Asking Price: $565,000

Address: 143 Islington, Irvine, CA 92620

{book5}

In 2004, Alan Greenspan, then the head of the Federal Reserve, had this to say, “Indeed, recent research within the Federal Reserve suggests that many
homeowners might have saved tens of thousands of dollars had they held
adjustable-rate mortgages rather than fixed-rate mortgages during the
past decade.” Many people took this as a tacit endorsement of these loans by the head of the Federal Reserve.

The ignorance of Greenspan’s statement reveals a pathological mindset among policy makers in Washington; the people in charge genuinely believed the general population capable of managing their own financial risks — risks they often are not aware of and obviously do not understand. For evidence of this ignorance one has to look no further than the nationwide epidemic of foreclosures. Regulators took this same attitude toward major financial institutions. The resulting flaunting of risk is the direct cause of the severe economic recession we are now enduring.

When an entire population is encouraged to take tremendous risk, the resulting losses can be so large that neither the individuals nor the institutions that encouraged them can absorb the losses. The Government must step in as the counter-party who absorbs the losses others cannot; hence, you and I and everyone else is paying for the excesses of The Great Housing Bubble.

{book3}

The government is going to tackle the issue of how much risk can financial institutions take on in upcoming policy and regulation debates. Today, I want to focus on whether or not people should be allowed to risk foreclosure with an adjustable-rate mortgage.

I have already made my position known in Bring Back Paternalism in the Mortgage Market. I am no longer the Reagan Era free-market capitalist I used to be. I am not alone in making this philosophical change. Privatizing profits is great, but the need to nationalize the losses reveals that free-market capitalism never really existed, and perhaps needs to be further regulated in order to protect the public interest.

Much of the risk sold into the mortgage market during the bubble has already blown up in the form of subprime loans. The worst loan program was commonly known as the two-twenty-eight (2/28), and it was given to subprime borrowers. It has a low fixed payment for the first two years, then the interest rate and payment would reset to a much higher value and recast to a fully amortized schedule for the remaining 28 years. Anecdotal evidence is that most of these borrowers were only qualified
based on their ability to make the initial minimum payment (Credit
Suisse, 2007). The demise of this loan has flattened the low end of the housing market.

All adjustable rate mortgages (ARMs) are risky because the payments can go higher thus increasing the likelihood of borrowers losing their homes. Interest-only ARMs are bad because they
generally have a fixed payment for a short period followed by a rate
and payment adjustment. This adjustment is almost always higher;
sometimes, it is much higher. At the time of reset (or recast), if the borrower is
unable to make the new payment (salary does not increase), or if the
borrower is unable refinance the loan (home declines in value below the
loan amount), the borrower will lose the home. It is that simple.
These risks are real, as many homeowners have already discovered.

Given the problems with ARMs, why do people use them? What is their incentive? When compared to fixed rate mortgages, people who use ARMs can finance greater sums and thereby outbid more conservative borrowers. This enables the reckless to outbid the responsible to obtain real estate. This is a powerful inducement to take on the risk of ARM loans; however, since borrowers have proven unwilling to accept the consequences of their risky behavior (foreclosure), it is legitimate to ask if this behavior should be permitted at all (Obviously, I don’t think it should be).

The problems with ARMs are many and obvious, but the overriding problems was the failure to qualify people based on the largest payment possible under the loan program. Let me explain.

Buried in the terms of your loan contact is the maximum interest rate you could be charged on the loan. Many people who signed up for 4% ARMs this year have a clause buried in their contract whereby the interest rate could increase by several percentage points during the life of the loan. Most people are qualified based on their ability to make the payment based on the initial rate period; if interest rates go up, or if there is an amortization recast, the loan blows up and the borrower loses the home.

Lenders are willing to loan people money on these terms because they believe (1) interest rates will not go up that much, or (2) people will either refinance into another ARM or (3) sell the home. As the Great Housing Bubble proved, those assumptions are erroneous.

All ARMs rely on the fact that lenders believe they have transferred the risk to some other party — either a borrower or an insurer. However, when too much risk has been concentrated on borrowers or insurers, they become unable to absorb the losses and the whole system becomes unstable.

The only way ARMs can be a stable lending vehicle is if the borrower is qualified based on the payment required with the largest combination of loan balance and interest rates allowable under the terms of the note. Anything less than that leaves a dead zone where borrwers can fall into the foreclosure abyss.

Dead Zone of ARM Interest Rates

If people were qualified based on the payment required at the contractual limit, ARMs would no longer be dangerous — and they would no longer be useful as an “affordablity” product. Lenders might be able to construct ARMs with low contractual limits to permit ARMs under certain circumstances, but they would no longer function as an affordability product, and borrwers would not have to choose between risking foreclosure or missing out on buying a property to the competition.

The beauty of fixed-rate mortgages is that borrowers can truly manage their payment risk. Since the payment is fixed, they know they can make the payment barring a job loss (which we have seen plenty of). An ARM provides no mechanism for the borrower to control their payment risk. If the terms of the note allow the interest rate charged to skyrocket, the borrower will surely default.

The scary part of this story is that we are still writing ARMs with unstable terms. I have written about the Temporary Affordability and the Third Foreclosure Wave. We are still building this foreclosure tsunami of the future, and nobody seems to care because we are solving our immediate problems with excess foreclosures. Putting people into unstable loans just pushes the problem out a few years, but it does not solve it.

If we are lucky, this third wave of foreclosures will coincide with the upcoming wave caused by Option ARMs and interest-only ARMs given to Alt-A and Prime borrowers. If interest rates go up dramatically while that wave is cresting, we may flush all these bad loans out of the system once and for all… Perhaps I am too much of an optimist. Until we stop writing ARMs with unstable terms, the housing market will continue to be volatile and prone to bouts of numerous foreclosures.

Asking Price: $565,000

Income Requirement: $141,250

Downpayment Needed: $113,000

Purchase Price: $520,000

Purchase Date: 12/12/2003

Address: 143 Islington, Irvine, CA 92620

POOL VIEW? You mean, I am expected to pay over half a million dollars, and the pool isn’t even mine? WTF?

I don’t know why, but this listing really bothers me. Is this what life in Irvine has come to? We are expected to pay $565,000 for a 3 bedroom condo with a view of a pool. Shouldn’t half a million dollars get you a single-family detached home with a yard and a pool of your own?

Priced right for a quick sale? If you say so….

This property was purchased on 12/12/2003 for $520,000. The owners used a $408,000 first mortgage and a $112,000 downpayment. Since then they have opened HELOCs for $206,000 and $261,300 respectively. Based on the increasing demand for HELOC limits, it appears they have taken out this money. If so, they are not losing their downpayment, only their good credit.

If this property sells for its current asking price, and if a 6% commission is paid, the total gain on the sale will be $11,100. The total loss will depend on how much of the HELOC money was taken out.

Lenders are completely in control of the pricing in many markets around California and the rest of the Country, and they control the lowest tier of the market here in Irvine. What will they do with their power?

Asking Price: $263,500

Address: 244 Lemon Grove, Irvine, CA 92618

{book7}

Bonus question: Would you buy on a freeway?

I Wanna Rule the World — 10CC

I wanna be a boss
I wanna be a big boss
I wanna boss the world around
I wanna be the biggest boss
that ever bossed the world around

Lenders will be the bosses of the Irvine market because they will control the majority of for-sale property in the market. They already control many markets where REOs make up more than 50% of all sales. They completely control the bottom market strata here in Irvine, and as foreclosures work their way up the property ladder, they will end up controlling our entire real estate market.

A couple of weeks ago, I wrote about Irvine’s Future REO Inventory. In that post, I noted the following:

Foreclosure is a four step process: (1) the borrower quits making
payments, (2) the lender issues of Notice of Default, (3) the lender
issues a notice of Trustee Sale, and (4) the foreclosure auction occurs
on the courthouse steps. Steps 1, 2 and 3 are separated by 90 days
each. At any time during this period, either the borrower can get
current with their payments, or the borrower and lender can agree to a
loan modification. If either contingency occurs, the foreclosure
process is aborted.

California passed SB1137 to force lenders to try harder to reach
borrowers in default and work out a loan modification plan. Also, the
GSEs and many large banks were on voluntary or mandated foreclosure
moratoria. This caused a dramatic decline in Notices of Default (step
2). Unfortunately, as I noted Moritorium on Defaults Announced,
stopping lenders from issuing notices does nothing to prevent borrowers
from actually defaulting (step 1). Borrowers everywhere stopped making
payments, and lenders merely stopped issuing notices about it.

I borrowed the chart below from Mish’s blog showing the delinquency rate since January of 2006 (#1 above — people who quit making payments). As you can see, there has been a steady increase in the delinquency rate. This is the first step in the foreclosure process. Unless a borrower who goes delinquent cures this delinquency, the property will work its way through the system and ultimately become REO.

In the past, people cured their delinquencies either by selling the property or borrowing the payments from another source. In today’s market, they cannot sell because they are underwater, and creditors have cut off other lines of credit; therefore, the two primary methods of curing default have been removed. Of course, this assumes that people want to cure their delinquency. When their is no equity in the property, and when the cost of ownership exceeds the cost of rental, there is little incentive to cure delinquency. In short, people walk.

Since the primary methods of curing delinquencies have been curtailed, and since the desire to cure is also diminished, the cure rate has dropped to near zero. Since the cure rate is near zero and likely to stay that way, new delinquencies will end up as foreclosures. The current delinquency rate is 9.12%. That means that over 9% of all homes with a mortgage are entering the foreclosure pipeline right now. The rate of delinquency is still getting worse.

In the astute observations last week, Dafox posted a link to Orange County foreclosure data. One of the charts created from this data is shows the number of NODs and foreclosures with the foreclosure numbers shifted by one year to account for the duration of the foreclosure process. I have taken the delinquency chart based on national data and guestimated the loan delinquency rate in Orange County based on national trends. I combined the two data sources into the chart below.

The purpose of the chart is to illustrate the pipelines of inventory currently working its way through the system. Remember just because a lender hasn’t filed a NOD does not mean people are not going delinquent on their payments; these properties make up the “Delinquency Inventory.” The foreclosure tsunami will continue to build until delinquencies stop rising and actual foreclosures catch up. There are no “green shoots” here.

Another kind of inventory known as “pipeline inventory” is the number of properties moving from NOD through to foreclosure. These properties will become REO unless the loans are cured.

The chart demonstrates that lenders were processing their foreclosures as they were obtaining them through mid 2007; there was little delinquency or pipeline inventory. In late 2007 as the various foreclosure moratoria began, lenders began falling behind on their filing of NODs and their foreclosure processes.

The foreclosure moratoria were supposed to workout
several million loans and stop people from entering the foreclosure
process. As we all know, this process has been a fiasco. The number of
loan modifications completed is a very small percentage of the number
of delinquencies, and 70% of those loan modifications default in 6
months. Other than buying the banks a little time, the foreclosure
moratoria were a failure.

The delays in foreclosure caused a buildup of properties in the system in the form of delinquency inventory and pipeline inventory. Unless the delinquencies and defaults are cured during the process–which seems unlikely–these properties will become REO.

As we all know becoming REO is only part of the story. Once a property becomes REO, it must be disposed of by the bank. The inventory owned by the bank but not being sold in the open market is known as “shadow inventory,” and estimates of this number vary widely. I cannot find a data source to verify the number, but the rumor is that there are 50,000+ bank owned properties in the five-county area of Southern California.

Add together loan delinquencies, pipeline inventory and shadow inventory, and you have a huge number of homes that will emerge from the system as must-sell inventory.

It will take years for the lenders to catch up on all the loan delinquencies they are facing because they are falling further behind every day. The result of all this inventory in the hands of lenders is a complete domination of the market by REO.

What will lenders do?

The fantasy of fence sitters everywhere is that lenders will either by choice or by force will dump large numbers of properties on the market all at one time and create so much must-sell inventory that prices roll back to the stone ages. I rather doubt 1970s prices are on the horizon. There will be regulatory pressure on the lenders to dispose of their assets, but an extreme rollback in prices would be so disruptive, that regulators will likely give the lenders some room to work off their inventories without causing a catastrophic collapse of asset values. So the question is, “How low will they go?”

Lenders are not completely stupid (kool aid insane perhaps, but not utterly clueless). Most understand cashflow valuations, and they can recognize price levels where it is cheaper for people to own than it is to rent. Once they cross that threshold, they know they can entice a renter to purchase a property from them because it really is a good deal. Depending on the desirability for long-term owner occupancy, they may have to increase their discounts in order to find a buyer, but it isn’t very likely that lenders will allow asset values to drop far below rental parity because even they recognize the value there.

IMO, once lenders gain total control of housing markets with the inventory they have, they will push prices down to rental parity and attempt to hold them there. There will be some pressure from regulators to dispose of assets, but there will be a pushback from lenders who recognize the floor of values rental parity creates. This tension will keep prices at these levels until the inventory of REO is flushed through the system.

It is hard to estimate how long this flushing process will take without hard numbers. Based on the current state of our economy, the huge number of bad loans yet to reset, and the general trend illustrated in the charts above, I would estimate we will not see a peak in foreclosures until 2012, and it will be three to five years after that before the inventory is purged from the system. It will take a decade to work off the excesses of The Great Housing Bubble.

{book3}

Asking Price: $263,500

Income Requirement: $65,875

Downpayment Needed: $52,700

Purchase Price: $350,358

Purchase Date: 5/8/2009

Address: 244 Lemon Grove, Irvine, CA 92618

Mirroed?

Aurora Loan Services did not mess around with this property:

They bought it at auction on 5/8/2009 for $350,358.

Foreclosure Record
Recording Date: 04/10/2009
Document Type: Notice of Sale (aka Notice of Trustee’s Sale)
Document #: 2009000174390

Foreclosure Record
Recording Date: 01/02/2009
Document Type: Notice of Default
Document #: 2009000000595

This property is tracking right on the statutory limits. Relative to what we have been seeing, this one is on the fast track. Given the rapid deteioration of low end pricing, it is wise to get this done as quickly as possible.

Pricing of these low end properties are still above cashflow investor levels, so quick foreclosure and sale provides opportunity for the lender to bequeath future depreciation to a knife catcher.

Asking Price: $130,000

Income Requirement: $32,500

Downpayment Needed: $26,000

Purchase Price: $62,500

Purchase Date: 10/29/1997

Address: 228 Orange Blossom #34, Irvine, CA 92618

IMO, this is a well executed price drop. They started high enough to get some of their money back, after an initial look, they began methodically lowering the price, and they did so at an unpredictable interval so potential buyers could not just wait a certain number of days expecting further declines. Of course, it can be argued that such a large price drop reflects too high a starting asking price. This is probably an accurate criticism, but with as fast as the low end collapsed, it is hard to say for sure.

This property was a classic “put” to the bank. The owner paid $62,500 on 10/29/1997 using a $35,000 first mortgage and a $27,500 downpayment. She only borrowed against the property once during the bubble taking out a $20,000 loan in late 2003–that is until 7/23/2007 when she took out a $212,000 first mortgage. Her timing was great because two weeks later the credit crunch hit, and financing these properties became significantly more difficult.

Why even look for a buyer when the bank will give you 100% of peak value?

Asking Price: $179,900

Income Requirement: $44,975

Downpayment Needed: $35,980

Purchase Price: $315,500

Purchase Date: 2/29/2007

Address: 426 Orange Blossom #202, Irvine, CA 92618

The property was purchased at auction for $268,814 on 2/20/2009. The owners lost their $50,000 downpayment.

Foreclosure Record
Recording Date: 01/05/2009
Document Type: Notice of Sale (aka Notice of Trustee’s Sale)
Document #: 2009000002015

Foreclosure Record
Recording Date: 08/22/2008
Document Type: Notice of Default
Document #: 2008000402030

The discount on this property is remarkable: 43%. The sad part is that it is still overpriced. It is probably near rental parity, but this isn’t a property an owner-occupant wants. This must fall to cashflow investor levels, and it isn’t there yet.

{book4}

Will the Cartel Collapse?

Implicit in my belief that prices will hold at prices between rental parity and cashflow investor levels is the belief that a variety of lenders holding properties will behave as an informal cartel and hold prices at levels above where supply and demand would find its own equilibrium. Cartels are inherently unstable because each member has an incentive to cheat. There is the possibility that the collapse of cartel pricing may push prices even lower. I doubt this will happen, not because the cartel will be stable, but because I believe cashflow investors will provide sufficient demand to mop up any supply. I might be wrong.

What do you think the lenders will do?

Most homebuyers underestimate how much cash they really need to purchase a house. Back when houses provided money, this was less of a problem than it is today.

Asking Price: $930,000

Address: 75 Trailwood, Irvine, CA 92620

{book}

Cashless and Pathetic — No Cash

livin off an income of depression and rejection
feeding off the remains of a scab of an infection
locked to a chain of i.o.u.s and endless debt
i’m cashless and pathetic

Unlike the heyday of the Great Housing Bubble when 100% financing was readily available, it now takes cash to close a real estate deal. If you have no cash, you get no house.

So how much cash does it take to close a deal? and how much cash do you need to have available to get through the process and still have a life? The actual cash demands during the process come from four main areas:

1. Downpayment — 3.5% – 20%+
2. Closing Costs — 1% – 3%
3. Inpsection Contingencies — 0% – 5%+
4. Furnishing and Move In — 2% – 5%+

The downpayment is the largest and most obvious use of cash in the homebuying process. Downpayments are generally 20% of the purchase price of the home because lenders are usually only willing to loan 80% of the appraised value or purchase price, whichever is smaller. Lenders will extend loans at levels greater than 80% of the value if a third-party issues insurance on the loan and promises to pay off the lender in the event of a loss.

The insurance on loans can come from a government entity like the FHA, or it can come from a private mortgage insurance company. In the wake of the Great Housing Bubble, private mortgage insurance is very hard to obtain due to excessive losses by insurers. The only insurer of loans over 80% LTV is the FHA which insures loans up to 96.5% LTV; this results in a 3.5% downpayment. The problem with FHA loans, and all private mortgage insurance, is the cost; you pay a premium for this insurance that comes out of the amount you could be putting toward a larger payment on a larger loan. Basically, if you don’t have a 20% downpayment, you will get much less house because you will both finance less and have less to put down.

Another issue related to downpayments is caused by a low appraisal. Sometimes buyers fall in love with a property and bid higher than its appraised market value (this also happens with falling comps in a declining market like ours today). When an appraisal comes in below the agreed sales price, the lender will only loan to appraised value–the buyer must make up any shortfall with their own cash if they want to close the deal. This is one of the reasons downpayments have been so high in Irvine since prices started falling; only those with the extra cash can close the deal.

{book2}

Closing costs are another hefty yet forgotten drain of your cash. These come in two forms; fees and contingencies. The fees you will pay may include any of the following: appraisal fees, lender fees, assumption fees, attorney’s fees, credit report, escrow company fees, “garbage” fees (miscellaneous charges, not your garbage pick up), loan fees, inspection reports (more on this next), prepaid homeowners insurance, prepaid loan interest, prepaid property taxes, private mortgage insurance, recording and filing fees, survey fees, tax service fees, title search fees, transfer tax, and other fees. Not all of these fees are incurred on each transaction, but most are. These add up to between 1% to 3% of the purchase price of the property with 2% being the norm. Buyers pay this out of their cash as these costs are not usually rolled up into the loan.

Once you enter the escrow process, you will pay for property inspections (you do not have to, but you are very foolish not to). The inspections may turn up expensive repairs. Some repairs may be immediately necessary while some may be able to be deferred. In either case, you will need to go back to the seller to negotiate who will pay for these repairs. The seller is under no obligation to offer you any allowance or offer to make repairs to the property. If the seller is unwilling to make repairs, as a buyer you have the right to terminate the escrow and obtain a refund of your deposit, or you can decide to go ahead with the deal and make the repairs yourself–out of your own cash. It is sometimes possible to get the loan increased to cover these items, but usually it is not.

The cost of moving in and furnishing the property is another area of cash need. Many people simply move the furnishings from their previous residence, but many do not. It is a nearly universal desire to have new furniture and appliances when moving in to a different house. Those that have the cash reserves after the closing nearly always do this. Depending on the tastes of the owners, this number can be just about anything, but a good rule of thumb is to have 2%-5% of the purchase price set aside for moving expenses and new furnishing.

Another issue related to cash management and housing costs is the need to keep a cash reserve. Financial planners tell people they should have six months cash reserve as liquid savings at all time. Although that sounds good in theory, in practice almost nobody does this. In the real world few people consider all the expenses listed above, so they drain every penny they have by the time they close escrow; the cost of furnishing and moving in is financed on credit cards. The closest most people have to six months reserves is a large available credit line through a collection of credit cards (remember Southern California’s Cultural Pathology and “credit is saving”). Lenders often require borrowers prove they have at least two or three months of mortgage payments saved up, but even if they had this at closing, most blow it when they move in.

Despite these real world problems, it is important to have an adequate budget for the actual cash demands of the transaction and the move in plus the cash reserves to survive after the fact. During the housing bubble, people could rely on house price appreciation to furnish the house, fund all repairs, replenish an emergency reserve fund and provide additional spending money. Over the next decade or more, houses will provide none of these things; the money will need to come out of wage income. Few are prepared for this reality, but now you know what you are facing and how much this will all cost. Think about it when you go to bid on property when the time is right.

Asking Price: $930,000

Income Requirement: $232,500

Downpayment Needed: $186,000

Monthly Equity Burn: $7,750

Purchase Price: $1,200,000

Purchase Date: 6/22/2005

Address: 75 Trailwood, Irvine, CA 92620

When a realtor takes a short sale listing, they know they probably will not make a commission from it. You can tell because the listings have no money and less than 5 minutes time put into them, just like this one.

This property was purchased on 6/22/2005 for $1,200,000. The owner used a $900,000 first mortgage, a HELOC for $180,000, and a $120,000 downpayment. He refinanced the first mortgage for $1,040,000 on 1/3/2007. He probably wishes now that he did not pay down the HELOC because after the refinance, he had $160,000 of his own money into the property.

If this property sells for its asking price, the owner stands to lose his $160,000, and the lender stands to lose as well.

Right now there are more houses in some stage of foreclosure than there are current listings of properties for sale. The lifting of foreclosure moratoria is causing a spike in default notices. The second wave is building.

The owner of today’s featured property recently cut the price $100,000 in an effort to move it before the wave hits.

Asking Price: $499,999

Address: 26 Longshore #31, Irvine, CA 92614

{book}

See my profile of Oak Creek at Irvine Homes blog.

We’re Ready — Boston

We’re ready now
Catchin’ a wave to ride on
Steady now
headin’ where we decide on
And I know that there’s something that’s just out of sight

It is conventional wisdom in the housing blog community (and the OC Register) that a giant wave of foreclosures is coming later this year, but what facts do we have that support this thesis? Today, we take a look at the available data and show this wave in its formative stage.

Foreclosure is a four step process: (1) the borrower quits making payments, (2) the lender issues of Notice of Default, (3) the lender issues a notice of Trustee Sale, and (4) the foreclosure auction occurs on the courthouse steps. Steps 1, 2 and 3 are separated by 90 days each. At any time during this period, either the borrower can get current with their payments, or the borrower and lender can agree to a loan modification. If either contingency occurs, the foreclosure process is aborted.

California passed SB1137 to force lenders to try harder to reach borrowers in default and work out a loan modification plan. Also, the GSEs and many large banks were on voluntary or mandated foreclosure moratoria. This caused a dramatic decline in Notices of Default (step 2). Unfortunately, as I noted Moritorium on Defaults Announced, stopping lenders from issuing notices does nothing to prevent borrowers from actually defaulting (step 1). Borrowers everywhere stopped making payments, and lenders merely stopped issuing notices about it.

The hope of foreclosure moratoria is that additional time will allow lenders to work out the bad loans and avoid the foreclosure process. Unfortunately, it did not work. First, very few borrowers even try to work out the loan with the lenders, and many who try fail to reach an agreement. Second, most who have agreed to a loan modification end up defaulting again; the redefault rate is running at about 50%. And third, financially it is in a borrower’s best interest to give up the house in foreclosure, so the only thing keeping them in the loan and in the home is their sense of morality concerning the payment and their attachment to their properties.

By far the best writing on this subject is coming from Mark Hanson, aka Mr. Mortgage. He has access to all the mortgage and foreclosure data, and he does a great job analyzing it.

His graphs and charts show exactly what we would expect to find; a temporary decline in defaults while loan modifications are attempted followed by a dramatic increase once the moratoria are lifted. This is statewide data in California, but it doesn’t tell us much about Irvine.

We all know what has happened to pricing in less desirable communities dominated by subprime lending. The initial wave of foreclosures wiped these areas out. Prices in many areas are down 50% to 70%. The decline in these areas did not occur because they were less desirable (a conceit common among high-end property owners); the decline occurred there first because their loans reset first.

The loans in Irvine are due to reset over the next 3 years as very little of it was subprime. If you put the default chart together with the reset chart, it would suggest that the new wave of defaults would be the tapering off of subprime and an increase in other ARMs–a problem being exacerbated by a bad economy and high unemployment. Is there any evidence that the new spike of defaults is due to mid-
to high-end properties starting to default? On the map of Irvine below, the green dots with a “P” on them are “preforeclosures” otherwise known as Notices of Default.

There are always more Notices of Default (“P”) than there are Notices of Trustee Sales (“A”) because some defaults are cured through payment or modification, and the foreclosure process is avoided; however, the ratio is currently quite high due to the spike in Notices of Default. There are currently 72 bank-owned properties, 196 scheduled for auction, and 416 in preforeclosure.

According to our inventory tracker, there are about 675 homes for sale in Irvine. According to Foreclosure Radar, there are 684 properties in some stage of the foreclosure process. That means there are more homes in the process than there currently are for sale in the market. Several of the distressed properties are already listed, so there is some double counting (most of these properties are not currently on the MLS), but a large number of houses in Irvine are going to be hitting the market, and they will be sold.

So which neighborhoods are showing the most stress right now? Let’s take a tour of Irvine and see…

I have already profiled many Northpark homes along the 261 corridor. Many homes here have already gone through the foreclosure process and ended up in the hands of new owners. Many of the new owners from 2007 and 2008 may default themselves as they fall further underwater. This area may see multiple waves of foreclosures. One thing I found interesting was the relative lack of foreclosures in the part of Northwood northeast of Irvine Boulevard. With the exception of the Lakes condos and the condos on Timberwood, there has been little foreclosure activity here. It doesn’t appear there is much coming soon either.

It is no surprise that Northwood II and Woodbury are getting hammered. They are new communities and most of the homeowners are underwater. There is a small group of condos near Culver and the 5 that also is seeing a great deal of foreclosure activity. The Lakes condos appear to be letting up a bit on their foreclosures. Many properties there have already gone REO, and perhaps the worst is over for this complex. The rest of Northwood, College Park and El Camino Real all show moderate foreclosure activity, mostly at the low- to mid- price range.

I was surprised at two things when looking at this map: (1) the lack of foreclosures in Culverdale and Columbus Grove, and (2) the plethora of distressed properties outside the loop in Woodbridge. We have already seem many foreclosures in Culverdale and Columbus Grove, so this is either a lull in the storm, or the worst may be behind these neighborhoods. I suspect more foreclosures are to come in Columbus Grove because all the homeowners there overpaid.

The worst area in Irvine for distressed properties is Orangetree. If you sort the listings on Redfin for either Price or $/SF, the properties in Orangetree will all be at the top of the list. The entire neighborhood is a foreclosure war zone, and it will get worse.

The area of Oak Creek adjacent to the commercial center is dominated by three-story condos. This neighborhood is showing significant distress. Expect the distress to appear next in the SFD condos on Alevera Street, the 6-pack clusters in the Cobblestone community, and the condos across from Royal Oak Park. It is working its way up the housing ladder.

Quail hill is also getting clobbered as one would expect of the new neighborhoods. It is particularly bad in the grid-like area above the commercial center, and in the nicer homes around the loop near the elementary school. I cannot explain why this neighborhood in particular is so bad. There are some of the less expensive three-story condos, but the nicer properties on Canopy are a real surprise. Also note the auctions scheduled for the high-end stuff up the hill and over into Shady Canyon. Those are $1M+ properties going to auction.

It is no surprise–at least not to me–that Turtle Ridge is seeing many times the foreclosures of Turtle Rock. Many of these are new properties purchased at WTF prices by over-leveraged pretenders.

So there you have it; the new neighborhoods and the older low-end neighborhoods are seeing the worst of the foreclosure crisis–for now. This is where the REO will be this fall and winter. This doesn’t mean the other areas in Irvine will not be impacted. The bad economy, high unemployment and recasting ARMs will take their toll in other areas, but right now, the areas outlined above are where the action will be in the near term.

Asking Price: $499,999

Income Requirement: $125,000

Downpayment Needed: $100,000

Monthly Equity Burn: $4,166

Purchase Price: $304,000

Purchase Date: 3/31/2000

Address: 26 Longshore #31, Irvine, CA 92614

it’s almost like four
bedrooms! If it were 4 bedrooms, nearly 2000 SF, on the water feature and under $500,000, I would be offering on it.

I am so excited over this new trend toward “chef’s kitchens.” Do you think the IHB had anything to do with losing the “gourmet kitchen” label?

This seller is showing true motivation. It appears they want to get out while there is still some bubble equity left. Soon it will be gone. If this place sells for its current asking price, and if a 6% commission is paid, the owners stand to make $166,000; although they did HELOC a little out, so they will net about $120,000.

IMO, this is a smart move. The wave is coming.

{book6}

We’re ready now
Catchin’ a wave to ride on
Steady now
headin’ where we decide on
And I know that there’s something that’s just out of sight
And I feel like we’re trying to do something right
Come on make it if we hold on tight
Hold on tight
We’re Ready! C’mon We’re ready
We’re ready

We’re Ready — Boston