Each new low sale or asking price lowers neighborhood values. As I discussed in Financing in a Declining Market, everything within a 1 mile radius of a low asking price becomes very difficult to finance. All of the short sales we have been seeing advertised do nothing for the would-be seller, as they rarely result in a sale; however, they do serve to obliterate the neighborhood comps as these low asking prices sit on the market. In fact, I would say that attempted short sales are doing more damage to the market right now than foreclosures because the foreclosures simply disappear into the black hole of lender holdings whereas short sales stand out in the market signaling a new lower pricing level. Today’s featured property is a nearly new property in Northwood II asking $240/SF. It is an astonishingly low price in today’s market.
There are no pictures on the MLS, but the pictures below are of the identical property at 39 Secret Garden offered by a neighbor for $240,800 more (WTF?) Let’s just say this neighbor can’t be very happy about this short sale.
Elegant&luxurious 4 bedroom detached town home,very bright
interior,spacious living space(2,492 sq.ft)built in2004,$120,000
upgraded option when purchased, This is a short sale property!
Is this the bottom for pricing in this neighborhood? I doubt it. It isn’t very likely we will see the bottom of resale pricing anywhere in 2008. The bulk of the problem with foreclosures is ahead of us, not behind us. No matter how low prices get in 2008, they will go lower. Seeing this price levels in 2008 is rather surprising. It foretells of a significant downside overshoot of fundamentals, in my opinion, but we will see.
Many of the buyers in this neighborhood used 20% downpayments. I heard rumor that it was a requirement of the builder. Not to worry, they promptly withdrew their equity with a HELOC, so they will not lose any money. In fact, if they fully tapped their $250,000 HELOC with Washington Mutual, they stand to make money on the deal. If the HELOC is fully tapped, the total mortgage debt is $901,200. If this property sells for its asking price, the total loss to the lenders will be $338,140. Washington Mutual will eat $250,000 and America’s Wholesale Lender will lose the rest.
As for the rest of the neighborhood, the financing environment just got a lot more challenging. I doubt the sellers at 26 Shadowplay will be getting any tearful send offs by the neighbors…
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To the centre of the city where all roads meet, waiting for you To the depths of the ocean where all hopes sank, searching for you Moving through the silence without motion, waiting for you In a room with a window in the corner I found truth
In the shadowplay acting out your own death, knowing no more As the assassins all grouped in four lines, dancing on the floor And with cold steel, odour on their bodies made a move to connect I could only stare in disbelief as the crowds all left
I did everything, everything I wanted to I let them use you for their own ends To the centre of the city in the night, waiting for you To the centre of the city in the night, waiting for you
Here are a few fragmented excerpts on Countrywide’s thirst for quantity and increasing lack of quality.
As for Countrywide being a great place to work — as Jonas Roth
(the head of the trading desk at Countrywide) and others might testify
to — Betsy Bayer (VP of compliance at Countrywide) wasn’t so sure. “It
was a sweatshop,” she said. “They had these posters all over the
office. They were ‘work/life balance’ posters, like they were concerned
about our well being. What a load of Bullsh*t. It was a sweatshop.”
Even though many of Mozilo’s senior executives had been with the
company 20 years or more, the Countrywide she worked for had a high
turnover rate where many employees would leave before two years was
out. “That’s a fact that never gets published,” she said.
Managing wholesale compliance, she — and others — learned the
idea was to produce as many loans as humanly possible. Bayer, being the
company’s “rules person” for loans brought in through its broker
network, didn’t think compliance was being taken all that seriously by
Mozilo and his senior management.
Mozilo, for his thirst for market share, had followed Arnall’s
company (Ameriquest and Argent) into the business of originating
stated-income loans (where home buyers state their incomes and the
lender believes them as long as their FICO score checks out).
Stated-income loans came in two types: prime and subprime. But when it
came to the “A” paper credit quality stated-income loans, Fannie Mae
and Freddie Mac (for the most part) wouldn’t touch them because of the
lack underwriting. Countrywide also followed the crowd in originating
another popular loan of the 2004 to 2007 period: payment option ARMs
(adjustable-rate mortgages) (POAs), a product where the consumer was
offered four different payment plans each month. One of these payments
artificially low by delaying large interest payments each month, thus
adding new debt onto the loan amount. It was what some lenders called
an “I’ll worry about it tomorrow” option. By 2006 Countrywide was the
largest pay option ARM lender in the nation, originating $11 billion
worth a quarter.
“When you go for quantity, quality is what you give up,” said
Bayer. “To get volume, you lose quality — that’s what they did.” When
she arrived in 2004, the company’s compliance department was in what
she called “complete turmoil.” When pressed further, she said
Countrywide wasn’t doing its homework when it came to underwriting.
“They were relaxing credit guidelines.”
She said that inside the company compliance staffers had a word
for stated-income loans: “liar loans.” Bayer said the only ones in the
company who called them that were members of the compliance staff. No
one in the firm used the phrase, at least not within earshot of the
production chiefs.
Matt Padilla, from the OC Register, has a book out on the mortgage mess. It was co-written with Paul Moulo of National Mortgage News, but I can tell from the writing and the content that Matt did the majority of the work for book. I had previously mentioned the book in blog post and quite a bit on the forums, and since then many other MSM sources have written some stellar reviews. Many of the reviews are mentioned on the book’s website, as well as my hat tip to the book. Also, the WSJ recently reviewed it along with Mark Zandi’s new book. Now that I have finished the book, I can finally do my own review.
I promised Matt that I would be honest on what I thought about the book, and I have to say… I loved it. I am not sure what I liked best about the book; whether it was the both deep and broad historical perspectives it covered, or the way that that he made some of the more complex issues of the mortgage world easy to understand. The book’s central theme is Angelo “The Tan Man” Mozilo, and the rise and fall of Countrywide. However, it goes into detail of the beginning of subprime and Peter Cugno’s rise in Beneficial Finance in the 60s. Back then they would loan people a couple hundred bucks, and if you didn’t pay, Peter would be at your office asking where his payment is. Back then loan officers, like Peter, not only orginated the loan, but they serviced it and collected on it. That and they wouldn’t lend money on a house above 60% LTV.
Matt goes into detail of the failed subprime shops of the late 90s, during the Russian currency crisis and Long Term Capital Management’s failure, and how they were using “gain on sale” accounting rules, that ultimately lead to their failure. New Century was around then too, but they were bailed out by US Bank. US Bank made a good bet then, and it’s a good thing no one, like US Bank, was willing to make a bet like that in this bubble. He also goes into how Countrywide survived that time, and how the Tan Man had some choice expletives about the poor performance of those years. It comes to light, how the Tan Man liked to drop the f-bomb, as any true Bronx native would, and how he was not shy to tell people how he felt about his competition. About this time is when the Tan Man decided to expand the use of mortgage brokers. He touches on the death of the banks keeping loans on their books during the S&L crisis, and how this became the birth of the use of mortgage brokers. He brings to light some of the early subprime shops of the early 90s, and how many people from that era became some of the leaders of what subprime was to become. He has an entire chapter on Roland Arnall of Ameriquest and Argent, and how the Tan Man was forced to compete with him. He shows how Arnall was the opposite of Mozilo, in trying his best to remain under the radar.
REITs? They’re like pigs with lipstick. – Angelo Mozilo. One of the greatest things about this book, is that it separates the difference between a banking institution (like WAMU), and a non-banking institution (like New Century). One of the main reasons for the numerous failures of non-banking institutions is the fact that they were set up to be a REIT. The problem with this is that a REIT must pay out most of all of its profits in the form of dividends, and not save any of their profits for the bad times. Ironically, they drank their own Kool-Aid, in not saving for the future like most of their borrowers. Friedman Billings Ramsey (FBR) was main player preacher of converting these non-banking institutions into REITs, and taking them public or converting them if they were public. Many of the non-banking institutions FBR convinced conned into converting into a REIT, has gone BK, including New Century. Or, one could say that in a Ponzi scheme like industry, when there is no more money, they also have the least amount of liability, and can and will be shut down very quickly. This is where it leads to the beginning of New Century, and some of the players from the 90s of Guardian Savings, Plaza Mortgage, and Long Beach Mortgage from the previous chapters. This is when (the 90s), and where (Irvine) subprime truly began.
It dives into the conspiracy of Merrill, David Einhorn, and Bear Stearns’ rise and eventual fallout from the mortgage world. The details of Bill Dallas’ sale of First Franklin, to the funding of warehouse lines and 20% ownership from Merrill in Dallas’ OwnIt mortgage, shows how it comes full circle. Then, the message from Lewie Ranieri, the co-creator of the MBS security, comes to fruition. Anyone who has read Liars Poker, will know who Lewie Ranieri is, and his personality. The details of the underwriters, of the firms (like Bear Stearns) buying the mortgages from New Century, are downright frightening. Amazingly, when the book went to print, it had intimate knowledge of Ralph Cioffi (the manager of the Bear Stearns hedge funds that went broke) and the details of the failures of his hedge funds before the indictment. The fallout of Bear Stearns can be traced to this one big screw up.
The details of the interviews, er non-interviews from the Tan Man during the collapse of Countrywide are just a great reminder of how slick he thought he was. His arrogance shines through even brighter than his bright tan by some of the things he said during financial reporting conference calls. Then, the details of how Ameriquest and Argent screwed over a suburb of Cleveland show how the lawsuits start rolling. This is where the rating agencies start getting blamed, and how they denied any wrong doing. The excuses really begin flying now.
I highly recommend this book. This book is for anyone who is an industry insider that, like myself, that has intimate knowledge of it and even know some of the people quoted. This is also a book for anyone who wants to understand WTF happened, and who, when, why, and what they did to make all of this happen. No matter whom you are or what you know of the industry, you will end up learning something from this book. The only other book I recommend as highly on how we got into this mess, and for a more economic fundamental and psychological perspective, is The Great Housing Bubble by IrvineRenter. So, go get your copy at Amazon now, and let me know what you think. I have a thread in the forums up to discuss the book, so feel free to chime in.
Today’s featured property is a typical victim of the mortgage game. The owner bought at the peak with a toxic mortgage with the hope that these “innovative” products would always be around. They aren’t. Therefore, they next buyer could not leverage up as much as buyers could in 2006, and prices fall — a lot.
Beds: 5 Baths: 3 Sq. Ft.: 2,420 $/Sq. Ft.: $370 Lot Size: 5,800 Sq. Ft. Property Type: Single Family Residence Style: Mediterranean Year Built: 1995 Stories: 2 Levels Area: Westpark County: Orange MLS#: S538971 Source: SoCalMLS Status: Backup Offers Accepted On Redfin: 8 days
Beautiful, upgraded home on larger corner lot!!! Great location in
lovely Westpark, rarely on market! Vaulted ceilings! Spacious home has
downstairs bedroom with full bath. Gorgous marble flooring and generous
use of marble in bathrooms & on fireplace. Custom moldings, new
carpet and new paint. Inviting backyard with covered patio is
professionally landscaped.
This property has been featured before. It was for sale last summer. It certainly appears to be a huge, high-end loss in Westpark. If this property sells for its asking price, the total loss on the property will be $458,700. This appears to be a corporate relocation, so there is no telling who will ultimately absorb the loss, and it is perhaps even more difficult to figure out who is to blame…
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The story hit the news From coast to coast They said you beat the girl You loved the most Your charitable acts Seemed out of place With the beauty With your fist marks on her face Your buddies all stood by They bet their fortunes And their fame That she was out of line And you were not to blame
Six hundred thousand doctors Are putting on rubber gloves And they’re poking At the miseries made of love They say they’re learning How to spot The battered wives Among all the women They see bleeding through their lives I bleed– For your perversity– These red words that make a stain On your white-washed claim that She was out of line And you were not to blame
I heard your baby say When he was only three “Daddy, let’s get some girls One for you and one for me.” His mother had the frailty You despise And the looks You love to drive to suicide Not one wet eye around Her lonely little grave Said, “He was out of line girl You were not to blame.”
Do you remember the predictions post from January 1st. Well, we saw our first major bank failure this week as IndyMac bit the dust. With all of the Alt-A crap on their balance sheet, this shouldn’t be terribly surprising. The only thing that surprises me is the fact that most of the Alt-A loans have not reset yet. The toxic waste they own is going to get much more toxic.
The toxic waste is even starting to poison Freddie Mac and Fannie Mae. The GSEs will be saved, and it is the mechanizm for getting the American Taxpayer on the hook for the housing debacle. I can’t say I am too surprised about that one either…
Sometimes you just have to surrender to the absurdities in life. Despite my efforts to figure it out, the housing bubble, and the behavior of the people who participated in it, is simply unfathomable. Mommy’s alright, Daddy’s alright, they just seem a little weird.
Today’s featured property is another in our endless series on HELOC abuse. Another day, another homeowner who spent themselves out of house and home…
Oustanding location behind The University Park, this desirable 4
bedroom Parkcrest home has a separate living room, dining room and
family room. All bedrooms are large and upstairs. Both the master
bedroom and master bath are huge with tall vaulted ceilings. Property
is slightly dated and needs some work.
Oustanding? The realtor couldn’t be bothered to spell the first word correctly. Hmmm…
Property
is slightly dated and needs some work? Apparently, they did not spend all the HELOC money on upgrades.
The previous owners of this property took out a bit of money:
The property was purchased on 11/9/1999 for $279,000. They borrowed $276,500 and put a whopping $3,000 down.
On 5/29/2002 they had their first sip of kool aid with a $330,000 refinance.
On 8/14/2003 they refinanced again for $408,000.
On 5/5/2004 they refinanced again for $500,000.
On 7/25/2005 they refinanced again for $588,000 with a stand alone second for $73,500.
Total property debt is $661,500 which explains the asking price.
Total mortgage equity withdrawal was $385,000
Look at the pattern. First they took out about $50,000 when they got their first taste of kool aid. They must have liked it because they withdrew $100,000 a year for the next 2 years followed by a $150,000 withdrawal. They must have had a good time. How do you blow $385,000 in 4 or 5 years and have nothing to show for it? I wonder how they are doing now that they have bad credit, and they have to get used to living on their wages. Oh, the horror of it…
This property is REO, and it appears the Bank of New York Asset Backed
Pass Through Certificate is trying to get their money back. They have
priced this thing to recover all their capital. Good luck with that.
There is a reason they picked it up at auction for $524,800 — That is
all it is worth it today’s market. I guess they have their loss
mitigation procedures to follow. This one will see some serious price
reductions to find the market.
Are you starting to see just how prevalent this behavior was? Can you see now why we had such a booming economy during the bubble? For those who think our local economy will be OK, explain to me how the loss of all that consumer spending will not have a major impact.
Thus concludes another week at the Irvine Housing Blog. Come back next week as we continue chronicling ‘the seventh circle of real estate hell.’ Have a great weekend.
🙂
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Mother told me, yes, she told me I’d meet girls like you. She also told me, “Stay away, you’ll never know what you’ll catch.” Just the other day I heard a soldier falling off some Indonesian junk that’s going round.
Mommy’s alright, Daddy’s alright, they just seem a little weird. Surrender, surrender, but don’t give yourself away, ay, ay, ay.
Father says, “Your mother’s right, she’s really up on things.” “Before we married, Mommy served in the WACS in the Philippines.” Now, I had heard the WACS recruited old maids for the war. But mommy isn’t one of those, I’ve known her all these years.
Mommy’s alright, Daddy’s alright, they just seem a little weird. Surrender, surrender, but don’t give yourself away, ay, ay, ay.
Whatever happened to all this season’s losers of the year? Ev’ry time I got to thinking, where’d they disappear? When I woke up, Mom and Dad are rolling on the couch. Rolling numbers, rock and rolling, got my Kiss records out.
Mommy’s alright, Daddy’s alright, they just seem a little weird. Surrender, surrender, but don’t give yourself away, ay, ay, ay.
I find HELOC abuse stories fascinating in a train-wreck sort of way. I like to try to imagine the thought processes and belief system that would allow someone to do something so incredibly foolish. Spending your home equity is not a one-time event that could be the result of a single, rash decision, it is the cumulative effect of numerous bad decisions made over a long period of time. Each refinance or equity extraction was the result of a rational thought process with some deliberation. The fundamental belief must be that house prices always go up, therefore additional equity will always be available to spend. If you didn’t believe that, you might pull the money out to screw the lender, but you wouldn’t do it knowing it might cause you to lose your house. The second fundamental belief must be that interest rates and payments will always decline. When you take on more debt, you have to make larger payments to service it, unless of course, you continually refinance with an adjustable rate mortgage in a declining interest rate environment. It is possible some of these people believed their income would rise to make the larger payment as well, but the overriding belief had to have been that low interest rates and serial refinancing would always be available. All of these beliefs are wrong, and the market is driving this point home (literally) right now.
It is the end-game planning I can’t quite get my head around. When was this supposed to end? If people are perpetually spending their equity increases as income, when they finally sell the home, they have no equity. I suppose if you really believed house prices always go up, the house could serve as a perpetual breadwinner that would provide income for retirement and beyond. I guess it really doesn’t make much sense to rent when you can buy a house for no money down and live off the appreciation forever. Did people really believe that was possible? If you look at the behavior of HELOC abusers like today’s featured property owners, you would have to conclude they believed all of those absurd things, and so did a great many others in California as well.
Highly desirable one story single family home in great area of
Dierfield Park. Lots of upgrades including best quality new roof. New
tiles and baths with marble shower areas & glass doors, new
cabinets & granite tops. Top of the line kitchen appliances &
granite counters, recessed lighting. Marble family room fireplace. New
garage door, solid wood front door. Close to park, association pool
& play ground. You can enjoy 6 assoc pools, spas, tennis courts,
picnic areas & etc. No Mello Roos, low tax, and only $45
association dues. Walk distance to award winning schools. just a few
minutes to 5 & 405 freeways. It’s in the heart of Irvine, close to
shopping centers, movie theaters, restaurants, day care & schools.
You will enjoy this beatiful quiet area.
Dierfield? beatiful?
How do you like the staging of the photographs? You can just imagine the realtor showing up with some plants to try to hide the mess. Is it too much of a bother to clean up the place before taking pictures for the MLS?
This one requires the bullet-point recap:
On 1/8/2004 the property was purchased for $465,000 with a $372,000 first mortgage, a $46,500 second mortgage and a $46,500 downpayment.
On 3/11/2004 the owners opened a HELOC for $92,000 and withdrew all their downpayment plus another $45,500.
On 9/20/2004 they refinanced with a $552,000 first mortgage.
On 8/16/2005 they opened a HELOC for $38,000.
On 12/8/2005 they opened a HELOC for $150,000.
On 6/8/2006 they refinanced with an Option ARM for $650,000 and a second mortgage of $115,000.
Total property debt of $765,000.
Total mortgage equity withdrawal of $393,000 over a 2 1/2 year period.
Those owners were livin’ large for a few years there. I wonder how they are adjusting to life without free money…
For the record, if this place sells for its asking price (doubtful), the total loss on the property will be $130,500 after a 6% commission. One interesting note: the second mortgage being wiped out is listed as being insured by either Freddie Mac or Fannie Mae. No wonder there is talk about having to bail them out.
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I work all night, I work all day, to pay the bills I have to pay Aint it sad And still there never seems to be a single penny left for me Thats too bad In my dreams I have a plan If I got me a wealthy man I wouldnt have to work at all, Id fool around and have a ball…
Money, money, money Must be funny In the rich mans world Money, money, money Always sunny In the rich mans world Aha-ahaaa All the things I could do If I had a little money Its a rich mans world
A man like that is hard to find but I cant get him off my mind Aint it sad And if he happens to be free I bet he wouldnt fancy me Thats too bad So I must leave, Ill have to go To las vegas or monaco And win a fortune in a game, my life will never be the same… Money, Money, Money — ABBA
To the centre of the city where all roads meet, waiting for you
Mother told me, yes, she told me I’d meet girls like you.
I work all night, I work all day, to pay the bills I have to pay