The FHA is raising the insurance premium on the loans it insures. This will make FHA bids lower and may impact low-end pricing.

Irvine Home Address … 263 TANGELO #354 Irvine, CA 92618

Resale Home Price …… $298,900

Divided by destiny

Torn between death and doom

Destruction by decision

Fate shows me my open tomb

Trivium — Torn Between Scylla and Charybdis

The FHA has to navigate the waters between qualifying enough borrowers to absorb the foreclosure inventory and qualifying too many borrowers who fail to make their payments and end up as foreclosures. If they error to the conservative, house prices fall because demand is curtailed. If they error to the permissive, the government is going to pay for a huge bailout.

The FHA stabilized the housing market by providing low-interest and low down payment loans to buyers when private institutions were unable and unwilling to do so. The FHA's market share typically runs from 8%-10% of the market, but it fell to 2% during the housing bubble as asset-backed security (ABS) loans took its market share. In the aftermath of the credit crunch and the withdrawal of private investment from unbacked mrtgages, the FHA's market share has climbed to over one-third of the mortgage loan market. The FHA and the GSEs insure over 95% of mortgage loans in the United States.

Since the down payments on FHA loans are only 3.5%, there is no real equity cushion for borrowers. After transaction costs, borrowers are 2.5% underwater when they leave the closing table. The lack of equity contributes to strategic default, particularly in markets that have continued to decline since FHA loans became prevalent.

To combat the problem of losses on FHA loans, Congress just passed an increase in the FHA insurance premium to help head off a government bailout. I have my doubts about how successful they will be — or if anyone in government really cares.

Bill to Let FHA Raise Annual Premiums Heads to Obama

Thursday, August 5th, 2010, 4:18 pm — Diana Golobay.

The Senate approved its versions of HR 5872 and HR 5981, which would respectively raise the Federal Housing Administration's (FHA) multifamily commitment authority and allow it to hike its annual premiums for its single-family program.

Both bills now travel to the desk of President Barack Obama to be signed into law.

HR 5981, which also passed the House of Representatives last week, would allow the FHA to raise its annual premiums for the single-family program, raising the statutory cap rate to 1.55% from 0.55% — a flexibility that could ultimately reduce the cost of credit insured by the FHA, according to the Mortgage Bankers Association (MBA).

"While premium increases are never ideal, this bill was necessary to help improve the strength and stability of FHA's single family programs," said MBA chairman Robert Story Jr. "We are encouraged that FHA Commissioner [David] Stevens has indicated he may not need to raise premiums to the maximum, and we believe that that a small increase in the annual premium, coupled with a decrease in FHA's upfront premium [calculated in the chart below, from the FHA], will help stabilize FHA while lowering closing costs for many borrowers."

The annual premium raise will provide approximately $300m of additional insurance per month to the FHA's Mutual Mortgage Insurance (MMI) Fund, according to Stevens.

"I thank Congress for giving FHA the flexibility to adjust its annual premium at a time when our reserves are perilously low," he said. "With this authority, FHA is in a better position to address the increased demands of the marketplace and return the MMI fund to its congressionally mandated level without disruption to the housing market."

Stevens added: "While we appreciate and applaud this recent action, there is still work to be done. [The US Department of Housing and Urban Development] remains steadfast in its commitment to comprehensive FHA reform legislation, similar to the FHA Reform Act passed earlier this year by the House, which would further enhance FHA's lender enforcement capabilities and risk management efforts."

The MBA noted that the broader FHA Reform Act passed the House in June but has yet to be considered by the Senate.

HR 5872, which passed the House of Representatives last week, increases FHA's commitment authority for its multifamily insurance programs by $5bn for the remainder of the fiscal year — which ends at the end of September.

Without the increase, the FHA would have exhausted its current authority sometime in mid-August, according to the MBA.

I have advised people to Use FHA Financing: Loan Assumption is the Appreciation of the Twenty-Teens. Of course, the ability to assume a loan and only put 3.5% down comes at a price. As that price continues to go up, the advice may become less valid.

The advantage and value of assumability becomes greater the more interest rates go up. If five or ten years from now we are back at 9% interest rates, an assumable 4.5% interest rate will have significant value. If we are still in the 5% to 6% range, assumablity won't make a significant difference.

FHA Set To Increase Annual Mortgage Insurance Premium

By Jessica Holzer — Thursday, 5 August 2010

… The FHA doesn't make loans; it backs mortgages for borrowers who pay a minimum 3.5% downpayment and meet the agency's other standards.

People often misunderstand the role the FHA plays. It does not actually make loans, it merely provides insurance to loans underwritten to a certain standard. IMO, this is the ultimate fate of the GSEs — if they survive at all.

"I remain cautious because the big uncertainty is what house prices are going to do," Stevens said.

The FHA's business has ballooned during the housing bust as home buyers have struggled to get conventional financing. The agency's market share rose to about one-third of the mortgage market last year, up from 2% in 2006. Together, the FHA and government-run mortgage insurers Fannie Mae (FNMA) and Freddie Mac (FMCC) are providing backing for more than 95% of new U.S. mortgages.

In an effort to shore up its finances, the FHA has expelled more than a thousand lenders from its program in recent months and tightened its credit standards. For example, it now requires borrowers with down payments of less than 10% to have credit scores of at least 580.

A 580 FICO score is not a particularly high standard.

Still, many critics argue the agency needs to go much further if it wants to avoid a taxpayer bailout. House Republicans pushed unsuccessfully earlier this year to raise the minimum FHA downpayment to 5%.

The reason the increase to 5% was defeated was due to the fact such and increase would have dramatically diminished an already depleted buyer pool. Most FHA loans have the bare minimum 3.5% down payment because so few people have saved any more than that.

Stevens said the higher premiums are "a significant step" for attracting private capital back to the mortgage market because private mortgage insurers were having difficulty competing with the government's pricing.

Do we really need a large private mortgage insurance market? Is there something wrong with the FHA standard? Call me a socialist if you like, but I don't have a problem with the government providing insurance that crowds out the private sector. If the government does a good job, the insurance is much less expensive, and if it doesn't do a good job, the private insurers can fill in the gaps.

But he acknowledged that, in the current environment, the private sector doesn't have much appetite for mortgage risk.

No kidding.

According to Mortgage Bankers Association Senior Vice President Steve O'Connor, "The FHA is still going to be the only game in town in the near term for lower-income and cash-strapped borrowers."

In other words, the FHA is the only game in town. After the huge debt orgy we witnessed during the bubble and the ugly recession that followed, everyone is cash-strapped.

The hardest working condo yet

The people who bought at the bottom of the last cycle in 1997 obtained the full advantage of the housing ATM. For those that utilized it, they managed to spend every penny of appreciation. It is more convenient to sell the property to the bank over and over again while prices go up because the bank will still let you live there after prices go down and you quit paying. Plus, you can still consider yourself a homeowner even though all you really have is a loan with no equity. Banks really did make the deal irresistible.

• The previous owner of this property paid $93,000 on 2/24/1997. They used a $50,000 first mortgage and a $43,000 down payment. At least it started out well.
• On 12/28/2000 the owners obtained a $55,000 HELOC and pulled out their down payment plus a few bucks spending money.
• On 7/12/2001 they refinanced with a $111,000 first mortgage.
• On 3/3/2003 they refinanced again with a $155,400 first mortgage.
• On 3/1/2004 they obtained a $70,000 HELOC.
• On 8/27/2004 they refinanced the first mortgage for $276,000.
• On 1/26/2005 they obtained a stand-alone second for $67,800.
• Total property debt was 343,800.
• Total mortgage equity withdrawal was $293,000 including their down payment. That is an astonishing amount on a small condo.
• Total squatting time is difficult to measure. They went delinquent in early 2007, got a loan modification, and re-defaulted in 2010.

Foreclosure Record

Recording Date: 05/19/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 02/16/2010

Document Type: Notice of Default

Foreclosure Record

Recording Date: 11/08/2007

Document Type: Notice of Rescission

Foreclosure Record

Recording Date: 08/13/2007

Document Type: Notice of Default

Irvine Home Address … 263 TANGELO #354 Irvine, CA 92618

Resale Home Price … $298,900

Home Purchase Price … $230,000

Home Purchase Date …. 6/8/2010

Net Gain (Loss) ………. $50,966

Percent Change ………. 22.2%

Annual Appreciation … 168.0%

Cost of Ownership

————————————————-

$298,900 ………. Asking Price

$10,462 ………. 3.5% Down FHA Financing

4.60% …………… Mortgage Interest Rate

$288,439 ………. 30-Year Mortgage

$59,103 ………. Income Requirement

$1,479 ………. Monthly Mortgage Payment

$259 ………. Property Tax

$0 ………. Special Taxes and Levies (Mello Roos)

$25 ………. Homeowners Insurance

$250 ………. Homeowners Association Fees

============================================

$2,013 ………. Monthly Cash Outlays

-$136 ………. Tax Savings (% of Interest and Property Tax)

-$373 ………. Equity Hidden in Payment

$18 ………. Lost Income to Down Payment (net of taxes)

$37 ………. Maintenance and Replacement Reserves

============================================

$1,559 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$2,989 ………. Furnishing and Move In @1%

$2,989 ………. Closing Costs @1%

$2,884 ………… Interest Points @1% of Loan

$10,462 ………. Down Payment

============================================

$19,324 ………. Total Cash Costs

$23,800 ………… Emergency Cash Reserves

============================================

$43,124 ………. Total Savings Needed

Property Details for 263 TANGELO #354 Irvine, CA 92618

——————————————————————————

Beds: 2

Baths: 1 bath

Home size: 864 sq ft

($346 / sq ft)

Lot Size: n/a

Year Built: 1978

Days on Market: 23

Listing Updated: 40371

MLS Number: U10003021

Property Type: Condominium, Residential

Community: Orangetree

Tract: Cm

——————————————————————————

Welcome to the quiet and secluded Orangetree community of Irvine. This cozy 2 bedroom, 1 bath condo features an additional bonus loft with extra large storage room. Fully upgraded kitchen features new countertops and appliances, newer flooring and cabinets, and an open layout, perfect for entertaining. The living area features original hardwood flooring, a spiral staircase leading to the loft, and a large sliding door that allows for plenty of natural sunlight opening to a large outdoor patio space. The bedrooms have been upgraded with new paint and carpet and the bathroom features new porcelain tile flooring, fixtures, and stainless steel detailing. Enjoy the scenic views and peaceful sounds of the flowing creek just below your patio while you BBQ with friends!

I hope you have enjoyed this week, and thank you for reading the Irvine Housing Blog: astutely observing the Irvine home market and combating California Kool-Aid since 2006.

Have a great weekend.

Irvine Renter

The market has a funny way of dealing with financial folly: crashing house prices have turned off the housing ATM and stopped HELOC abuse… for now.

Irvine Home Address … 43 LEUCADIA #76 Irvine, CA 92602

Resale Home Price …… $539,000

She dreams of cheap land, children,

Towels labeled his and hers

Plaster ducks in pairs

Flying up the stairs

Some of that piggy bank lovin'

Some of that piggy bank lovin'

Some of that piggy bank lovin'

Piggy bank love

Piggy bank love

The Bonzo Dog Band — Piggy Bank Love

Everyone in California loves that Piggy Bank in their house. Most people here are so kool aid intoxicated that they take the free money for granted. It is just another California entitlement.

Americans Tap $8.3 Billion in Home Equity, Least in a Decade

Americans in the second quarter tapped the smallest amount of home equity in a decade, showing households are focused on repairing tattered finances.

No. It shows that households don't have any home equity left and that the housing ATM has been turned off. The writer of this article is implying the lack of mortgage equity withdrawal is a prudent choice of wise financial managers. Do any of you believe that?

Owners took out $8.3 billion while refinancing prime home loans as borrowing costs dropped from April through June, down from $8.4 billion in the previous three months and the least in 10 years, according to a report today by McLean, Virginia-based Freddie Mac. Twenty-two percent chose to reduce loan principal, matching the third-highest rate since records began in 1985.

Hurray! People are paying down their mortgages. Paying down debt is always the wisest choice. Debt is not tool, and sophisticated people do not use it to finance their daily lives. Posers do.

Instead of extracting cash to binge on everything from cars to vacations as in previous recoveries, owners are refinancing to improve terms and reduce mortgage payments. The mending of household balance sheets means consumers will be in a better position to join the recovery once employment picks up.

“It’ll put consumers on firmer ground going forward,” said Michael Bratus, an economist at Moody’s Economy.com in West Chester, Pennsylvania. “It’ll give consumers more confidence.”

If it were only true. In reality, it will provide a litte more capacity to hold and service debt which is what most fools will do.

A report yesterday from the Conference Board in New York showed confidence dropped in July to a five-month low on concern about jobs and wages. Americans may eventually become less pessimistic as they repair balance sheets and their financial situation improves.

So-called cash-out loans, in which borrowers increase their loan amounts by at least 5 percent, accounted for 27 percent of all refinanced loans in the three months to June, capping the lowest three-quarter share on record. Cash-out refinances peaked at 88 percent in mid 2006.

OMG! Eighty-Eight percent of refinances took out cash in 2006. Does anyone still doubt that we had a HELOC Economy?

No ‘Cash-Out Boom’

“This is a rate-and-term refinance boom as opposed to a cash-out boom,” said Michael Larson, a housing analyst at Weiss Research in Jupiter, Florida. “Five years ago you had people liquidating equity to finance debt-fueled consumption. Now, refinancing gives them breathing room.”

Figures from the Mortgage Bankers Association signal the drive to take advantage of record-low mortgage rates has accelerated this month. The group’s refinancing gauge for the week ended July 16 reached the highest level in a year. Refinance applications accounted for 79.4 percent of all mortgage requests, the most since April 2009.

This is a misleading use of statistics. There has been no acceleration in refinances. The reason refiance applications accounted for a higher percentage of total applications is because applications for purchase are at record lows. That is also why interest rates keep falling. The supply of money available exceeds the number of applicants that demand it, so competition to put that money to work is forcing interest rates lower.

Ron Keating, a 50-year-old federal employee in Woodbridge, Virginia, said he lowered his monthly mortgage payment by about $150 after refinancing.

“The less I pay, the better,” he said in a telephone interview.

Borrowing Costs

The average rate on a 30-year fixed mortgage fell to a 4.56 percent in the week ended July 22, the lowest since Freddie Mac, the second-biggest buyer of U.S. mortgages after Fannie Mae, began keeping records in 1971. At that rate, monthly payments for each $100,000 of a loan would be about $510, down about $40 from a year ago when the rate was 5.2 percent.

The median homeowner cut their mortgage rate by 0.9 percentage point in the second quarter, according to Freddie Mac. On a $200,000 loan, that would lead to a savings of $1,300 in the first year.

The money will contribute to a pickup in growth over the next two years, according to a forecast by economists at Moody’s Economy.com. They project consumer spending, which accounts for 70 percent of the economy, will grow 3 percent in 2011 and 4.5 percent the following year. Purchases are likely to climb 2.1 percent this year.

I would be remiss if I didn't point out that not everyone thinks that consumer spending is 70 percent of GDP.

The effect of HELOC abuse — and now the lack thereof — has been obvious here in California. The chart below from Calculated Risk shows just how dramatic the decline in MEW has been:

U.S. “Home Equity” Loans Revealing

A Bloomberg headline today read “Americans Tap $8.3 Billion in Home Equity, Least in a Decade”. This is indeed a very news-worthy figure. Sadly, you won't learn anything about this issue from reading Bloomberg's ridiculous “spin” of this news.

At the peak of the U.S. housing-bubble, Americans were initiating more than $800 billion/year of such loans. They are now on a pace to take-out loans amounting to less than 5% of that gargantuan figure…and yet this same, propaganda-machine talks about a “recovery” in the housing market.

Wow! A 90% reduction in MEW. No wonder the economy is sputtering.

“It'll put consumers on firmer ground going forward. It'll give them more confidence,” quotes Bloomberg, from an “economist” named Michael Bratus. Note the use of contractions to make his statement sound like a “cheer”. The only thing he forgot to add was “Rah! Rah! Rah!”

If only Americans were getting on “firmer ground”, and thus had any reason to be more “confident”. Here's what is happening in the real world. After going on the most insane borrowing-binge in the history of our species, based upon all the “home equity” which Americans thought they had, that “equity” has all evaporated – but the trillions in debt remain.

The result: Americans hold less “equity” in their homes than at any time in history: not during the Great Depression, nor at any other time. Indeed, for the first time in history U.S. banks hold more equity in U.S. residential real estate than American “homeowners” themselves. U.S. “home equity” loans have collapsed not because Americans are “repairing their balance sheets” (as the Bloomberg propaganda suggests).

Instead, U.S. homeowners (except for the small minority with full-ownership of their homes) are leveraged-to-the-hilt with debt – and can't afford to borrow one more penny. Secondly, the banks won't lend these over-leveraged consumers any more money. And third, there is no “equity” to borrow against. You can call this process “repairing balance sheets” – as long as you include the observation that it will take a full generation to “repair” the damage of the Wall Street-induced credit-stampede (for those homeowners who survive the process).

Then Bloomberg gets plain silly. “This a rate-and-refinance boom as opposed to a cash-out boom,” quotes Bloomberg, this time citing a suit-stuffer named Michael Larson (identified as a “housing analyst”).

“Hello” Mr. Larson! Home-equity loans collapsed to less than 5% of their peak, which at least 95% of English-users would describe as a “crash”. One can only wonder what numbers it would take to cause this “housing analyst” to use the word “crash” instead of “boom”. One might even suspect that this “housing analyst” makes more money in a strong real estate market – and so his characterization might be a tiny bit biased.

The only truth in Larson's statement was his observation that the only activity taking place this in this market is respect to the (small number of) credit-worthy borrowers who are able to take advantage of the zero-percent-panic-interest-rates to refinance a minute piece of this mountain of debt (no more than 1%). Other than that, this market is dead.

The problem is that these over-leveraged “homeowners” are now about to face a worse, and much, much longer collapse in the U.S. housing market – which will make the collapse after the first housing-bubble look like nothing but a passing, bad-dream. What is ahead will be nothing less than a waking nightmare. There are no surprises here. A second collapse of the U.S. housing market was always 100% certain – but the Obama regime can be "thanked" for making it worse, courtesy of the second "bubble" they created in this market.

All of this has been detailed in recent commentaries, so I won't bore regular readers by re-hashing it. Instead, it is time to once again remind readers where this is leading. As I have maintained since shortly after the U.S. housing burst, and hidden facts began to emerge, this was a deliberately manufactured bubble (i.e. a deliberate scam) – which was designed to do exactly it has done: to rapidly accelerate the transformation of middle-class, Americans to poor, 21^st century serfs.

Indeed, we are already very close to the definition of a “serf”: someone who toils for a mere “subsistence” living – where all they are able to do is barely buy enough food to survive, while they pay “rent” to their “landlords” (the banks).

The banks “own” these homes, not the “homeowners”. For at least 25% of these “homeowners”, the balance owing is either so large that they could never pay-off their mortgage, or only do so through ultimately paying two or even three times what these homes are worth. The extremely modest number of “mortgage modifications” only seek to stretch-out the length of these mortgages. While that results in lowering current, monthly payments (and may make it possible to “service” the mortgage), it can add up to $100's of thousands of dollars (in extra “interest”) on what the “homeowner” must pay – to actually become a homeowner.

In short, for a rapidly growing segment of the U.S. population, they can either never become true “homeowners” (and are thus destined to always be “serfs”); or, their “freedom” from their banker/landlord can only be “purchased” by paying many times what these homes are really worth. Now, with the “second bubble” having burst, this trend is going to accelerate exponentially: as housing prices fall, “equity” continues to evaporate, loan-terms get stretched-out, wages continues to fall, and more and more simply lose their jobs; the transformation from “homeowner” to “serf” will progress relentlessly.

I love that rant. I have nothing to add.

I am not quite as bearish and as pessimistic as the author of that piece, but I share his attitude toward debt and the impact this mountain of debt is having on our economy and our society. Besides writing about the perils of debt, I do the only thing I can — I don't have any.

Another HELOC implosion

• The previous owner of today's featured property paid $520,000 on 12/1/2003. She used a $389,925 first mortgage, a $77,985 second mortgage, and a $52,090 down payment.
• On 11/2/204 she obtained a $145,000 HELOC.
• On 4/15/2005 she refinance with a $487,500 Option ARM.
• On 6/24/2005 she got a $102,900 HELOC.
• Total property debt was $590,400.
• Total mortgage equity withdrawal was $122,490.
• Total squatting time was about 18 months.

Foreclosure Record

Recording Date: 07/24/2009

Document Type: Notice of Sale (aka Notice of Trustee's Sale)

Click here to get Foreclosure Report.

Foreclosure Record

Recording Date: 03/16/2009

Document Type: Notice of Default

The flipper that bought this property was probably counting on a further bump in prices this summer. It didn't happen. They have been lowerin their price and reducing their margins. Like the another property they bought in Irvine, they did nothing to improve it. We are still a pergraniteel market, and flippers who don't make the necessary improvements don't get the prices they want.

If you would like to learn how you can get involved with trustee sales, please contact me at sales@idealhomebrokers.com.

Irvine Home Address … 43 LEUCADIA #76 Irvine, CA 92602

Resale Home Price … $539,000

Home Purchase Price … $465,600

Home Purchase Date …. 5/25/2010

Net Gain (Loss) ………. $41,060

Percent Change ………. 8.8%

Annual Appreciation … 60.0%

Cost of Ownership

————————————————-

$539,000 ………. Asking Price

$107,800 ………. 20% Down Conventional

4.60% …………… Mortgage Interest Rate

$431,200 ………. 30-Year Mortgage

$106,579 ………. Income Requirement

$2,211 ………. Monthly Mortgage Payment

$467 ………. Property Tax

$120 ………. Special Taxes and Levies (Mello Roos)

$45 ………. Homeowners Insurance

$282 ………. Homeowners Association Fees

============================================

$3,125 ………. Monthly Cash Outlays

-$371 ………. Tax Savings (% of Interest and Property Tax)

-$558 ………. Equity Hidden in Payment

$186 ………. Lost Income to Down Payment (net of taxes)

$67 ………. Maintenance and Replacement Reserves

============================================

$2,449 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$5,390 ………. Furnishing and Move In @1%

$5,390 ………. Closing Costs @1%

$4,312 ………… Interest Points @1% of Loan

$107,800 ………. Down Payment

============================================

$122,892 ………. Total Cash Costs

$37,500 ………… Emergency Cash Reserves

============================================

$160,392 ………. Total Savings Needed

Property Details for 43 LEUCADIA #76 Irvine, CA 92602

——————————————————————————

Beds: 3

Baths: 3 baths

Home size: 1,826 sq ft

($295 / sq ft)

Lot Size: n/a

Year Built: 2002

Days on Market: 50

Listing Updated: 40374

MLS Number: S620673

Property Type: Condominium, Residential

Community: Northpark

Tract: Mont

——————————————————————————

TURNKEY STUNNER IN HIGHLY SOUGHT AFTER NORTHPARK COMMUNITY! Can close in 30 days or less. Not a short sale or REO. Freshly painted throughout and NEW carpet. The room design of the living room, kitchen and dining area allow for maximum enjoyment of this open floor plan with soaring ceilings. Enjoy preparing meals in your gourmet kitchen with an abundance of cabinet space and breakfast bar. NEW 18×18 Ceramic tile in Kitchen, bathrooms and upstairs laundry room. Master suite boasts walk-in closet, vanity area, dual vanities, large oval soaking tub and separate shower. Laundry room conveniently located upstairs. Within walking distance to Beckman High and Northpark square Plaza for shopping! TUSD schools share an excellent reputation for education and have a top notch staff. Association Ammenities include, Basketball Court, pool, Children's play areas, park, picnic and barbecue areas!

Today's featured property is the largest loss in Irvine to date at $2,650,000. Will the flipper turn it around, or will he be a knife catcher?

Irvine Home Address … 29 BLACK HAWK Irvine, CA 92603

Resale Home Price …… $3,599,999

This time, you have to face your future

Although it’s just a dusty road

It’s clear that backing down don’t suit you

I’d hate, to break your sacred code

People, along for the ride

High noon, getting closer

I think you’ll find, everybody loves a loser

So you’ll be fine, you won’t be lonely long

Morcheeba — Everybody Loves a Loser

I recently wrote a post titled How to Lose $1,100,000 in Irvine Real Estate. That condo in the North Korea Towers was the largest closed-sale to closed-sale loser I had seen to date. Today's featured property shatters that record.

This property was purchased in 2005 for $5,925,000. It was purchased at auction in 2010 for $3,275,000. The closed-sale to closed-sale loss is $2.650,000.

A $4,485,000 Option ARM!

This is perhaps the worst loan I have seen to date. Washington Mutual underwrote a cash-out refinance for $4,485,000 to the previous owner of this property. WTF!

This property was purchased on 5/9/2005 for $5,925,000. The owner used a $4,147,500 Option ARM first mortgage and a $1,777,500 down payment. Apparently, this owner is a big developer in Las Vegas. He was probably solvent when this loan was made. The prospects for recovery are pretty grim right now.

On 12/15/2006 he refinanced with a $4,485,000 Option ARM. I guess he needed $350,000.

It's loan like these that inflated high end prices beyond all reason, and it is the delinquency on these loans and eventual liquidation that is going to cause the high end to come tumbling down. With delinquency rates on $1,000,000+ loans over 15%, this isn't a one-off. This is one of many where the owners aren't paying. Since most of these jumbo loan are held on the balance sheets of banks, we aren't seeing the distressed properties hit the market yet. But since this one was WAMU, which is backstopped by the FDIC, Chase is liquidating its holdings. More will follow.

Foreclosure Record

Recording Date: 06/15/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 03/11/2010

Document Type: Notice of Default

Nerves of steal

If I had access to that kind of cash, I would not have touched this deal. I don't care how steep the price reduction is, there is almost no market for properties at these price points, and there is no valuation metric I trust. The flipper who bought this put $3,275,000 of his own cash down to buy a property he really has no idea what he can sell for. Maybe he will make the $350,000 he has priced for. Perhaps he will get bids over his asking price. Or perhaps, this property will sit there forever along with the numerous other over $2,000,000 properties waiting for buyers who are few and far between. I wish him luck.

Irvine Home Address … 29 BLACK HAWK Irvine, CA 92603

Resale Home Price … $3,599,999

Home Purchase Price … $5,925,000

Home Purchase Date …. 5/9/2005

Net Gain (Loss) ………. $(2,541,001)

Percent Change ………. -42.9%

Annual Appreciation … -8.0%

Cost of Ownership

————————————————-

$3,599,999 ………. Asking Price

$720,000 ………. 20% Down Conventional

4.60% …………… Mortgage Interest Rate

$2,879,999 ………. 30-Year Mortgage

$711,843 ………. Income Requirement

$14,764 ………. Monthly Mortgage Payment

$3120 ………. Property Tax

$800 ………. Special Taxes and Levies (Mello Roos)

$300 ………. Homeowners Insurance

$500 ………. Homeowners Association Fees

============================================

$19,484 ………. Monthly Cash Outlays

-$1947 ………. Tax Savings (% of Interest and Property Tax)

-$3724 ………. Equity Hidden in Payment

$1240 ………. Lost Income to Down Payment (net of taxes)

$450 ………. Maintenance and Replacement Reserves

============================================

$15,503 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$36,000 ………. Furnishing and Move In @1%

$36,000 ………. Closing Costs @1%

$28,800 ………… Interest Points @1% of Loan

$720,000 ………. Down Payment

============================================

$820,800 ………. Total Cash Costs

$237,600 ………… Emergency Cash Reserves

============================================

$1,058,400 ………. Total Savings Needed

Property Details for 29 BLACK HAWK Irvine, CA 92603

——————————————————————————

Beds: 5

Baths: 6 full 1 part baths

Home size: 7000

($514 / sq ft)

Lot Size: .48 ac

Year Built: 2005

Days on Market: 7

MLS Number: 10-466827

Property Type: Single Family, Residential

Community: Shady Canyon

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THIS IS NOT A SHORT SALE, CORPORATE OWNED REO BARGAIN . .(please see cancelled listings for pictures) Reminiscent of the Spanish Revival Estates of California's Montecito District, 29 Black Hawk in Shady Canyon is the perfect marriage between Old World ambiance and World Class amenities found only in the finest custom homes. Located on an expansive private lot bordering Bommer Canyon and the pastoral Irvine Ranch open preserve, this custom residence features 5 bedrooms, 6.5 baths, an office/library, a sun-drenched pool with cabana which includes a shower, fireplace & 1/2 bath. With the finest in custom features and fixtures, artisan applied Venetian Plaster, top-of-the-line appliances, state-of-the-art media and electronics, a finished 3-car garage and a 2,500 bottle wine room , 29 Black Hawk is the idyllic setting to enjoy the California lifestyle.

Still a bear at the high end

Many people seem to think the trouble has passed for the high end and that these properties somehow escaped the ravages of the bubble. Well, so far that has proven true because lenders are not foreclosing, owners are continuing to list at WTF prices, and very little is selling. Lenders are not going to give away these homes. They will have to foreclose and put these properties in the hands of owners who can afford them.

Take a careful look at today's featured property and think about the many that are like it. This property's value was inflated to $6M by stupid lending. The buyer who had $1,777,500 cash available generally would have purchased a home for no more than $2,777,500 as loans over $1M used to be very rare. You can't deduct the interest on a loan over that amount, and there aren't many people with the income to support the payments on loans that large. However, during the housing bubble, massive loans became common, and they were used to inflate property values all over the California coastline.

Nobody is underwriting $4,485,000 loans today, nor is anyone likely to any time soon. The buyer to replace this previous owner will not be so leveraged, and as a result, this house will sell for much less. Think about it, if the high end were a safe haven, wouldn't a cash buyer come along and pay $2,400,000 over the current asking price to get the value back up to $6,000,000? Doesn't the fact that a $6M home is selling for 45% off going to impact the values of other homes in the area. Is the buyer of this property getting this property at a steal?

Loans were the air of the housing bubble. Nobody is providing any air to the jumbo market. We have a huge number of homes that can only be afforded by a very small number of people. The high end is going to be crushed, and the fallout will reverberate through the entire chain of housing values. Picture it like an ice cream cone on a hot day. The top slowly melts downward, and the resulting ooze spreads out over the rest of the housing market.

Income-Price mismatch

The basic problem is a mismatch between the number of people who can afford a property and the number of properties available at any given price point. In Orange County, there are not enough properties being made available at the low end — a phenomenon that has stabilized prices there, and there is an overabundance of properties available at the high end. Even Steve Thomas's made-up numbers show that.

The problem is much deeper than unemployment related market distress. There are simply not enough households that earn the kind of money required to support high end prices. During the bubble, all the home values were raised in the neighborhood, and many people could not afford they houses they lived in. In order for prices to remain high, when these people sell, they must sell it to someone who can afford the property. If that buyer is not available, the price must be lowered to find a buyer that can afford the property.

Banks are not foreclosing on high end properties because they know there is no replacement buyer available. Prices will need to take a big step down just like today's featured property. Lenders are fantasizing that borrowers will go back to work and make enough money to support these prices. It may work in certain areas, but most of jumbo loan land prices are going to fall significantly.

For those who think the high end is stable and the market has recovered, how do you explain this property?