Delinquencies TWO times, foreclosures EIGHT times historic norms

Delinquency rates are declining, but they are still double their historic norms. Foreclosure rates are temporarily declining, but they are still eight times their historic norms. Mortgage distress is very high.

Irvine Home Address … 27 GEORGIA Irvine, CA 92606

Resale Home Price …… $659,000

The party's over

It's time to call it a day

They've burst your pretty balloon

And taken the moon away

It's time to wind up the masquerade

Just make your mind up the piper must be paid

Nat King Cole — The Party's Over

The housing bust has entered a new phase; inventory liquidation. Lenders have been accummulating REO and delinquent loans for several years, but with fewer and fewer new delinquencies being added to the inventory, lenders are turning their focus on clearing out the debris. It's going to take a while.

LPS Mortgage Monitor June 2011

During the housing bubble, borrowers were given loans that were much too large and with terms which doomed them. When people began succumbing to the toxic debts they were given, delinquency rates began to rise. As delinquency rates went up, lenders realized they made a huge mistake, so they stopped underwriting stupid loans. Without Ponzi loans to bail out the overextended, delinquency rates rose to levels never before seen. Couple the mortgage distress that was built into the system with recession unemployment, and the delinquency rate peaked at 10.97% in January of 2010.

In the 18 months that followed, delinquency rates have declined as new delinquencies have slowed and foreclosures have begun clearing out the shadow inventory. At the current rate of decline, it will be at least another 18 months before the delinquency rate falls to 5.5% and re-enters its historic range. That assumes the double dip and strategic default doesn't cause fresh delinquencies and recent slowdowns in foreclosures doesn't slow the decline in the delinquency rate.

New delinquencies are still being added to the system at a lower but still alarming rate. Lingering unemployment and strategic default from the house price double dip are largely responsible for the high rate. Lax underwriting is no longer the driving force behind delinquencies.

Back in late 2008, the amend-extend-pretend dance caused the correlation between delinquency and foreclosure to break down. The result is a large backlog of foreclosures known as shadow inventory. Lenders have been metering out their REO as the highest rate they can which does not crash the market. The slower they sell their REO, the longer the problems will linger. The faster they sell their REO, the more prices will drop and more borrowers will opt to strategically default. It's a difficult balancing act.

Shadow inventory is full of delinquent mortgage squatters. Millions of people are occupying homes they are not paying for. The high end has more shadow inventory than the low end as lenders have been foreclosing on smaller loans while leaving larger loan balance borrowers alone.

Lenders are foreclosing on fresh delinquencies while allowing older delinquencies to remain in shadow inventory. However, they are making more headway on reducing shadow inventory as the percentage of foreclosures on old delinquencies is steadily rising.

The big problem for lenders is clearing out the backlog. As the chart above notes, the foreclosure starts relative to their delinquent inventory is still low. That number needs to rise from 10% to 100% before shadow inventory is clear.

The chart above is very revealing. In the summer of 2010, lenders reduced their foreclosures dramatically. The chart below reveals this slowdown is a result of problems in judicial foreclosure states.

California is a non-judicial state, so Robo-signer and other procedural delays have not impacted the foreclosure rate. In judicial foreclosure states like Florida or New York, many more borrowers are being given extra squatting time.

The above charts are a different way of looking at the same procedural delay problem in judicial foreclosure states.

It will take time to clear the inventory overhang

The important fact to take away from this post is that it will take a long time before the market is not burdened by homes that need to be sold. Let's take a look at some of the inventory overhang in Irvine.

Foreclosure Date — Amount — Address

Dec 16, 2008 — $856,029 — 78 Dovecrest Irvine, CA 92620

Jul 23, 2010 — $1,719,455 — 51 Summer House Irvine, CA 92603

Jul 21, 2009 — $711,000 — 85 Legacy Way Irvine, CA 92602

Nov 02, 2009 — $445,000 — 3131 Michelson Dr Unit 907 Irvine, CA 92612

Aug 11, 2008 — $742,500 — 5155 Scholarship, Irvine, CA 92612

Dec 16, 2008 — $458,739 — 19 Meadowsweet Way, Irvine, CA 92612

The above list is a small sample. Most of these were mortgages over $1,000,000, and many of them have been owned by lenders since 2008.

When are these properties coming to the market? If lenders are waiting for peak prices, they may own some of those properties for decades. Locally lenders have not capitiulated yet. At some point, these properties will be sold. The current supply is being temporarily constricted, and people are not being allowed to have the beneficial use of these properties. Most are sitting empty as if they didn't exist. However, they do exist, and at some point they will need to be sold.

I'm not the only one who has noticed this problem locally.

Distressed sales could last 5 years


Jon Cook is president and CEO of the Prudential California Realty chain owned by HomeServices of America Inc., a Berkshire Hathaway affiliate. …

Us: What’s the outlook for the Orange County housing market down the road?

Jon: I’m optimistic that we have seen the toughest part of the distressed sales market. NOD’s/ Notices of Default are decreasing; however, I’m not saying we’re out of the woods yet. You still have trailing inventory that the banks are holding that hasn’t come to market yet.

We probably still have a couple of years to work through the distressed sales and they make up almost 50% of all sales in the county. It could be as long as an additional 5+ years to work through the distressed property inventory. …

Ponzis since 2001

Some people figured out Ponzi borrowing from their house earlier than others. The owners of today's featured property began with a small down payment in 1999, and parlayed that into several hundred thousand dollars of mortgage equity withdrawal and a few years of squatting. To them, housing is not a cost, it is a reliable source of income supplementation.

  • This property was purchased on 3/26/1999 for $290,000. The owners used a $275,450 down payment and a $14,550 down payment.
  • On 10/1/2001 they obtained a stand-alone second mortgage for $60,000 and obtained their first cash infusion.
  • On 5/30/2003 they refinanced with a $354,900 first mortgage.
  • On 9/18/2003 they got a $100,000 HELOC.
  • On 4/2/2004 they opened a $250,000 HELOC.
  • On 5/23/2006 they refinanced with a $650,000 first mortgage.
  • Total mortgage equity withdrawal is $374,550.
  • Total squatting time is over 30 months.

Foreclosure Record

Recording Date: 05/24/2011

Document Type: Notice of Default

Foreclosure Record

Recording Date: 07/23/2010

Document Type: Notice of Rescission

Foreclosure Record

Recording Date: 05/19/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 02/16/2010

Document Type: Notice of Rescission

Foreclosure Record

Recording Date: 02/16/2010

Document Type: Notice of Default

Foreclosure Record

Recording Date: 04/22/2009

Document Type: Notice of Default

These are the kinds of homeowners the system could do without. These people have gamed the system for maximum advantage. They will endure a serious fall from entitlement after their sale or foreclosure because for the first time in more than a decade, they will actually have to pay for housing rather than having their housing pay for them.


This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707


Irvine House Address … 27 GEORGIA Irvine, CA 92606

Resale House Price …… $659,000

Beds: 5

Baths: 3

Sq. Ft.: 2200


Property Type: Residential, Single Family

Style: Two Level, Modern

Year Built: 1999

Community: Walnut

County: Orange

MLS#: P791518

Source: SoCalMLS

Status: Active

On Redfin: 2 days


This gorgeous gated community home offers 5 bedrooms 3 full baths, downstairs bedroom is currently used as an office with accessible full bath, large family room with fireplace, downstairs ceramic tile flooring, tile kitchen counter tops with breakfast nook, upstairs laminated flooring, upstairs laundry room, vertical blinds throughout the home, oversized two car garage with extra storage space, security system, professionally landscaped front and back, low maintenance large back patio, largest floor plan. Association amenities include large swimming pool, basketball court, sand volleyball court, kid s playground, barbeque area, open green park. Minutes to great Irvine Schools and Shopping Centers and easy freeway access. Buyers must see this property !!!


Proprietary IHB commentary and analysis

Resale Home Price …… $659,000

House Purchase Price … $290,000

House Purchase Date …. 3/26/1999

Net Gain (Loss) ………. $329,460

Percent Change ………. 113.6%

Annual Appreciation … 6.6%

Cost of Home Ownership


$659,000 ………. Asking Price

$131,800 ………. 20% Down Conventional

4.31% …………… Mortgage Interest Rate

$527,200 ………. 30-Year Mortgage

$141,645 ………. Income Requirement

$2,612 ………. Monthly Mortgage Payment

$571 ………. Property Tax (@1.04%)

$217 ………. Special Taxes and Levies (Mello Roos)

$137 ………. Homeowners Insurance (@ 0.25%)

$0 ………. Private Mortgage Insurance

$122 ………. Homeowners Association Fees


$3,659 ………. Monthly Cash Outlays

-$616 ………. Tax Savings (% of Interest and Property Tax)

-$719 ………. Equity Hidden in Payment (Amortization)

$206 ………. Lost Income to Down Payment (net of taxes)

$102 ………. Maintenance and Replacement Reserves


$2,633 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$6,590 ………. Furnishing and Move In @1%

$6,590 ………. Closing Costs @1%

$5,272 ………… Interest Points @1% of Loan

$131,800 ………. Down Payment


$150,252 ………. Total Cash Costs

$40,300 ………… Emergency Cash Reserves


$190,552 ………. Total Savings Needed


23 thoughts on “Delinquencies TWO times, foreclosures EIGHT times historic norms

  1. rkp

    If a buyer is ready to pay market price, what’s holding the lender from offering it? They don’t need to list on MLS but advertise their inventory discretely to brokers who might have buyers ready.

    I don’t think such a method would cause prices to tumble and people can live in these houses.

    Anyone live next to a foreclosed home? Does it look abandoned or do they at least maintain it?

    1. HydroCabron

      If you define “market price” to be the current prices given the lenders’ withholding of inventory, then, yes, they could sell one house that way, discreetly.

      If they intend to clear their inventory in this manner, they will be selling quite a few houses. Sotto voce, strictly hush-hush, and on the QT discretion won’t preserve current market prices if thousands of homes are offered, because being low-key will not defeat the laws of supply and demand.

      Sure, thousands of homes would still sell, albeit quietly, at market prices, but those will be prices lower than the current ones. But this is all tautological: properties always sell at market prices.

    2. winstongator

      Prices need to be recorded w/gov’t officials, so even if they were outside MLS, they would still be available.

      In my area, banks are not sitting on foreclosed inventory. Properties go through pretty fast, and if need be, massive price drops are used to clear (home that sold for 750k in ’04 reo’d for 245k.)

      Areas where there is minimal negative equity and fewer delinquencies will work through their foreclosures MUCH faster than areas with lots of neg-eq and foreclosures. 3 yrs from now, there will still be some shadow inventory places, but other areas will be as close to ‘normal’ as they’re going to get.

    3. RahRahGrl

      We lived next to a foreclosed condo that was empty for more than a year. I don’t know how long the owners squatted (I actually think they were collecting rent while it went through the foreclosure process), then it sat on the market for ~9months before selling. The new owner rehabbed it before moving in, making it about 1.5 years before we had a new neighbor.

      Even in a community where the outside grounds are nicely maintained by the association, it was clearly abandoned. No car in the driveway, ever. No lights on, ever. No outside adornments. Oh yeah, and teenagers smoking weed and making out in the shadows.

      The new owner turned out to be a busybody nightmare. Made me miss the days it was empty.

  2. Perspective

    I still don’t personally know anyone who has strategically defaulted. I know plenty of people who have defaulted, but they’re typical defaults – people who bought a house way beyond their means and/or suffered serious income disruption over the last few years.

    It’s almost like it requires a serious income loss for a reasonable homedebtor to finally choose the default option.

    Considering current asking prices for comps, we’re underwater the equivalent of 50% of our annual income today, but I feel no pressure to exercise my default option. It’s weird – hard to explain…

    1. HydroCabron

      Maybe you like where you’re living, and you understand on some level that life is not a business.

      I cheerfully encourage anyone considering strategic default to do what’s best for their balance sheet, but I don’t think that financial considerations should always come first. If there are other issues, then weigh them in the decision and act accordingly.

      Right now, having been treating like ____ by three successive landlords, I have a good understanding of the other considerations which make ownership desirable.

      1. Perspective

        Yeah, I blame Irvine Co. as a major factor in pushing me into purchasing/financing a home. There were always a ton of vacant units in Villa Siena, yet every year we’d receive a new lease agreement with a 6-7% increase. I had to spend time and effort negotiating it down to ~4% every year.

    2. irvine_home_owner

      Without getting into specifics… are you in a newer or older area? An SFR or a condo?

      I ask because not only do I not know anyone who has strategically defaulted, but I don’t know many people in Irvine who are underwater by a significant amount.

        1. irvine_home_owner

          Ahh… so still during the bubble prices.

          Sorry to hear about your situation.

          I guess the key here is if your monthly expense is within a reasonable amount to a rental situation — and if so, that may be also why you are staying.

    3. rkp

      I personally know a few people who have/are strategically defaulting. 2 of my friends own their own businesses so first thing they did was to show a drop in income to negotiate a loan mod. One friend got 5 years at 2% and another got something similar for 7 years. It bothers me that they game the system but then again, it really feels like all people have lost morals and just care about “me”.

      The person who has strategically defaulted was a neighbor and he would brag about not paying. He got close to 2 years of free rent and doesnt need to default. Good job that hasnt changed, nice cars, etc. Obviously no clue if he is living beyond his means but his lifestyle or income didnt change before the crash so he just didnt think it made sense to pay any more. In our building, condos have dropped over 50% from peak.

  3. PnL

    Who in their right mind would pay nearly 700k for a house that sits 10ft from the 5 fwy? Is the promise of “great” schools and shopping that strong to pull the trigger on this house? I would think the smog and noise alone would drop this price by 250k.

  4. SoCal78

    Hi, IrvineRenter and friends at IHB!

    This is your long-time reader, SoCal78.

    After years of waiting / thinking / reading / number-crunching, I closed escrow yesterday on a home… not in Irvine… but nearby in Foothill Ranch.

    I decided to share the news here – rather than on my own turf at – to pay homage to the helpfulness that this blog has had in my personal life and to direct our readers to your helpful site. It helped me to make a smart choice. I came here not even knowing what a housing bubble was (yes, that bad) and left as an educated buyer. I owe much of that to Larry and even to your super-helpful & knowledgeable broker-brother, Zovall, who so kindly assisted me behind the scenes even though he had absolutely no obligation nor incentive to do so.

    I was able to get a good deal on an upgraded 4-bedroom home pretty close to rental parity, using a generic / conventional, fixed-rate loan, with 20% down. I think I found the only remaining equity seller who was an original owner, had plenty of wiggle room, and was extremely motivated to work with me, having both the ability and desire to do so. Using what I learned, I was able to identify all the factors that would make for a clean deal and target that sort of homeowner, while also making myself as “marketable” of a buyer as possible.

    My lender was none other than SGIP who frequents this site! I can’t say enough good things about him. His excellent customer service helped me recover from the post-traumatic stress disorder that resulted from the last loan officer I worked with years ago. 😉 It had been a long time since I made a purchase transaction – 8 years – so, being a little rusty, I needed more hand-holding than others might. The poor guy was in touch with me at 10 p.m. on Sunday night in some cases… evenings and weekends, all hours of the day. He has a great attitude. He made the process as smooth as it can be, doing everything he could to take good care of me. His rates were also on-par with what you would find with other lenders who might not offer the same white-glove treatment. So, if you’re a picky-type like me, if you like to ask a thousand & one questions like I do, and if you must know how everything works if it’s not totally necessary, I would recommend that you consider him. I’m not sure he’ll thank me for that but you will. 😉

    Thanks for keeping this blog rolling along. It is a valuable resource for its readers no matter which side of the coin you may be on. I hope others will stay tuned in here. I will continue to check in now and then to read Larry’s take on the state of affairs in the local housing market and beyond. Thanks, guys!!

    Yours truly,


    1. Perspective


      I bought a new car last week after 15 years with the same car; but your news is more exciting!

    2. lee in irvine

      That’s great SoCal78 … be prepared to refinance that conventional loan in the next few weeks. After what happened with the Fed statement, the 10 year bond is yielding 2.26% right now. That’s about 100 bps (or 1%) less than a month ago.

      1. SoCal78

        Thanks for the head’s up. I’ll be on the look-out. I’m at 4.50% right now (could have gone lower but preferred the no points / no fees). I’m not sure if doing a refi right away is possible – I’ll have to check. I thought I heard something about needing to wait a month or something like that… I could be mistaken. I’ll keep my eyes peeled.

    3. Soylent Green Is People

      Thanks for the kind words. The finishing line could not have been reached without my processing, doc drawing, and closing support teams, along with the attention to detail your professional Realtor (with a bonus capital R no less….)provided during the purchase. Buying a home today has a Rube Goldberg feel to it, but the right mechanics will come alongside to make the gears mesh correctly.


      Soylent Green Is People.

    4. zovall

      Congratulations SoCal78 and thanks for the kind words! Have fun getting settled in. 😉 I hope to hear more soon.

    5. rkp

      congrats socal78! we considered foothill ranch but just felt too far from 405 to us…we spend a ton of time in Santa Monica and love being near 405.

  5. irvine_home_owner

    The house profiled is one my favorite floorplans in Harvard Square.

    It’s actually a 2.5 car wide garage and you see very few of those in Irvine. I remember when these were new and the sales office talking up the extra wide garage.

    The big bugger on this one is it’s right next to the 5 freeway… so $659k is probably high.

Comments are closed.