Crack Music — Kanye West

What were the guys over at IndyMac smokin’? I recently spoke with two developers who have looked at the IndyMac portfolio of large loans. They both said it was nearly impossible to value because it was such an eclectic mix of properties with appraisals of dubious quality. There is a great post at Appraisers Forum on the nonsense over at IndyMac. In residential home lending, IndyMac had positioned itself as the leader in Alt-A loans.

Tanta at Calculated Risk has a great discussion in her post Reflections on Alt-A. Her basic premise is that Alt-A was never a good business plan. Alt-A loans were generally stated-income and low-doc loans given to people with high FICO scores. The theory was that people who could be responsible with normal debts could do just as well with enormous debts. It isn’t working out too well, particularly for IndyMac.

One of the intriguing ideas from her post is that Subprime will return, albeit in a different form. There has been much discussion about how people who have gone through foreclosure will get back into the housing market. Subprime was originally intended to take people with poor FICO scores that had good income and savings and give them bridge financing until they could repair their FICO scores and refinance into conventional loans. This business model will probably return in a few years as there will be many people in this category. However, Alt-A is likely dead, and it will not be resurrected. Stated-Income, High CLTV, and low or no-doc loans will probably not resurface no matter how good a persons FICO score is simply because people will default on these loans not matter how responsible their past history.

So where does that leave Irvine’s housing market? Without Alt-A, people will not be able to get the loans necessary to support today’s still-inflated prices. Buyers will actually need to qualify for loans based on their real income, and they don’t make that much money. And since many previously Alt-A borrowers have defaulted and are now Subprime, and since Subprime is currently defunct, the buyer pool in Irvine has gotten much, much smaller.

Today’s featured property is a simple story of speculative greed, Alt-A financing and the aftermath of years of irresponsible lending. The buyer used 100% financing and defaulted when prices didn’t go up. IndyMac foreclosed on its first mortgage and wiped out the second. They are now trying to sell the house to recover the value of their first mortgage, and they are over market. The only mystery remaining is how much of their first mortgage they stand to lose.

Asking Price: $562,250

Income Requirement: $140,562

Downpayment Needed: $112,250

Monthly Equity Burn: $4,685

Purchase Price: $690,000

Purchase Date: 9/26/2006

Address: 2 Shelby, Irvine, CA 92620

Tremendous value! Clean, light and bright. Vaulted ceilings. Recessed
lighting. Scraped ceilings. Tile floor throughout. Fireplace with
mantel in living room. Tile roof. Corner lot in quiet family
neighborhood. Close to schools, parks, shopping, freeway. Low HOA. No
Mello Roos!

Isn’t the front yard beautiful? What a value!

I think the kitchen is the 1986 original, too.

The previous owner bought this property on 9/26/2006 which was the approximate peak of Irvine’s market. He used a $552,000 first mortgage a $138,000 second and a $0 downpayment. It looks like he made payments for about a year and gave up. It went back to IndyMac on 6/25/2008. If this property sells for its asking price, and if a 6% commission is paid, IndyMac stands to lose $161,485.

IndyMac may be on crack, but at least they didn’t get Merril-Lynched…

.

How we stop the black panthers?
Ronald Reagan cooked up an answer
You hear that?
What Gil Scott was hearin
When our heroes and heroines got hooked on heroin.
Crack raised the murder rate in DC and Maryland
We invested in that it’s like we got Merril-Lynched
And we been hangin from the same tree ever since
Sometimes I feel the music is the only medicine
So we cook it, cut it, measure it, bag it,sell it
The fiends cop it
Nowadays they cant tell if that’s that good shit
We ain’t sure man
Put the CD on your toungue yeah, thats pure man.

From the place where the fathers gone,
The mothers is hardly home
And the…
Gonna lock us up in a…home
How the Mexicans say we just tryin to party homes
They wanna pack us all in a box like styrofoam

Crack Music — Kanye West

Back in Time — Huey Lewis and the News

Today’s rollback is truly impressive, not because it is a great property or a great deal, but because the discount is so severe. The low end of the market is searching for the bottom, and it hasn’t found it yet. What is also interesting about this property is its cost per square foot. At $174/SF, it is the least expensive place in Irvine. This might be expected on a large property over 3,000 SF, but when you see a price like that on a small condo, it is signaling more declines in the market. Smaller units almost always carry a higher price tag on a per square foot basis. From a construction cost perspective this makes sense because the smaller units still have the expensive bathroom and kitchen space and very little of the inexpensive filler.

The low end of the market must find a bottom before the market can stabilize. Without price stabilization there, the move-up market is non-existent, and the substitution effect will eventually pull down the larger, more desirable properties. Someone looking for a two bedroom place might take a smaller property if the price differential is great enough. Is that second bedroom really worth paying double for? Today’s featured property is probably the least desirable property in Irvine. It is old, small, ugly and in need up renovation (although it is a livable rental.) All premiums can be measured off units at the bottom. Properties in Brio may be superior, but would you pay 80% more ($360,000) for a smaller unit there? (2701 Ladrillo Aisle, Irvine, CA 92606) People looking at 1 bedroom properties will not likely pay an 80% premium no matter how much nicer the property might be. As you can see this will put further price pressures on units in Brio, and this will reverberate through the entire chain of move ups. High-end property prices will not hold up with continued price erosion at the bottom of the market. The high end may continue to be populated by a few knife catchers, but as the substitution effect really kicks in, volume will decline further, and the imbalance of supply and demand will create a fragile market. REOs that find the few remaining buyers will finally overwhelm the feeble price support, and the next leg down will begin. Look for it this fall and winter.

Asking Price: $199,900

Income Requirement: $49,975

Downpayment Needed: $39,980

Monthly Equity Burn: $1,666

Purchase Price: $295,000

Purchase Date: 3/26/2004

Address: 145 Pineview, Irvine, CA 92606

Unbeliveable?

I would be very concerned about the unpermitted extension…

Great for a first time buyer or investor? Oh, really? It cost these people their good credit, but at least they took a wad of bank cash with them on the way out.

Check out the sales history. This is a 2003 rollback:

Sales History

This is practically a 2001 rollback. Of course, some excited knife catcher will probably bid over the asking price. This may be near rental parity for an owner occupant, but who wants to own and live here? An investor looking for positive cashflow would still bid less than this asking price.

None of this is a concern to today’s owners of course. They bought the place in 2004 with a $236,000 first mortgage, a $44,250 second mortgage, and a $14,750 downpayment. They refinanced in 2005 with a $284,000 first and a $71,000 second leaving a total property debt of $355,000. They got their downpayment back plus an additional $60,000. If this property sells for its asking price, and if a 6% commission is paid, then Master Financial Inc. stands to lose $167,094. That is almost half of their loan balance. Ouch!

.

Tell me, doctor, where are we going this time
Is this the 50’s, or 1999
All I wanted to do – was play my guitar and sing

Gotta get back in time
Gotta get back in time
Get back, get back

Back in Time — Huey Lewis and the New