Congratulations to Option ARM borrowers for costing lenders more in losses than subprime borrowers! Today's featured property is one of a number of two-bedroom condos sporting a wide range in asking prices.

Irvine Home Address … 14 WILDFLOWER Irvine, CA 92604

Resale Home Price …… $295,000

{book1}

You're getting closer

To pushing me off of life's little edge

This will fall away, this will fall away.

Loser – 3 Doors Down

A particular borrower or loan category will be the biggest loser of the housing bubble. Subprime was an early front-runner, but loan amounts were small, so despite astronomical default rates and severe losses on a percentage basis, in absolute terms, subprime did not have the potential of Alt-A, and Prime borrowers nor the potential of Interest-Only and Option ARM loans to lay waste to lender balance sheets. Subprime is officially old news as we are all subprime now.

Option ARMs Surpass Subprime Mortgages in Loss Severity

Moody’s does not expect a bottoming of house prices before Q310, with another 11% national decline likely before the worst is over. These price declines, taken with rising unemployment, housing inventory oversupply and weak demand, are pressuring performance.

I also agree that we are not at a housing market bottom (also see: Deutsche Sees House Prices Falling Another 10 Percent).

On the heels of longer foreclosure and liquidation time lines “exacerbated by unsuccessful modification efforts” in 2009, loan loss severities worsened across all sectors, according to Moody’s.

Despite the fact that loan modifications make payments affordable people are defaulting in large numbers, particularly those with negative equity.

Option ARMs have surpassed subprime as the sector with the steepest loss projections for securities issued from 2005 to 2007, according to Moody’s. The rating agency now expects a 20% cumulative loss on ‘05 option ARM RMBS (from 11.7% in Q109), 41% on ‘06 securitizations (from 26.7%) and 51% on ‘07 securitizations (from 29.7%).

The loss severities are very high, but not unexpected. Option ARMs were loans about twice as large as they should have been if qualifying payments were applied to 30-year fixed-rate financing. IMO, before this is over, Option ARM loss severities will approach 70% and defaults will exceed 90%.

Delinquencies of 60 or more days, assets in foreclosure or held-for-sale rose “markedly” since the last Moody’s revision to option ARM RMBS projections in Q109. Serious delinquencies rose to 40.4% from 33.3% for ‘05 securities, to 47.3% from 38.6% for ‘06 securities and to 41.3% from 30.4% for ‘07 securities.

Forty-plus percent delinquency rates? That is remarkable! Nearly half of all Option ARM borrowers are living in a house rent and payment free, any many of these people have not faced their recasts yet!

Subprime soured, now Option ARMs fall out-of-the-money, so what is next? Loan poison creeps up the equity tree tainting higher branches: Alt-A Losses Outstripping Expectations, Moody’s Says, Prime Jumbo RMBS Delinquencies Swell to 9.2%: Fitch. No market segment is immune, and any borrower without fixed-rate financing at an affordable payment level is in peril.

Two-Bedroom Two-Bath Pricing

Today's featured property is one of the least expensive condos on the market at $295,000… which is rather disheartening when you think about it….

Other small condos for sale:

$350,000 — 241 HUNTINGTON Irvine, CA 92620

$395,000 — 209 ALICANTE AISLE #219 Irvine, CA 92614

$439,900 — 42 FABRIANO Irvine, CA 92620

I doubt any of the three sellers above are happy with an REO undercutting them by 20% or more.

Is being detached a premium worth $144,400 or $140/SF? Sharing dated interiors, the main difference between today's featured property and the last one on the list above is the degree of detachment. I think that premium is excessive, but the market will be the final arbiter.

Irvine Home Address … 14 WILDFLOWER Irvine, CA 92604

Resale Home Price … $295,000

Income Requirement ……. $61,990

Downpayment Needed … $10,325

3.5% Down FHA Financing

Home Purchase Price … $147,500

Home Purchase Date …. 4/29/1996

Net Gain (Loss) ………. $129,800

Annual Appreciation … 5.1%

Mortgage Interest Rate ………. 5.13%

Monthly Mortgage Payment … $1,551

Monthly Cash Outlays ………… $2,180

Monthly Cost of Ownership … $1,750

Property Details for 14 WILDFLOWER Irvine, CA 92604

Beds 2

Baths 1 full 2 part baths

Home Size 1,050 sq ft

($281 / sq ft)

Lot Size n/a

Year Built 1974

Days on Market 2

Listing Updated 1/28/2010

MLS Number P719435

Property Type Condominium, Residential

Community El Camino Real

Tract Db

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

Charming two bedroom condo with detached two car garage. Spacious living room with fireplace and access to private patio; galley style kitchen; separate dining area; bedrooms have mirrored closet doors and private baths; street parking for guests. Perfect for small family or investor. Sold 'As Is'.

So how does a property double in value and become REO? You guessed it, HELOC abuse.

This property was originally purchased by a single man. The current owner appears on title later and ownership of this condo may have been transferred in a divorce.

• The man purchased the property on 12/26/2002 for $270,000 using a $216,000 first mortgage, a $54,000 second mortgage, and a $0 downpayment.
• On 6/18/2004 the now couple's first mortgage was refinanced for $315,000.
• On 8/26/2004 they added a stand-alone second for $11,000.
• on 10/26/2004 they refinanced the second for $29,000.
• On 5/5/2005 they refinanced the second again for $36,000.
• On 6/7/2005 they refinanced the first mortgage for $340,000.
• On 6/14/2005 they added a stand-alone second for $36,000.
• On 7/20/2005 they added a third mortgage for $11,000.
• On 8/24/2005 they opened a HELOC for $75,000.
• On 8/31/2005 they expanded the HELOC to $87,500.
• Finally, on 4/12/2006 they refinanced the first mortgage for $472,500
• Total cash investment by owners is $0.
• Total property debt was $472,500 plus fees.
• Total mortgage equity withdrawal is $202,500.

This owner invested nothing and managed to pull out $202,500.

May I have one of those?

Home Equity Line of Credit (HELOC) abuse was a massive stimulus to our economy, and now it is one of the leading causes of foreclosure. Today, we are going to take a detailed look at this phenomenon and the implications for future lending.

Irvine Home Address … 25 ROSE TRELLIS Irvine, CA 92603

Resale Home Price …… $1,267,000

{book1}

He hears the ticking of the clocks

And walks along with a parrot that talks,

Blame it on a simple twist of fate.

Simple Twist of Fate — Bob Dylan

There is a simple truth about the housing market; people are going to buy and sell homes when is suits their life's circumstances. Unlike many of the readers of this blog, few base their decisions on market dynamics, and even when they do, each sets their own risk parameters.

The main factor separating those who benefited from the housing bubble from those who did not was a Simple Twist of Fate; for some it was time to sell or buy, and Fate either enriched or destroyed them.

I have often wondered if I had made different decisions during the bubble if I would have been caught up in the frenzy. Although I don't believe I could have fully ingested kool aid, I probably would have behaved like most of my cohorts and increased my loan balance. I consider those who did this with fixed rate financing and still managed to lower their payments as the sly ones. That is as far as I would have gone, but I probably would have taken some of the free money.

The conditions that spawned the rally of The Great Housing Bubble are gone, and we will not see rapid appreciation and a HELOC-fueled economy for decades. I believe we are embarking on a 20-30 year cycle of slowing rising interest rates as we stay one step behind inflation the entire journey. In an environment of increasing financing costs, mortgage equity withdrawal is rare because there is little equity available, and the cost of accessing and spending that equity is high — the opposite of what people have become accustomed to over the last 20-30 years.

It is important to me for people to realize HELOC spending is not coming back. Many buyers operative today are basing their decisions on poor information, they believe that if they can just get into a home, they will get to live off the HELOC money like everyone did in the 00s — they may have to wait a few years, but most buyers are certain HELOC money is on its way. It's not. As long as buyers are making buying decisions based on poor information, they will likely overpay and be unhappy with the results later on.

HELOC Abuse Grading System

I was looking back on the abundance of HELOC abuse stories from last year, and since I know we are going to see many, many more of these disasters over the next several years, I have developed a simple grading system that will tell you at a glance information about the borrower. By devoting this post to the grading sysem, in the future when you see a small graphic that labels the owner a "Grade D HELOC abuser," you will know a great deal about how they lived and how they managed their debt.

As I contemplated a grading system, I wanted something visually intuitive so I developed the graphic above. The origin point to the left represents the total loan balance on the day the property was purchased. The lines emanating from the origin extend to the right with an angle of trajectory that either pays down a mortgage or adds to it.

Each HELOC grade is separated by a psychological or behavioral threshold, and each one has observable results — you can compare the current mortgage balance with the original one and see how quickly the debt went up or down.

HELOC Abuse Grade A

Most people who borrow money do so because they need it. There is a limitation to how quickly they can repay the money, and the limit at the bottom of Grade A is the pinnacle of borrower prudence.

I probably shouldn't call this HELOC abuse at all because in order to earn an A, a debtor must pay off a mortgage faster than a 30-year amortization schedule. This should not be a difficult hurdle to jump over; in fact, prior to the housing bubble, most borrowers were forced to toe this line by conservative lenders.

The major difficulty in earning an A comes from deferred maintenance and renovation. People tend to borrow for major improvements with the justification it adds value to the property. Added value is debatable, but added debt is certain. Few people pay down their mortgage faster than a 30-year rate, and fewer manage to maintain that trajectory. Kudos and special recognition are in order for those who accomplish this difficult task.

HELOC Abuse Grade B

Earning a B in this system requires a debtor to at least hold the line on the total debt. Anyone who does better than treading water — which puts all interest-only borrowers on the line — can earn a B. As previously noted, prior to the bubble, few borrowers were near this threshold and most of the market earned a B for debt management.

Since lenders lost billions allowing copious amounts of mortgage equity withdrawal, since prices are no longer rising, and since the cost of money (interest rates) is likely to rise, borrowers of the future will be forced to earn a B as lenders drop their C, D, E and F customers.

Earning a B is a badge of honor; the scarlet letters are coming next….

HELOC Abuse Grade C

I hate to give borrowers in this category a "passing" grade, but this is the reality for most Americans. Growing credit card or mortgage debt slowly generally can be compensated for through home price appreciation, and although I consider this a bad idea, I can't really call it HELOC abuse, just foolish HELOC use. Is there a distinction there? I will let you decide.

Financial planners will tell you that most people fail to budget properly for unexpected expenses (they don't save), so when they fall behind a little each month, they put the balance on a credit card and hope they can pay it back with a tax return — or during the bubble with a visit to the housing ATM.

People are still going to manage their bills this way going forward, and there will be pressures to "liberate" this equity to pay for these expenses. The money changers will continue to peddle this nonsense as sophisticated financial management. It is a stupid way to manage debt, and I give it a C.

HELOC Abuse Grade D

The transition between a grade C and a grade D is somewhat subjective, but it is hinged to an idea; once borrowers start knowingly increasing their loan balance to spend appreciation as a matter of habit, once they start expecting appreciation and HELOC money as a reliable source of income, they have moved from what some may consider legitimate use of HELOCs to Ponzi Scheme financing and ultimately a foreclosure implosion. This Ponzi borrowing limit is an invisible threshold borrowers do not realize they have crossed, but once they accept using debt to pay debt as a concept, they have crossed over to the Dark Side.

The top of the range of D graded HELOC abusers is the limit of each borrowers self delusion when it comes to how much appreciation they feel comfortable spending without losing their homes. People who earn a D still planned to keep their homes, they were merely misguided by their own ignorance and the incessant Siren's Song of kool aid intoxication. These are the sheeple; like the rats St. Patrick cast into the sea, each borrower followed the Piper to their underwater mortgage and a watery foreclosure.

HELOC Abuse Grade E

Most of the HELOC abuse posts I have done have been Grade E abusers because they are entertaining. When someone borrows and spends a $1,000,000, it is dramatic, and as an outside observer, you have to wonder what they spent all that money on.

Somewhere beyond the limit of self delusion, a borrower makes another psychological leap, they no longer worry about the consequences of their actions and they spend, spend, spend. This grading category spans the continuum from thoughtless spending to foolish and reckless spending where the borrower exercises no restraint at all.

HELOC abusers who get an E had to make an effort to spend. It takes time and effort to really spend beyond ones means one small transaction at a time. How many dinners out, trips to Vegas and other indulgences does it take to consume $1,000,000? I don't know, but grade E abusers try to find out.

HELOC Abuse Grade F

Grade F HELOC abusers are the creme de la creme of their craft. These people are not maxing out their debt to spend recklessly — although I am sure much reckless spending occurred — grade F HELOC abusers are openly gaming the system to flip properties or strip equity while passing the risks on to lenders.

Another group that falls in this category are the Land Barons, as they are described at the Coto Housing Blog. People who stripped the equity from one property to acquire others build a massive Ponzi structure. Back in February of 2009, I profiled the holdings of one such land Baron in Everybody Wants to Own the World.

The upper limit of this boundary is determined by lender greed as reflected through their underwriting standards. During the housing bubble, this line was pushed so far as to create categories C, D, E and F. Since most of these people are going to lose their homes, expect to see lenders lower the trajectory of this line significantly.

Grade F HELOC abusers are the ones who benefited the most from the housing bubble. All Grade D, E, and F borrowers either have or will lose their homes. The grade F borrowers got to extract the most value out of their equity before the market collapsed. Any borrower who had any psychological restraint — even the clueless ones who get an E — are worse off than those who spent with the greatest abandon.

When you contemplate the wide range of bad behaviors that were encouraged during the Great Housing Bubble, do you think we will have future issues with moral hazard? I do.

{book4}

Irvine Home Address … 25 ROSE TRELLIS Irvine, CA 92603

Resale Home Price … $1,267,000

Income Requirement ……. $272,289

Downpayment Needed … $253,400

20% Down Conventional

Home Purchase Price … $1,274,000

Home Purchase Date …. 11/24/2004

Annual Appreciation … -0.1%

Mortgage Interest Rate ………. 5.33%

Monthly Mortgage Payment … $5,647

Monthly Cash Outlays ………… $7,640

Monthly Cost of Ownership … $5,630

Property Details for 25 ROSE TRELLIS Irvine, CA 92603

Beds 3

Baths 3 full 1 part baths

Size 2,650 sq ft

($478 / sq ft)

Lot Size 4,792 sq ft

Year Built 2004

Days on Market 3

Listing Updated 12/31/2009

MLS Number S599997

Property Type Single Family, Residential

Community Turtle Ridge

Tract Ledg

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

Bank Owned Property With Spectactular City Lights Views. Upgraded 3 bedroom home with distressed hard wood flooring downstairs. Kitchen has a large center island, Granite counters and a breakfast nook. Each bedroom has its own bathroom with a guest half bath downstairs. Outstanding City views from master bedroom upstairs with two french doors to two juliet balconies. Upstairs laundry. Nice size Casita with full bath for your guests downstairs. An upgraded epoxy flooring in Garage. This community is guard gated 24 hrs with resort like association amenities that includes a Gym, Club House, Parks, picnic areas and two pools. Walking and biking trails everywhere with views of the city and the ocean. Agents, bring you clients to see this resort like area and this outstanding home. Don't miss out!

IMO, cropping the bottom half of the sunset photograph would be an improvement. The sunset is pretty; the black blob below is not.

upgraded epoxy flooring? Does epoxy flooring come in a standard and upgraded form?

bring you clients… correct you grammar…

Spectactular?

The lender is trying to break even and get late 2004 pricing. If they can find a qualified buyer, the property will sell.