will reset in the next 2 years and banks are trying everything they can to offload this toxic mortgage waste to the taxpayer like every other mistake they have made.

    1. NewportSkipper

      Wells Fargo (via Wachovia) loans (the 10 year variety) represent a “tiny portion” of these loans? That right there shows the author’s ignorance in all its glory. I guess it also didn’t occur to them that loans don’t get modified when people can still afford them and with today’s rates that is the case. You would be hard-pressed (no, it isn’t even possible) to find an option arm that is negatively amortizing with today’s ultra-low rates. Are there any good journalists left?

      1. norcal

        Dear NewportSkipper,
        You claim that IR is ignorant, but supply no statistics to counter him. If you really want journalistic excellence, maybe you should supply it. I’d appreciate seeing your numbers and knowing what evidence supports your very different take on the real estate market.

        1. NewportSkipper

          Many arms, especially option arms, are paying around 3.0%-3.5% right now. Borrowers holding these loans have won big. That’s the thing with arms, they go up and they go down. I don’t have the time or inclination to argue with you, but Matthew Padilla at the register has done more solid work on this than 100 other writers/bloggers combined.

          His take on option arms:


          This one shows what Countrywide has been doing and will continue to do. You’d have to suffer from a complete failure of imagination to not see how easy this is to remedy:


          This guy blows the sloppy analysts and journalists clean out of the water:


          1. grabasnorkel

            “Many arms, especially option arms, are paying around 3.0%-3.5% right now. Borrowers holding these loans have won big.”

            Hey Skipper, you do realize don’t you that the rates are only low because of the government and Fed forcing them down, right? Right? It’s a welfare program for the legion of idiots who were *so* legion, in fact, that the government and Fed felt their hands were forced. So, they’ve won in the same fashion that the bankers have won, by screwing over the taxpayer.

            Of course, the low rates may not last forever, either.

  22. DarthFerret

    IR: “When I wrote last Friday’s post Good Karma, it was astutely pointed out that for every buyer I saved I made life more difficult for a seller.”

    It is completely outrageous for anyone to even suggest that. These sellers are just mad that you are not helping them to perpetuate a Ponzi scheme. That’s the nature of a Ponzi scheme: someone gets left holding the bag.

    I have no doubt that you’ll keep telling it like you see it, and I’m glad that you do.


  23. IrvineHomeowner

    How many units are owned in that complex (are they all sold are there still some unsold?)

    What is the HOA?

    How much can it rent for?

    At what price can this cash flow?

  24. Gemina13

    In my case, it was a relative. I hate to reinforce the stereotypes that fly so fast and furious here (except to note that I’m a woman, and I could see the housing bubble was methane rising from a pile of shit), but where he was happy renting, she wanted a house. And not just any house–it had to be brand new, granite countertops, 18″ tile, new fixtures, Viking appliances, etc., etc., etc.

    Well, I had a ton of information drawn from Hale Steward (BondDad), Paul Kasriel, Nouriel Roubini, IR, and many other experts who were, in ’06, attempting to educate the masses on the financial tsunami heading our way. I laid it out for her, explained how the housing market was riding for a fall, and she’d be better off waiting a few years until things calmed down. Next month, she calls to cheerfully inform the family that “We’ve bought a house! It’s in Triple-Inflated New Development!” Yeah. It was also a stone’s throw from a major highway, miles from anything but a couple of spa resorts and an outlet mall.

    Fast-forward to now. The day they discovered their neighbor bought a house identical to theirs for $40,000 less, my relatives’ marriage imploded. They’re both declaring personal bankruptcy, and the house is now bank-owned.

    Yes, I’m enjoying the Schadenfreude. My relatives let me know they considered me an idiot, although it was her more than him. Now they’re going to have borked credit for 10 years. Hope it was worth it to them.

  25. muzie

    I think it’s a tough call.

    Because, although logic and economic principles do suggest prices need to fall, we must be still open to the possibility that some unforeseen external agent can cause things to not go as foreseen. I don’t see what that external agent would be, but the world is complex and I would think even IrvineRenter knows the odds of prices going down significantly are not 100%. Very high perhaps, but not 100%.

    If a buyer puts off his desire to buy a home due to warnings from a friend, and the expected decline doesn’t materialize, or is too small to have made any difference, it’s quite likely the relationship could be damaged.

    If a friend says nothing… then the friend will never be put to blame.

    So it’s a tough call. Markets are hard to predict. I think I might give pointers to friends to where they can find people like IR who can give them the information they can use, but I wouldn’t push the issue too much myself.

  26. n2

    I was planning to buy a house until a coworker told me some unpleasant things about the neighborhood. She saved me from making a huge mistake and I’m very thankful.

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