“[A]s the Fed chairman, Ben S. Bernanke, laid out the potentially
devastating ramifications of the financial crisis before congressional
leaders on Thursday night, there was a stunned silence at first…. Senator Christopher J. Dodd [said] the congressional leaders were told “that we’re literally maybe days away from a complete meltdown of our financial system, with all the implications here at home and globally.””
If I were the king of the world; Tell you what I’d do… I’d throw away the loans and the moans and the unknowns; Make home sweet home for you…
When I started writing for this blog, part of my drive was emptying my Reservoir of Schadenfruede. It has grown beyond that, and I appreciate all the people who thank me for convincing them to wait and saving them a great deal of money. I am not a pessimistic or bearish person by nature, and I would rather everyone experience the joy of living rather than the pain and stress of the collapse of an epic financial bubble. However, I am a realist who is willing to face the truth come what may. The truth is prices have fallen, and they will continue to do so. The government may be able to ease the transition to lower prices and borrower solvency by keeping interest rates low for a time. However, sub-6% mortgage interest rates will not be available forever, and after a big push to restructure and refinance existing borrowers out of their bad loans (that may be mandated,) market pressures will cause a gradual rise in long-term rates.
Mortgage interest rates are a combination of the risk-free rate, the inflation premium, and the risk premium. Risk premiums during the bubble were artificially low. If they weren’t, our banking system would not be in trouble, and the bailout of the GSEs would not have been necessary. When the government took over the GSEs, they knowingly took on the investment risk in order to control the risk premium in the open market. This allows them to keep rates artificially low during the upcoming restructure period (I am of the opinion that the government took control of the GSEs to rid the market of toxic paper through a combination of low interest rate refinancing and foreclosure). Government ownership of the GSEs is not going to be a permanent condition, unless of course the government wants to be the defacto subsidized mortgage insurer of the country forever. At some point, the government will want to get out of the mortgage insurance business, particularly since it will not be profitable. Risk premiums will rise to market when the government moves to get out of the business. Three to five years from now, I would look for the government to spin off the GSEs once again (they did this first in the early 70s). I doubt it will take that long for mortgage interest rates to rise again, so if you ever thought about refinancing, now is the time.
Just in case you needed a reminder of what caused this problem, today’s featured property was purchased with an Option ARM with a 1.5% teaser rate. Restructuring this borrower into a mortgage they could afford would require a very low interest rate and likely some significant principal reduction. Since this is well outside of the parameters for a reasonable restructuring, and since this wasn’t a GSE insured loan, it is another foreclosure-in-waiting.
BACK ON THE MARKET. .. .COUNTRYWIDE SAID BRING THEM THE BEST OFFER. ..
.. SHORT SALE PACKAGE ALREADY SUBITTED TO LENDERS. LENDER ORDERED BPO
ALREADY. .SHORT ESCROW. .. .. SHORT SALE. .. SUBJECT TO LENDER
APPROVAL. .. .BEAUTIFUL HOME IN THE PRESTIGIOUS IRVINE. .. ..
CONVENIENTLY LOCATED NEAR FRWY, SCHOOL AND SHOPPING CENTER. .. .CUSTOM
TITLE FLOOR, GRANITE COUNTER TOP. .. .. THOUSANDS OF DOLLARS IN
UP-GRADES. .. .. .MUST SEE TO APPRECIATE
For any of you wondering why I chose Three Dog Night today…
ALL CAPS
An ellipsis is three consecutive periods. I have no idea what form of punctuation is displayed above.
This property was purchased on 7/19/2004 for $660,000. The owner utilized a $500,000 loan and a $160,000 downpayment. On 3/24/2006 he took out a $220,000 second mortgage and withdrew his equity downpayment plus an additional $60,000. On 7/14/2006, he refinanced with a $640,000 Option ARM with a 1.5% teaser rate, and opened a HELOC for $80,000. The total debt on the property is $720,000 plus any accumulated negative amortization, and the total mortgage equity withdrawal is $220,000 including his downpayment.
Is it fair to include his downpayment in the mortgage equity withdrawal? Well, unless he is going to give it back to the lender, he got his money without selling the property, so IMO it should count. If this property sells for its asking price, and if a 6% commission is paid, the total loss on the property will be $203,940. PMC Bancorp’s loan (now being administered by Countrywide) will see a significant loss. Perhaps that 100% cash-out refinancing was not such a good idea.
I hope you have enjoyed this week at the Irvine Housing Blog. Come back next week as we
continue chronicling ‘the seventh circle of real estate hell.’ Have a great and joyous weekend.
🙂
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Jeremiah was a bullfrog Was a good friend of mine I never understood a single word he said But I helped him a-drink his wine And he always had some mighty fine wine Singin’…
Joy to the world All the boys and girls now Joy to the fishes in the deep blue sea Joy to you and me
If I were the king of the world Tell you what I’d do I’d throw away the cars and the bars and the war Make sweet love to you Sing it now…
Joy to the world All the boys and girls Joy to the fishes in the deep blue sea Joy to you and me
[electric piano]
You know I love the ladies Love to have my fun I’m a high life flyer and a rainbow rider A straight shootin’ son-of-a-gun I said a straight shootin’ son-of-a-gun
Joy to the world All the boys and girls Joy to the fishes in the deep blue sea Joy to you and me
Today’s featured property demonstrates the living-off-your-house mindset in action. Apparently, all you had to do was buy a house, any house, and start extracting money from it. It didn’t require any money of your own to invest, and if things go bad, well… it’s not your problem. This house was purchased on 2/10/2006 for $705,000. The owner used a $564,000 first mortgage, a $141,000 second mortgage, and a $0 downpayment. On 9/29/2006, a mere 7 months later, the property was refinanced using a $632,000 first mortgage and a $158,000 second. This netted the owners $85,000 in mortgage equity withdrawal. That is the median income in Irvine, and these people got it simply for owning a house for 7 months! Actually, it is better than that because if you earned $85,000, you would have to pay taxes and have withholdings. To net $85,000, you would need to be making more like $120,000. Further, to get this in 7 months, you would need to be making $205,000 per year. That is one hard working house!
I profile these day after day. Are you starting to get a sense how common this was? Look at how much money these people got to spend for doing absolutely nothing. Is it any wonder houses were such a popular investment? Was it logical to think this could go on forever?
As a society during the real estate bubble, we put enormous sums of money into assets that produce nothing. This isn’t like investing in a factory or machinery or infrastructure of some other sort of productive use. These are houses. They only have consumptive value. There is no production here. Is this where society’s resources should be diverted?
How can a society thrive when it ties up all its resources in non-productive assets? I joke about hard-working houses because the whole idea is so absurd. Imagine if we took every resource in our economy and put it into house production. For a time, everything would be OK because everyone would be working in construction, they would be making money, and we would all have houses, but what happens once we were done? Houses can’t produce anything else. Once the boom was over, the entire economy would collapse because there are no productive assets.
This is basically what we did since the collapse of the NASDAQ stock market bubble. Our manufacturing base never did recover from the recession of 2001. When liquidity was added to the financial system, this money poured into mortgage loans rather than business infrastructure. It is a misappropriation of resources that will likely haunt us for quite some time.
This bank owned property offers nice cherry wood floors through out
bottom level.All 4 bedrooms upstairs with 2 balconys.Located in a nice
neighborhood with desirable schools near by. This property is being
sold as is with no warranties expressed or implied.
Look at that picture of the stairway. Does it look like an optical illusion to you? It plays tricks on my eyes.
Do you think the cherry wood floors are real?
Is putting expensive flooring in a 40 year old condo putting lipstick on a pig?
If this property sells for its asking price, and if a 6% commission is paid, the total loss to whoever purchased Wholesale Capital’s toxic loans will be $254,200.
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I’ve been kicked I’ve been hit I’ve been scratched I’ve been bit I’ve been pushed around Shoved around Had it rough But it ain’t enough
‘Cause I never knew an angel could be so wild I never felt love ’till I tried your style
Lipstick and Leather Black and red, oh yeah! Lipstick and Leather Rock and roll baby made a mess of my head
I’ve been slapped I’ve been blamed I’ve been attacked And I’ve been chained Yeah you put me down Slapped me round Long enough But love is tough
‘Cause you’re ready, willing, able to please Somebody tell me why I’m down on my knees, I said This must be love or I’m goin’ insane There’s such a thin, thin line between pleasure and pain
Lipstick and Leather Black and red, oh yeah! Lipstick and Leather Black and red…
Sometimes I come across a property where the circumstances around the speculative purchase lead to one of two possible conclusions: fraud or cluelessness. I am giving the benefit of the doubt to call this one clueless. This property was purchased in April of 2007. The news of the subprime implosion were on the front page. News of weakness in the housing market was everywhere as sales volumes were already declining and prices were dropping in many markets. And, of course, outlets like the IHB were screaming from the rooftops that prices were going to crash. It was in this environment that our flipper purchased today’s featured property.
The purchase allowed the previous owner who purchased in 2004 to sell at a small profit. It is the kind of circumstances that also has potential for fraud, particularly since the property went into foreclosure in just over a year after its purchase.
But was it really clueless? The flipper didn’t have any money in the transaction. This was a 100% financing deal, so Affiliated Funding provided the money, and the loan was packaged and sold in the secondary market. Some faceless investor is eating the loss. If prices had rebounded, this flipper would have made money. If it went down (which it did in a big way) then only their credit score was at risk. In those circumstances perhaps those of us who did not participate were the clueless ones…
What really caught my attention with this property was the discount. The asking price is 34% off its 2007 purchase price. That is a substantial drop. Perhaps they are hoping for multiple bids over asking. Perhaps there are enough knife catchers out there that they will succeed. In the comments recently, we were reminded about all the bullish commenters in the early days of the bubble blogs who were certain that if prices dropped 10% that investors would swoop in and buy up the entire inventory. This one is 34% off. Where are they now?
Excellent Starter in Gate guarded community. 3 Bed Rms, 3 Baths, 2 Car Garage. Don’t miss out on this one.
Does that picture and description scream, “I don’t give a crap?”
If this property sells for its asking price, and if a 6% commission is paid, the total loss will be $286,940. Think about these losses magnified by the total number of REOs in California and the rest of the country. No wonder our financial system is in such distress.
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Scared to look ahead Instead I fold my arms waiting The train’s arriving with the goodies I’m entitled to All this time I never felt I got what I deserved Oh what a shame (why me why me)
I never take a thing for granted I’ll never be a hypocrite (what would you know)
Fly, watch you’re falling sunset I can’t remember when I ever heard you say Thank you for everything you gave I’m so grateful (hang on) to your fallen sunset
Don’t you see I’m talking can’t you wait until I’m done Hold on a second here’s another one you haven’t heard You think you’re owed the world well look at me I’m owed it too (you’re feeling sorry for yourself once again)
I never take a thing for granted I’ll never be a hypocrite (can’t stand to hear you) Always taking things for granted you’re such a hypocrite (what would you know)
Fly, watch you’re falling sunset I can’t remember when I ever heard you say Thank you for everything you gave I’m so grateful (fly) watch you’re falling sunset
Many people during the bubble took out HELOCs and extensively renovated their properties. Historically, interior property renovations add $0.70 for every dollar spent. Exterior renovations add $0.50 per dollar. It was not uncommon to see property listings touting $200,000 in renovations to justify a $500,000 price increase. It isn’t the renovations that were adding value to property; it was the financing that was inflating it. There were several properties in Irvine that were torn down to a single wall and rebuilt from the ground up. Those that attempted this kind of extreme home makeover in 2007 did not fair to well.
We first profiled 2 Angell, Irvine, CA 92612 in February of 2008 when it first came on the market. The flippers who were trying to sell this property took a $600,000 house, rebuilt it, and asked $1,469,000 for it. I was thinking they might get lucky to get $1,000,000. Now the property is back on the market for $1,199,000.
Today’s featured property is another total redo. It is an interesting story of renovation gone awry.
Absolutely gorgeous Tuscany styled home. Must sell……
For someone who really must sell a property, they didn’t put much effort into the MLS listing.
This property was purchased for $640,000 on 4/7/2005. The original structure was completely replaced by a new, much larger home. On 6/9/2006, the owner opened a HELOC for $170,250. This probably did not cover the full cost of the renovation. On 1/12/2007 he refinanced the first mortgage for $1,200,000. He promptly put the house on the market for $1,789,000 and watched it sit there for a year.
Listing Price History
Date
Price
Sep 06, 2007
$1,789,000
Dec 10, 2007
$1,699,900
Mar 07, 2008
$1,450,000
Apr 24, 2008
$1,200,000
Sep 11, 2008
$999,000
Every 90 days, this seller lowered the price another $200,000 and chased the market as it fell even faster. He might have got out for enough to pay off the debt if he had cut the price early, but this was supposed to be a ticket to riches, not a backbreaking labor for chump change. Of course, now, he is either going to have to write a big check at the closing table or accept a serious credit hit. If this is the man’s primary occupation, it is a very difficult choice to make…
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Im moving through some changes Ill never be the same Something you did touched me Theres no one else to blame
The love we had has fallen The love we used to share Weve given up pretending As if you didnt care
Change changing places Root yourself to the ground Capitalize on this good fortune One word can bring you round Changes
Unsold in 90+ days
Jeremiah was a bullfrog
This bank owned property offers nice cherry wood floors through out
Unsold in 90+ days