Higher loss severities will force lenders to resolve bad loans and liquidate REO

The high cost of servicing bad loans will force lenders to resolve their problem loans and liquidate the resulting REO.

Irvine Home Address … 8 WESTMORELAND Irvine, CA 92620

Resale Home Price …… $660,900

If I could save time in a bottle

The first thing that I'd like to do

Is to save every day

Till Eternity passes away

Just to spend them with you

If I could make days last forever

If words could make wishes come true

I'd save every day like a treasure and then,

Again, I would spend them with you

But there never seems to be enough time

To do the things you want to do

Once you find them

Jim Croce — Time in a Bottle

If banks could store time in a bottle, they could keep in on the shelf with their worthless paper until the market gives it life again. Unfortunately, rather than storing time in a bottle, the remaining equity capital in our banking system is leaking away through servicing costs like sand in an hourglass. These servicing costs are hidden by amend-extend-pretend until disposition forces recognition of the losses.

Astute housing market observers note the amend-extend-pretend policy of banks is untenable in the long term. As some point, keeping fantasy books must intersect with reality. The fantasy had house prices going up until reality and fantasy intersected. I don't believe it can or will work out that way.

The weight of the inventory and the incentive to liquidate will have individual banks working against their collective best interest. Ultimately, the fantasy of amend-extend-pretend will become so implausible that the banks will find that position is no longer operative.

But what will it take to force banks to end amend-extend-pretend? In my opinion, the answer is increasing loss severities.

Higher loss severities on foreclosures will push servicers to short sales in 2011: Fitch

by JON PRIOR — Thursday, December 16th, 2010, 5:28 pm

Loss severities are expected to increase between 5% and 10% on residential mortgage-backed securities in 2011 as loss mitigation costs and foreclosure expenses go up, according to Fitch Ratings. This, analysts said, will push servicers to short sales.

It will not push servicers to short sales because the loss severities are large there too. In some cases, once the bank has to pay sales commissions, back taxes, back HOA dues and other costs at short sale, they would have been better off simply pushing through a foreclosure and getting their cash.

The loss severity, or the percentage of principal lost when a loan is foreclosed, on prime mortgage loans is currently at 44%. This, according to Fitch, will increase to between 49% and 54% in 2011. For Alt-A loans, the current 59% loss severity should increase to between 64% and 69%.

Currently, the loss severity on subprime loans is 75%, but Fitch predicts it will increase to 80% and 85% by the next year.

These loss severities had remained stable for more than a year. In the second quarter of 2009, the amount a lender could recover when it foreclosed on a mortgage was propped up by slightly improving home prices, low mortgage rates, homebuyer tax credits and government-funded modifications.

Loss severities leveled off because prices made a minor rally during the echo-bubble engineered by the government and Federal Reserve. It takes appreciating prices to make up for the losses from servicing costs.

With the tax break expired, mortgage rates increasing and underwhelming modification numbers pose many tough challenges for the housing market in 2011.

Increased servicing costs from pressures to modify more loans and recent problems with many banks' foreclosure processes will drag down the amount of principal banks can recover from a foreclosure. Borrowers average 19 months without making a payment before they are foreclosed upon, a record high, and Fitch projects this to increase to 25 months in 2011.

Fitch Managing Director Diane Pendley said the answer for some lenders is a short sale.

“Servicers are increasingly turning to less costly alternatives to foreclosure such as short-sales,” Pendley said.

Recovery rates on short sales are usually 10% higher than foreclosures. Pendley said servicers are also reducing the amount of payments they advance to securitization trusts from delinquent borrowers, particularly on subprime loans. In November, Fitch said, servicers advanced only roughly 60% of delinquent subprime loans, down from 90% at the beginning of 2009.

Each month a loan is delinquent it costs 1.5% of the loan balance in carrying costs. That is a troubling rate of financial decay. Time is the actually the bank's enemy when it comes to loan loss severities. Banks are providing squatters time in hopes they will get current and keep the zombie debt alive. Eventually, the carrying costs are going to make the loss severities so large that banks will either liquidate or implode, after which they will be liquidated anyway.

A loan in foreclosure: 492 days — and growing


… Let’s start with real-world implications. The average borrower in foreclosure has been stuck in the default pipeline for more than 16 months, according to Lender Processing Services (LPS: 29.66 -1.69%), without making any sort of payment on their mortgage. That's well over a year, with some states even averaging north of this number. No wonder servicers are increasingly halting principal and interest advances, deeming loans unrecoverable. At that level of severe delinquency, there is simply no cure that can restore a loan to performing.

Here’s why: Consider that the average carry cost of a home in foreclosure is 1.5% of unpaid principal balance per month, on average, a figure I’ve been given by various servicing executives. For a $200,000 loan in foreclosure, that amounts to more than $48,000 in accumulated carry costs given the average age. That’s roughly a quarter of the entire original indebted amount.

(If you wondered how loss severities above 100% are materializing on liquidated debt, by the way, this is how you get there.) …

Loan severities will continue to increase as appreciation no longer hides the bleeding on bank's balance sheets. The longer these foreclosures are dragged out, the worse the loss severities will become.

A HELOC the bank deserves to lose

Sometimes when I see a really stupid loan in the property records, it really infuriates me that taxpayers are making up the business losses of people who approved such stupid loans. The owners of today's featured property went Ponzi. It was obvious they had gone Ponzi. However, some banking genius thought it was a good idea to extend a HELOC to a Ponzi in second position to an Option ARM. WTF?

Second position to an Option ARM?

Lenders willing to take on that kind of risk deserve the losses they receive. They gave the owners of this house free money to spend. They spent it, and now they can't pay it back. Anyone with an ounce of common sense could look at the property records and see this coming. Why didn't the banks bother?

Banks won't worry about future loan losses either now that they know the rest of us will bail them out. Moral hazard is an impossible problem to overcome. It can only be avoided.

  • This property was purchased on 6/26/2000 for $392,000 according to the property records. There is also a $392,000 first mortgage and a $58,800 second mortgage, so it is more likely the owners paid closer to $450,800.
  • On 3/18/2002 they refinanced with a $387,000 first mortgage.
  • On 11/13/2002 they refinanced with a $300,000 first mortgage and a $92,000 second mortgage.
  • On 3/2/2004 they obtained a $220,000 HELOC, and the problems began.
  • On 7/21/2004 they refinanced the first mortgage for $522,000 and obtained a $128,000 HELOC.
  • On 6/20/2006 they refinanced with a $656,000 Option ARM first mortgage and obtained a $82,000 HELOC.

I find that HELOC offensive in its stupidity. Anyone in lending with half a brain could see it was only a matter of time before these borrowers imploded (they already went Ponzi) yet they were extended a $82,000 HELOC on top of a loan product with a growing balance, the Option ARM.

If lenders had any concern for risk, they would not have made that loan. It angers me that I am paying for it with taxpayer bailouts.

Next housing bubble, I am going to figure out how to get a HELOC on my rental.

Irvine Home Address … 8 WESTMORELAND Irvine, CA 92620

Resale Home Price … $660,900

Home Purchase Price … $392,000

Home Purchase Date …. 6/26/2000

Net Gain (Loss) ………. $229,246

Percent Change ………. 58.5%

Annual Appreciation … 5.0%

Cost of Ownership


$660,900 ………. Asking Price

$132,180 ………. 20% Down Conventional

4.87% …………… Mortgage Interest Rate

$528,720 ………. 30-Year Mortgage

$134,828 ………. Income Requirement

$2,796 ………. Monthly Mortgage Payment

$573 ………. Property Tax

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

$110 ………. Homeowners Insurance

$75 ………. Homeowners Association Fees


$3,554 ………. Monthly Cash Outlays

-$476 ………. Tax Savings (% of Interest and Property Tax)

-$651 ………. Equity Hidden in Payment

$247 ………. Lost Income to Down Payment (net of taxes)

$83 ………. Maintenance and Replacement Reserves


$2,758 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$6,609 ………. Furnishing and Move In @1%

$6,609 ………. Closing Costs @1%

$5,287 ………… Interest Points @1% of Loan

$132,180 ………. Down Payment


$150,685 ………. Total Cash Costs

$42,200 ………… Emergency Cash Reserves


$192,885 ………. Total Savings Needed

Property Details for 8 WESTMORELAND Irvine, CA 92620


Beds: 4

Baths: 3 baths

Home size: 2,132 sq ft

($310 / sq ft)

Lot Size: 4,750 sq ft

Year Built: 1985

Days on Market: 75

Listing Updated: 40522

MLS Number: U10004545

Property Type: Single Family, Residential

Community: Northwood

Tract: Cs


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

Price reduction. REO. Nice 4 bedroom, 3 full baths SFR in very nice Courtside neighborhood. Newly painted interior, new stove, over the range microwave, new sink, disposal, etc. Very nicely landscaped with a deep lot. Near everything, freeways & shopping.

70 thoughts on “Higher loss severities will force lenders to resolve bad loans and liquidate REO

  1. winstongator

    Were the lenders for the option-arm and heloc the same? I would imagine that they sold off the option-arm and kept the heloc.

    1.5%/month holding costs? That’s 18%/yr. They have to be including the lost interest in that.

    Are most foreclosures today still in MBS’s? If it’s in an MBS, the loss has pretty much already been seen, and the person losing out is the holder of the MBS, probably some pension fund, that is currently being vilified for promising too much in benefits. Pension funds: providing honest income streams, currently vilified. Big banks: insane incomes and bonuses, and they are the people we need to ‘work with together’ or ‘we’re in this together’.

    1. Perspective

      “…funds: providing honest income streams…”

      What? Seriously? There’s been nothing honest in California (or Illinois or New Jersey for that matter). Our state and municipalities have increased pension benefits regularly over the past two decades while ever-increasing their unrealistic and downright dishonest projections for growth thereby negating the need for greater taxpayer contributions.

      Now we’re at the point where many pension systems will be broke very soon, and that’s used as an excuse to raise taxes in California. Of course, if you’re a California Democrat, you think Prop 13 caused these problems too…

      1. winstongator

        Really. How inflated might these pensions be? 10%, 20%? The pensions were actually earned, in a lot of cases, it was the states not contributing to the funds. Would people in defined contribution plans tolerate their employers not contributing the amounts they were under contract to contribute?

        I am just comparing it to the ill gotten gains of bankers. If you think that banker bonuses are more reasonable than firefighter, police officer, or teacher, you have a seriously perverse worldview.

        1. Perspective

          The unions and Democrats purposely mislead and hide the costs of these pensions and healthcare costs. That’s fraud – no different than what many bankers did.

          “In 1999 then California Governor Gray Davis signed into law a bill that represented the largest issuance of non-voter-approved debt in the state’s history. The bill SB 400 granted billions of dollars in retroactive pension boosts to state employees, allowing retirements as young as age 50 with lifetime pensions of up to 90% of final year salaries. The California Public Employees’ Retirement System sold the pension boost to the state legislature by promising that “no increase over current employer contributions is needed for these benefit improvements” and that Calpers would “remain fully funded.” They also claimed that enhanced pensions would not cost taxpayers “a dime” because investment bets would cover the expense.

          What Calpers failed to disclose, however, was that (1) the state budget was on the hook for shortfalls should actual investment returns fall short of assumed investment returns, (2) those assumed investment returns implicitly projected the Dow Jones would reach roughly 25,000 by 2009 and 28,000,000 by 2099, unrealistic to say the least (3) shortfalls could turn out to be hundreds of billions of dollars, (4) Calpers’s own employees would benefit from the pension increases and (5) members of Calpers’s board had received contributions from the public employee unions who would benefit from the legislation. Had such a flagrant case of non-disclosure occurred in the private sector, even a sleepy SEC and US Attorney would have noticed.

          Eleven years later, things haven’t turned out as Calpers promised. While state employees have been big winners from the bet, the state budget has been, and will continue to be, a huge loser. Far from being “fully funded” as promised, Calpers has already required $15 billion more from the state budget than projected in 1999 and $3.5 billion is budgeted for this year, a figure that is more than five times the expense projected by the state legislature in its SB 400 analysis. Pensions are crowding out important programs like higher education, parks and health care, and the state will continue to whack away at those programs because the legislature refuses Governor Schwarzenegger’s request to repeal SB 400 for new employees…”


        2. Perspective

          And don’t get me started on teachers and firefighters. Teachers in California are paid very well, and that’s just considering their salaries relative to other states’ teachers.

          Firefighters are simply paid too much. There is a serious qualified wait-list to become one, which would suggest that wages/benefits could be lowered to lessen the demand.

          Cops? Well, they may be paid fairly. We have to recruit people to become cops and it’s a brutal job. I don’t have a problem with cops retiring in their 50s.

          1. toshi

            I’ve seen those lists before that revealed California teachers to be among the highest paid teachers on average (just under 60K). Fiscal conservatives always bring up that statistic. What they always fail to mention is that our teachers are also among the lowest paid in the US when their salaries are adjusted for cost-of-living.

          2. toshi

            Maybe Irvine should bus their teachers in from Riverside, where it’s cheaper to live. That way, they can cut their salaries and save some money.

          3. Perspective

            My point on teachers, was just that all we hear from the unions here, is that they’re over-worked and under-paid, and that taxes need to be raised.

            I’d accept huge raises for teachers if in exchange, we could eliminate their pensions and place them in defined contribution plans like the rest of us. At least then the costs would be known and current, with no time-bombs ticking…

          4. BD

            Idiots all who believe that this nonsense of public pensions and unions can last… CA will break these promises guranteed! CA simply cant steal enough from the private sector and tax payer to meet the promises.

            No wonder we can’t hire new teachers when we have to write 4-10K checks a month to those retired!!!!

            Wake up…


      2. BD

        So very true and so very sad! I believe the republicans are just as corrupt but, has anyone noticed that it is the “Blue” states that are teetering on the brink??

        Please… only CA would re-elect a relic of socialist dogma like Brown. RE in CA and OC in particular is being supported by nothing more than thin air and hope. I will vote with my feet. I will move to a zero income tax state and keep an apartment in CA to visit. Of course, even that is suspect.

        Look at all the hundreds of thousands of dollars lost in RE on a given property! That pays for a lot suites at the Hyat Newporter…


        My .02


  2. winstongator

    Case-Shiller LA is still 75% above 2000 levels (non inflation adjusted). This current listing is 70% above its 2000 sale price. Miami is 45% above 2000. To a large degree prices there have stabilized, imo. I’m not sure that Irvine will see the 20-30% price drops relative to other areas are in the cards.

    1. IrvineRenter

      “I’m not sure that Irvine will see the 20-30% price drops relative to other areas are in the cards.”

      I doubt the price declines will be that large either, but prices will continue to fall and grind along the bottom for years.

      1. Planet Reality

        You’ll need to be a little more surgical to determine that. Redfin has incomes for specific neighborhoods and zip codes. They also tell you want percent of a zip is single family detached houses.

        For the nicer parts of Irvine with SFR percentage greater than 85% the median incomes range from $150,000 to $220,000 which includes people who have lived in Irvine for 20+ year. They are the opposite of shadow inventory, inventory that has been eliminated as people live longer healthier lives. God bless.

        Irvine Inventory down to 727

          1. Planet Reality

            I don’t know, right now we are at a puny 4 months inventory. Wow a whole 4 months, very devastating.

            Last year were we at a red hot 3 months inventory? you tell me, let’s get to the bottom of this one.

          2. AZDavidPhx

            Yesterday, Lee In Irvine said:

            Astute Observation by lee in irvine
            2010-12-22 03:51 PM

            Last year at this time there were 461 Irvine homes on the market. So seasonally adjusted, we have a 58% increase in inventory over last year.

            I noticed that you stuck your head in the sand and wanted no part of the conversation after that.

          3. IrvineRenter

            “What was the inventory at in December of last year?”

            On December 23, 2009, Irvine had 461 homes for sale. We currently have 58% more homes for sale in Irvine than we did on this day last year.

            You can verify for yourself on our inventory history in the upper right hand corner of the blog.

          4. AZDavidPhx

            PR –

            How can inventory be up 58% when premium areas are in such high demand now and there are so many high wage earners lining up and climbing the walls to get in and replace all of the pretenders with their real money?

            It doesn’t make sense to me. We have had tax credits, declining interest rates, a huge transfer of wealth to the rich and yet inventory is not finding enough buyers.

          5. tenmagnet

            No mention is made about the 800+ new homes that sold in less than a year.
            Wasn’t the “credit crunch” and great recession supposed to bring the Irvine housing market to a grinding halt.

          6. Planet Reality

            So we went from 2.5 to 4 months inventory, both are small. 58% increase in a small number is still a small number.

          7. irvine_home_owner


            Didn’t you just answer your own question? The tax credits are gone, the interest rate has risen to an ALL TIME FOUR MONTH HIGH… shouldn’t inventory be higher?

            The 461 number was one of the lowest for Irvine… go back to 2008 and 2007, what were the numbers then? You crack me up trying to take a single data point to prove something you don’t even have any experience with.

            And don’t even talk about putting your head in the sand here, you’ve taken your ball and gone home several times yourself.

          8. AZDavidPhx

            No mention is made about the 800+ new homes that sold in less than a year.

            800 HUNDRED houses! DAY-YAM!

            800 houses according to PR is what? 4 – 5 months supply? And you think it is amazing that 4-5 months supply would sell in less than 12 months? I’ll have what you are having, genius.

            You would think with out that all that supply and lack of demand prices would be tanking.

            Prices always lag sales declines.

          9. AZDavidPhx

            You crack me up trying to take a single data point to prove something

            Nonsense. Year-Over-Year sales comparisons are perfectly valid as they account for the “seasonal” variations in sales numbers. There is no single data point. The argument is simply that inventory has actually increased year over year while PR was pumping the “decline” of a few houses in the current inventory.

            Didn’t you just answer your own question?

            My question was actually rhetorical – you may not have interpreted it that way. Of course inventory should be higher now that the gimmicks have dried up. Of course don’t tell this to PR who believes that Irvine buyers don’t need such proletariat subsidies.

          10. Planet Reality

            The bottom line is the Irvine market chugs along selling around 200 houses a month to a median cash down payment buyer with 30% cash down.

            2.5 months inventory is red hot, 4 months is nothing, count down to armageddon LOL

            1000 homes in Irvine inventory would not be that impressive

          11. tenmagnet

            The 800+ homes represents new supply that was introduced and quickly absorbed
            That’s in addition to all the re-sale product already sold.

          12. AZDavidPhx

            The bottom line is the Irvine market chugs along selling around 200 houses a month to a median cash down payment buyer with 30% cash down.

            Ah, but the numbers show us that the number of buyers bringing in these 30% down payments for Irvine tract houses are not as abundant as last year. It certainly seems to support the argument that the pool of buyers will eventually exhaust itself.

            I have maintained that most Irvine buyers are likely 90’s vintage beneficiaries of price appreciation via a former house whose equity they then pump into an Irvine house. The thought is that if the move up market stalls then Irvine will be affected. As we can see, without the gimmicks to goose the lower end, the move up crowd slows down. We can see this by looking at the YOY inventory increase.

          13. Planet Reality

            Wrong, demand has been steady at around 200 homes a month and that is not including the new homes that were sold.

            You’d have to get up to an inventory of 10 months for it to start to even matter, that’s 2000 for those keeping track.

            4 months inventory is very very low

          14. jumpcut

            That 800+ new home figure is low and only reflects the originally-announced 2010 Collection. Add in 125 homes in SB, 90+ homes in SGE, and additional homes sold in Sonoma II, Montecito II and Esplanade. Some new homes were even sold in the Irvine portion of VOC, believe it or not! If THAT doesn’t indicate a hot market, I don’t know what does. 😉

          15. AZDavidPhx

            So, am I hearing (reading) this straight? The new argument that the bulls are running with now is that the inventory is up because the majority of buyers prefer to buy new houses rather than used?

          16. irvine_home_owner

            AZDave –

            I have maintained that most Irvine buyers are likely 90’s vintage beneficiaries of price appreciation via a former house whose equity they then pump into an Irvine house.

            How do you maintain this? Where is your data that supports this theory?

            Even IrvineRenter himself says the bulk (or all?) of buyers in the 2010 New Home Collection are not move-up buyers, so your theory contradicts his.

            Do you even know what demographic buys in Irvine? You admit you don’t so how can you make such claim?

            Not to mention that your theory also contradicts your other drums you like to pound on… people who have equity will HELOC and blow that money. Or people bought with zero down loans so there is not equity to access.

            You can’t have it both ways.

          17. AZDavidPhx

            How do you maintain this?

            Common sense. I can do math. Even if you have a 25 year old making 100K a year, it’s likely going to take them 6-10 years of disciplined savings to make it to 200K. I then ask myself how likely even this scenario is in a city where the median household income is reported to be 98K. How many 25 year olds are making 100K in a city where half the households make less than 98K? It sounds like a stretch to me. It certainly may occur, but I highly doubt this is the norm based upon median income data..

            Even IrvineRenter himself says the bulk (or all?) of buyers in the 2010 New Home Collection are not move-up buyers

            I don’t recall reading this so I am unaware of the context. Nevertheless, if you want to believe that the majority of people that are buying 650K houses with 200K down payments are 25-30 year old first time buyers then you are kidding yourself.

          18. IrvineRenter

            In their zeal to see their home values remain high, the herd of Irvine bulls are trampling AZDavidPhx on this thread.

          19. Honcho

            I think AZDavidPhx is doing a damn fine job here supporting his commentary and pointing out holes in the logic being used to discredit him.

            I’ve enjoyed following the thread today.

          20. just bought in irvine

            I do not know about inventory but the new home smell is very strong in Irvine. I personally bought a resale but know a lot of people who made compromises just to own a new home….i don’t know why ..just saying what i see

          21. Planet Reality

            Irvine Bulls?

            LOL more like realist, nobody here is bullish it’s a bubble blog.

            People stating facts based on reality isn’t bullish just because you don’t want to face the facts.

          22. irvine_home_owner

            Common sense. I can do math. Even if you have a 25 year old making 100K a year, it’s likely going to take them 6-10 years of disciplined savings to make it to 200K. I then ask myself how likely even this scenario is in a city where the median household income is reported to be 98K. How many 25 year olds are making 100K in a city where half the households make less than 98K? It sounds like a stretch to me. It certainly may occur, but I highly doubt this is the norm based upon median income data..

            So what makes you think that big down came from a move-up equity sale? It would have been hard for that 25 year old to buy a home 10 years ago.

            Have you ever considered much of these huge downs are coming from foreign sources? Check the last names of the people buying these homes.

            The “Theory of the FCB” will set you free.

          23. just bought in irvine

            Checking the last names does not tell you if the money is “foreign” or not.

            Irvine has a huge population of people with origins in Asia. They live here , work here and many of them are US citizens. I take exception with with categorizing these people as “FCB”. FCB for me clearly means money coming from outside the US.

          24. irvine_home_owner


            You are focusing on the “foreign”. You should be focusing on the “cash”. Whether they are nationalized, work visa or visa-tors… the point is that the cash is not from the equity flips AZDave thinks they are from.

            @IR: When did the term “bull” describe people who are talking about the value of real estate in a city. We are not telling people to buy now or be priced out (or interest rated out) forever… we are merely suggesting that the bubble is deflating much more slowly in premium areas. Some of us think Irvine qualifies, others, who have never lived in Irvine yet feel they are experts on the demographics, think otherwise.

          25. matt138

            excuse me, i left out the various other forms of subsidy floating house prices.

            anyone can “snapshot” market data and spin it as positive. if you do so, you are fooling yourself and clearly ignoring the bigger picture.

          26. toshi

            My guess is that many of these so called FCBs are just Asian Immigrants or Asian Americans who are speculating that the housing market will “go back to normal” pretty soon (By normal, I mean annual appreciation of 10% or more).

            Based on my social circle, I got the impression that Asian Americans and especially Asian immigrants caught the housing bubble bug more than the rest of Americans. Money, frugality, and the building of wealth are highly valued in many Asian socieites, particularly Chinese society. For instance, I know two brothers (both engineers) who combined their incomes to buy a house a few years ago in San Diego. I’m not sure how much they paid, but I’m fairly certain that their house is worth much less now than what they paid for it. Yet, the last time I talked to them, they were eager to jump back in and buy another house, saying, “I think the market is going to recover really soon — don’t you?” I disagreed, but I don’t think they thought I knew what I was talking about since I never bought a house before. They’d rather listen to their realtor.

          27. toshi

            I know another guy, an ABC (American Born Chinese) who lived at home for most of his 20s, shared a car with his mom, and finally bought a house last year. How many people can do what he did? I sure couldn’t. I know I should admire his diligence, but I can’t help but wonder if it’s really worth it for a boring house in a boring neighborhood.

            Oh, and the two brothers I mentioned earlier, they live in their house together with their semi-retired parents.

            These are the “FCBs” you’re competing against. Not wealthy foreigners with tons of cash to invest. You should ask yourselves if you really want to compete with these people. I say, let them win, because it’s not worth it.

          28. Chris

            Just think of Irvine as a high tech company that has lost its luster.

            It’s still being desired….just that its stock price no longer performs like AAPL.

          29. Chris

            Toshi, there are reasons beyond what you’ve mentioned that FCBs are buying in Irvine. Imagine how many houses FCBs can buy at places such as Texas, etc.

            Now let’s not sugar coat things and say that FCBs (ah, let’s cut to the chase and say mostly Asians) are gonna live there. Are they going to?

            NO THANK YOU. Assimilation is one thing but infestation, mostly from natives perspective, is going to affect FCBs lives.

            Enough said.

          30. BD

            Do you really believe that people putting big cash downpayments is “smart money” here in Irvine?????

            You must be joking. People bought the nasdaq down a 1000 points thinking they were smart. Now, a decade later we are down another 60%.

            Don’t be a house trader… prices will go up and down a few points but, the trend is clearly down for fundamental reasons.


    2. lee in irvine

      “Case-Shiller LA is still 75% above 2000 levels (non inflation adjusted)”

      Oh Hey, just wanted to point something out:

      As of month ending September, 2010

      Los Angeles ~ 175.36
      Miami ~ 145.64
      San Diego ~ 162.43
      Las Vegas ~ 101.18

      Oh, but I know, who wants to live in crappy Las Vegas.

      BTW, unlike Orange County, they’re gonna sell more homes in Las Vegas this year, than ever before.

  3. fred mercury

    Screw the banks. They have already been paid 3 times over and now they want to collect again? WTF?

    They don’t even know where the freggin’ deed is for the loan they are trying to foreclose on. When this chit starts to hit the fan it is all over for the banks and they know this.

    Fractional reserve lending baby…yeahhhhhhh!

    1. AZDavidPhx

      Hey come on, we need an elastic money supply! Sure, the people in charge will never let it contract but it is a cute idea nonetheless!

      Sure, inflation is built right into the system to steal back your money over time so you are inclined to spend, not save, not build wealth, and remain in servitude for the rest of your life.

      Sure, the Government, Wall Street, and the various elite class get their paws on the money first and spend it while its purchasing power is greatest and by the time it trickles down to the little people is worth less.

      But other than that, it is an awesome system. Don’t worry about it – just think positively and stroke yourself. Go watch a television program and make yourself feel better.

      Happy Winter Solstice.

    2. Vincenzo

      Actually, American taxpayers must pick up all bank bills because they have elected politicians who have demanded lax credit requirements. “Every poor American must be able to buy a house”.

      For example, a person in Spain must pay all bank expenses once he defaults. That would be great for the USA, too. But American taxpayers don’t want strict financial rules.

      Rules in Spain:
      “In Spain, foreclosure and eviction do not terminate the debt, so after losing their homes, many people owe the remainder of the mortgage. Therefore, people cannot escape the debt through bankruptcy either, because mortgage debt is specifically excluded from the bankruptcy laws.

      Going into denial and hoping your debts won’t catch up with you is a big mistake because it drags out the process, which drives up the final cost to you. All the payments you miss are added to the debt, as are any legal fees the bank incurs, and you start paying a higher penalty interest rate, so your debt will quickly escalate. The longer the process takes, the more expensive it will be for you. And be warned, the penalty interest rate you pay is much higher, potentially over 20%.”


  4. tenmagnet

    Shevy from the IHB Group closed a couple of deals in Irvine these past few weeks representing buyers.
    Maybe he can better explain the strong demand and why people continue to buy in Irvine despite what Dave and others think.

    1. AZDavidPhx

      The argument has never been that nobody will buy. If I bought a house in 1990 and watched it triple in value to 2010 – I would totally sell it and move up to a new house. We had one observer stop by earlier this year going by the name “Property Owner” or something and said exactly that – that he didn’t mind overpaying because he was just taking the profits from his former property and moving it to the new one so even if the value dropped, it would not matter.

      This is great, but these kinds of buyers do not grow on trees. Over time, people are going to have to come up with those 30% down payments the hard way.

      I don’t believe that Irvine buyers are some special breed of saver. So who is going to come up with these 200K down payments after a decade of flat prices? Tough question, huh?

      1. tenmagnet

        We are talking about the present market.
        The robust new home sale numbers reinforce the fact that those special Irvine buyers out pace the low levels of current supply.

    2. Shevy

      I wish I would have had an opportunity to jump in and reply to this thread while it was cruising. Regardless, in November and December we had 8 closings. Based upon my experience in the market and what I’m seeing daily both sides of this discussion make good points that are reflected in the market at some level.

      First, a home that shows well and is priced right will sell fast; moreover, it will often have multiple offers. That said, out of our 4 Irvine Closings in November and December all of them sold for less than they would have during the summer. Moreover, our advice to continue to look but not to be frustrated or over anxious during the tax credit and that deals would likely be available once the tax credit expired and that the tax credit was creating artificial demand leaving a higher probability of good deals once it expired was correct. As a result, 2 of our Irvine closings appraised for more than the contract price. While the other 2 Irvine closings were equally as good of purchases given the Irvine market, our client’s loans, and their goals.

      For the Bears, our closing on 7 Pear Leaf (did not appraise for more than the contract price), serves as an example of what should happen to prices if supply is released and prices return to levels in line with people’s incomes. In April of 2010, one of the closest comparable properties to 7 Pear Leaf sold for $637,000. As a result a trustee sale buyer purchased it for $522,000 in August and paid off back taxes, HOA’s, installed new carpet, and painted and listed it at $650,000. Our client purchased the property for $525,000 in late November, a large reduction from the original list price of $650,000 in August, which was reasonable at the time based upon the comparables. This was the result of supply, demand, and motivated sellers pricing to what the market will support. As a result of this sale, 17 Bluebell, the closest model match that was active at the time of our clients purchased was allowed to expired and taken off the market in early December; it was listed at $630,000. Unfortunately for the bears, there are many homeowners in Irvine that have the ability to take their properties off the market and wait and hope that prices return, moreover, few tracts are allowed to build supply the way this one has as banks have made a point to avoid foreclosing on homes that they take larger losses, which tend to be in higher priced areas like Irvine.

      On the flip side, many tracts in Irvine still lack supply. A good example of this is 43 Washington in the Walnut area of Irvine. By many accounts other than supply this property is over priced, however, due to the lack of supply the property went into escrow in less than 10 days. There are numerous examples of this not only in Irvine but also in many other areas. If there is only one property for sale in a given tract, they can hold off for their price and will likely get it. Unfortunately, in many of these tracts there are numerous homes that are not available, despite the owner’s inability to pay. There are people that can afford these homes, however, they should be able to afford homes one or two levels above if the market was allowed to work naturally.

      Finally, with the artificially low rates despite the artificially controlled supply, most tracts in Irvine now have rental parity. Moreover, most people buy homes for their consumption value and not their investment value. As a result, even educated buyers will buy if they are planning on holding the property long term, are using proper financing, and if they can acquire the property at or below rental parity. If one looks at the drop in home prices relative to other assets like gold, I believe that one will see that home prices have dropped by amounts that match what many of the bears predicted. The frustrating part is that the prices in terms of dollars have not dropped enough to satisfy many bears because it was done by devaluing the dollar, thus helping the banks while hurting those that are educated and have been responsible and waited to buy more home with dollars and not gold.

      In regards to the future, it’s hard to argue that if rates and supply are not manipulated that prices should not go down further. However, there is nothing to indicate that rates and supply will not continue to be manipulated. However, there is a huge back log of foreclosures that are currently set to be released at trustee sales after the new year, if they are not postponed or canceled and the banks bring the properties to sale in Orange County that are scheduled it will result in a dramatic jump in supply. Properties like Pearleaf are great examples of what happens when supply increases, however, only time will tell.

      1. irvine_home_owner


        Excellent post. I like to read these “from the battlefield” type comments.

        The one thing that sticks out to me based on my own daily Redfin searches is the lack of supply in Irvine. I totally concur with you that certain tracts/models are in very low supply which creates a premium for the properties that are available.

        So while someone unfamiliar with the Irvine market can throw out a data point like “58% higher than last year’s inventory”, without proper context, one doesn’t realize that the current inventory is still a small number and remains a SINGLE data point without taking into account the previous years which were higher.

        Thanks again for your post… I hope it will help people who are not local to Irvine understand the strange dynamics in our market (as well as others that seem to be stubborn like Irvine).

  5. ocwatcher

    As a long time reader, I miss comments from old folks who used to contribute, to name just few: graphrix, awgee, EvaLSeraphim, USCTrojanCPA, freedomCM and …
    I stop by less often as …

    1. Chris

      The market probably didn’t pan out as they probably were expecting another leg drop. Other bear blog sites are facing similar drops in comment sections except for CR.

  6. Jimbo

    You guys are funny. Irvine will drop to where it should be, but it will take 5 to 10 more years to finish it’s decline. It will be a slow bleed of 2% or less per year, you won’t even notice it. I predict a total 10% decline to the bottom from current prices, and it will finish at 2017. This is because it is a great area and there is demand. Still, Irvine won’t be immune because other less desireable areas will have quicker price drops and will exert downward force on Irvine prices.

  7. BD

    Big “Blue States” (CA, NJ, NY, IL) in big debt, because of big promises to public unions, now looking for big bailouts from the feds and other states.

    Burn baby burn… this is what socialism looks like.

    Housing in OC will be just another casualty…fine if you don’t believe the basic laws of finance apply to Irvine. You will be seperated from your money – one way or another.

    You must be joking… Irvine with twice the price and only 30% more in income????!!! Ha!

    I so wish that someone would create an ETF for OC and each city… I would short Irvine immediately. We are going back to 2001 – 2002 prices and will stay there for a long, long time…


  8. BD

    Irvine is like Webvan circa 1999. It must be different and a new paradigm. I live here and I know the schools are good. It’s hard to justify 2-300K in premium compared to the rest of OC.


  9. FreedomCM

    Thanks for including me in such august company.

    Many of us still read IHB, but now post more at OCreader (linked to my CM price thread, above) since the discontinuation of the boards here.

    Personally, I’m very frustrated by the pace of the correction, but I still think that it is all about income.

    And yes, I think even “immune” irvine will return to 3.5-4x income for the ‘average’ house.

    FCBs be damned….

  10. BD

    C’mon big spenders! Fools all. IR has made this point before. Desire is not demand.

    The price to borrow money will increase buy a full point in 2011 based on my research. If it doesn’t you will still be able to get a bank to loan you money at 4.5%.

    Nearly no-one has the income or savings to buy a 800K house without cheap money. We have seen the bottom collapse. Now we are going to see the top collapse. If you think rates will be where they are a decade or more from now..then buy, buy, buy!!

    But, I’ll bet you have to sell to someone that has to borrow money at 7-12% in a decade. You are going to get killed on the equity. Let’s hope that milk goes to $30 dollars a container and wages inflate dramatically to to afford your entry level 600K condo….


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