Failure’s Not An Option — Chamillionaire

The old adage in real estate is location, location, location. During the Great Housing Bubble, location and quality really didn’t matter much. It all came down to financing and the options it created. 100% financing gave all buyers a “Call” option on real estate. If the price went up, they got to keep all the money, and if it went down, the losses were passed on to the lender. 100% refinancing gave all owners a “Put” option on real estate. If the property went down in value, they had already extracted all their equity, so again the risk was passed on to the lender. Of course, the real bonanza for speculators was the Option ARM. This gave speculators a way to drastically reduce the carrying costs on their speculative investment. Many could even rent the property out for positive cashflow, particularly if they used a 1% teaser rate like today’s speculator. With all the incentives favoring speculative betting in the housing market, it is really any wonder people got a bit carried away? Is it any wonder lenders are now expected to lose $1,600,000,000,000? (That is $1.6 Trillion.)

Asking Price: $639,000

Income Requirement: $159,750

Downpayment Needed: $127,800

Monthly Equity Burn: $5,325

Purchase Price: $815,000

Purchase Date: 3/15/2006

Address: 129 Roadrunner, Irvine, CA 92603

ATTN INVESTORS!! Here is your opportunity to prove you have no idea what you are doing. Someone needs to buy this overpriced property before the lender losses any more money. HURRY!!!

Note the increasing number of exclamation points as the realtor got excited at the beginning of the description.

Don’t be surprised if this property gets multiple offers over the asking price. After all, this is Turtle Ridge, and properties there are immune to price declines — except perhaps for this one that has declined 20%…

If this property sells for its asking price, the lender stands to lose $214,340 after a 6% commission. The seller didn’t use 100% financing at first, but after 30 days, she opened a third mortgage and extracted her downpayment plus $2,000. She won’t lose anything other than her good credit.

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Do it do it
Do it do it
Do it do it
Ain’t got to tell you I’m the truest (Truest Truest)
You better tell them i’m the truest (Truest Truest)
You better tell them i’m the truest (Truest Truest)
You better tell them i’m the truest (Truest Truest) everyday AY

I keep a ear to the street u can see im eves droppn
They talkn bout my buzz tryn to picture me floppn
Under ground ruler wreck on every beat knockn
Gobble gobble all the green so they call me green goblin

Failure’s Not An Option — Chamillionaire

Mercy — Duffy

By now most of you have seen the revised Option ARM reset schedule.

There is one more variable that this schedule does not capture, and neither does the ARM reset schedule: people who give up early. Being trapped in a property you cannot sell is torture. You just want to be released from your obligations and go about your life. Begging for mercy probably doesn’t help much, but it might make some of these sellers feel better.

Today’s featured property is an Option ARM holder who gave up early.

Asking Price: $389,000

Income Requirement: $97,250

Downpayment Needed: $77,800

Monthly Equity Burn: $3,241

Purchase Price: $443,000

Purchase Date: 5/19/2008

Address: 8 Eastmont #46, Irvine, CA 92604

Gourmet Kitchen and pregraniteel.

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Today’s sellers are going to lose their own money. They put 20% down ($88,600) and took out an Option ARM for $354,400 with a 1% teaser rate. As one might imagine, they likely made only the minimum payment, and now they are hoping to sell for enough to pay off the debt and a commission. If they get their asking price and pay a 6% commission, they stand to lose $77,340. Assuming they have added almost $11,000 to their loan balance during the period of ownership, this sales price reflects the minimum they need to salvage their credit. Their downpayment is lost.

Both of this chart and the Option ARM reset chart are very ominous, and they show the tentative schedule of the disaster in our housing markets. However, the whole ARM reset issue is more complex than either chart makes apparent. Most people when they read the chart assume that houses will hit the market on the same schedule. This is an overly simplistic reading. Some people, like today’s featured owners, give up early. Some people, will try to make the new payment for an extended period of time before they give up. Some people will make the new payment and keep their houses. All of the people who give up, will go through a foreclosure process (which they can drag out) before the property is sold at auction and finally added to the MLS inventory. I have outlined this whole process before. It takes almost a year from reset to final sale.

What is really important is not when the ARM resets, but when the property is added to available inventory. As we have seen with the lenders slowly adding their REOs to the market, prices do not get hammered until the REOs are actually put up for sale. We are starting to see more REOs on the market, and the process will likely accelerate this fall and winter. We will probably see another big drop then. It is hard to say when we will see a bottom, but it doesn’t seem likely that there will be any sustained appreciation before 2012-2014.

The Gods of the market have no mercy…

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I love you
but i gotta stay true
my morals got me on my knees
I’m begging please stop playing games

Why wont you release me yeah yeah
break it down

Mercy — Duffy