Option ARM Losses Surpass Subprime

Congratulations to Option ARM borrowers for costing lenders more in losses than subprime borrowers! Today's featured property is one of a number of two-bedroom condos sporting a wide range in asking prices.

14 WILDFLOWER Irvine, CA 92604 kitchen

Irvine Home Address … 14 WILDFLOWER Irvine, CA 92604

Resale Home Price …… $295,000


You're getting closer

To pushing me off of life's little edge

'Cause I'm a loser

And sooner or later you know I'll be dead

You're getting closer

You're holding the rope and I'm taking the fall

'Cause I'm a loser, I'm a loser, yeah.

This is getting old.

I can't break these chains that I hold

My body's growing cold

There's nothing left of this mind or my soul.

Addiction needs a pacifier, the buzz of this poison is taking me higher.

This will fall away, this will fall away.

Loser – 3 Doors Down

A particular borrower or loan category will be the biggest loser of the housing bubble. Subprime was an early front-runner, but loan amounts were small, so despite astronomical default rates and severe losses on a percentage basis, in absolute terms, subprime did not have the potential of Alt-A, and Prime borrowers nor the potential of Interest-Only and Option ARM loans to lay waste to lender balance sheets. Subprime is officially old news as we are all subprime now.

Option ARMs Surpass Subprime Mortgages in Loss Severity

Moody’s does not expect a bottoming of house prices before Q310, with another 11% national decline likely before the worst is over. These price declines, taken with rising unemployment, housing inventory oversupply and weak demand, are pressuring performance.

I also agree that we are not at a housing market bottom (also see: Deutsche Sees House Prices Falling Another 10 Percent).

On the heels of longer foreclosure and liquidation time lines “exacerbated by unsuccessful modification efforts” in 2009, loan loss severities worsened across all sectors, according to Moody’s.

Despite the fact that loan modifications make payments affordable people are defaulting in large numbers, particularly those with negative equity.

Option ARMs have surpassed subprime as the sector with the steepest loss projections for securities issued from 2005 to 2007, according to Moody’s. The rating agency now expects a 20% cumulative loss on ‘05 option ARM RMBS (from 11.7% in Q109), 41% on ‘06 securitizations (from 26.7%) and 51% on ‘07 securitizations (from 29.7%).

The loss severities are very high, but not unexpected. Option ARMs were loans about twice as large as they should have been if qualifying payments were applied to 30-year fixed-rate financing. IMO, before this is over, Option ARM loss severities will approach 70% and defaults will exceed 90%.

Delinquencies of 60 or more days, assets in foreclosure or held-for-sale rose “markedly” since the last Moody’s revision to option ARM RMBS projections in Q109. Serious delinquencies rose to 40.4% from 33.3% for ‘05 securities, to 47.3% from 38.6% for ‘06 securities and to 41.3% from 30.4% for ‘07 securities.

Forty-plus percent delinquency rates? That is remarkable! Nearly half of all Option ARM borrowers are living in a house rent and payment free, any many of these people have not faced their recasts yet!

Subprime soured, now Option ARMs fall out-of-the-money, so what is next? Loan poison creeps up the equity tree tainting higher branches: Alt-A Losses Outstripping Expectations, Moody’s Says, Prime Jumbo RMBS Delinquencies Swell to 9.2%: Fitch. No market segment is immune, and any borrower without fixed-rate financing at an affordable payment level is in peril.

Two-Bedroom Two-Bath Pricing

Today's featured property is one of the least expensive condos on the market at $295,000… which is rather disheartening when you think about it….

Other small condos for sale:

$350,000 — 241 HUNTINGTON Irvine, CA 92620

$395,000 — 209 ALICANTE AISLE #219 Irvine, CA 92614

$439,900 — 42 FABRIANO Irvine, CA 92620

I doubt any of the three sellers above are happy with an REO undercutting them by 20% or more.

Is being detached a premium worth $144,400 or $140/SF? Sharing dated interiors, the main difference between today's featured property and the last one on the list above is the degree of detachment. I think that premium is excessive, but the market will be the final arbiter.

14 WILDFLOWER Irvine, CA 92604 kitchen

Irvine Home Address … 14 WILDFLOWER Irvine, CA 92604

Resale Home Price … $295,000

Income Requirement ……. $61,990

Downpayment Needed … $10,325

3.5% Down FHA Financing

Home Purchase Price … $147,500

Home Purchase Date …. 4/29/1996

Net Gain (Loss) ………. $129,800

Percent Change ………. 100.0%

Annual Appreciation … 5.1%

Mortgage Interest Rate ………. 5.13%

Monthly Mortgage Payment … $1,551

Monthly Cash Outlays ………… $2,180

Monthly Cost of Ownership … $1,750

Property Details for 14 WILDFLOWER Irvine, CA 92604

Beds 2

Baths 1 full 2 part baths

Home Size 1,050 sq ft

($281 / sq ft)

Lot Size n/a

Year Built 1974

Days on Market 2

Listing Updated 1/28/2010

MLS Number P719435

Property Type Condominium, Residential

Community El Camino Real

Tract Db

According to the listing agent, this listing is a bank owned (foreclosed) property.

Charming two bedroom condo with detached two car garage. Spacious living room with fireplace and access to private patio; galley style kitchen; separate dining area; bedrooms have mirrored closet doors and private baths; street parking for guests. Perfect for small family or investor. Sold 'As Is'.

So how does a property double in value and become REO? You guessed it, HELOC abuse.

This property was originally purchased by a single man. The current owner appears on title later and ownership of this condo may have been transferred in a divorce.

  • The man purchased the property on 12/26/2002 for $270,000 using a $216,000 first mortgage, a $54,000 second mortgage, and a $0 downpayment.
  • On 6/18/2004 the now couple's first mortgage was refinanced for $315,000.
  • On 8/26/2004 they added a stand-alone second for $11,000.
  • on 10/26/2004 they refinanced the second for $29,000.
  • On 5/5/2005 they refinanced the second again for $36,000.
  • On 6/7/2005 they refinanced the first mortgage for $340,000.
  • On 6/14/2005 they added a stand-alone second for $36,000.
  • On 7/20/2005 they added a third mortgage for $11,000.
  • On 8/24/2005 they opened a HELOC for $75,000.
  • On 8/31/2005 they expanded the HELOC to $87,500.
  • Finally, on 4/12/2006 they refinanced the first mortgage for $472,500
  • Total cash investment by owners is $0.
  • Total property debt was $472,500 plus fees.
  • Total mortgage equity withdrawal is $202,500.

This owner invested nothing and managed to pull out $202,500.

May I have one of those?

42 thoughts on “Option ARM Losses Surpass Subprime

  1. AZDavidPhx

    Out in AZ’s neck of the woods, we have had some pretty spectacular knife catches. One of the nearby depressed prime areas reminds me of Irvine in many ways; guard gates, fancy pants construction, ponds in the backyard with boats!

    Here are a handful that I just quickly grabbed from Zillow – there are a lot more where this came from.


    I dedicate that image to anyone who thought that buying in 2007 or 2008 was a good idea.

    Is Irvine going to be different?

    1. IrvineRenter

      Prices will come roaring back, we will surpass the peak in a year or two, and everyone who bought real estate for appreciation will be proven right.

      Delusions are very comforting, aren’t they?

      1. AZDavidPhx

        You don’t hear much of this in the media. They like to talk and write stories about people who bought houses before the peak.

        Pretty much never hear anything about those who bought after.

        I just hope that the banks forced these buyers to put down some significant cash to absorb the loss. But then again – Irvine has nice weather.

        I suspect this is going to happen in Irvine when all the bubble equity house swappers exhaust themselves.

      2. minou270

        The Irvine Company seems to think so considering how they are touting the success of selling overpriced little boxes in Woodbury this past weekend. I happen to rent in Woodbury and there were a lot of people looking at the models. Do you think the response to the new homes means anything?

        1. Swiller

          Your damn skippy it means something. It means that people who have common sense and waited to buy, are ready for an AFFORDABLE home. Might as well look to Irvine and see what the big event is!
          I wouldn’t be surprised to see many of the Irvine Co. homes sell……to asians. Chinese love Irvine and in the past few years, many many THOUSANDS have moved here.
          It’s just the way it is now, So.Cal is a global market…and the more word spreads in China, the more people that want to move here. Hell, I’m surprised Congress isn’t selling citizenship’s for $25,000 k apiece….nothing is sacrosanct anymore to these slimeballs.
          On a side note…WTG Mission Viejo…booting a politician I LOVE IT!!!

          1. Jeff

            The US has sold citizenship since 1990, but the price is more than $25K.

            Foreigners can get an EB-5 visa and a green card by investing $1M to start or support a business in a way that will add at least ten jobs. ($500 K in economically depressed areas). As long as you don’t commit any serious crimes, that green card can be traded in for citizenship after some time passes. Participants in this program don’t have to wait in the usual long lines for standard immigration.

        2. Architect Dave

          I went to the event, and I have NO intent of buying anytime soon! Hey, they had free cookies, coffee and bottled water! I think most people there were just looky-loos like myself. hahaha.

    2. Planet Reality

      “One of the nearby depressed prime areas reminds me of Irvine in many ways; guard gates, fancy pants construction, ponds in the backyard with boats!”

      That’s where similarities end I’m afraid, in fact I’m sure those houses are nicer than the ones selling for $1M in Irvine today, with 20% cash down payments.

      1. AZDavidPhx

        I do prefer late 80’s early 90’s vintage. Anything built during the mania 98-07 is highly questionable to me as my instintcs alert me that it was most likely built as quickly and cheaply as possible with whatever craftsmanship could be mustered.

        1. DarthFerret

          Don’t kid yourself, the 70’s and 80’s were no better. And they might not even benefit from modern innovations like whole-house fans, extra electrical outlets, extra phone/internet/cable wall connections, double-paned windows, extra insulation, etc. And 60’s/70’s/80’s houses can be very quirky. Ever see the sinks/faucets installed in one of the spare bedrooms? What’s up with the half-hearted attempt at installing a wet bar? Good thing that disco died before that caught on.

          When it comes to quality workmanship and durability, U.S. housing sucks. Makes me long for the steel and concrete/masonry housing that I became familiar with while living in Germany. Those will still be standing 100 years after our stucco boxes have been demo’d for something new. Of course, modernization/remodeling can be difficult on a steel/concrete house.


          1. SoOCOwner

            Your are correct, about U.S. housing quality. Our home was built in So County in 1993. When we had to do some repair work to the walls, we found beer cans (in the walls). Within two months of moving into the home, it leaked so badly that the entire back of the home had to be removed down to the studs. The builder’s VP came to our home to try and appease us. He brought an invoice stating they had spent 15k “repairing” our home. We were younger back then, but not stupid. My husband told him that if it had been done properly in the first place, there wouldn’t have been an issue. He suggested that they sue the subs. Geez…

          2. ockurt

            Hi Darth,

            There still is some housing made with reinforced steel-especially the 3 level floorplans like we have. I didn’t know that until I tried installing some shelves…doh

  2. Sue in Irvine

    This condo looks like it’s stuck in there. What’s that saying, between a rock and a hard place?

    1. IrvineRenter

      The front elevation is beyond hope. The picture fails to capture the true ugliness as the shadow of the tree breaking up that large blank face provides character and interest where none exists.

      1. ockurt

        Would this place make a good rental without the extra full bath?

        I wouldn’t move into this place if I suffered from depression or some other disorder.

        1. Anthony

          Don’t laugh just yet.
          Who managed to skim out of this place a cool 200K?
          —-> The guy who bought it with Zero, Zil down.
          Who is holding the bag now?
          —-> Us, me and you, the taxpayers.
          So who’s with the depression at the end?

  3. es

    IR, do you think this property is a good purchase at this price? Is that rental parity down there? what’s the payment on that… $1500/ month? Sounds like rental parity… but I’m in the bay area. We’re even more skewed.

    1. IrvineRenter

      The price is close to rental parity, but no, I don’t think it is a good price.

      Your market in the Bay area is stubbornly inflated. I hope we haven’t doomed everyone there to a lifetime of debt servitude to pay for those overpriced homes.

  4. AZDavidPhx

    Ken Lewis of BoA being charged with fraud over the Merrill Lynch acquisition.

    The claim is that the toxic junk on the Merill Lynch balance sheet was sugarcoated to “mislead” shareholders into approving the deal.

    BoA then is alleged to have threatened to terminate the deal if the government did not cough up some taxpayer money in additional aid.

    They then went and paid out bonuses to former Merrill employees.

    Ok, maybe I am just being dense but where is the fraud on the part of BoA? As much as I detest them – I am not making the connection between the dots.

    If Merrill losses were understated then shouldn’t the indictment be flung their way?

    Was the government not arranging shotgun marriages between these organizations?

    If I were running a bank and the government wanted me to acquire a failing bank, I’d want aid as well. Why go along with it otherwise?

    They say “bonuses” but aren’t those just “severance” bonuses that would normally be paid out when a company is acquired and the redundant jobs eliminated?

    What did Lewis stand to gain from the big conspiracy? I don’t get it.

    1. Swiller

      If I remember correctly, Ken Lewis did NOT want Merrill, but the good ol’ boys WE elected into office, used threats and coercion to get him to do it. He resigned shortly after. I’m thinking they now want to use HIM as a scapegoat to cover their trail. I say bring the members of Congress up on charges.

      1. nefron

        Yeah, that’s the impression I have, too. I thought I was the only one who wasn’t connecting the dots.

      1. Anthony

        Does this rule apply for this guy’s case? He probably went through several rounds of refi. On top of this, he had second, also through refi several times.

        1. Swiller

          Doesn’t matter. 2nd mortgages are non-recourse as well if they were used to purchase the home. Great…now the guy who used NOTHING to buy the home walks, while the guy who waited and then got a HELOC to fix the house up…he loses his house AND gets sued. Way to reward foolish behavior. HELOC collection is stopped cold with a Chapter 13 or Chapter 7.
          I have a HELOC on my house, think it will get paid if I decide to walk from my house? You are correct…it will not. $4k for a chapter 13….even LESS for a chapter 7. People need to fight back against the fraud that was perpetrated.

          1. AZDavidPhx

            I wonder how much longer the banks are going to be able to scare us little piggies with their FICO machine.

            What does it matter when everybody has a 500 “score” and having a bankruptcy foreclosure on your record is regarded as a badge of honor socially?

            I have always hated how they rig up a number so that the majority of folks are a hair’s length away between “Average” and “Complete Deadbeat” and then threaten to lower us to Deadbeat status if we do not bend over for them and their business partners.

          2. awgee

            IIRC, Fair Issac is an fiercely independent entity with no afiliation with banks or any other organization. Fair Issac refuses to share with lenders or anybody else how they calculate their credit scores.

          3. newbie2008

            I’m no lawyer, but I think the CA one action rule would apply instead of the CA non-recourse rule on purchase loans. this was refin money and not purchase money.

            This guy is a novice:
            Total cash investment by owners is $0.
            Total property debt was $472,500 plus fees.
            Total mortgage equity withdrawal is $202,500.

            Only took the banks for $200k. I was at a TRidge house where a mortgage broker took the bank for 4400k in less than 2 years. Or the Newport owner who took the bank for 1.6 million. Opps. My mistake, the banks just rolled the loss to the taxpayers, so we’re holding the bags of …. It’s the common man acting like the WS banksters.

            I don’t think these “condo” are good investment at this time with so many non-paying HOA members. The reserves are going rapidly to pot and the paying members will be made to pay for the non-paying HOA members/units. I think back due HOA are wiped out on FC. What do you say IR?

          4. Swiller

            I’ve been doing some apartment hunting….just in case. Every community I have visited I have asked right from the beginning…”I just foreclosed on my home, will it keep me from renting?”
            Every…EVERY response I received back was positive and they vehemently said it will *not* affect your ability to rent.
            I’ve talked to many, many people here in CA that are either losing their homes, or thinking about walking. I encourage them to walk if they are $100,000 or more underwater. I don’t care what the effect is to the bank, I hope the banksters get sentenced to prison.

          5. MalibuRenter

            ” wonder how much longer the banks are going to be able to scare us little piggies with their FICO machine.”

            Well, if people don’t buy anything on credit, not long at all.

  5. Stock Investor

    “DarthFerret: Makes me long for the steel and concrete/masonry housing that I became familiar with while living in Germany. Those will still be standing 100 years …”

    One really deadly problem: there are earthquakes in California. Wood frame structure (1-2 stories) may survive even high magnitude earthquakes.

  6. MalibuRenter

    “A particular borrower or loan category will be the biggest loser of the housing bubble.”

    I’m expecting there to be an individual who loses well over $30 million dollars on something which is at least called a single family home.

    1. Planet Reality

      When it happnes you should write a sincere informational letter to the thousands who made over $30M on the opposite side of the trade; at the expense of the insurance companies and banks, scratch that, at the expense of the tax payer.

      Thank yourself for making it possible.

    2. Chuck Ponzi

      Yes, his name is Nicholas Cage.

      Google it and you’ll see what I mean.

      For example, what reason did he need to buy a castle in Germany?

      That was stupid.

      Chuck Ponzi

  7. Chris

    OT a bit of good news for those of us that are longing for housing price to be ‘affordable’.

    A few days ago, I saw a short sale listing on what I assumed was a SFH listed as a condo (why it’s that, I have no idea) in the better part of the Bay Area (granted, it’s not Irvine, but somewhat close). I couldn’t believe my eyes when I saw the price listed *below* $500k while smaller size condos/townhouses at the same community (it was a newer community that I bought back in the bubble days but have sold before the burst) were listing between $550k and $570k. Although the pictures haven’t been posted, I was somewhat sure it was a SFH and not a condo as listed.

    Well, today was a pleasant surprise (as well as the 200+ pts drop in the bubbly DJIA) as I finally saw a few pictures of the house. Yep, my speculation was correct.

    The condo sellers must be pissed 🙂

  8. Chris

    i think the reason this one is so cheap, is that it is right up against the wall next to the railroad

  9. Curtis LeMay

    “DarthFerret: Makes me long for the steel and concrete/masonry housing that I became familiar with while living in Germany. Those will still be standing 100 years …”

    What about the ones built in 1910? Oh yeah, B-17s.

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