Trapped in the purgatory of their home, awaiting repossession, the slow death of bank acquisition. The sky is falling; it is raining blood; the return to renting is near.
Quality shows throughout in this beautiful Fieldstone home. The great functional kitchen with walk-in pantry and glistening black granite on counters and center island opens into a huge family room with fireplace, and French doors lead into the broad backyard. Off the vast master bedroom is a bath suite with separate tub and shower and giant walk-in closet. Upstairs are three more roomy bedrooms and even a walk-in linen closet. Myford Elementary and Pioneer Middle are both California Distinguished Schools and this beautiful, nearly new community has NO association dues!
That is a well-written MLS description.
Do you see how the “r” and the “i” run together to turn carriage into carnage?
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How much will the lenders lose today? Well, assuming a 6% commission, the total loss on the property will be $124,700. The people who have been renting from the bank — sorry, the owners — will lose $5,600. The lender will lose $119,100. This gets worse. There is a HELOC for $192,500 issued on 3-8-2007. I have no idea how much if any of this money has been borrowed. If the owners were smart, they would take it all out and hide the cash somewhere. Of course, a HELOC is a recourse loan, and they would still be required to pay it back, but if it is already borrowed and spent…
There has been plenty of carnage in our real estate market, and if you are in to that sort of thing, there will be plenty more as Armageddon approaches. The God of bear markets is hungry, and he is consuming everyone in his path. He gives new meaning to “Credit Crunch.”
Come back next week as we continue chronicling ‘the seventh circle of real estate hell.’
We are running out of land. There’s no room, no space to rent in this town. You’re priced out forever, you’re out of luck — or so you thought. The market is stuck and houses are not moving. Don’t worry, it’s a beautiful day…
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When Zovall first started this blog, he profiled many attempted flips. As 2006 gave way to 2007, there were fewer and fewer people making the attempt. Today, we have one complete with a WTF asking price. But what do we know. The seller is a realtor, and realtors know more about housing than we ever will…
From Redfin, “Beautiful Dramtic Corner Town Home! No One Lives Below or Above, Double High Ceiling! Lots of Windows, Light, Warm Open Floor Plan, Highly Upgraded, Gorgeous Hardwood & Slate Floors & Seagrass Carpet, Slate Fireplace Surround, Designer Paints, Fabulous Designer Kitchen, Stainless Kitchen Aid Appliances, Concrete Counters! Loft Landing Office Area With Mountain, City Lights View. Master Suite With Walk In Closet Wth Mirrored Door. Enchanting Ceiling Fan, High Ceiling Master Bath. Covered Patio Off The Living Room. Laundry Room, Double Car Attached Garage with Built in Closets( Not Tandem) Community Pool, Spa, BBQ. Across Street, Park with Tennis Courts, Many Sports Fields and Activities.”
What Is The Deal With Title Case Writing? I guess it is more Dramtic.
What is Seagrass Carpet? Do you eat it, mow it, or smoke it?
Concrete Counters? Do you prepare your food on the sidewalk?
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I guess we should not be too surprised. Turtle Ridge is the last place in Irvine where the kool aid is free flowing. Apparently, this seller has not seen the recent developments in Newport Coast. The high end is not immune, and people are simply not willing to pay ridiculous prices for Irvine tract homes. This seller wants over $700K for a 2 bedroom condo. WTF! I guess it is under $500 / SF, so it must be a bargain, right? If she gets her sales price and pays a 3% commission (she would make the other 3% as listing agent), she stands to make $68,130.
This will be a real test of your sales abilities. Good luck with that selling price, you are going to need it. Feel free to contact us if you succeed. I will post an update.
BTW, Trooper posted this hilarious video in our forums. Enjoy…
Are those who bought during the rally encumbered forever by desire and ambition? Will their hunger go unsatisfied? Our market has gone down this road many times, but each time the grass is greener and the light is brighter. Like moths to the flame, the greedy get consumed by the market’s hunger. In our long night of wonder many will long for the simplicity of youth.
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Today’s rental price comparison is not for the same property, but it is for two identical properties in the Northwood Pointe village of Lanes End. The for-sale property is an REO we profiled on a number of occasions with the most recent being The English Garden ** Final Update **. The bank has relisted the property at a market price designed to move the house. As we will see, it is still overpriced relative to value, but it is a significant step forward for market affordability.
From Redfin, “Quiet interior location in Northwood Pointe Cottage in Lanes End. Charming curb appeal! Cozy fireplace with attached garage. Walk to Blue Ribbon Schools, Association pool, tennis and parks.”
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If the rental rate is appropriate for this “median” home then the market here is only overvalued by about $120,000 or 30%. That is real progress from the peak price paid for this unit which was about 60% to 70% over rental value. Of course, that means we are only at the halfway point for the correction in this neighborhood, but we are getting there…
Wake up, hear the music, open the wondows and blinds, see the sun, feel the winds of change hitting the housing market. It’s a new year, and sellers are still lost in space, but some have come down to earth, and they are bringing prices down with them.
From Redfin, “Great College Park home. Fantastic Location. Newer furnace and A/C, recessed lighting, newer kitchen counter, sink and faucet. Scraped ceilings, upgraded baseboards, wood trim, berber carpeting, 16 inch tile floors, ceiling fan, Newer Milgard double paned windows/slider, newer roof, remodeled master bath, and MUCH MORE. A MUST SEE FOR THE PRICE.”
What does it mean that certain features are “newer?” Newer than what? Does that mean it is too old to call it new, but new enough that they want to get some credit for it?
Upgraded baseboards? Give me a break.
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Now before we all get too excited, this is a 100% financing deal gone bad — probably fraud, and the bank will not want to sell for less than the amount of the first mortgage of $552,000. I wish I knew more about the circumstances of this property. It may be a first-payment default fraud, or it may the dumbest flipper on the planet. This house was purchased as the implosion of subprime was front page news. If this was purchased as a flip, we can all feel the schadenfreude.
This price is 24% off its 2007 purchase price. If the seller gets their asking price and pays a 6% commission, the total loss will be $196,594. Wow! The second mortgage will be completely wiped out, and the first mortgage will lose $58,594.
Do you think this seller put up a very low price to catch the attention of the IHB and get some free publicity? If so, it was a good plan.
Perhaps the hardest part of the housing bubble was not taking part in the rally. There was pressure from everyone and the lenders were giving away money. It was very difficult to make a conscious choice not to participate, particularly when people want to own. I felt these desires; I wanted to own again. My intellect and my emotions were in conflict. Now that the bubble is bursting and prices are coming down, I see the light at the end of the tunnel, but it is still difficult to wait. Like Archie Bunker said, “Patience is a virgin.” I will only buy once at the bottom, and I want the time to be right.
For those who participated in the bubble, the hardest part (beyond the financial problems) is yet to come. It will be accepting that everything they thought they knew was wrong. As I described in What is a Bubble? a financial mania is supported by a whole series of erroneous and fervently held beliefs. It will take time for the participants to come to the realization that they were wrong, very wrong. Accepting this truth will be even harder. Unfortunately, financial markets have a way of forcing a painful awareness on its participants. Whether they like it or not, each participant in the market will come to realize it was a colossal mistake.
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The cutting edge is sharp. Innovators often pay a heavy price for advancement. Sometimes these advances lead to quantum leaps in human knowledge and understanding. Sometimes the time, effort, and money is merely thrown into the abyss. The innovations of the Great Housing Bubble were of the latter category.
The lending industry touted its “innovation” with exotic loan products. They sold these toxins far and wide. Now that these loans are achieving the highest default rates ever recorded, it is safe to say the “innovations” over the last 5 years were not entirely successful. It is amazing that a group of intelligent bankers came up with this loan and expected a positive outcome. When you really look at the whole “innovation” meme, you see that it is nothing more than a public relations effort to convince brokers the products were safe to sell and borrowers the products were safe to use. It is hard to fathom the widespread acceptance of this nonsense, but that is the nature of the pathological beliefs of a financial mania.
Many in the lending industry think their work is like science that continually advances. It is not. It is far more akin to assembly line work where the same widgets are pumped out year after year. When lenders start to innovate, trouble is brewing. The last significant advancement in lending was the widespread use of 30-year amortizing loans that came into favor after World War II. Prior to that time, home loans were interest-only, short-term loans with very high equity requirements (50% was most common.) This proved problematic in the Great Depression as many out-of-work owners defaulted on their loans. A mechanism had to be found to get new buyers into the markets and allow them to pay off the loan. The answer was the 30-year, fixed-rate amortizing loan. To say this was an innovation is a stretch as this loan has been around as long as banking has existed, but it did not become widely used until equity requirements were lowered. The lenders were willing to lower the equity requirements as long as the loan was amortizing because their risk would decline as time went by and the loan balance was paid off.
Over the last 60 years since World War II ended, a number of experimental loan programs have been attempted. These include, interest-only loans, adjustable rate loans, and negative amortization loans among others. It is this group of loans that has consistently failed in the past for one simple reason: if payments can adjust higher, people will default. It is really that simple. The Option ARM is certainly the most sophisticated loan on the market today. It is a dismal failure, not because it isn’t sophisticated, but because it has embedded within it the possibility (probability, no — near certainty) of an increasing payment. Any loan program that has the possibility of a higher future payment will fail because there will be a certain number of people who cannot afford the higher payment.
Here is where the lenders lie to themselves and to the general public after a financial debacle like the Savings and Loan problems of the 1980s or our current housing bubble: they blame the collapse and the high default rates on some outside factor rather than the terms and conditions the lenders created all by themselves. There are still many out there who believe the high default rates and problems in the housing market in the 90s were caused by a weak economy. This is rubbish. House prices declined for 6 years. The decline started before the economy went soft, and it continued well after it had recovered. People defaulted because they overextended themselves on loans to buy overpriced housing, and toward the end of the mania, many were using interest-only loans. Whenever lenders start loaning people money with total debt-to-income ratios over 36% people start to default. Whenever lenders start loaning more than 80% of the purchase price, people get underwater and start to default. These phenomenons, which we document daily on this blog, are not new. It happened in the early 90s; it is happening again, and it is happening for the same reasons: lax lending standards.
Someday the lending community may actually innovate and come up with some financial product that has low default rates which most people can qualify to obtain — Not. Unless you change human nature, there are always going to be people who are too irresponsible to make consistent payments. This is the key to any loan program. Either people do or do not make their payments. You can reinvent new terms and schedules as often as you like, and it will always boil down to people making payments. When these fancy loan programs contain provisions that make it difficult for people to make payments — like increasing payment amounts — they will default, and the loan program will fail. This is certain.
When lenders create new, “sophisticated” loan programs that require advanced financial management on the part of the borrower, both the lenders and the borrowers fall victim to the Lake Wobegon effect. Everyone thinks they have above average abilities when it comes to managing their finances. In reality, perhaps 2% of borrowers have the financial discipline to handle an Option ARM loan. Unfortunately, 80% of borrowers think they are in this 2%. The reason for this comes from the inherent conflict between emotions and intellect. 80% of borrowers may understand the Option ARM loan, but when the pressures of daily life create emotional demands for spending money on one’s lifestyle, the intellectual knowledge that this money should go toward a housing payment is conveniently set aside. It is this 2% of the most disciplined borrowers who will cut back on discretionary spending to make their full housing payment. Everyone else will make the minimum payment, fall behind on their mortgage, and end up in foreclosure.
It seems lenders forget basic facts about lending every so often and create a new financial bubble. Perhaps they succumb to the pressure of the investment community or their own shareholders, or perhaps they just start believing their own “innovation” bullshit and forget the basics of sound lending practices. This is why we need the upcoming recession. These pathologic lending practices must be purged from the system or else they will survive to build an even bigger and costlier bubble — although it is difficult to imagine a bubble bigger than this one, it is still possible.
In the aftermath of a financial fiasco, lenders return to the practices that did not fail them in the past. Some will consider this taking lending standards back 50 years. They would be right. The only program lenders know is stable is a 30-year, fixed-rate, conventionally amortizing loan based on 80% of appraised value taking no more than 28% of a borrowers gross income (36% maximum total debt.) This is what is coming. The last vestige of kool-aid denial I see in the comments is the insistence that equity requirements will not get that high. They will, and it will be a catastrophe for sales volumes and home prices. This is why I always post the downpayment and income requirements on my posts. People need to think about Your Buyer’s Loan Terms.
Why would banks continue to loan 90% of value when there is a likelihood of a greater than 10% decline and banks know high loan-to-value ratios result in high default rates? They are doing it now because they have to to make any loans at all, but they are limiting these loans to those with very high FICO scores, and they are betting these people will not default do to moral reasons or the desire to keep that high FICO score. If they try to extend these loans to lower FICO score individuals or subprime borrowers, they won’t stay in business long. Think about the losses we have documented here on this blog. Banks can’t sustain those losses indefinitely. Large downpayments are coming back, and government assisted financing will become widely used by first-time homebuyers to overcome the high equity requirements. There really is no other way forward. The credit crunch we have all been hearing about was not caused by some unexpected or unknown factor, it was caused by the failure of lenders. Credit will continue to tighten until lenders stop making bad loans. The bad loans will not disappear until lenders return to the stable loan programs with a proven track record. That is how the credit cycle works.
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Note to Lenders:
I plan to purchase in the aftermath of your most recent failure. Please wait until about 5 years before I am ready to retire before you innovate again so I can sell my house near the top of the next bubble you facilitate.
