Like poker players, people attempting cram downs with their lenders are playing a game where the strength of their hand often determines whether or not the lender will call their bluff.
Today’s featured property is a large 5/3 REO. The owner bought a little too late and borrowed a little too much.
Asking Price: $639,900
Address: 50 Nebraska, Irvine, CA 92606
Poker Face — Lady GaGa
Michael Lewis wrote a book in the late 1980s called Liar’s Poker. In it he describes the inner workings of Wall Street and how the culture rewarded trickery and deceit. (He also recently wrote Panic which features a post from the IHB.) In poker the players bet against each other based on the relative strength of each other’s hands. The strongest hand wins the money — most of the time… What makes Poker such an outstanding game is that the betting itself provides an alternate method of victory. In fact, actually playing the cards to determine the victor often does not occur.
There is a new game of poker being played all over the country between borrowers and lenders. It is a high stakes game with hundreds of thousands of dollars riding on the outcome. First a little background on how it is played.
Borrowers know they can get loan modifications with principal reductions that save them big bucks. This is the pot people are playing for. In a normal market, borrowers do not have the cards to play in this game. If they try to force a loan modification, the lender would simply foreclose and take back the property. However, since many borrowers are underwater, and since lenders already have too many foreclosures, borrowers have a much stronger hand. In fact, the hand gets stronger as the borrower falls further and further underwater.
In order to play this game, borrowers must petition their lenders for a loan modification. Simply asking isn’t good enough. To play their first card, the borrower must default on their mortgage. As I mentioned in the post Reverse Liar Loans, many borrowers are now doing this. What many borrowers do not realize is that this is the first gambit in a larger game. The loan modification is not guaranteed just because they default and ask for it.
{book}
Here is where everyone can get a schadenfreude overdose: many people who are defaulting on their mortgages to gain a loan modification are being turned down by their lenders. I mentioned in yesterday’s post that I had an extended conversation with a banker at a recent event. He told me his bank routinely turns down these attempted loan modifications, particularly if they believe the borrower has capacity to continue making payments, and if they are not that far underwater.
Think about what the lenders are doing. They are calling the borrower’s bluff. Now look at the borrower’s circumstances: 1. They trashed their credit with the series of late payments, so they have the damage of a short sale or foreclosure. 2. They are way behind on their payments (do you think any of them saved the money?) 3. Now they have to decide whether or not they are really going to walk away from their homes.
This is when borrowers realize the stakes they are playing for. Anyone who attempts to force a lender into a loan modification has to be prepared to walk away from their home because the lender may call their bluff. This is where the strength of the hand of the borrower is increased by being underwater. If they are way underwater, they actually benefit by walking away and starting over. It is easier to walk when there is little hope of getting back to breakeven. Banks know this too, and they are more willing to negotiate with these people. If a borrower is only a little under water, their hand is much weaker because the lender knows they are less likely to walk away.
The game of loan modification is just like playing poker. Anyone thinking about doing this needs to consider that like any bluffing game, the other party may call your bluff. If you are not prepared to walk away from your home, you probably shouldn’t play.
Today’s featured property is a large 5/3 REO. The owner bought a little too late and borrowed a little too much.
Asking Price: $639,900
Income Requirement: $159,975
Downpayment Needed: $127,980
Monthly Equity Burn: $5,332
Purchase Price: $496,000
Purchase Date: 1/31/2003
Address: 50 Nebraska, Irvine, CA 92606
| Beds: | 5 |
| Baths: | 3 |
| Sq. Ft.: | 2,179 |
| $/Sq. Ft.: | $294 |
| Lot Size: | 3,494
Sq. Ft. |
| Property Type: | Single Family Residence |
| Style: | Contemporary |
| Year Built: | 1999 |
| Stories: | 2 |
| Area: | Walnut |
| County: | Orange |
| MLS#: | S561581 |
| Source: | SoCalMLS |
| Status: | Active |
| On Redfin: | 5 days |
bathrooms, large open floor plan, near freeways, shopping,
entertainment and more. This Property is priced to sell and will not
last long, submit your offer today!!
- This property was purchased on 1/31/2003 for $496,000. The buyer used a $396,800 first mortgage, a $74,000 second mortgage, and a $25,200 downpayment.
- On 2/25/2004, the first mortgage was refinanced for $528,000 cashing out the downpayment plus an additional $32,000.
- On 2/25/2004, the owner also opened a HELOC for $66,000.
- On 12/22/2004, the owner opened a HELOC for $156,000.
- In 2006, there was a lien filed by a bail bondsman…
- On 6/21/2007, the owner opened a HELOC for $286,000.
- Total property debt is $814,000.
- Total mortgage equity withdrawal is $343,200 including the downpayment.
This owner bought in early 2003, and he would probably fall underwater anyway before prices bottom. However, he added another $300K+ to the mortgage, and now it is hopeless. The property went into foreclosure, and it was purchased by the lender on 9/17/2008 for $548,666. (Notice that it is taking 90 days or more for these to hit the MLS.)
If this property sells for its asking price, and if a 6% commission is paid, the total loss on the property will be $212,494.
The auction price was 33% below the peak appraised value used to justify the final HELOC.
{book}
I wanna hold em’ like they do in Texas Plays
Fold em’ let em’ hit me raise it baby stay with me (I love it)
Luck and intuition play the cards with Spades to start
And after he’s been hooked I’ll play the one that’s on his heart
I wanna roll with him a hard pair we will be
A little gambling is fun when you’re with me (I love it)
Russian Roulette is not the same without a gun
And baby when it’s love if it’s not rough it isn’t fun, fun
Oh, oh, oh, oh, ohhhh, ohh-oh-e-ohh-oh-oh
I’ll get him hot, show him what I’ve got
Oh, oh, oh, oh, ohhhh, ohh-oh-e-ohh-oh-oh,
I’ll get him hot, show him what I’ve got
I won’t tell you that I love you
Kiss or hug you
Cause I’m bluffin’ with my muffin
I’m not lying I’m just stunnin’ with my love-glue-gunning
Just like a chick in the casino
Take your bank before I pay you out
I promise this, promise this
Check this hand cause I’m marvelous
Poker Face — Lady GaGa
Where’s Dog Chapman when you need him!
For those who don’t have the time to read the link.
“A single entry from the Irvine Housing Blog, which shows how a person in January 2005 bought a $1.157 million house with $270 down, refinanced with a funky teaser-rate mortgage and then proceeded to open up a $491,000 home equity line of credit by 2007, neatly encapsulates the lunacy.”
Yes, there is lunacy in Irvine.
How much was the bail lien?
Those little manicured shrubs (?) in the front – who really likes those?
There was no recorded amount. I almost didn’t reveal the bond because it felt like something you would read on TMZ or Access Hollywood. I decided to include it because I had never seen that before. I didn’t realize bail bondsmen recorded liens on property, however it makes sense. They do put up a great deal of money, and they want security just like any other lender.
You have to include the bail bondsman lien…since you saw it, the bank should have seen it when gave him a big HELOC in 2007. After that lending history, and with absolutely no equity in the place besides price inflation, whoever approved that HELOC should have been fired.
Why would the lender think that they would get a higher price through traditional marketing than at an auction? Are there any examples of a bank buying a home at auction and then selling it for more – assuming the bank pays near the original list/purchase price?
All-cash auctions do not yield maximum resale price. Flippers active in today’s market rely on this fact. The buyer pool in the all-cash market is very small, and it tends to be dominated by professional investors who will not overbid. Of course, these professionals know that prices are falling and knife catching is dangerous, so they bid even less. With the collapse of bids in the all-cash market, lenders are forced to buy properties at auction even if they bid well below the first mortgage value. Fair market value in the financing-eligible market is higher, so they are forced to attempt what looks like a flip.
Very bad location – at cross roads right on I5.
Very small rooms – 5 beds in 2100 sf.
Buyers are advised to wait it out for $400-$450k in a year.
I think this area of Walnut won’t hold its value very well over the years.
Especially this place as it sits on the freeway.
It’s not really 5 bedrooms. 4 bedrooms upstairs, two of which are very small. Downstairs there is a room that COULD be a bedroom in lieu of an open office or living room. It doesn’t have a closet. There is a full bath downstairs though and a vaulted ceiling in the foyer area that could be floored over and used to enlarge both the smallish bedrooms upstairs.
I stopped by this place for giggles on broker preview day. The rumbling of the tractor trailers passing by was amazingly loud. I said to the agent, “You’ll probably be able to sell this place for $600K but its amazing that someone would pay that much to live right on top of the 5”. She replied, “Well, it is Irvine”…
The location can be describe as “easy access to the highway” :}
Has anyone else noticed that Redfin hangs a lot recently? I constantly have to use Task Manager to exit out of the application….
thats your machine hanging, not redfin (though redfin is an intensive website for browsers).
try clearing your temporary internet files (aka: cache)
I was made aware that Fannie and Freddie are in the works of contracting with various loan servicing companies to rework a significant amount of their loans. I was told they are willing to write down 60% of the principal loan balance to get them off their books. The servicing comapanies are being instructed to reach out to the borrowers and offer them deals.
IR, what are your thoughts on a this? I’m concerned that prices won’t reurn to fundamentals if these write downs occur on a grand scale.
Their notion of “write down” is nothing more than a codeword phrase for “tax-payer subsidized” gift from you and I.
Prices are going to keep falling either way because of the contraction of credit. The only difference is that rather than remove the foolish borrower from his McMansion, he gets to stay for awhile and mow the lawn, put chlorine in the pool, and keep the place tidy (rather than bank), thanks to the generosity of the public welfare.
The government has one and only one objective in mind which is to ensure that their partners in crime never lost a penny. They talk a good talk about “keeping people in their homes” as though they are doing the lord’s work – but the reality is that they want troubled borrowers to remain obedient and continue to make their payments while the rest of the (Patzy) public is consumed with American Idol and whether they want to drink Pepsi or Coca Cola. They know that if the troubled borrower goes too far underwater – they will walk and their banker hustlers will be out more money. So better to keep the payments coming and let the current and future generations of tax-payers cover the rest.
The slogan that they are chanting is: stopping the foreclosures will “put a floor” under everything. It’s bunk – foreclosures do not change affordability. In order to put a floor under the problem they have to either let prices fall to levels that regular people can afford (at 3x to 4x single person income) or engineer some more easy credit via financial voodoo and convince people that house prices never fall so everyone should buy (Good luck with that one)
In other words – the writedowns don’t matter in terms of prices dropping. They may introduce some moral hazards and screw future generations but that isn’t a concern of the “here and now” politician.
Financial voodoo is right. Lower interest to 4.5% for a 30Y Fixed to buy votes and have it explode on somebody’s else’s watch.
In the past, fool the country on 2-3% for a 5Y ARM once, twice, three times. Now fool the country on 4.5% 30Y fixed. Too bad we’re stuck with the 1.5 trillion bailout for the next 30 years. Likely to raise to 4 trillion.
For the 4.5% fixed (or rigged), it will be billed to the our childred and grandchildren.
David is right. Prices are going to fall to the levels of affordability because most people can only bid what they can borrow. Right now the knife catchers are all people who can supplement their loans with very large downpayments. It seems very unlikely that can go on for 10 years or more while fundamentals catch up.
And the knife catchers are few and far between if you look at the rising inventory that continues to grow as the Hoi polloi begins to leave their state of denial.
The current bailout installment is just the down payment. Just look back to the 2007 IHB posts to see the thousands upon thousands of dollars that have been lost by the bargain hunters of ’07 who listened to the real-estate cartel’s talking points and lept off of the fence into the sinking tarpit. Imagine what their state of mind will be in 5 years as they are still under water and slaving away to pay off all that interest to their mortgage masters.
The Option-ARMs are fixing to blow up gloriously as the layoffs hit the non-McWorker on the high end as he discovers that he is not immune to a recession if his serial-refinancing way of life runs into a wall.
This is going to be a tough year; I think we will see some pretty amazing price drops by the end.
Interesting anecdote:
My dad is a loan broker. A guy bought a $500k property with $100k down.
His wife is new to the country and literally has no credit history. He makes $50k, she makes $35k. So they ignore her income and give him a $400k loan on $50k income. 68% DTI (gross)! He has an 800 FICO.
He has $175k ‘in reserves’ (I assume this means cash).
The banks are still lending stupidly.
I calculate:
$2528/month on $400000 at 6.5% 30Y fixed
500 taxes
$100 insurance
$3128 on housing
85000/12 income
44% DTI
If at 5.2%, 39% DTI.
Still too high for a health economy. IMHO
But because the wife had no credit history, they used his score only; and therefore his income only.
His interest is ~5.5%. I think his mortgage came in around ~2200/mo, and piti around 2700/mo.
thats silly high if you’re going ‘by the book’
The banks know exactly what they are doing and they always have – the rules of the game have just changed to adapt to the times. They may be run by cunning low-life scumbags who like to dole out bonuses to themselves on tax-payer dollars and set up party tents at superbowls, but they are definitely not stupid.
If the guy that you mentioned put down 100K, the bank is simply taking to be a “fall guy”. When the value of the house drops another 100K and the guy walks – they’ll just foreclose him, resell the house for 100K less in order to break even and then find another mark with another 100K to part with. Damage control. It’s the reason why they won’t let prices drop like a rock immediately – they need the steady stream of hasty knife catchers to subsidize the losses on the way down. Pick off 100K here 100K there and in the meantime let them pay some monthly interest as well.
David you have a great reason behind the banking system. The bank only has to bill the tax payers for another bailout (next sales price less original principle) while collecting the commission on the next loan. Only in America!
“…He has $175k ‘in reserves’ (I assume this means cash)…”
“Reserves” includes investments that can be liquidated into cash also. Most lenders will consider 401ks/IRAs as part of your reserves for purposes of proving you have some cushion (6 months?) if you lost your job.
I searched the web for comps on my area and found my home was listed for sale w/o my knowledge, at $300K below current market. (that’s $600K below peak) No wonder I got calls from realtors daily.
A complaint to http://www.owners.com went unanswered on weekend (they close don weekend), and complaint email went unanswered. Got a life person who said they don’t know how the listing got to their database and a transfer to their CA headquater went a voice mail.
This listing was used as comp for major sites like redfin.com
My property is over 3500sqft and it was listed in the $500K range. Redfin allowed these unchecked listings to effect property value, what’s the future of our housing market
I guess a realtor’s due diligence for taking a listing does not include making sure the owner is the one listing the property.
You may want to check the property records. Some fraud schemes record new owners of the property by forging your signature on sale documents and having them recorded. As far as the world knows the new owner is whoever is forged on the documents. If they can sell or refinance the property before this is discovered, they can walk away with a huge windfall.
Aren’t title companies on the hook for this type of fraud?
I don’t know who absorbs the loss on that particular kind of fraud. Since there was a forged signature, there is nothing out of the ordinary for the title company to pick up. I suspect the title company that handled the closing would be responsible because they did not properly check identification, although a good fraudster probably has a passable fake ID. Perhaps a RE attorney can chime in.
This home is still mine and no realtor has listed the home in MLS. http://www.owners.com or some other site decided to make up listing and sell to sites like redfin.com
They took the site down after my complaint to redfin.com. But think of it, what you see as “listed” were not listed by the owners, and the listing agency like owners.com don’t even check it.
Kind of like the Columbus Grove property I checked out a couple years back. Went on the upstairs balcony and got a nice whiff of the Waste Management facility along with the rumblings of the cement plant.
P.S. They wanted $900k for this 2,000 sq. ft. place back in ’06.
Still total WTF pricing — the home looks like CRAP – like most of the listed homes recently — no WAY this is a 650K property. I’m waiting for the Turtle Ridge SFRs or some Newport Coast condos to come down to 550-600K before I’ll buy, which they most definately will. 2009 won’t be pretty, and ’10 won’t be much better.