Category Archives: WTF

A detailed look at Irvine Village premiums by Global Decision and IHB

Which Irvine neighborhoods does the market consider the most desirable? Personal opinions aside, the market has spoken, and we have the results.

Irvine Home Address … 60 CEZANNE Irvine, CA 92603

Resale Home Price …… $2,100,000

You can be better than that

Don't let it get the better of you

What could be better than now

Life's not about what's better

John Butler Trio — Better Than

Which Irvine Village is the most desirable for single family homes?

Which Irvine Village is the best, and how could this be determined? Well, taking an opinion poll might be interesting, but it wouldn't be backed by anything substantial. To determine what people really believe about desirability, we have to look where people put their money. Money talks. The neighborhoods where people pay the most for real estate determines what is “best.”

Determining which neighborhood obtains the highest premiums is not easy. We couldn't simple look to the MLS or to past sales and see where the prices are highest because there can be many reasons people pay more in one neighborhood versus another. To accurately measure premium, we needed to normalize for other factors to distill a premium value not explainable by other factors.

In the first post in this series, An accurate view of the Irvine housing market by Global Decision and IHB, I introduced Jaysen Gilespie of Global Decision. “Jaysen Gillespie of Global Decision, an analytics and consulting firm that has worked in the real estate industry. He shares my interest in determining what is really going on in the real estate market. As a professional data analyst, he is trained in special techniques I cannot perform.” The first post was well recieved. Jaysen's skills with data analysis are remarkable, and I am thrilled he is working with me and the IHB to bring this information to the readership.

The following is the writing of Jaysen Gillespie. I have not set it off in block quote to make it easier to read.

A presentation by Jaysen Gillespie of Global Decision

Global Decision is an analytics consulting firm. While our methods are not industry-specific, our engagements are skewed towards specific industries in Southern California, such as real estate (along with online gaming and restaurant chains). We specialize in applying both foundational and advanced analytics to better understand business and economic issues.

Today’s post is part two of our series on hedonic housing valuation in Irvine. The goal of a hedonic housing valuation model is to use all information about a sale, including both the sale price and the characteristics of the home (number of beds, number of baths, square footage, etc.) to understand how the home’s value is derived from its constituent parts. Wikipedia offers a good overview of hedonic regression or see the Global Decision tutorial on how to build your own hedonic regression model.

What is a mathematical model?

A mathematical model is an abstraction of a real-world situation. Models help us understand how complex systems work by distilling them down to a manageable number of inputs, and they provide the ability to tinker with the model – and see how the system responds. In our case, the “system” under consideration is the Irvine, CA housing market. The hedonic model helps us do two things: first, it deepens our understanding of the drivers of housing demand. Second, it allows us to play with hypothetical scenarios and see what the impact would be on the value of a property.

How would someone in the “real world” use a hedonic housing model?

A fun aspect of building and using mathematical models is that you can perform experiments that would be physically or financially impossible in the real world. Because “neighborhood” or “area” is an input into the hedonic housing model, we could theoretically pick up a house from Woodbury and move it to Woodbridge (keeping all else equal) and see how the value of the property changes. For those engaged in building new homes, or developing a plan for a new neighborhood, an accurate hedonic housing model can be used to optimize revenue. If you know the incremental revenue you can obtain from an extra bedroom, an extra bathroom, or an extra 1000 sq. ft. of lot size, you can compare the costs of each option with the resulting expected increase in valuation and find the best bang-for-the-buck. It’s not an exact science, and I wouldn’t execute blindly based on just the results of a model. But a well-structured model can provide valuable insight and an unbiased view into the marketplace’s preferences.

How are neighborhoods modeled in the Irvine Hedonic Housing Model?

With Irvine it’s really a case of “the hits just keep on coming.” Not only do we have a background of glasslike consistency, especially in terms of education and safety, but we also have large, well-defined neighborhoods. Some locals refer to them as villages, though they have no governmental or political authority. Each village is similar, in that it was constructed in the same range of years, has access to many shared facilities, and generally sports a consistent look-and-feel throughout.

In regression models, there are generally two types of explanatory factors – continuous and categorical (discrete). Continuous factors can take on any value, or perhaps any integer value. Examples include the age of a property, the square footage, and the lot size. Categorical factors typically have either well-defined and finite possibilities or have a practical limit on their range. In theory the number of rooms in a home is continuous. You could construct a home with 700 of them. Unless you have the resources of Louis XIV, it’s probably not going to happen. So we’d consider the number of rooms in a home to be categorical for practical reasons.

If a categorical variable is numeric in nature, we can – at our option – use that number directly as an input into the underlying regression model. Treating a categorical numeric variable as a continuous variable makes sense when incrementing the factor by one has about the same impact. In our model, we treat the number of bedrooms and bathrooms as continuous, even though there is a finite range for these values.

An area designation, by contrast, can’t be directly fed into a regression model. It’s not numeric, and the model has no conceptual understanding of “Woodbridge” vs. “Oak Creek.” Fortunately, there are well-developed methods for handling these types of variables. The crux of the solution requires us to do two things: first, we must pick a baseline level for each category. In our example, we use “Northwood-Old” as our baseline area. After the regression is run, the baseline becomes the reference level against which others are measured. A good baseline contains a lot of data points and is preferably an area of average value.

Once we have a baseline level (Northwood-Old), we can model all other levels as extra variables in the regression. Continuing our example, we’d set up a variable called “Woodbridge.” Homes in Woodbridge get a “1” for that variable; others get a “0.” We benefit here from Irvine’s village system. Because villages are quite large, we need introduce only a small number of extra variables (16 in our case) into the regression model.

So what will the hedonic housing model tell me about neighborhoods?

The output of the hedonic model will tell the analyst how much more (or less) a home would be worth if that home were moved from the baseline area (Northwood-Old) to the area designated by each area variable. The virtual move from Northwood-Old to another neighborhood assumes all else is held constant. So if you start with a 3/2, 1600 sq.ft. home from 1977 in Northwood-Old and move it to Woodbridge, you’d gain (or lose) the dollar amount stipulated by the Woodbridge variable’s coefficient.

The model assumes all else holds constant. In reality, the model can only hold constant the factors that are directly input into the model. So if you use the model to move a home from Turtle Rock down to University Park, and you lose a city lights view in doing so, the model will revalue the home lower – but miss the fact that the view disappeared. Views, backing up to Culver, having Metrolink as your neighbor, or owning a strangely shaped lot are all examples of factors not in the model. In the future, it may be possible to add this type of data into the Irvine Hedonic Housing Model. A parcel map and GIS system would be able to determine if the property is located next to a major negative (I-405, for example).

The above chart represents the results of the Irvine Hedonic Housing Model, run on 2007-2011 data (so that all neighborhoods could have sales in that time frame).

Important but statistical side note: regression methods provide a best estimate of the impact of each area on home values. For the above analysis, our margin of error for each estimate varies by neighborhood. This “standard error” ranges from 0.7% to 1.9%. Areas with standard error greater than 1.4% are shown in lighter blue. There is a 68% chance that the true impact of the area on market value falls within 1 standard error of the quoted best estimate, rising to 95% when the band is expanded to 2 standard errors. For this reason, we might say that Portola Springs and Northpark are statistically similar in their impact on value, but we are more sure that Columbus Grove (CG) has the lowest incremental market value. Even if the true CG value was 3.8% greater (2 standard errors), CG would still create a decline of 6.1% in market value. The 6.1% might put it in contention only with Orangetree and West Irvine in a statistical analysis. The standard error decreases as more data is accrued, so new neighborhoods are more subject to statistical swing.

The premiums for each area, relative to Northwood-Old, are listed on the chart. These values are not a human judgment of any type, and are derived directly from the relationship between the physical area of the home, the other factors in the regression model (beds, baths, sqft, lotsize, etc.) and the selling price of the home. The above result indicates how the market perceives each neighborhood in terms of valuation.

The general ordering of the areas should be of no surprise to area residents. Turtle Ridge, Turtle Rock, and Quail Hill stand out as having high incremental market value. Woodbridge is also a very solid performer and leads the pack of the older vintage flatland areas. The El Camino Real / Walnut complex lacks an association in some areas and is of an older design, so one might speculate that those factors lead to its lower valuation. It’s important to note that a property-based hedonic model does not tell you *why* each neighborhood is valued how it is – unless you have factors in the model that theorize the “why.”

It’s up to the analyst to consider what might be the underlying root causes. Models are a tool; some domain-specific knowledge is helpful in leveraging and interpreting their results. Some theories are testable by adding additional variables to the underlying regression. If, for example, we theorize that El Camino Real loses value because there is not enough park space, we could add in a variable with the number of square feet of parkland per housing unit.

Columbus Grove is a particularly interesting example. It’s located on the fringe of Irvine, but within the bounds of the Irvine school district and enjoys all the other benefits of being in Irvine (i.e. safe, near jobs, climate, etc.). However, the properties appear to sell for quite a discount to even an average area. Such a result shows that newer is not sufficient to generate enhanced market value.

In the above chart, properties sold in Columbus Grove are in blue, with Woodbury in red.

It’s easy to see that properties in Columbus Grove (CGR), at the same size as those in Woodbury (WDB), sell for considerably less. These 2-dimensional scatter plots are quick-and-easy tools to help verify that model results are sensible. Given that CGR and WDB are both newer neighborhoods – and that the regression takes lot size and bed/bath configuration into account, it’s interesting that the market has valued Columbus Grove so much lower.

From the Case-Shiller Tiered indexes, we already know that area (for which price is a proxy) already plays a large role in determining how home values have performed after the housing bubble’s peak. We’ve overlaid the Global Decision Irvine Hedonic Home Price Index on top of the Case-Shiller LAOC Tiered Value Indexes in the above graph. While Case-Shiller’s Aggregate value is down almost 40%, there is a clear distinction between lower-end and higher-end results. Case-Shiller’s High Tier is down only 30% from peak pricing. Irvine SFRs are performing even better, with 15-20% declines since the Irvine peak in early 2006.

For the areas of Irvine that have more data, we can take a stab at computing a hedonic price index for just those specific villages. We gain a finer level of granularity from doing so, but we lose statistical accuracy. In the overall Irvine Hedonic Housing Model, a typical standard error for the price trend numbers is near 1%. When we go area-by-area, those errors range from 1.5% to near 5%.

While all areas exhibit the same rapid rise, decent, and flattening trends, a few edge cases are worth a mention. First, 5 of the 6 areas have the same overall increase from Jan 2000 to early 2006, about 140-150%. Turtle Rock, however, is different. Its peak value hits “only” 120% above the Jan 200 value. Even more interesting, is that Turtle Rock did not experience nearly as much of a decline-from-peak as the other areas. We don’t have enough data to do a meaningful hedonic price trend model for the other top-3 value add areas (Quail Hill and Turtle Ridge), but we know from Case-Shiller’s Tiered metrics that higher-end properties have held value better post-bubble. Irvine is, itself, the higher-end of Case-Shiller’s Top Tier. The decline in Irvine home values has averaged 15-20% vs. 30% for the LAOC Case-Shiller Top Tier. Within Irvine, a high value area such as Turtle Rock appears to be experiencing even smaller declines.

Conversely, the area which rose the most in value (as a percentage of Jan 2000 values), is El Camino Real. Interestingly, El Camino Real’s values have now dropped the most of any neighborhood in Irvine (in this analysis) after the bubble popped. Again, the model cannot explain why – it could be a higher percentage of subprime loans, lower down payments, a change in consumer preferences, etc.

Most areas, including Irvine as a whole, are now about 100% above the Jan 2000 prices. Over 11.5 years, that’s a CAGR of 5.9%. That’s a useful number to have, as it can help inform the debate about the future direction of home prices. We can compare that 5.9% growth rate to other drivers of home value – average wage, job counts, new supply, persons per household, total households – to discuss whether current values represent a post bubble bottom or a landing on a stairway where another drop is forthcoming.

IrvineRenter's Commentary

I was not surprised to see Turtle Ridge and Turtle Rock at the top of the list, but the size of the premium was shocking to me. The same sticks and bricks are worth 40% more in these villages. Perhaps the premium views account for some of this (which also explains Quail Hill), but there are many non-view homes in these neighborhoods also obtaining substantial premiums.

I was also surprised to see Northwood Pointe and surrounding areas did not receive a higher premium. I would have guessed that Northwood Pointe was on par with Turtle Rock and Turtle Ridge, but it isn't. I was also surprized that Woodbury did not obtain a higher premium, that Woodbridge is more desirable than Westpark, and that University Park is more desirable than the old Northwood.

In my opinion, Columbus Grove represents the best value in Irvine. It feeds to the Irvine school district, the houses are nearly new, and yet it trades at a discount to the least desirable communities in Irvine. I imagine the Irvine Company would like to have everyone believe it is due to their superior land planning and community marketing. IMO, it's largely due to the fact that Lennar finished off the community and sold houses at a discount while the Irvine Company stopped construction to keep prices up. I believe Columbus Grove will rise in value relative to the less desirable Irvine communities of Walnut, El Camino Real, Orangetree and West Irvine.

The hedonic model showed than many of the undesirable areas exhibited the most volatile house prices. As mentioned above Turtle Rock didn't go up as much as other neighborhoods and didn't crash as hard either. On the other extreme is El Camino Real that went up a great deal and crashed more than other areas. This same phenomenon shows up in the general price tiers of Case-Shiller with the lowest price tier being the most volatile.

IMO, this volatility was largely the result of subprime lending and Option ARM financing. As lending standards were lowered during the bubble, more and more people qualifed to obtain loans. The fringes of the market (i.e. the lowest tier) should be the biggest beneficiary of an influx of new buyers. Turtle Rock wasn't being bid up by the 580 FICO score mob, El Camino Real was. Couple the influx of new buyers with the extreme leverage of Option ARMs, and the low end of the market gets pushed up substantially. The rest of the market is impacted by the move-ups with diffusion lessening the impact as you go up the housing ladder.

One of the factors that can never be modeled is human emotion and the variability of negotiation. For this reason, I don't believe it's possible to construct a model that can vary less than 5% from what the market actually does. Sometimes either the buyer or the seller is represented by a good agent who helps their client keep their emotions under control to make reasonable decisions. Sometimes not. Often either the buyer or the seller has motivations to complete the sale that have nothing to do with the real estate. Buyers can fall in love with a property and over bid, and sellers may need to move and lower their asking price aggresively to sell. People's emotions and negotiating skills will always represent a variable that can never be accurately modeled.

I want to thank Jaysen for this post. Next week, he will be back with a look at square footage, beds, baths, lot size, and other factors the strongly influence the prices of homes. Stay tuned.

Irvine's Turtle Ridge Premium

Never underestimate the power of zealots to sustain house prices. There is no metric by which the prices measured in Turtle Ridge make any sense, yet people keep paying the prices there. As distressed properties come to market, a buyer always seems to step up to pay off the Ponzi's debts.

I reasoned that Turtle Rock may not deflate much from it's bubble peaks because as an established community, there were fewer toxic loans there, and thereby there would be fewer distressed sales. Turtle Ridge was entirely built and sold during the bubble. People paid astronomical prices and borrowed huge sums to buy there. Despite the financial distress, prices have not fallen much, particularly at the high end.

What do you think? Will Turtle Ridge prices fall?


This property is no longer available for sale via the MLS.

Please contact Shevy Akason, #01836707


Irvine House Address … 60 CEZANNE Irvine, CA 92603

Resale House Price …… $2,100,000

Beds: 3

Baths: 4

Sq. Ft.: 3887


Property Type: Residential, Single Family

Style: Two Level, Tuscan

Year Built: 2004

Community: 0

County: Orange

MLS#: S653380

Source: SoCalMLS

Status: Closed


Welcome to your own Private Oasis in the Heart of Turtle Ridge. There has been no expense spared in this spacious Plan 3 in Chaumont. Upgrades include Venetian Plaster and Custom Paint throughout with recessed lighting. Fully Equipped Gourmet Kitchen comes with stainless steel appliances and opens to the Family Room. The family room has been upgraded with sliding glass doors that open onto the magnificent backyard. Fireplaces have been upgraded with sophisticated mantles and crushed glass. Three luxurious suites are located on the upper level with easy access to laundry. Master Bedroom comes with cozy Master Retreat and balcony overlooking the stunning landscaping. Surrounded by mature trees, this home is completely secluded with immaculate landscaping. The backyard comes with a spa and reverse infinity, salt water pool that cascades down over handpicked rocks. Custom Made Wrought Iron accents surround the estate while three crushed glass fire pits create a one of a kind environment.


Proprietary IHB commentary and analysis

Only in Irvine would someone pay $2,100,000 for a “plan 3,” and only a realtor would have the nerve to say it's a “one of a kind environment.” The perception of value is undeniable. Wether it's logical or not, the market makes it correct.

Resale Home Price …… $2,100,000

House Purchase Price … $1,542,500

House Purchase Date …. 3/31/2004

Net Gain (Loss) ………. $431,500

Percent Change ………. 28.0%

Annual Appreciation … 4.1%

Cost of Home Ownership


$2,100,000 ………. Asking Price

$420,000 ………. 20% Down Conventional

4.59% …………… Mortgage Interest Rate

$1,680,000 ………. 30-Year Mortgage

$368,674 ………. Income Requirement

$8,602 ………. Monthly Mortgage Payment

$1820 ………. Property Tax (@1.04%)

$708 ………. Special Taxes and Levies (Mello Roos)

$438 ………. Homeowners Insurance (@ 0.25%)

$0 ………. Private Mortgage Insurance

$280 ………. Homeowners Association Fees


$11,848 ………. Monthly Cash Outlays

-$1581 ………. Tax Savings (% of Interest and Property Tax)

-$2176 ………. Equity Hidden in Payment (Amortization)

$721 ………. Lost Income to Down Payment (net of taxes)

$282 ………. Maintenance and Replacement Reserves


$9,094 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$21,000 ………. Furnishing and Move In @1%

$21,000 ………. Closing Costs @1%

$16,800 ………… Interest Points @1% of Loan

$420,000 ………. Down Payment


$478,800 ………. Total Cash Costs

$139,400 ………… Emergency Cash Reserves


$618,200 ………. Total Savings Needed


Bankers' Circle of Life: principal reduction programs and unintended consequences

Are principal reductions on their way? Some form of it might be. Who will get the free money coming?

Irvine Home Address … 2349 South WATERMARKE Cor Irvine, CA 92612

Resale Home Price …… $429,000

But all are agreed as they join the stampede

You should never take more than you give

In the circle of life

It's the wheel of fortune

Some of us fall by the wayside

And some of us soar to the stars

And some of us sail through our troubles

And some have to live with the scars

Elton John — The Circle of Life

A year ago today, I had Soylent Green is People author a guest post, The Debt Star has Cleared the Planet.

He's back. And this time, the forces of light and goodness will prevail, right?

And now, Soylent Green Is People

(And my cartoons. None of the artwork in this post or any other is mine, and some of the cartoons are direct reproductions. My “cartooning” is limited to some limited photoshop work and the use of additional text generally in Comic Sans font.).

The Bankers Circle Of Life – principal reduction programs and unintended consequences.

Soylent Green Is People — April 7, 2011

Banks have had it good for the past couple of years. They’ve feasted on taxpayer subsidized capital, allowed accounting tricks to book phantom profits, and transferred privately created risk to the public’s balance sheet with nary a whisper of protest. Many responsible home owners continue to enriched said same bankers by paying mortgages that can never be refinanced into today’s lower rates. By owing more than the present value of their property, many home owners are trapped in a cycle that often ends in financial ruin.

The final insult to those who chose to live up to their promise to repay instead of living large through leverage will soon be here. How do I know this to be true? Since Irvine lives in the shadow of the House of Mouse, I thought it best to re-tell a family favorite to help illustrate how we got here, and what our inescapable future might look like.

In 2003 homeowners from far and wide came to see what special thing NAr-Fiki was revealing to the people of the USALands. Holding for all to see as an example of our bright future was Home Ownership, the offspring of King Conforming.

As Home Ownership grew older, King Conforming took him up to the highest point of the land – Peak Equity – and showed him a bountiful future. “Someday you’ll be a part of the Circle of Life. You’ll buy a home, pay off the loan, have plenty of equity to share with your children, and eventually see them become a home owner just like you.” That’s how it’s supposed to work out.

Unfortunately things began to go the wrong way in the USALands. Bankers ran out of loan programs that allowed greater fools to purchase homes at ever inflated prices. People began to panic. A mad rush to the exit began.

Home prices fell, crushing King Conforming. The only Big Cat left alive after the stampede was Home Ownership’s mean old Uncle “Sam” and the banker cartel.

During the Great Recession, Uncle Sam and his minions pushed Home Ownership out of the USALands. Jobs were few and far between. Prices were tunneling their way to the center of the earth. Only a few places seemed hospitable to relocate to. Eventually Home Ownership found the OC Oasis, a land flowing with milk an honey. There he made a few friends – the chatty Rodent and a well fed Pig. Home Ownership marveled at the lifestyles Rodent and Pig had – swimming pools with waterfalls, eating out more than in every night. How could they pay for their life of luxury? “Home Equity Ponzia” said Rodent. “It’s a wonderful thing”. Home Equity Ponzia, ain’t no crying shame”. “It means “No Worries” exclaimed Pig. Home Ownership was a little unsure of what all this meant and so didn’t dive in to debt along with his new neighbors.

As time went on life in the OC Oasis wasn’t going as planned. He wasn’t fully employed, things were getting a bit tight financially. In a vision one night King Conforming appeared telling Home Ownership that since he paid his house loan on time, certainly there were programs available that might make things easier, but they could only be obtained by going back to the land that Uncle Sam ruled. Even old NAr-Fiki came by, reminding Home Ownership that strategic default was a shameful, bad thing.

In the USALands, things were now worse than ever. Uncle Sam tried every trick in the book to get home prices back on track, but nothing was working. The remaining residents faced either unfit loan modifications or a lifetime of serfdom.

Home Ownership asked Uncle Sam to force his minions to let up on his loan terms, but to no avail. “Change?” asked Uncle Sam… “What is this hopey change you speak of? My banker cartel can’t profit from changing your loan terms so why would we do it?” Home Owner tried down to the last ounce of his strength and legal capacity to wrest control of his financial future from the bankers clutches but alas, it wasn’t to be.

Home Ownership was surprised to see his friends Rodent and Pig sitting next to Uncle Sam. ” Whatever remains after my bankers are done with you”, sneered Uncle Sam, “will be given to these two”. “Hey”, Rodent and Pig sang in unison, “We’ve got to maintain our lifestyle somehow. HomeEquity Ponzia!” Uncle Sam’s last words to the cornered Home Owner were chilling – “That’s how the Circle of Life really is, baby!”

And so the bankers devoured Home Ownership. The End.

Hey, I didn’t say the story would had a happy ending. This isn’t some friggin’ fairy tale.

Principal reduction plans are coming to USALands. Uncle Sam and his banker minions have several programs in place to get this started.

Bank of America set to write down principal on California mortgages

Mortgage Principal Reduction in Play

Ally to reduce mortgage principal in Michigan

We’ll focus in this post on what may become the biggest, baddest one of all, but first:

The Why Question.

Why are bankers going to reduce principal? What benefit might there be for them? The answer to this question is fundamental in understanding the reason for these programs. Like any complex story, it’s best told when the details are simplified. The following is a close approximation of why PA loans will start in earnest, but not a scenario that fits all circumstances. Also, we’re going to use a few assumed names along the way for copyright avoidance illustration purposes.

In 2008 Bank of Albania (BA) was given incentives by the Government to absorb the assets of the troubled mortgage lender Capital Wagon (CW), one of many marriages of convenience during those days. Venture capitalists also began to purchase from the FDIC mortgage debt from other failed banks over the past few years. The companies essentially paid a net price of .20 cents on the dollar or less for these troubled mortgage assets. Some assets turned in to REO’s, some loans were modified to keep the regulators and Congress at bay, but a vast number of these loans are simply not performing, threatening to swamp the survivor institutions balance sheets.

HUD created several programs to help facilitate mortgage relief for income distressed home owners, but it is the FHA Short Refinance / Negative Equity program that will be used to cycle the remaining private non-performing loans into taxpayer guaranteed debt.

Aren't they all bad banks?

Banks like BA will create a “bad bank” (BBA) – a place to dump off load their CW legacy assets at perhaps .40 cents on the dollar. That’s a nice profitable return (since their cost basis was .20 COTD) that BA conceivably could use to declare itself a “Well Capitalized” bank again.

BofA Segregates Almost Half of its Mortgages Into ‘Bad Bank’

Barclays could set up a “bad bank”, say analysts

How to Build a Bad Bank—for the Greater Good

BBA will now contact the home owners and offer them an FHA Short Pay refinance. Imagine a home owner getting a call from their loan servicer that goes something like this:

BBA – Hi, is this Mr. Refi Rodent?

RR – Yes it is.

BBA – I see you owe us $500,000 on a Stated Income 5/1 ARM.

RR – You mean the loan I’ve not made the $2,700 payment on for the last two years, The one with a rate of 3.2%?

BBA – Certainly! Here’s what I’d like to offer you. We see that home values in your area are now at $350,000. What if we cut your principal balance by $175,000 down to $325,000 and give you a 6.0% 30 year fixed loan. The payment would be $2,260. You owe less, your payment is reduced by $440, and all we ask is that you re-start to pay your loan for the next 60 days while we process this principal reduction. Deal?

RR – Frak YAH!

So in a few quick months BBA has turned a non-performing, un-sellable $500,000 loan (that cost them $200,000 when “purchased” from BA) into a shiny new easily re-sellable recourse FHA loan at $325,000 which you and I now are on the hook for as a taxpayer. My guess then is that BBA will in turn sell the loan back to BA at .80 cents on the dollar ($260,000) which makes the “Bad Bank” look like a pretty savvy operator. BA now has a 6.0% rate loan on their books which cost them originally around $100,000. The Bankers Circle of Life!

Remember this important factoid: The banks paid the market value of these loans or $100,000. The borrower is paying on the contractual value, or $500,000. When an FHA Short Pay refinance is transacted, the home owner is not getting a reduction in principal equal to the value of the loan, according to the bank’s valuation of the asset. The home owner is actually increasing the amount of their debt from the $100,000 assumed value to $325,000 present value based on current home prices. What happens tomorrow if the value of homes drops by another 20%? That’s the FHA Short Refinance borrowers Circle of Life. Their best course may be to again stop paying their loan. Rescue came to them once before. Whose to say it won’t happen again?

Some loan service companies offering these negative equity refinances will add a 5 year clawback provision. If there is a principal reduction of $100,000 and you sell at a higher price than current value, the home owner will have to give up the gain. After 5 years pass the feature sunsets. I’d be happy to wait 60 months before pulling the rip cord and bailing out if it meant I could sell for a gain, wouldn’t you?

Additional issues.

The borrowers who will have these offers made to them are those who took out Alternative Financing (ALT-A) or other now toxic portfolio loans, not traditional FNMA Agency 30 fixed rates. The Government created the Home Affordable Refinance Program (HARP) for those mortgages. These loans simply had the rate and not the principal balances reduced. Loan to Values under HARP were capped at 125% which does not help you if you purchased in parts of the Inland Empire or pretty much anywhere in Kern County. You’re stuck with the loan balance and the rate from 2006 unless you strategically default. Thanks for playing.

As principal reductions begin to spread, the social consequences will be catastrophic. When your neighbor comes over to share their excitement about their BA loan balance reduced by 35%, what will BA’s response be when you phone to get the same deal? That call will go something like this:

Responsible Home Owner: Hi, I’ve got a $417,000 30 year fixed loan that I didn’t refinance. My rate is 6.0% but values are such that I cannot fit within the HARP guidelines. The neighbor across the street just refinanced with you and got a lower balance. I’d like to do the same thing.

BA – I see that your loan is owned by Fannie Mae. Take it up with them.

Responsible Home Owner – But you made the loan, you take the payments, and you just refinanced someone I can see from my living room window lounging in his back yard pool. What’s the deal?

BA – I’m sorry, We actually bought this loan from another bank that wasn’t us even though we did have the loan originally. Besides only special cases can use this program. Would you like to open a new CD account with us? Our new rates are .00011013 percent for 60 month!


Why should Responsible Home Owner continue to make their house payment at that point? Is it made out of guilt, obligation, or shame? To be honest, I’d have real doubts why I should fork over good money after bad if my neighbors got a consequence free haircut on their loan balance.

What now happens to property values? Well for one lets say values remain flat. The FHA Short Pay home owner decide to put their home on the market at the same time you do. Their sale will be an “Equity Sale” at a market price. Yours will be a Short Sale that might not close. If values fall further, their home will might also be a Short Sale, perhaps even an assumed FHA loan. Yours will likely become an REO. If values increase, you might eek out a slight profit and rent from there on out. Their gain will go towards the purchase of a better home in a nicer neighborhood.

In a world where principal forgiveness, unevenly and inequitably applied, becomes normative, the responsible will end up as waste byproduct in the Bankers Circle of Life. You can’t fight the coming principal reduction wave. It’s reach will stretch not just through the financial world, but down to the very streets we live on. It’s simply the amplified end point of a national policy of that enforces zero consequences for any actions.

Hakuna Matata er… HomeEquity Ponzia to all.

Soylent Green Is People.

It's the Circle of Life

And it moves us all

Through despair and hope

Through faith and love

Till we find our place

On the path unwinding

In the Circle

The Circle of Life

The Lion King — The Circle of Life

Some short sales aren't really for sale?

Today's featured property has been on the MLS for over three years. When a property is on the market for nearly 1,111 days, is it really for sale? Either the price is too high, or other conditions are preventing a sale from taking place which effectively remove it from the listing pool.

I write often about shadow inventory, but has anyone measured the MLS inventory that never transacts? There are currently 157 properties on the MLS that have been for sale for more than 180 days. Not to give false hope to the bulls, but if 150 listed properties aren't really for sale, how much inventory do we really have?

Irvine House Address … 2349 South WATERMARKE Cor Irvine, CA 92612

Resale House Price …… $429,000

House Purchase Price … $422,000

House Purchase Date …. 10/20/2005

Net Gain (Loss) ………. ($18,740)

Percent Change ………. -4.4%

Annual Appreciation … 0.3%

Cost of House Ownership


$429,000 ………. Asking Price

$15,015 ………. 3.5% Down FHA Financing

4.84% …………… Mortgage Interest Rate

$413,985 ………. 30-Year Mortgage

$87,218 ………. Income Requirement

$2,182 ………. Monthly Mortgage Payment

$372 ………. Property Tax (@1.04%)

$0 ………. Special Taxes and Levies (Mello Roos)

$89 ………. Homeowners Insurance (@ 0.25%)

$306 ………. Homeowners Association Fees


$2,949 ………. Monthly Cash Outlays

-$357 ………. Tax Savings (% of Interest and Property Tax)

-$512 ………. Equity Hidden in Payment (Amortization)

$28 ………. Lost Income to Down Payment (net of taxes)

$54 ………. Maintenance and Replacement Reserves


$2,161 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$4,290 ………. Furnishing and Move In @1%

$4,290 ………. Closing Costs @1%

$4,140 ………… Interest Points @1% of Loan

$15,015 ………. Down Payment


$27,735 ………. Total Cash Costs

$33,100 ………… Emergency Cash Reserves


$60,835 ………. Total Savings Needed

Property Details for 2349 South WATERMARKE Cor Irvine, CA 92612


Beds: 1

Baths: 1

Sq. Ft.: 818


Property Type: Residential, Condominium

Style: 3+ Levels, Mediterranean

View: Back Bay, City Lights, Estuary, Golf Course, Hills, Mountain, Park/Green Belt, Pool, Trees/Woods, Water

Year Built: 2003

Community: Airport Area

County: Orange

MLS#: S515125

Source: SoCalMLS

Status: Active


Best location in building with breathtaking views of the San Joaquin Nature Preserve and Wetlands, golf course, city lights, along with one of the three pools. This is a rare, private one bedroom and one bath Carlton Arms unit, with a walk-in closet, brand new carpet, granite counter tops, washer, dryer, dishwasher, refrigerator, crown moldings, and additional appliances included. The Watermarke community offers spectacular ammenities boasting three pools and four spas with cabanas, a 24-hour elite fitness center, facialist, masseuse, covered and lighted full-court basketball, ground and roof top tennis courts, and parks with playgrounds. The Clubhouse also offers concierge services, a gourmet kitchen, dry cleaning, sitting areas, an extensive library, custom movie/screening theater room, and business center. A must-see opportunity awaits!

Thank you, Soylent Green Is People. Apparently, you are my cartooning muse.

What Really Prompts Borrowers to Accelerate Their Default?

A series of new studies on borrower behavior shed some light on the motivations behind those who quit paying their mortgages.

Irvine Home Address … 23 FOXHOLLOW Irvine, CA 92614

Resale Home Price …… $319,900

On and on we're charging to the place so many seek

In perfect synchronicity of which so many speak

We feel so close to heaven in this roaring heavy load

And then in sheer abandonment, we shatter and explode.

Judas Priest — Turbo Lover

Strategic default: the abandonment of mortgage and property. A financial explosion.

Most buyers of property were seeking riches from appreciation. They all enjoyed the synchronized movements of the market when everyone was clamoring for more property. Trees don't grow to the sky, and no matter how close prices get to heaven, nirvana is always out of reach.

Strategic Defaults Threaten All Major U.S. Housing Markets

Posted by Keith Jurow 09/30/10 8:00 AM EST

In my last article, we examined the shadow inventory to determine how many distressed properties (not on MLS) were almost certain to be forced onto the market in the not-to-distant future.

For a sensible follow up, let's take an in-depth look at so-called "strategic defaults" to see how many homeowners are likely to "walk away" from their mortgage debt although they might be financially able to continue paying it.

Strategic Default Defined

According to Wikipedia, a strategic default is "the decision by a borrower to stop making payments (i.e., default) on a debt despite having the financial ability to make the payments." This has become the commonly accepted view.

From Accelerated Default: What Strategic Default Really Is: "There is no accepted definition of strategic default. Lenders have tried to define the issue as any borrower who is capable of making a payment and chooses not to. On the surface that sounds reasonable, but that misses a very important distinction. Some people chose to default because they know they can't afford the home and they are merely choosing the timing of the inevitable.

When I think about strategic default, I think about people who chose the timing of their default when there is little reasonable hope of having equity and they are facing escalating payments. The only thing strategic about the default is the timing, not whether or not they will lose the home."

In a recent, thorough study of strategic defaults, an effort was made to narrow its definition even more specifically. The report examining 6.6 million first lien mortgages was published this past April by Morgan Stanley analysts. They considered a default to be strategic only if a borrower went from being current on the debt to 90 days delinquent in consecutive months "without any curing in between or thereafter."

The authors went further and included two other prerequisites. First, the borrower had to be "underwater" on the first lien mortgage. Second, the homeowner had to have an outstanding non-mortgage debt balance of more than $10,000. The purpose of this last requirement was explained to me in a phone conversation with the lead analyst. He clarified that unless the borrower had at least $10,000 in non-mortgage debts which continued to be kept current; it was very likely that the mortgage default was induced by the inability to continue making the payments.

While this definition by the Morgan Stanley analysts is plausible, I consider it to be too narrow. It excludes too many borrowers who choose to stop paying the mortgage even though they may miss payments on some of their other debt obligations. I define a strategic defaulter to be any borrower who goes from never having missed a mortgage payment directly into a 90 day default. We'll examine a graph a little later which clearly illustrates this definition.

This definition is not a bad way to identify people who default by choice, but it doesn't necessarily tell us why they made the choice. Many people who financially implode keep it all together until the reach a breaking point where they capitulate. The only thing we can be sure of about the people Mr. Jarow has singled out is that they were decisive. Once they stopped making payments, they didn't bother to play around with loan modifications or otherwise game the system.

I believe it is important to note that most people chose to default because they know continuing to pay is futile. Just because someone is capable of continuing a futile act doesn't mean that stopping is an irrational decision. In fact, those that acclerate their defaults are far more rational than those who continue to pay when it makes no financial sense for them to do so.

Why Do Homeowners Walk Away from Their Mortgage?

In the midst of the housing bubble, it was inconceivable that a homeowner would voluntarily stop making payments on the mortgage and lapse into default while having the financial means to remain current on the loan.

Then something happened which changed everything. Prices leveled off in 2006 before starting to decline. With certain exceptions, they have been falling ever since around the country. In recent memory, this was something totally new and it has radically altered how homeowners view their house.

In those metros where prices soared the most during the housing bubble and collapsed most severely, many homeowners who have strategically defaulted shared three essential assumptions:

1. The value of their home would not recover to their original purchase price for quite a few years.

2. They could rent a house similar to theirs for considerably less than what they were paying on the mortgage.

3. They could sock away tens of thousands of dollars by stopping mortgage payments before the lender finally got around to foreclosing.

Notice the considerable value lenders obtained by their failure to foreclose. Locally, where house prices are still elevated above reason, people believe house prices will return to peak valuations in a few years and the HELOC party will be back on. Denial keeps people making payments who would ordinarily accelerate their default. Many families in Orange County cannot afford their houses. Many have already defaulted. Few have been foreclosed on so prices remain elevated, and the hopeless maintain denial of a brighter tomorrow.

Put yourself into the mind and the shoes of an underwater homeowner who held these three assumptions. The temptation to default became very difficult to resist. What would you have done?

The author presumes everyone believes accelerated default is wrong. He portrays it as something evil that people are tempted with. It isn't the default that is a tempting evil, it was taking out the loan in the first place. If someone goes out on an all night bender, are they tempted by evil aspirin in the morning? People who accelerate their defaults are merely curing the problem that was created by their earlier mistakes.

Now you may ask: What has kept most underwater homeowners from defaulting?

Why Do Struggling Homeowners Keep Paying Their Mortgages?

This is not an easy question to answer. I suggest that you take a look at a very thorough discussion of this issue in a paper written by Brent White, a professor of law at the University of Arizona and published in February 2010. Its title is "Underwater and Not Walking Away: Shame, Fear and the Social Management of the Social Crisis." He asserts that there are strong societal norms and pressures that lead to feelings of shame, fear and guilt which prevent many underwater homeowners from choosing to default.

He also cites the strong moral condemnation heaped on strategic defaulters by the press as well as by significant political figures. Take the speech given in March 2008 by then Secretary of the Treasury Henry Paulson. Paulson declared on national television: "Let me emphasize, any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator – and one who is not honoring his obligations." Coming from the former Chairman of a Wall Street firm that earns billions every year by speculating, these words had a certain hollow ring to them.

Strategic Default Is Merely Collecting On Home Price Protection Insurance Sold By Lenders

Walking Away from a Mortgage to Secure Their Children’s Future

Two Key Studies Show that Strategic Defaults Continue to Grow

Within the past six months, two important studies were published which have tried to get a handle on strategic defaults. First came the April report by three Morgan Stanley analysts entitled "Understanding Strategic Defaults." Remember their narrow definition of a strategic defaulter which I described earlier:

1. an underwater homeowner who goes straight from being current on the mortgage to a 90+ day delinquency "without any curing in between or thereafter"

2. has an outstanding non-mortgage debt balance of at least $10,000 which does not become delinquent

The study analyzed 6.5 million anonymous credit reports from TransUnion's enormous database while focusing on first lien mortgages taken out between 2004 and 2007.

One conclusion which the authors reach is that the percentage of defaults which they label strategic has risen steadily since early 2007. By the end of 2009, 12% of all defaults were strategic. Even more significant is that loans originating in 2007 have a significantly higher proportion of defaults which are strategic than those originated in 2004.

Interesting. It appears that people who have not been in the home as long are more prone to walk away. Are they less attached? Since their values went nowhere but down, did they fail to get a taste of kool aid to keep them hooked?

The following chart clearly shows this difference.


It is also important to note that with higher Vantage credit scores, the strategic default rate rises very sharply. [Vantage scoring was developed jointly by the three credit reporting agencies and now competes with FICO scoring].

Is anyone else surprised that strategice default is more common among people with good credit scores? I guess we really are all subprime now.

Another Morgan Stanley chart shows us that for loans originated in 2007, the strategic default percentage also climbs with higher credit scores.


Notice that although the percentage of loans which default at each Vantage score level declines, the percentage of defaults which are strategic rises. A fairly safe conclusion to draw from these two charts is that homeowners with high credit scores have less to lose by walking away from their mortgage. The provider of these credit scores, VantageScore Solutions, has reported that the credit score of a homeowner who defaults and ends up in foreclosure falls by an average of 21%. This is probably acceptable for a borrower who can pocket perhaps $40,000 to $60,000 or more by stopping the mortgage payment.

Very interesting data. If you had an 800 FICO score, a strategic default will lower it 160 points to a value of 640. It probably doesn't take long to bring that up enough to qualify for most forms of credit, albeit at a higher rate.

There is one more key chart from the study that is worth looking at. This one looks at strategic default rates for different original loan balances.


Note that the size of the original loan balance has little impact on the strategic default rate.

Rich people and poor people accelerate their defaults at the same rate. I would have guessed that wealthier people would hold out longer by drawing on other sources of credit. Apparently not.

The Key Factor Behind Strategic Defaults

Then what is the decisive factor that causes a strategic default? To answer this, we need to turn to the other recent study.

This past May, a very significant study on strategic defaults was published by the Federal Reserve Board. Entitled "The Depth of Negative Equity and Mortgage Default Decisions," the study was extremely focused in scope. It examined 133,000 non-prime first lien purchase mortgages originated in 2006 in the four bubble states where prices collapsed the most — California, Florida, Nevada and Arizona. All of the loans had 100% financing with no down payment. These loans came to be known as 80/20s – an 80% first lien and a 20% piggy back second lien. It's hard to remember that those deals once flourished.

The first conclusion to note is that an astounding 80% of all these homeowners had defaulted by September 2009.

Anecdotally, I am not surprised by that number. Do you remember back in 2007 and 2008 many of the properties I profiled were 100% financing walkaways. By the end of 2008 and into 2009, we stopped seeing those and we began seeing people who had put 5% to 10% down. It is still rare to see a default where the owner put 20% or more down and there was no HELOC abuse.

Half the defaults occurred in less than 18 months from origination date. During that time, prices had dropped by roughly 20%. By September 2009 when the study's observation period ended, median prices had fallen another 20%.

The study really zeroes in on the impact which negative equity has on the decision to walk away from the mortgage. Take a look at this first chart which shows strategic default percentages at different degrees of being underwater.


Notice that the percentage of defaults which are strategic rises steadily as negative equity increases. For example, with FICO scores between 660 and 720, roughly 45% of defaults are strategic when the mortgage amount is 50% more than the value of the home. When the loan is 70% more than the house's value, 60% of the defaults were strategic.

Now take a look at this last chart. It focuses on the impact which negative equity has on strategic defaults based upon whether or not the homeowner missed any mortgage payments prior to defaulting.


This chart shows what I consider to be the best measure of strategic defaulters. It separates defaulting homeowners by whether or not they missed any mortgage payments prior to defaulting. As I see it, a homeowner who suddenly goes from never missing a mortgage payment to defaulting has made a conscious decision to default. The chart reveals that when the mortgage exceeds the home value by 60%, roughly 55% of the defaults are considered to be strategic. For those strategic defaulters who are this far underwater, the benefits of stopping the mortgage payment outweigh the drawbacks (or "costs" as the authors portray it) enough to overcome whatever reservations they might have about walking away.

Intuitively, this makes sense: the further you are underwater, the more hopeless your situation, so you are far more likely to accelerate your default. With deeply underwater homeowners — like anyone who has not defaulted already in Las Vegas — true strategic default becomes much more common. I am sure I would default on my mortgage if I were 50% underwater. Anyone that far underwater is stupid not to default.

Where Do We Go From Here?

The implications of this FRB report are scary. Keep in mind that 80% of the 133,000 no down payment loans examined had gone into default within three years. Clearly, homeowners with no skin in the game have little incentive to continue paying the loan when the property goes further and further underwater.

While many of these 80/20 zero down payment loans have already gone into default, there are still a large number of them originated in 2004-2005 which have not. We know from LoanPerformance that roughly 33% of all the Alt A loans that were securitized in 2004-2006 were 80/20 no down payment deals. Over 20% of all the subprime loans in these mortgage-backed security pools had no down payments. These figures are confirmed by the Liar Loan study which I referred to in a previous article. It found that 28% of the more than 700,000 loans examined in that report which had been originated between 2004 and 2007 were 80/20 no down payment deals.

The problem of strategic defaults goes far beyond those homeowners who put nothing down when they bought their home. Although the Morgan Stanley study found that only 12% of all the defaults observed were homeowners walking away from the mortgage, I think their definition of a strategic defaulter is much too narrow.

The chart from that study which we looked at earlier shows strategic default rates when the loan exceeded the home value by 20-60%. Total default rates were over 40% for mortgages of all sizes. This tells me that a substantial proportion of all these defaults by underwater homeowners were walk-aways.

It is not only the four worst bubble states examined in the FRB study to which these two reports are applicable. Remember, prices have declined by 30% or more in just about all of the 25 large metros that had the highest number of distressed properties which I examined in my previous article on the shadow inventory.

Another chart from the Morgan Stanley study showed that for all the 6.6 million loans analyzed, the percentage of them defaulting rose steadily from 45% for loans with a LTV of 100 to 63% for loans with a LTV of 155. It seems clear from these two reports that as home values continue to decline and LTV ratios rise, the number of homeowners choosing to strategically default and walk away from their mortgage obligation will relentlessly grow. That means real trouble for all major housing markets around the country.

Where we go from here is simple: we foreclose on the squatters and let whatever happens happen. There is no real dilemma here. We just don't want to do what is necessary and endure the pain that goes along with it.

The HELOC Lifestyle

California is the only place in the world where people come to believe they can live on home price appreciation as a reliable source of income. It isn't surprising that real estate takes on a special level of desirability when each house comes with a built-in ATM machine. It becomes obvious that people come to expect and rely on this source of income when you witness them steadily and methodically increasing their mortgage balance.

Of course, since banks allow people to borrow this money and become dependant upon this source of income, houses become desirable beyond all reason. The competition for free money becomes intense, house prices rise, and when the market rally fizzles, prices crash back to earth, and the banks lose billions of dollars.

  • The owners of today's featured property paid $175,000 on 3/18/1999. They used a $169,750 first mortgage and a $5,250 down payment.
  • On 11/15/2001 they refinanced with a $229,500 first mortgage.
  • On 12/4/2002 they refinanced with a $240,000 first mortgage.
  • On 2/11/2003 they refinanced with a $278,000 first mortgage.
  • On 11/1/2004 they refinanced with a $300,000 first mortgage.
  • On 2/11/2008 they refinanced with a $323,000 first mortgage.
  • Total mortgage equity withdrawal was $153,250.
  • Total squatting time is about 15 months so far.

Foreclosure Record

Recording Date: 09/14/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 03/24/2010

Document Type: Notice of Rescission

Foreclosure Record

Recording Date: 03/09/2010

Document Type: Notice of Default

Foreclosure Record

Recording Date: 10/30/2009

Document Type: Notice of Default

This is what passes for good mortgage management in California. They tried to live within their means so to speak; they only spent what they perceived to be within the bounds of normal appreciation for their property. Of course, they were wrong, but that is the mindset by which they approached their mortgage management.

Am I the only one who thinks this is crazy?

Irvine Home Address … 23 FOXHOLLOW Irvine, CA 92614

Resale Home Price … $319,900

Home Purchase Price … $175,000

Home Purchase Date …. 3/18/1999

Net Gain (Loss) ………. $125,706

Percent Change ………. 71.8%

Annual Appreciation … 5.2%

Cost of Ownership


$319,900 ………. Asking Price

$11,197 ………. 3.5% Down FHA Financing

4.74% …………… Mortgage Interest Rate

$308,704 ………. 30-Year Mortgage

$64,292 ………. Income Requirement

$1,608 ………. Monthly Mortgage Payment

$277 ………. Property Tax

$0 ………. Special Taxes and Levies (Mello Roos)

$27 ………. Homeowners Insurance

$340 ………. Homeowners Association Fees


$2,252 ………. Monthly Cash Outlays

-$150 ………. Tax Savings (% of Interest and Property Tax)

-$389 ………. Equity Hidden in Payment

$20 ………. Lost Income to Down Payment (net of taxes)

$40 ………. Maintenance and Replacement Reserves


$1,774 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$3,199 ………. Furnishing and Move In @1%

$3,199 ………. Closing Costs @1%

$3,087 ………… Interest Points @1% of Loan

$11,197 ………. Down Payment


$20,682 ………. Total Cash Costs

$27,100 ………… Emergency Cash Reserves


$47,782 ………. Total Savings Needed

Property Details for 23 FOXHOLLOW Irvine, CA 92614


Beds: 3

Baths: 1 full 1 part baths

Home size: 1,300 sq ft

($246 / sq ft)

Lot Size: n/a

Year Built: 1985

Days on Market: 17

Listing Updated: 40443

MLS Number: S632715

Property Type: Condominium, Residential

Community: Woodbridge

Tract: St


According to the listing agent, this listing may be a pre-foreclosure or short sale.

Desirable 3 bedroom two story condominium in the Somerset Tract near an amazing and tranquil rest and park area, Green Belt and Pool. This perfect starter home includes super upgraded laminate and travertine floors. Kitchen has gas stove and stainless steel sink. Crown moulding and 3 inch baseboards grace each of the rooms, along with custom paint, smooth ceilings, and textured walls. For your comfort, home also features an oversized five year old air conditioner. Bathrooms feature new light fixtures. Living Room is showcased with a slate Fireplace and beautiful French Doors that open on to the Patio with an 8 year old fruit bearing guava tree. Enjoy all the Woodbridge area amenities, including the Lakes, Pools, Parks, Schools and Shopping. This home is lovingly maintained by this family and not a short sale fixer upper.

I hope you have enjoyed this week, and thank you for reading the Irvine Housing Blog: astutely observing the Irvine home market and combating California Kool-Aid since 2006.

Have a great weekend,

Irvine Renter

The Upcoming Collapse of the Banking Cartel

As the economy improves, lenders will start to liquidate their inventory. When they do, the lending cartel will collapse, and prices will get pushed lower.

63 CANYON Crk Irvine, CA 92603 kitchen

Irvine Home Address … 63 CANYON Crk Irvine, CA 92603

Resale Home Price …… $4,195,000

No time wasted, smile on your face

Gotta get out, out of this place

And I'll lend a helping hand

Cause we got it now, we got it good

Cartel — In No Hurry

Cartel Behavior

Despite the huge backlog of inventory of both bank-owned properties and shadow inventory, the banks are in no hurry to liquidate. It is classic cartel behavior.

When OPEC first formed, a group of oil producers had an idea: if they all agreed to restrict production, it will drive up prices and make them all rich. When they first put their plan into motion in the 1970s, it worked. The member countries curbed production, and prices went up. Once prices were high, each member country had incentive to cheat to obtain more income at the higher price, so the cartel weakened, and many argue it has little or no power today.

Similarly, the heads of all the major lenders today are like minded: they all agree that processing foreclosures into a weak job market will lower prices and reduce the value of their holdings. They all came to this conclusion in 2008, and during 2008 and 2009, they stopped processing foreclosures and restricted the inventory on the market to keep prices high, and it worked.

As the economy pulls out of this recession, each of the members of the banking cartel will change their opinions about the economy and the market. Some will evaluate their procedures and determine changes are in order, and some will evaluate the amount of inventory they must chew through and determine they better get going or they will own real estate for the next 20 years.

The 2:00 problem

Years ago I attended a seminar where the speaker was Kevin Haggerty, 7-year head of trading at Fidelity Capital Markets. He described what is known as the 2:00 problem.

When mutual fund managers want to buy or sell stock, they call the trading desk and place an order. Since these orders are often very large, it may take quite some time to get their orders filled. Let's say the trader was asked to fill a 100,000 share order, and at 2:00 he has only accumulated 60,000 shares. He informs the head of trading who calls the fund manager. The fund manager has to make a choice: (1) either wait and get the order filled tomorrow, or (2) have the trader fill the order regardless of what it does to the stock price. Filling a large order at the market can cause a major change in price.

The banks have a 2:00 problem… almost. It is only 12:00 in their world. They have only filled a tiny fraction of their original, market-clearing order, and they feel no urgency to fill the order through lowering price… yet.

Two o'clock is coming. When the economy starts to recover, banks will get pressure from regulators and stockholders to clean up the mess on their books. Lenders are not synchronized, and each one will hit 2:00 at a different time. The volume necessary to clear the garbage is simply not going to happen at current price levels. The price-income mismatch makes that impossible. At some point, the pressure to liquidate will force them to impact the market.

Procrastination on Foreclosures, Now 'Blatant,' May Backfire

American Banker | Friday, August 27, 2010

By Jeff Horwitz and Kate Berry

Ever since the housing collapse began, market seers have warned of a coming wave of foreclosures that would make the already heightened activity look like a trickle.

The dam would break when moratoriums ended, teaser rates expired, modifications failed and banks finally trained the army of specialists needed to process the volume.

But the flood hasn't happened. The simple reason is that servicers are not initiating or processing foreclosures at the pace they could be.

It really is that simple. I see uninformed shills write that there is no shadow inventory and other nonsense that realtors tell their customers to dupe them into a false sense of security. The fact is that shadow inventory does exist. It is very large, and eventually banks are going to have to liquidate this inventory. This liquidation will be the collapse of a cartel and may not be the orderly flow they are hoping for.

By postponing the date at which they lock in losses, banks and other investors positioned themselves to benefit from the slow mending of the real estate market. But now industry executives are questioning whether delaying foreclosures — a strategy contrary to the industry adage that "the first loss is the best loss" — is about to backfire. With home prices expected to fall as much as 10% further, the refusal to foreclose quickly on and sell distressed homes at inventory-clearing prices may be contributing to the stall of the overall market seen in July sales data. It also may increase the likelihood of more strategic defaults.

I have pointed out on many occasions that lender policy is encouraging strategic defaults.

It is becoming harder to blame legal or logistical bottlenecks, foreclosure analysts said.

"All the excuses have been used up. This is blatant," said Sean O'Toole, CEO of, a Discovery Bay, Calif., company that has been documenting the slowdown in Western markets.

Banks have filed fewer notices of default so far this year in California, the nation's biggest real estate market, than they did 2009 or 2008, according to data gathered by the company. Foreclosure default notices are now at their lowest level since the second quarter of 2007, when the percentage of seriously delinquent loans in the state was one-sixth what it is now.

Let that sink in: banks have six times as many delinquent borrowers, but they are foreclosing on less of them. What do they expect to do with all these squatters?

New data from LPS Applied Analytics in Jacksonville, Fla., suggests that the backlog is no longer worsening nationally — but foreclosures are not at the levels needed to clear existing inventory.

The simple explanation is that banks are averse to realizing losses on foreclosures, experts said.

"We can't have 11% of Californians delinquent and so few foreclosures if regulators are actually forcing banks to clean assets off their books," O'Toole said.

Officially, of course, this problem shouldn't exist. Accounting rules mandate that banks set aside reserves covering the full amount of their anticipated losses on nonperforming loans, so sales should do no additional harm to balance sheets.

Within the last two quarters, many companies have even begun taking reserve releases based on more bullish assumptions about the value of distressed properties.

That is mark-to-fantasy accounting. The banks are using bullish assumptions that can't possibly come to pass given the huge inventory that must be liquidated.

Now there is widespread reluctance to test those valuations, an indication that banks either fear they have insufficient or are gambling for a broad housing recovery that experts increasingly say is not coming.

Banks did not choose the strategy on their own.

With the exception of a spike in foreclosure activity that peaked in early-to-mid 2009, after various industry and government moratoriums ended and the Treasury Department released guidelines for the Home Affordable Modification Program, no stage of the process has returned to pre-September 2008 levels. That is when the Treasury unveiled the Troubled Asset Relief Program and promised to help financial institutions avoid liquidating assets at panic-driven prices. The Financial Accounting Standards Board and other authorities followed suit with fair-value dispensations.

These changes made it easier to avoid fire-sale marks — and less attractive to foreclose on bad assets and unload them at market clearing prices. In California, ForeclosureRadar data shows, the volume of foreclosure filings has never returned to the levels they had reached before government intervention gave servicers breathing room.

Some servicing executives acknowledged that stalling on foreclosures will cause worse pain in the future — and that the reckoning may be almost here.

"The industry as a whole got into a panic mode and was worried about all these loans going into foreclosure and driving prices down, so they got all these programs, started Hamp and internal mods and short sales," said John Marecki, vice president of East Coast foreclosure operations for Prommis Solutions, an Atlanta company that provides foreclosure processing services. Until recently, he was senior vice president of default administration at Flagstar Bank in Troy, Mich. "Now they're looking at this, how they held off and they're getting to the point where maybe they made a mistake in that realm."

Did you catch that? That is the beginning of the end for the lending cartel. Once they lose their like-minded action, once some of the cartel members begin to liquidate, prices will fall, and the cartel will crumble.

Moreover, Fannie Mae and Freddie Mac have increased foreclosures in the past two months on borrowers that failed to get permanent loan modifications from the government, according to data from LPS. If the government-sponsored enterprises' share of foreclosures is increasing, that implies foreclosure activity by other market participants is even less robust than the aggregate.

"The math doesn't bode well for what is ultimately going to occur on the real estate market," said Herb Blecher, a vice president at LPS. "You start asking yourself the question when you look at these numbers whether we are fixing the problem or delaying the inevitable."

I am amazed that anyone involved really thought the bailouts and false hopes would actually solve this problem. There was never any chance. Those programs were obviously delaying the inevitable.

Blecher said the increase in foreclosure starts by the GSEs "is nowhere near" what is needed to clear through the shadow inventory of 4.5 million loans that were 90 days delinquent or in foreclosure as of July 31.

LPS nationwide data on foreclosure starts reflects the holdup: Though the GSEs have gotten faster since the first quarter, portfolio and private investors have actually slowed.

"What we're seeing is things are starting to move through the system but the inflows and outflows are not clearing the inventory yet," he said.

I find it surprising that the government is actually leading the collapse of the cartel. Don't be surprised if the GSEs stop their foreclosure activity under pressure from banking interests that would rather see us become Japan than see themselves forced out of business.

Delayed foreclosures might be good news for delinquent borrowers, but it comes at a high price.

Stagnant foreclosures likely contributed to the abysmal July home sales, since banks are putting fewer homes for sale at market-clearing prices.

Moreover, Freddie says a good 14% of homes that are seriously delinquent are vacant. In such circumstances, eventual recovery values rapidly deteriorate.

Defaulted borrowers were spending an average of 469 days in their home after ceasing to make payments as of July 31, so the financial attraction of strategic defaults increases.

One possible way banks are dealing with that last threat is through what O'Toole calls "foreclosure roulette," in which banks maintain a large pool of borrowers in foreclosure but foreclose on a small number at random.

O'Toole said the resulting confusion would make it harder for borrowers to evaluate the costs and benefits of defaulting and fan fears that foreclosure was imminent.

For as cold as Sean's idea is, it would probably be effective. Random violence is an effective method of generating terror, and what Sean is suggesting is that lenders become terrorists.

Is that what this has devolved into? Are lenders going to resort to terrorist tactics to compel people to pay for lender's stupid lending mistakes? Are we going to allow lenders to do this? When will the government act for us rather than for the lenders?

The idea that lenders could and would do this makes me want to see them die.

The cartel in action

I am featuring a property today that demonstrates the macro-economic concept I discussed in the post. I originally featured this property back in January in Foreclosures Ravage Irvine’s High End.

This property was built with a $4,300,000 loan from Fullerton Community Bank. Loans like this inflated high-end pricing, and their absence has created a huge vacuum that no lender is ever going to fill. Evidence of the precarious nature of high end properties is evident with $2,650,000 losses in Irvine real estate.

Back in January, they were asking $4,500,000. A wishing price. They are now down to $4,195,000, and no buyers are to be found. It is 12:00 in their world. They are still in denial. Despite the obvious evidence of long-term weakness in this market, they are holding out for that one buyer who could bail them out. Unfortunately, so are hundreds of other desperate sellers at these price points.

Eventually, it will be 2:00, and they will have to make a decision about liquidation. Either they will mark it way down to sell it, or this may be REO until 2018 when their asking price is market. Which do you think they will chose?

63 CANYON Crk Irvine, CA 92603 kitchen

Irvine Home Address … 63 CANYON Crk Irvine, CA 92603

Resale Home Price … $4,195,000

Home Purchase Price … $4,300,000

Home Purchase Date …. 5/10/2006

Net Gain (Loss) ………. $(356,700)

Percent Change ………. -8.3%

Annual Appreciation … -0.5%

Cost of Ownership


$4,195,000 ………. Asking Price

$839,000 ………. 20% Down Conventional

4.50% …………… Mortgage Interest Rate

$3,356,000 ………. 30-Year Mortgage

$819,853 ………. Income Requirement

$17,004 ………. Monthly Mortgage Payment

$3636 ………. Property Tax

$792 ………. Special Taxes and Levies (Mello Roos)

$350 ………. Homeowners Insurance

$500 ………. Homeowners Association Fees


$22,281 ………. Monthly Cash Outlays

-$2068 ………. Tax Savings (% of Interest and Property Tax)

-$4419 ………. Equity Hidden in Payment

$1398 ………. Lost Income to Down Payment (net of taxes)

$524 ………. Maintenance and Replacement Reserves


$17,717 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$41,950 ………. Furnishing and Move In @1%

$41,950 ………. Closing Costs @1%

$33,560 ………… Interest Points @1% of Loan

$839,000 ………. Down Payment


$956,460 ………. Total Cash Costs

$271,500 ………… Emergency Cash Reserves


$1,227,960 ………. Total Savings Needed

Property Details for 63 CANYON Crk Irvine, CA 92603


Beds: 6

Baths: 7 full 1 part baths

Home size: 9,600 sq ft

($437 / sq ft)

Lot Size: 23,183 sq ft

Year Built: 2009

Days on Market: 248

Listing Updated: 40404

MLS Number: S599824

Property Type: Single Family, Residential

Community: Turtle Rock

Tract: Shdc


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

Bank Owned Estate presented in distinctive Andalusian Style, this custom designed and built home artfully balances grand scale spaces with an extraordinary attention to detail. Numerous viewing decks and a courtyard entry pay tribute to Old World traditions, while graceful archways, hand turned balustrads underscore the architectural theme. With 2 of the 5 bedroom suites & an office on main level, this 9600sqft home offers optimal flexibility.Oasis like landscaping with various waterfalls enhance the villa appeal of this magnificent residence. Subterranean soaking pool, sauna, home theatre/game room/ bar and a temperature controled wine cellar with custom racking and table seatings of 8 or more. Optional Elavator.

controled? Elavator?

Existing-Home Sales Sink to Lowest Level Ever Recorded

On Monday, I reported that California home sales were down 21.4%. Now the national figures show a similar, alarming drop.

Irvine Home Address … 4511 CHARLEVILLE Cir Irvine, CA 92604

Resale Home Price …… $850,000

When I was younger, so much younger than today,

I never needed anybody's help in anyway.

But now these days are gone, I'm not so self assured,

Now I find I've changed my mind, I've opened up the doors.

Help me if you can, I'm feeling down

And I do appreciate you being 'round.

Help me get my feet back on the ground,

Won't you please, please help me?

The Beatles — Help!

Help! Sales are hitting record lows. Months of supply is hitting record highs. Asking prices are starting to come down. Housing market prices are about to double dip.

We have been waiting almost 18 months for the government to allow housing prices to fall to their natural market-clearing levels. First, the Federal Reserve lowered interest rates and directly purchased mortgage-backed securities, then the federal government began providing tax incentives and credits to further prop up prices, even California got into the tax credit act. And for what? Prices are still going to fall.

July Existing-Home Sales Fall as Expected but Prices Rise

National Association of realtors — Washington, August 24, 2010

Existing-home sales were sharply lower in July following expiration of the home buyer tax credit but home prices continued to gain, according to the National Association of realtors®.

Notice how carefully the NAr spins this disastrous headline. First, they fail to mention that the sales fell to a record low. Second, they suggest that a decline of this magnitude was expected. And third, they add that prices rose even though the rise was tiny and more likely attributable to a changing mix rather than an increase in value. So they downplayed the devastating truth and added some feel-good nonsense to soften the blow. It is laughably obvious, and it should be embarrassing, but this is the NAr.

Existing-home sales1, which are completed transactions that include single-family, townhomes, condominiums and co-ops, dropped 27.2 percent to a seasonally adjusted annual rate of 3.83 million units in July from a downwardly revised 5.26 million in June, and are 25.5 percent below the 5.14 million-unit level in July 2009.

Sales are at the lowest level since the total existing-home sales series launched in 1999, and single family sales – accounting for the bulk of transactions – are at the lowest level since May of 1995.

How can this be interpreted as any way other than a complete catastrophe? We have more people and more homes than we did in 1995 or 1999, yet we managed to sell far fewer homes. The viability of the housing market is in question. It certainly appears that prices are going to have to come down for transaction volumes to increase. We already have record low interest rates. Doesn't record low sales and record low interest rates suggest that prices are too high?

Lawrence Yun, NAr chief economist, said a soft sales pace likely will continue for a few additional months. “Consumers rationally jumped into the market before the deadline for the home buyer tax credit expired. Since May, after the deadline, contract signings have been notably lower and a pause period for home sales is likely to last through September,” he said. “However, given the rock-bottom mortgage interest rates and historically high housing affordability conditions, the pace of a sales recovery could pick up quickly, provided the economy consistently adds jobs.

Consumers rationally jumped into the market? People were paying $30,000 to $40,000 more for properties to obtain an $8,000 tax credit. Is that rational, or is Yun trying to justify the taxpayer ripoff he supported?

The pace of recovery could pick up quickly? You better buy now, right? Lawrence Yun has mastered the art of bullshit over the last few years. He obviously has no conscience. At least he bothered to add his weasel statement about the economy consistently adding jobs. Since he knows that isn't going to happen, he can always argue that his prediction would have come true if the condition had been met.

“Even with sales pausing for a few months, annual sales are expected to reach 5 million in 2010 because of healthy activity in the first half of the year. To place in perspective, annual sales averaged 4.9 million in the past 20 years, and 4.4 million over the past 30 years,” Yun said.

More spin. First, do you think the activity in the first half of the year truly healthy? The housing market was smoking government tax-credit crack, and buyers purchased in a stupor. Now that the stimulants are gone, the market is crashing to sleep it off. Second, the annual sales rates over the last 20 or 30 years should be lower than today; we had fewer homes! If you adjust the current sales rates for population or housing stock, the rate would be at an all-time low. This is a blatant misuse of statistics.

According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage fell to a record low 4.56 percent in July from 4.74 percent in June; the rate was 5.22 percent in July 2009. Last week, Freddie Mac reported the 30-year fixed was down to 4.42 percent.

Mortgage interest rates are at the lowest level every recorded too.

The national median existing-home price2 for all housing types was $182,600 in July, up 0.7 percent from a year ago. Distressed home sales are unchanged from June, accounting for 32 percent of transactions in July; they were 31 percent in July 2009.3

“Thanks to the home buyer tax credit, home values have been stable for the past 18 months despite heavy job losses,” Yun said. “Over the short term, high supply in relation to demand clearly favors buyers. However, given that home values are back in line relative to income, and from very low new-home construction, there is not likely to be any measurable change in home prices going forward.”

Volume always precedes price. There almost certainly will be a measurable downward change in home prices going forward. I will agree with Yun that prices will not be going up any time soon. Notice that when the signs are unambiguously bearish, the furthest he will go is to say the prices will remain flat.

Months of Supply hits highest level ever recorded

Total housing inventory at the end of July increased 2.5 percent to 3.98 million existing homes available for sale, which represents a 12.5-month supply4 at the current sales pace, up from an 8.9-month supply in June. Raw unsold inventory is still 12.9 percent below the record of 4.58 million in July 2008.

While we are looking at housing market records, the months of supply of homes on the market is at an all-time high. We have high unemployment, record low sales, increasing inventory, and record high of months of supply. How do prices hold up with pressures like that?

NAr President Vicki Cox Golder, owner of Vicki L. Cox & Associates in Tucson, Ariz., said there are great opportunities now for buyers who weren’t able to take advantage of the tax credit. “Mortgage interest rates are at record lows, home prices have firmed and there is good selection of property in most areas, so buyers with good jobs and favorable credit ratings find themselves in a fortunate position,” she said.

She had to slip in the nonsense about prices firming to convince people that it is okay to buy when its likely that prices will be heading lower. Although, to be fair to her, in Arizona where she is, prices have already been crushed, so prices don't have near as much bubble air in them as they do in Orange County.

A parallel NAr practitioner survey shows first-time buyers purchased 38 percent of homes in July, down from 43 percent in June. Investors accounted for 19 percent of sales in July, up from 13 percent in June; the balance were to repeat buyers. All-cash sales rose to 30 percent in July from 24 percent in June.

Single-family home sales dropped 27.1 percent to a seasonally adjusted annual rate of 3.37 million in July from a pace of 4.62 million in June, and are 25.6 percent below the 4.53 million level in July 2009; they were the lowest since May 1995 when the sales rate was 3.34 million. The median existing single-family home price was $183,400 in July, which is 0.9 percent above a year ago.

Single-family median existing-home prices were higher in 11 out of 19 metropolitan statistical areas reported in July in comparison with July 2009 (the price in one of 20 tracked markets was not available). However, existing single-family home sales fell in all 20 areas from a year ago.

This is a broad-based drop. All real estate may be local, but all local markets are seeing the same dramatic decline in sales.

Existing condominium and co-op sales fell 28.1 percent to a seasonally adjusted annual rate of 460,000 in July from 640,000 in June, and are 24.0 percent below the 605,000-unit level in July 2009. The median existing condo price was $176,800 in July, down 1.7 percent from a year ago.

Condo prices have already rolled over.

… Existing-home sales in the West fell 25.0 percent to an annual level of 870,000 in July and are 23.0 percent below a year ago. The median price in the West was $224,800, up 3.3 percent from July 2009.

Sales volumes are very weak.

WTF are they thinking?

Do any of you think house prices have appreciated 11% per year each and every year since 2002? These owners do.

Perhaps in 2003 and 2004 that really did happen. The housing bubble frenzy was ridiculous. However, the rate of appreciation dropped in 2005, and the market peaked in 2006. In 2007 and 2008 prices dropped. They stabilized in 2009 — thanks to our expired stimulants — and now they are about to roll over again… But don't provide these facts to the owners of today's featured property. They think prices are still going to the moon. Perhaps they wanted to give some room to negotiate down to $550,000 where this property might have a chance to sell.

This property was purchased on 3/27/2002 for $337,500. The owners used a $269,900 first mortgage, a $50,000 second mortgage, and a $17,600 down payment. From that seed, they believe they should make $461,500.

They refinanced on 6/12/2003 for $309,000, and they have a credit line that has increased since then, but an increasing credit line is not proof positive that they took out the money. If they did, the final HELOC was for $275,600.

Obviously, at this asking price, it would be an equity sale…

Irvine Home Address … 4511 CHARLEVILLE Cir Irvine, CA 92604

Resale Home Price … $850,000

Home Purchase Price … $337,500

Home Purchase Date …. 3/27/2002

Net Gain (Loss) ………. $461,500

Percent Change ………. 136.7%

Annual Appreciation … 11.0%

Cost of Ownership


$850,000 ………. Asking Price

$170,000 ………. 20% Down Conventional

4.51% …………… Mortgage Interest Rate

$680,000 ………. 30-Year Mortgage

$166,315 ………. Income Requirement

$3,450 ………. Monthly Mortgage Payment

$737 ………. Property Tax

$0 ………. Special Taxes and Levies (Mello Roos)

$71 ………. Homeowners Insurance

$0 ………. Homeowners Association Fees


$4,257 ………. Monthly Cash Outlays

-$823 ………. Tax Savings (% of Interest and Property Tax)

-$894 ………. Equity Hidden in Payment

$284 ………. Lost Income to Down Payment (net of taxes)

$106 ………. Maintenance and Replacement Reserves


$2,931 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$8,500 ………. Furnishing and Move In @1%

$8,500 ………. Closing Costs @1%

$6,800 ………… Interest Points @1% of Loan

$170,000 ………. Down Payment


$193,800 ………. Total Cash Costs

$44,900 ………… Emergency Cash Reserves


$238,700 ………. Total Savings Needed

Property Details for 4511 CHARLEVILLE Cir Irvine, CA 92604


Beds: 3

Baths: 3 full 1 part baths

Home size: 1,369 sq ft

($621 / sq ft)

Lot Size: 5,000 sq ft

Year Built: 1970

Days on Market: 27

Listing Updated: 40388

MLS Number: P745790

Property Type: Single Family, Residential

Community: West Irvine

Tract: Othr


Great Area, Good Curb Appeal, Sharp Home, Kitchen Has New Stove, Dishwasher Eating Area,living Room W/fireplace, Family Room, 2 Car Garage With Roll Up Garage Door & Garage Access. home is also located at the end of a cul-de-sac street. All award winning schools are within walking distance.

The pictures and the description read to me like the realtor knows this listing is hopeless and he doesn't want to waste any effort on it. I wouldn't want to either.