Lenders Can Hold Real Estate Indefinitely

Did you know that the only pressure on lenders to dispose of their real estate owned comes from shareholders?

15 MORRO BAY Irvine, CA 92602 kitchen

Irvine Home Address … 15 MORRO BAY Irvine, CA 92602
Resale Home Price …… $1,629,000


So sure
So sure you are
Nothing can
Touch you now
I need to know
Did you think of me
But you’re forgettng me now
Slow down
Don’t be so
Eager to let me go
Realise it could change you
It could change your mind

Repetition — Blur

Today I briefly want to again Revisit Option ARMs, and I want to address a common misperception about REO; lenders do not have to sell REO due to regulatory pressure. Shareholders may dissuade lenders from becoming real estate investors, but the banking regulators will not.

The Option ARM Kingpins: Who Holds the Elusive Option

$189 Billion Securitized and Outstanding and big Three of Wells
Fargo, JP Morgan, and Bank of America Playing with Time

There have been many charts … and much of the confusion is around a few key points:

-1. Banks have been circumspect given the actual number of option ARMs

-2. Many option ARMs are in California (roughly 60 percent of the market)

-3. Many of those behind on payments are now simply not paying their mortgage but banks are not moving

It is hard to quantify the above data since this is something banks
would like to hide. Nearly 60 percent of all current outstanding
option ARMs are in the hard hit state of California.
As many of you know, the median price of a home in California has
fallen by 50 percent. The peak in home prices was reached in 2007, the
last year option ARMs were made in mass. Since that time, option ARMs
were merely ticking financial bombs.

But what if homeowners balk? Many in California are strategically
defaulting. In many cases, unless their mortgage meets with market
rents many will walk away. Also, the California unemployment and
underemployment rate is at 23 percent so no amount of modifying can
help out with a loss of income.

So let us sum up the option ARM market:

option arm market data

$750 billion in option ARMs were originated between 2004 and 2007.
The top 10 option ARM originators cornered over 60 percent of the
market. Of these, many are now part of the too big to fail banks.
We know that $189 billion is still securitized in investor portfolios
while many billions are still on the banks books (i.e., $107 billion
with Wells Fargo and $50 billion with Chase). The bottom line is the
option ARM issue is still here and we will be contending with this for
the next couple of years.

That doesn’t sound very good, does it?

From yesterday’s discussion about Shadow Inventory, matt138, said, “Shadow Shadow inventory – the people who are currently thinking, “why the hell am I still paying if nobody else is?” I did some calculations and my result was: A LOT.”

What I find interesting is how much of the Option ARM problem has already been resolved (probably through foreclosure). If $750B was issued, and only $200B remains, only 20%-25% of the Option ARM problem remains — at least in the form of Option ARMs. Many of these original borrowers already went through short sale, foreclosure or walked away. The Option ARMs didn’t go away due to market sale because the homedebtors were all underwater, and these loans did not go away through successful loan modification because cure rates are very low.

The good news is 75% of the Option ARM holders appear to have defaulted early. The bad news is most of the homes of these borrowers will end up as REO sold on the open market, it is only a matter of when. This problem is going to be stretched out as long as possible, and the abundance of overhead supply will prevent appreciation from saving the market for many years.

Lender’s Options for REO

The lenders I have spoken with are genuinely concerned about the auditors forcing them to reclassify loans. Many lenders are not properly categorizing their loans for accounting purposes — the still have it on their books as if it is a good loan and the borrower is making their payments. Many, many non-performing residential loans are still classified as performing while lenders have the shield of government loan modification programs. The reality is many of these loans are not performing, they are never going to, and lenders are not being forced to recognize this fact until their balance sheet ratios support it.

Regulators are not concerned with what a lender does with the REO it picks up through the foreclosure process as long as the losses are accurately accounted for — in theory. Once the REO department gets a property, the only pressure they get to sell property comes from through management from shareholders.

Shareholder Pressure

People who invest in banks are investing in a business that writes loans and carries loans on its balance sheet. If a balance sheet becomes polluted in the eyes of investors with real estate assets, it starts to look less like a bank and more like a real estate investment trust or a hedge fund. When banks cease to be banks, investors bail out and stock prices crumble — at least that is the belief of bankers, so the management does not want to hold real estate. Also, REO is lingering evidence of prior poor lending practices, and nobody wants to keep that around.

The implication for the market is simple, there will be no forced dump of REO instigated by bank regulators. That isn’t to say we don’t have a huge pig to send through the snake, but it can be digested in smaller pieces rather than one massive chunk. We may (probably will) see a cartel arrangement evolve, but the large amount of supply and the competition to dispose of it will serve as a drag on prices until the inventory is exhausted. In some markets that will take decades.

Direct from an Asset Manager

As part of my work, I go to Building Industry Association meetings on a regular basis. As a courtesy to them, I am keeping my sources anonymous, but should any of you wish to attend a BIA meeting, you can see and here these people yourself. The meetings are open to the public for a fee.

At a recent meeting I listened to asset managers from two major West Coast banks. I asked one of these asset managers to detail his banks policy toward REO based on market conditions. He said that in markets where they do not see recovery in a longer-term horizon (think Lancaster), they may sell at reduced prices to clean up the mess; however, if they do see the market recovering in a reasonable time, they will hold the property, and perhaps even rent it out while values improved. In short, the REO departments of these banks are empowered to act as responsible asset managers trying to obtain the greatest recovery for the bank. This also means there will be no massive inventory dump forced by a government regulator.

Each bank will evaluate its own financial circumstances, its exposure to the market and other factors and pursue a policy of maximizing recovery while disposing of these assets. Certain banks will dump in some markets and hold in others. It will be the chaotic collapse of a cartel with much volatility, and most likely slowly declining prices for several years as lenders slowly release their inventory to obtain price recovery.

Blue skies are not here yet.

15 MORRO BAY Irvine, CA 92602 kitchen

Irvine Home Address … 15 MORRO BAY Irvine, CA 92602

Resale Home Price … $1,629,000

Income Requirement ……. $337,684
Downpayment Needed … $325,800
20% Down Conventional

Home Purchase Price … $791,875 ???
Home Purchase Date …. 3/28/2001

Net Gain (Loss) ………. $739,385
Percent Change ………. 105.7%
Annual Appreciation … 8.3%

Mortgage Interest Rate ………. 5.01%
Monthly Mortgage Payment … $7,004
Monthly Cash Outlays ………… $9,040
Monthly Cost of Ownership … $6,540

Property Details for 15 MORRO BAY Irvine, CA 92602

Gourmet Kitchen Award

Beds 4
Baths 4 full 1 part baths
Size 4,464 sq ft
($365 / sq ft)
Lot Size 8,285 sq ft
Year Built 2000
Days on Market 4
Listing Updated 12/10/2009
MLS Number P713549
Property Type Single Family, Residential
Community Northpark
Tract Cmbr

**Bring your checkbook & RUN…DONT WALK!** Drop-Dead GORGEOUS & *PRICED TO STEAL!* PREMIUM GREENBELT Location, Serene PRIVACY & Tranquil PARK VIEWS! Rare *OVERSIZED LOT* w/Huge ENTERTAINERS BACKYARD! Location! LOCATION! **THIS HOME SURPASSES EVERY HOUSE IN THIS PRICE RANGE!** Must See to Believe! Exquisite Architecture w/Romatic Archways, Dramatic 10-Ft Ceilings, Walls of Windows, Splendor of Natural Light & Inviting French Doors that Welcome Outdoor Living & Entertaining! Spacious Open Design offers 4 Bedrooms w/Bath en suite (Including Main Floor BR & BA) & BONUS ROOM (Optional 5th BR) plus Office, Exercise Rm/Study, & Elegant Formal Living & Dining. Huge Gourmet Kitchen w/Chefs Island Opens to Charming Breakfast Nook & Generous Family Room w/access to Sprawling Backyard & Custom BBQ. An Entertainers Delight! Master w/Retreat, Fireplace & Huge Closet plus Generous secondary bedrooms w/walk-in closets & tranquil park views! EVERY ATTENTION TO DETAIL! *ACT FAST!* Only ONE like this!!!

This description is awful on every level. It contains (1) RANDOM CAPS LOCK, (2) three exclamation points, (3) random asterisks, (4) numerous cliches, (5) over-the-top writing, (6) Intermittent Caps, (7) cheap techniques to create urgency, (8) and a general lack of substance. If the nonsense were strpped from the description, the number of words cuts in half and the reader is spared needless distraction.

My data records do not show the original purchase price, but it does show me the original first mortgage. I assumed the mortgage was 80% of the purchase price. That may not be correct.

As borrowers, the owner’s of today’s featured property did not add to their mortgage. Kudos. That is a rare accomplishment worthy of recognition.

69 thoughts on “Lenders Can Hold Real Estate Indefinitely

  1. Chris

    “Did you know that the only pressure on lenders to dispose of their real estate owned comes from shareholders?”

    Frankly, all these talk about shadow inventories, increasing foreclosure rate, etc, will only come to light when FASB revert back the mark-to-market accounting. Remember back when Ken Lewis said that mark-to-market was hurting the financial firms? VOILA!

    No matter how much stimuli the govt does, this hurts the market more in the long run as banks and financial firms lie and lie on their balance sheets (and no need to offload all those boatload of vacated properties) in order to rack themselves up with bonuses until AHBL.

  2. travis

    Hey IR. Im sure you’ve answered this question before: At what price per sq ft do you see the market bottoming out at for a home like this?

    1. IrvineRenter

      If interest rates remain low, properties like this should hold above $300/SF. I previously believed Irvine would bottom between $225SF-$250SF. Now with 5% interest rates, prices that low seem less likely.

  3. BD

    Hell0 All – what is going to happen if we enter a prolonged period of rising rates?? Say 11% for a 30 yr fixed in the next decade? This surely will put significant continued and long standing downward pressure on prices!

    The best housing can do in CA is break even over the next 10 yrs…IMHO

    1. matt138

      The general consensus is that rates are low and they might go up a little to curb inflation. Few truly believe that double digit rates are coming.

      Break even at best over a long period of time will purge the kool aid out of even the drunkest cowboy.

      1. lunatic fringe

        Really? You don’t see a scenario where interest rates head higher? We try to run $2 trillion deficits for very long and I could easily see foreign investors shun buying our debt. The Fed purchase program for buying agency debt will run out soon and that will drive up mortgage rates. FHA is gonna explode and what happens to housing demand when that occurs?

        These are just three things off the top of my head and I think they’re all likely to occur. I can see mortgage rates not only head higher, but much, much higher.

        And besides, when has the “consensus” ever been right?

        1. jimfromJaxFla

          I agree Lunatic…
          last March Geithner visited our Masters in China.. We were told China will move from purchasing long term Bonds to short term..
          China also is pushing for a “Basket of Currencies” to replace the Dollar as the World’s Currency..
          This will and has allowed for a slight increase in the 10 year Treasury notes and therefore Mortgage rates to increase.. When the Fed stops purchasing in April, even higher rates..
          I believe with Paul Volcker on Obama’s staff will be forced to raise rates like he did in the late 70’s.. He’ll have to do this to keep SOME value to the Dollar…

        2. Geotpf

          Interest rates will almost certainly be much higher than they are now in the medium term, once the economy recovers and inflation becomes a semi-threat (right now, we are in a deflationary period, which is one reason why rates are so low). They will almost certainly not hit double digits any time soon, however.

          1. cheap dollars

            Geotpf says that “right now, we are in a deflationary period, which is one reason why rates are so low”.

            IMO, that’s not why and wholesale prices were up recently. Interest rates are low because the banks are awash in cheap dollars, so they do not need to make any effort to lure savers to put their money to their banks. Remember that period in 2007/2008 when banks needed to raise money and they were paying 5% or more on one-years CD’s?

          2. matt138

            I didn’t say I agreed with the consensus. They will try to keep rates this low forever, provided they can. I see the govt denying inflation exists until it is blatantly obvious to the general public. The people will be screaming bloody murder before they raise rates, unless of course treasury demand drops off first. But they may choose to self finance for a while – that’ll turn out well.

            The fact that CPI hovers at 0 in a massive deflationary contraction tells me inflation is already here. Please think about the effects of housing subsidy on realtor commissions (inflationary due to propped up prices and bear market rally transaction counts). Think about the effect of bailout money to a bank (inflationary due to continued employment/bonuses to employees, the guy who should be making zero but is still making a half mil). Oh, and what about unemployment benefits (inflationary as the unemployed should be making zero while seeking employment and many work under the table and keep collecting unemployment) Newsflash – the money is getting out there.

  4. AZDavidPhx

    Confessions of an Underwater Homeowner



    One in four borrowers is underwater on a mortgage in the U.S.

    Count me among them.

    My family’s modest, suburban New Jersey house is now worth about $30,000 less than our current balance. We never dreamed of walking away, but the idea of “strategically defaulting,” is something we had to at least consider. Many others have, too, as my colleague Mark Whitehouse reported in Thursday’s Journal (See American Dream 2: Default, Then Rent.)

    We’re not home flippers or boom-era borrowers who opted for an exotic loan with no documentation. In buying our house, we believed we were making a life decision.

    We started thinking about buying in 2004, when my wife and I found out that we were having a baby. We were thrilled. Shortly after that, we learned we were having multiple babies, we were equally thrilled–and terrified. We’re going to need a bigger place, we thought.

    We probably could have held out a few years in our sizable apartment in Metuchen, N.J., a bedroom community about 35 miles outside of New York City. But we knew interest rates were hovering at historic lows. It was impossible, working at The Wall Street Journal, to not read those headlines every day. At the same time, people all around me were buying homes and refinancing their mortgages to capture these relatively inexpensive home loans. It was like a race, and everyone else was crossing the finish line while I was still putting on my sneakers.

    We weren’t oblivious to the fact that people were stretching to buy homes. We were adamant about getting a fixed-rate loan–rates really had nowhere to go but up, so why would we want an adjustable rate? (That line of thinking turned out to be an epic fail–30-year fixed rates have been at less than 5% for weeks lately.)

    We were concerned about the down payment. My wife and I had just wiped clean our tens of thousands of dollars in college-loan debt. The nearly $20,000 we had saved seemed like a king’s ransom. In reality, it would be less than 10% on any home we could afford. Getting to 20% now, with our three new arrivals, was way out of reach.

    It came time to deal with the finances. Because we were plunking down only 7% or so on the down payment, we were faced with a steep insurance fee. I was naively insulted by this PMI–the idea that we were risky borrowers out of the box. So we opted for a “piggyback” loan, a second loan that would cover the rest of the down payment and allow us to avoid the PMI. We would pay about the same per month, and when our home’s value rose, we would refinance and combine the two loans into one. A lot of the people I turned to for advice were recent homebuying colleagues facing similar questions, or longtime owners who were doe-eyed by low interest rates. I don’t recall anyone saying “Dude, wait a few years.”

    1. AZDavidPhx

      This person is considering strategically defaulting when only being 30K in the hole? WTF? Wow, what a sense of entitlement.

      He and the wife managed to pay off their thousands of dollars for their college loans, but 30K underwater is some sort of impossibly hard thing to do?

      I like the tone, setting himself up as a victim. Dragging out the usual child worship – We thought we were making a “life decision” Oh we found out we were having babies! Multiple babies! We were thrilled! We were terrified! BLAH BLAH BLAH. We did everything right! We got a fixed rate loan, not an adjustable rate mortgage! We were responsible! I was offended that my 20K down payment was only 7% and they made me pay PMI! Nobody ever told me to wait or not buy! It’s not my fault for not doing any homework whatsoever and letting realtors and bankers do my thinking for me.

      Is anyone else tired of hearing these dumbasses complain? If they don’t even know what PMI is then they should not have been buying in the first place. They clearly went into it without knowing anything and got hustled. Too bad. 30K underwater is not bad – pay it off, JACKASS.

      Extremely annoying.

      1. ma_hernandez

        If you read the whole thing (http://online.wsj.com/article/BT-CO-20091209-712403.html), he concludes that he isn’t likely to strategically default:

        … “We wouldn’t. Although, if I were laid off and unemployed for more than a few months we might have to.”

        The blog contains a fair amount of, “we were stupid,” and “we were naive.” Not really swimming in self-entitlement as your comments imply.

      2. matt138

        increasing unemployment and this cut and run zeitgeist are both factors which are hard to account for – especially as the news tells us jobs are coming back

        Case in point – the same dude in 2006 who basically said, “be a man, stop renting and get a house like me” now says, “yeah, just gonna short sell my house…y’know it doesn’t make sense to pay for all the stuff on the house and I can rent the one down the street for half…and the greedy banks…where’s my bailout?…” Ahah! Now he gets it! Take away the appreciation and people, even the dumbest people, understand the cost of ownership and the headaches. This is not just limited to Option ARMs, although kudos to IRVINE RENTER for bringing to light much of the Option ARM inventory has been worked through – almost making me bullish!

      3. norcal

        Hi AZ,

        I agree with you, the onset of parenthood is NO EXCUSE for buying a house, despite what your contemporaries tell you. And $30K underwater seems laughable to those of us here in the Great State of California.

        These folks just didn’t think in terms of price to income, the figure that should be the mantra of all potential home-buyers – not appreciation, not interest rates, not the advice of people who’ve already bought. Price to income.

    2. Lee in Irvine

      I don’t think Mr. Fitzgerald is even close to defaulting … ($30,000 down — come on???). He’s basically laying the case that it’s smart to walk away from your house when it’s deep in the hole. This story is really about all the other people who are upside-down $100k plus, who are making the economic choice to mail the keys back to the lender, not because they can’t afford to pay, but rather because it no longer makes sense to pay.

      Screw the banks!

  5. IrvineRenter

    Our somewhat volatile Feedburner subscription meter went over 3,000 today. Thank you loyal IHB readers!

  6. Serenity Now

    sorry…. don’t have time to read all the posts this morning….. I’ve gotta RUN!! really fast to that property. I shouldn’t even be taking the time to post this ‘cuz I’ve gotta ACT FAST!! Oooops, I almost forgot to “bring my checkbook”!
    Man, I hope that property’s still available when I get there.

    1. Alan

      I’m afraid that I’m missing the “PREMIUM GREENBELT Location, Serene PRIVACY & Tranquil PARK VIEWS! Rare *OVERSIZED LOT* w/Huge ENTERTAINERS BACKYARD!” and later on the “Sprawling Backyard”. That is even more WTF than the price, or is it misidentified on the maps?

      I don’t see any of that stuff, and want my money back.

  7. AZDavidPhx

    ma_hernandez –

    Believe it or not, I did read the whole thing.

    A strategic default, to me, implies a debtor who stops paying even though he can still make his payments. We are not talking about people who get laid off and can no longer meet their monthly obligations due to their lack of income. If you accept that definition then the act of a strategic default implies a sense of entitlement by the actor. Maybe they feel entitled to a lower payment, a lower principal balance, whatever.

    The act of strategic default immediately reveals the debtors true motives for buying real estate – speculating that prices will rise or as realtors call it ‘investing’.

    The guy in the article said he ‘considered’ a strategic default now that he is 30K underwater. My question is why is he so concerned about being underwater when he got exactly what he wanted : a house for all of his babies. He is still employed and living the American Dream, but he appears to be demonstrating a large case of buyer’s remorse. Why so bummed? I never defaulted on a car loan because its value went down.

    The author is painting himself as a victim of life and feeling sorry for himself because he threw away 20K and now wants it back.

  8. Hank

    What about insurance, maintenance, association fees, and property taxes? Especially property taxes – where I live it is no small amount. Maintaining these expenses on a year over year basis for a bank is going to cause them to bleed cash pretty heavily. Also, a house that is unoccupied is going to deteriorate from lack of use of the systems (think A/C, heating, electrical, etc.). A house that is rented is going to suffer as well unless the bank is extremely choosy about who rents the house. And lets not forget about vandals and squatters if the house sits vacant for too long.

    Now imagine this problem multiplied by hundreds or thousands of homes… The longer this drags out, the more money the banks are going to bleed. That and their inventory is continually deteriorating. Couple this with high unemployment and a state teetering on bankruptcy. I don’t think this is going to end well.

    1. norcal

      Yes, Hank, I agree – the banks are going to wind up balancing the pain of mark-to-market against the pain of paying property taxes, association fees, and maintenance.

      Essentially the REO banks will become landlords, but only until the mounting costs of taxes and maintenance balance the loss to their balance sheets. Then they’ll release properties to the market. In California Prop 13 keeps the taxes relatively low. But if these houses sold at actual market valuation it could become even lower!

  9. Newbie2008

    Allowing the bankers use their own made-up account to make the books and profit look good, i.e., maximize their bonus’ ignores human nature — greed and dishonesty for self interest. As long as they are rewarded for short-term profits (even paper) and not penalized for long-term loss, the books will be made to have years of profits and then short string of huge loss to make a net long-term loss.

    This can be seen with the bankers wanting to pay back the TARP money to avoid lowering the top exec. bonus. Either the banks were not in such a bad position to warrant the TARP and/or the books and taxpayers are being cooked.

    Allowing fantancy pricing for bad loans allows easy cooking of the books and bonus.

  10. AZDavidPhx

    My favorite part of today’s listing is the continued use of slang in the descriptions. Specifically the usage of the phrase ‘Drop Dead Georgeous‘.

    Personally, I think ‘absolutely’works much better than ‘drop dead’ bar talk. The listing agent has no class.

  11. AZDavidPhx

    I am going to follow up with theory that banks are holding off shadow inventory to keep prices from going lower.

    I just do not believe this whatsoever. If this were true, then the banking cabals could apply the strategy in reverse by unloading all of their properties onto the market at WTF prices in an effort to force buyers to pay high prices by fixing prices.

    The reason they are holding back properties seems to me a simple flow control problem. They are valuing their junk assets on the books way higher than they will fetch on the open market. Each time they sell, they are forced to give up the charade and admit the loss.

    All they are doing is staggering their losses slowly while the central bank pumps them full of money and knife catchers give back their bubble wealth in the depreciating market.

    The weak link is FHA which is enabling the current speculative bubble. Once FHA has no more money and the first time buyer is out of the game, this is all going to unravel.

    1. Food

      I thought the banks are getting 0% interest from the Fed. So, it does not hurt the banks by holding on to these inventories other than maintenance and taxes. When the short term interest rate goes above 0%, the banks would start to rethink about holding on to these properties.

  12. matt138

    Judging by where rates and prices are currently, coupled with other massive subsidies, and the fact that this was the largest re boom in the history of the world; I think any asset manager holding properties in the areas he/she thinks are going to rebound – is an idiot.

    He/she is using the same perverse logic as our politicians. Maybe the numbers make sense with 5% interest rates…

    1. IrvineRenter

      I spoke with a professional market analyst who was active during the last decline, and he said the behavior of the banks was similar in the mid 90s. Some cut their losses and sold out quickly whereas others held their REO for years to get more money. One of the banks mentioned specifically in this post held their REO last time, and they will likely pursue the same strategy this time. The overhead supply will be with us for a long time.

      1. matt138

        It’d be interesting to see who fared better. Do they not take into account the last boom pales in comparison to this one? And that rates were far more realistic?

  13. Trevor Speirs

    Other problem is that the Federal Funds rate is near 0%. So the cost to the bank of holding these is minimized and as IR has noted as long as it is not moving up, house prices should not decrease much.
    If we see the FF rate increase, holding costs will increase and potential sale prices will decrease. I expect the banks to move more quickly to rid itself of REO inventory.

  14. Geotpf

    I’m going to follow up from the discussion yesterday, where everybody was saying I was gung ho about buying properties and was probably an industry shill. I’m not, on both accounts. In Irvine, renting is probably the best option for most people (which is what I was saying the whole time). But if you are going to buy, now’s probably the time.

    That is, IMHO, for most people and most properties in Irvine and other high demand areas:

    Renting > Buying now > Buying later

    In less prime markets (Riverside, for instance), the equation is this for most people, IMHO:

    Buying now > Buying later > Renting

    The difference is that rent is more expensive than the monthly cost of buying in low end markets and vice versa in higher end ones (like Irvine). IMHO, purchase prices have bottomed or near bottomed pretty much everywhere.

    1. bigmoneysalsa

      Yes, right now it is better for most people in higher end areas to rent than buy now. But there have been several points in the past where that was not the case. Looking at the prices for high end areas of OC (including Irvine) before the bubble, and comparing them to rents at that time, it was pretty clearly better to buy then rent for most people. Or at least the rent vs buy scale was leaning much closer to the buy side than it is now.
      So your reasoning makes sense only if such a situation never comes to pass again. If you are right, then that means it’s different this time and home prices prices have reached what looks like a permanently high plateau.

    2. norcal

      I respect your measured analysis, Geotpf, but I don’t see how current Irvine prices are sustainable in terms of income. If HELOC, FHA and Option-ARMs are unavailable the prices must surely come down, don’t you think? Or do most Irvinians earn the annual $200K they’d need to sustain a median price of $625K?

      So yes, rent in Irvine now, maybe forever, but don’t lose hope that pricing sense might some day prevail.

      1. OC_Boston_Bay

        Professional couples can make the ratio work however once kids come into the picture having both couples work to make the books balance has longer term consequences…a ticket to the “treadmill”.

    3. Craig

      This appears to completely contradict the interpretation expressed by IrvineRenter (atleast in past blog posts) for higher end Irvine areas:

      buy later > buy now

      If you buy now, when interest rates are low, your home will lose value when rates inevitably rise and puts downward pressure on home prices.

      If you buy later, when interest rates are higher, home prices are lower (if you wait long enough), and then down the line you can always re-finance when interest rates are lower again.

      The upshot: the price you pay for the home will not change, so buy low; interest rates will always eventually change.

      Of course, this equation changes if either A) Irvine has already hit bottom; or B) prices will be sticky for reasons described ad nauseum (e.g., fed keeps interest rates low for much longer than expected, banks release inventory much more slowly than anticipated, and uber-gradual inflation).

      In that case, Geotpf’s proposed relationship might be correct. Buy now or rent forever! (unless your under 20)

      God, I’m glad I don’t live in Irvine.

  15. thrifty

    Irvine Renter: Can you clarify a graph that appears in your Dec. 9 subject relating to resets of Alt-A and Option Arm resets in 2010-2011 and to the question of shadow inventory?
    The single columns on the graph are divided into several segments, each a different color and each supposedly representing a different kind of loan. The two circled “loans” are “Alt-A” and “Option ARM”.

    My question: Since Alt-A is a type of borrower and Option ARM is a type of loan, why could there not be a large number of Alt-A borrowers with Option ARM loans? Counting a loan and its borrower as two separate “loans” results in significantly overstating the resets.
    Where is the fallacy in my reasoning? Thanks.

    1. IrvineRenter

      The categories as described are not mutually exclusive. This has been an issue since the earliest Credit Suisse report. They assembled data from the various sources they had, and they attempted to eliminate any double counting. The report had few details on their methodology. I don’t think this is a smoking gun of fallibility in their findings.

      1. thrifty

        Thanks for the clarification. Not sure what you mean by “smoking gun”? My question was simply to clarify the possibility of overlap in their methodology, not as a “gotcha”. I posed it because a number of reports have used the Credit Suisse chart and I can’t recall a single one that brought up the overlap possibility and its implications.
        btw, Had I not ordered from Amazon and read “The Great Housing Bubble” in December, 2008, I wouldn’t have been sufficiently knowledgeable to ask the question! 🙂

  16. AZDavidPhx

    IrvineRenter –

    Why should banks hide their inventory to wait for more money?

    What is stopping them from putting every last house onto the MLS at some WTF price and wait for buyers to capitulate and pay the WTF price? Banks have a lot more time and patience than buyers.

    Existing house debtors would love it – it would keep their house prices high if all these foreclosure sales were put on the market with WTF price tags in their neighborhoods.

    They don’t need to engage in deceptive conspiracies to keep supply artificially low when the market is rigged to begin with.

    1. cara

      Frighteningly, that’s what they’ve started doing in the DC area. Our inventory is so low, that REO’s have started listing at normal sale prices. They then drop once or twice by $25k each, until the price finally reflects the additional money needed to get them up to shape, and find a buyer. The REO discount itself is gone from whole swaths of the DC area market now. It’s still there for homes over the $500k mark, or places with reasonable inventory.

      The reason not to list is to maintain the sense of urgency. There’s less than 3 months of inventory in the market as a whole here, less than 1 month for under $400k. Banks and professional flippers only release one property at a time in any given neighborhood, so that buyers don’t immediately feel they have a choice of selection.

    2. avobserver


      “What is stopping them from putting every last house onto the MLS at some WTF price and wait for buyers to capitulate and pay the WTF price?”

      I would agree with you if all the REO’s were controlled by one bank. Otherwise any collusion to push inventory to the market at WTF price would unravel once some banks begin to defect (lowering prices to undercut others). Even with all the consolidations last year we still have many players out there other than the big four.
      Banks hold inventory because of the wishful thinking that economy will quickly bounce back in a couple of years. Many people (not just banksters) still believe this is just one of the more severe recessions we experienced in the post WWII era, and they think wage growth and drop in unemployment rate will justify for WTF price again in a few years. Of course, as many who bought JDSU @ $200/share and have since waited for a NASTAQ rebound can attest – once a bubble is pricked, it’s burst and gone, for good. Other bubbles may get inflated but it will never be the same one that just burst.

  17. Soylent Green Is People

    I was a believer in a Q4 shadow inventory dump, which clearly isn’t going to happen. Since the Chosen One has sided with the banksters, zip-a-dee-doo-dah pressure will come down on the banks to unload any inventory, nor force insolvent homedebtors out of their homes at the pace needed to clean out this market once and for all. Only a 5.5% or higher mortgage rate environment will push banks to put more REO’s out for sale. At 5.5% or higher, fewer buyers are able to qualify and thus prices have to come down. It will be interesting to see what Big Ben does in March when the MBS purchase program ends.

    My .02c

    Soylent Green Is People.

    1. Major Schadenfreude

      “It will be interesting to see what Big Ben does in March when the MBS purchase program ends.”

      He will extend it until every last MBS held by the favored banks is on the books of the taxpayers.

      Soon, empty houses with no For Sale signs in front of them will populate many neighborhoods. There will be an outcry from 1st time home buyers, but this will be drowned out by the existing home owner/debtors: “We overpaid for our home, so you must too!”

      Actually, if the empty homes are leased, then this will help cave-in high home prices, since no one will want to own when they can lease for less. The concern is that if the government does truly end up with a stock of homes, I don’t think they have the sense to turn them into rentals as they should.

    2. renew

      “It will be interesting to see what Big Ben does in March when the MBS purchase program ends.”

      He will renw the MBS purchase program. my 0.02$

  18. picflight

    This box is worth $770K.

    Low interest rates, when factored into the cost of the house makes a higher priced house seem affordable. Buyers forget that what they are really getting is worth much lower yet somehow they perceive it to be more because of realtors continuously telling them it will go higher.

    By this rule, a Toyota financed at 0.5% should also look good if you paid $129K for it?

    1. Geotpf

      Well, car loans are typical three to five years, not thirty. Interest is a much bigger deal on a thirty year loan than a three to five year loan. Of course, there are also tax advantages to home loans that don’t exist for other loans.

      But even at the shorter term, car companies frequently offer zero percent financing, because it lowers payments and sells cars.

  19. Ochomehunter

    If anything, the system has taught the responsible folks a lesson. The crooks prevailed. Those who bought homes for say $500K and cashed out substantial equity and then walked away from their properties and pocketed the cashout, those folks are now coming back to buy homes for cash or bigger downpayments. Its happening in Corona. Other folks who also cashed out are now not paying as Banks encourage them to create hardships first. One of the fellow that I know actually was coming up with $600 extra per month income after all liabilities so he wouldnt qualify for loan modification. Believe it or not, BAC loan guy advised him to buy an expensive SUV, he did so and now he is showing negative income and hardship. BAC agreed to modify the loan.

    Folks are playing with the system as it allows, and others are following the suit as well. Those like me waiting for my first purchase may have to wait another few years until all suckers are burned out and banks collapse.

    Something is going to give, I know I am not going to cave in as after paying rent, I save good chunck of money and will continue to stay away for this BS of home chasing.

    Cant wait for Mark to market to come back, that would be the icing on the cake.

    Ever heard about dead cat bounce? Irvinerenter when in 2006 posted his forecast for housing slump, he did show on his chart a dead cat bounce, well there you have it folks, the dead cat is bouncing, dont chase it.

  20. Ochomehunter

    Irvinerenter, I have a question for you.

    When the boom and subsequent bust of housing market, US actually got richer and not poor. Imagine this, home values appreciated dramatically and folks cashed out or bought very expensive homes, buyers got hammered both home owners and those who paid for the loans (CDO’s and MBS), at the end of the day, those who sold these homes are the ones who got rich in the process. If you think about it, wealth transfer happened from the entire globe to the US and guess what, that money is still here and those holding the bag are spread globally and others are US Homeowners that are underwater.

    Funny isn’t it?

    1. IrvineRenter

      When you look at the aftermath of a housing bubble, it is hard to deny the assets on the ground that result from the mis-allocation of resources. California in particular gains an enormous wealth boost as resources pour into California from all over the globe to build houses we do not need. When the Ponzi Scheme collapses, we have a large number of homes we otherwise would not have. In that respect, we certainly do become richer.

      Anyone who cashed out during the bubble, and did not put the money back into real estate, those people did quite well.

      1. thrifty

        Not necessarily – if they invested and left their profits in the stock market. The S&P is still down 29% from its October 2007 high.

        1. LC

          Does anybody have a list of the best investments of the past decade? It is always so nice to take a trip down memory lane. I am pretty sure the stock market and real estate are not up there.

  21. nefron

    Okay, one thing I don’t get. How are these banks able to pay back these billions of TARP dollars so that their executives can get their bonuses and at the same time have all of these nonperforming assets? I get it that their balance sheets don’t reflect the reality of all of their bad loans, but where is all of the money coming from to pay back the gov’t? How can they have billions of dollars to pay back the gov’t and have billions of bad loans that aren’t paying a cent? That’s a huge disconnect to me.

        1. awgee

          Because at the time, no one wanted to buy their stock or bonds. They were selling for cheap and new issues would have caused the prices to fall further, ie. Citi today.

  22. very profitable

    Apart from their upside down mtg loan portfolios, banks are extremely profitable now onsidering their cost of money is near zero %. They make money on new mortgage loans, car loans, cc loans, and some of them make money servicing other mtg investor’s (bad) loans for fees. If they continue this way, they will make back more than their mtg loan losses and replenish their cash and balance sheets. This is done on purpose because policy mkers believe healthy banks are needed to have a functioning economy. That’s why you hear some law makers urging banks to lend more (to return the favor? ) but I doubt banks will lend unless it’s in their best interest to do so which is something some policy makers don’t seem to get.
    Needless to say this seems to come, in part, at the expense of savers getting near zero% for their money.

    I heard someone here (Geotpf) say that “right now, we are in a deflationary period, which is one reason why rates are so low”. That’s not why and wholesale prices were up. Interest rates are low because the banks are awash in cheap dollars, so they do not need to make any effort to lure savers to put their money to their banks.

    One more thing, banks can sell stock and raise even more cash to pay back Uncle Sam.

  23. awgee

    “What I find interesting is how much of the Option ARM problem has already been resolved (probably through foreclosure). If $750B was issued, and only $200B remains, only 20%-25% of the Option ARM problem remains — at least in the form of Option ARMs.”

    Where are you getting the above info from?

    1. IrvineRenter

      It is in the chart I borrowed from the other post. The amount outstanding is from a recent report. I don’t know where the amount of origination comes from.

      1. awgee

        Does the amount outstanding sound right to you? I once analyzed loans for the homes sold in Coto for year 2005, and IIRC, only about 10% were no longer still in effect. I will go back to my post and see if it jogs my memory.

    1. Major Schadenfreude

      Home builders losers? Nah…They will get $33 billion back courtesy of you:


      Now, I agree with you that the real losers are the apartment renters. They should have bought a home during the boom for no money down, stopped paying rent, saved up big time, and stuck it to the tax payer.

      “F” America, right? That’s what my county and its leaders are presently teaching me.

      1. tonye

        Obama offered change.

        Yes, change from responsibility…we’re all victims and we should all work for the Gov.

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