The GSEs no longer buy or insure interest-only loans; the last vestige of Ponzi financing washes away.
Today's property features excellent photography, and of course, too high a price.
Irvine Home Address … 4 LOCUST Irvine, CA 92604
Resale Home Price …… $499,900
{book1}
Hooked into this deceiver
Need more and more
Into the endless fever
Need more and more
New consequence machine
Burn through all your gasoline
Asylum overtime
Never mind
You reach the end of the line
Metallica — The End Of The Line
Interest-only loans have reached the end of the line. I discussed interest-only adjustable rate mortgages in Conservative House Financing – Part 1:
The advantage of IO ARMs is their lower payments. Or put another way, the same payment can finance a larger loan. This is how IO ARMs were used to drive up prices once the limit of conventional loans was reached (somewhere in 2003 in California). A bubble similar to the last bubble would have reached its zenith in 2003/2004 if IO ARMs had not entered the market and inflated prices further. In any bubble, the system is pushed to its breaking point, and it either implodes, or some new stimulus pushes it higher: the negative amortization mortgage (Option ARM).
Besides the low interest rates, the continued use of these products has helped support our market at 2003/2004 prices despite the still inflated price levels. Will removing this form of financing cause prices to fall?
(Federal Citizen Information Publication link)
Freddie Mac Will Cease Purchases of Interest Only Mortgages
McLean, VA – Freddie Mac (NYSE: FRE) announced today that on or about September 1, 2010, the company will cease purchasing and securitizing interest only mortgages, including Freddie Mac Initial InterestSM fixed-rate and adjustable-rate mortgages.
Freddie ends buying of all interest-only mortgages
By Lynn Adler
NEW YORK, Feb 26 (Reuters) – Freddie Mac (FRE.N), the second largest purchaser of U.S. residential mortgages, said on Friday that it would stop buying and securitizing all interest-only mortgages because of the poor performance of those loans.
Interest-only mortgages, or IOs, including Freddie Mac's Initial Interest mortgages, provide only interest payments for a specified period starting with the first monthly payment, and then principal and interest for the rest of the loan term.
In its fourth quarter results this week, Freddie Mac said the unpaid principal balance of IO loans was almost $130 billion at the end of December, or 7 percent of its total portfolio.
Nearly 18 percent of those loans were seriously delinquent, meaning at least 90 days late.
"This change is another step in our efforts to refine our mortgage credit and purchase requirements to promote responsible lending and sustainable homeownership," Freddie Mac spokesman Michael Cosgrove said.
About 14 percent of the loans had credit enhancements, according to the company. The average unpaid principal balance per loan was $254,601, Freddie Mac said.
"Our decision to stop purchasing all interest-only type mortgages — through all flow and bulk purchase paths — and to retire our Initial Interest fixed-rate and adjustable-rate mortgage products in the coming months is a result of continuing poor performance of these products in aggregate," Cosgrove said.
Freddie Mac said it would end its IO purchase and securitization activity on or about Sept. 1.
When you cut through the BS, Freddie Mac bailed on interest-only mortgages because they are losing too much money — we were losing too much money. As the guarantor, taxpayers should be happy this program is being eliminated.
The impact this will have on the housing market is yet to be seen, but eliminating affordability products, by definition, harms affordability. In a rising market, this is a speedbump, but in a weak market, it is another reason for continued price weakness. Many marginal buyers who would have used this unstable financing option must now reduce their bids.
Freddie Mac: Final Nail in the Coffin of Interest Only Mortgages?
For those unfamiliar with interest only loans, in general it is a mortgage that the borrower agrees to only pay the interest on the debt for a set period of normally five or ten years. At the end of the interest-only period, the mortgage payment “balloons” because the borrower must begin paying off the principal as well as interest. Many times, the purpose for such a loan is for a person who wants to buy a house and believes their future income will increase to cover the payments that otherwise they would not be able to afford. It is easy to understand why these loans get a lot of the blame for inflating the housing bubble. Obviously, the problem arises when the borrower’s income does not meet their expectations, or as is all too common these days it disappears entirely. Furthermore, this type of loan can be particularly destructive when the housing market falls because there has been no dent made in the principal amount, so a home owner can be “underwater” more quickly.
…. Underwriting standards have necessarily become stricter since the housing bubble burst, and borrowers are often required to have substantial down payments. However, if the GSE’s are no longer willing to buy up these IO mortgages on the secondary market, there are certainly few banks willing to take the risk on getting stuck with more non-performing loans. This is not to say that the IO loan is dead and gone forever, but at least for now Freddie Mac is doing its part in killing this relic of a bygone era.
Good riddance. Interest-only financing is the Ponzi limit. Once this threshold is reached, there is no turning back. Option ARMs crossed this limit, and they disappeared about 2 years ago,and now financing at the Ponzi limit is dead as well. If you want a sign we are ready to inflate the next housing bubble, wait for this form of financing to reappear. Perching on the cliff is the last stop before the abyss.
Irvine Home Address … 4 LOCUST Irvine, CA 92604 
Resale Home Price … $499,900
Income Requirement ……. $104,928
Down Payment Needed … $17,497
3.5% Down FHA Financing
Home Purchase Price … $200,000
Home Purchase Date …. 4/2/1991
Net Gain (Loss) ………. $269,906
Percent Change ………. 150.0%
Annual Appreciation … 4.9%
Mortgage Interest Rate ………. 5.12%
Monthly Mortgage Payment … $2,625
Cost of Ownership
———————————————————
$499,900 ………. Asking Price
$17,497 ………. 3.5% Down FHA Financing
5.12% …………… Mortgage Interest Rate
$482,404 ………. 30-Year Mortgage
$104,928 ………. Income Requirement
$2,625 ………. Monthly Mortgage Payment
$433 ………. Property Tax
$0 ………. Special Taxes and Levies (Mello Roos)
$42 ………. Homeowners Insurance
$320 ………. Homeowners Association Fees
=============================================
$3,420 ………. Monthly Cash Outlays
-$436 ………. Tax Savings (% of Interest and Property Tax)
-$567 ………. Equity Hidden in Payment
$35 ………. Lost Income to Down Payment (net of taxes)
$62 ………. Maintenance and Replacement Reserves
=============================================
$2,515 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$4,999 ………. Furnishing and Move In @1%
$4,999 ………. Closing Costs @1%
$4,824 ………… Interest Points
$17,497 ………. Down Payment
=============================================
$32,319 ………. Total Cash Costs
$38,500 ………… Emergency Cash Reserves (6 Months Net Salary)
=============================================
$70,819 ………. Total Savings Needed
Property Details for 4 LOCUST Irvine, CA 92604
——————————————————————————-
3 Beds
2 full 1 part baths Baths
1,517 sq ft Home Size
($330 / sq ft)
2,107 sq ft Lot Size
Year Built 1975
10 Days on Market
MLS Number S606348
Condominium, Residential Property Type
El Camino Real Community
Tract St
——————————————————————————-
Lovely two story condo in desirable area of Irvine close to 5 frwy. Some of the upgrades include granite counters, bamboo floors, new carpet & paint. New furnace, air conditioner,hot water heater,low e windows, new interior doors. This home has been well cared for by owner. You will enjoy the lovely quiet patio as well as pool, spa,clubhouse and tennis courts near by. Award winning and California Distinguished schools.
I need a graphic for "lovely"
Another well composed photo above. The kitchen photo was particularly good:
Notice how squares and rectangles dominate the picture, and the vanishing point perspective draws your eye into the kitchen. This photo is so good you forget you are viewing a tiny galley kitchen.
Add in the “stated income” factor and you’ve got I/Os and Option ARMs on steroids.
http://www.crackthecode.us/images/lovely_realtor.jpg
::shudder:: That guy looks like one of my mother’s ex-boyfriends–or, as I called him at the time, Creepazoid To The Max. (It was 1983.)
The French doors are a nice touch, but the condo would have looked new when I was in junior high (see reference above). As it is, it just looks dated, in a cheesily ’80s sort of way. I definitely wouldn’t spend $499K on it, but I’m sure someone will think prices can’t go lower in this neighborhood.
$499,900 for a house in Irvine? Cool!
Oh, wait … it’s a 35 year-old condo.
Meh.
The Next Crash
Obama advisor Larry Summers told my former ABC colleagues that “everyone agrees the recession is over.”
It’s possible. But I doubt it.
Sure, the vast Bush/Obama spending blew some air back into the housing bubble. But politicians’ delusion that they can control the economy does more harm than good. Home prices that by now might have found a sound floor — a foundation for growth — instead float on a sea of subsidies.
The March 15 issue of Forbes summarizes the Fed’s house of cards:
The FHA has a $45 billion cushion to cover $757 billion in home-loan guarantees. This is just one part of the federal government’s investment in housing. Another is the bailout of Fannie Mae and Freddie Mac… a third is the Federal Reserve’s purchase of mortgage securities ($1.25 trillion).
How much will the FHA cost taxpayers? Officially, nothing. FHA officers have told Congress they don’t believe they’ll need a bailout. (Fannie and Freddie said the same.)
CEO Franklin Raines promised, “it is private capital that is at risk, not the taxpayer’s…. We do not receive a nickel of federal money.”
But then, oops, Congress grabbed grabbed $125 billion of your money to bail out Fannie and Freddie. Then congress promised to provide unlimited assistance — scrapping the previous $400 billion promise.
It’s not hard to imagine how the FHA’s finances could deteriorate. The recently extended first-time home buyer credit gives buyers a subsidy of 10% of the home’s purchase price, up to $8,000, in the form of a refundable credit (meaning people too poor to pay income taxes get a check from the government). The FHA allows buyers to put down as little as 3.5%. … In short, the government will pay a family money to move out of a rental and into a home.
Wow. What happened to that sober lending and “responsibility” Obama talks about? And it gets worse. Today, taxpayers insure most (Forbes says 90%) new mortgages. Big lending by Big Government is a recipe for the next crash. And since its not their money, the fools keep making bigger loans.
The FHA started out (in 1934) helping families of modest means, but the mission has drifted a bit. Its maximum loan guarantee is now $730,000.
This is one of the reasons that “The worst is not behind us”, Tim Cavanaugh says in the April edition (what is it with magazines and their pub dates? March just began…) of Reason. His article on “Lies about the Economy” points out that millions of foreclosed properties are just now coming on the market. “No matter how hard the government pretends it can control economic outcomes…” the bubble will continue to deflate.
“The FHA started out (in 1934) helping families of modest means, but the mission has drifted a bit.”
Somebody remarked yesterday that it’s strange how many people believe the government has total control over interest rates.
That is remarkable. Also remarkable is the number who believe that government support of the housing market is a recent practice, unheard-of before 2003.
Why do they take pictures with the TV on?
Good thing they were not watching something embarrassing.
If the TV is on it adds light to the picture, making the room look bigger. The living room in this place is pretty tiny; it only looks sizable here because they include the entryway, staircase and dining area! So to have a big blank black TV against the wall would make it look dark and dinky.
A good stager and photographer was here.
Thank you. I never noticed that a black TV screen gave that effect in pictures.
And it looks like the TV was on the Weather Channel or something equally innocuous. The stager knew what she was doing.
Just found this while browsing redfin…has to be one of the most honest descriptions:
“Nice home in Quail hill overlooking hospital, city area and local highways. .. Somewhat open spacious floor plan with vaulted ceilings, plantation shutters, canned lighting, newer carpet, hardwood flooring in some areas, partly travertine flooring, stainless steel appliances, granite countertop in kitchen, wood banister leading upstairs to smaller bedrooms and master has a small view balcony off the room. .. .backyard has built in island bbq with room for entertaining with slight local freeway noise. ”
http://www.redfin.com/CA/Irvine/101-Lattice-92603/home/5902687
It is almost as if on these short sales the agent does not want any offers because they dread the battle with the bank.
Will have to admit, a little honesty is refreshing.
Opposite of the listing I went to show that said move in ready. Got there and there were squatters or construction workers living there and the place was a mess.
How about this for straightforward advice from today’s wsj.com:
Millions of Americans are now deeply underwater on their mortgage. If you’re among them, you need to stop living in a dream world and give serious thought to walking away from the debt.
No, you shouldn’t feel bad about it, and you shouldn’t feel guilty. The lenders would do the same to you—in a heartbeat. You need to put yourself and your family’s…
How widespread is this? More than 11 million families are in “negative equity”—that is, they owe more on their home than it is worth—according to a report out this week by FirstAmerican Core Logic, a real-estate data firm. That’s a quarter of all families with mortgages. And for more than five million of those borrowers, the crisis is extreme: They are more than 25% underwater—the equivalent of having a $100,000 loan on a property now worth just $75,000 or less. That’s true for a fifth of mortgage holders in California, nearly a third in Florida and an incredible 50% in Nevada.
Are you in this situation? Are you still battling to pay the bills each month, even when it may make little financial sense to do so?
It’s time for some tough talk.
Stop trying to chase your lost equity. That money is gone. Don’t think like the gambler who blows more and more cash trying to win back his losses. That’s how a lot of people turn a small loss into a big one.
And do the math. Even if you hope the real estate market is near the bottom—it’s possible, but by no means certain—it may still take years to see any meaningful recovery. If you are 25% underwater, your home will have to rise by 33% just to get you back to even.
Is that likely? And over what time period? Even if home prices rose by 5% a year from here, that would still take six years. And during that time you could instead be building fresh savings elsewhere.
If you are reluctant to give up on “your” home, realize that it isn’t “yours.” If you are in negative equity, it’s the bank’s home. You’re just renting it. And right now you may be paying way above market rates. You need to be ruthless about your cash flow.
Are you worried about the legal consequences of walking away? Certainly, you should check with a lawyer before doing anything, but the consequences will probably be more limited than you think.
In “non-recourse” states, the mortgage lender may have no right to come after you for any shortfall. They may have no option but to take the home, sell it and eat the loss. According to a survey last year by the Federal Reserve Bank of Richmond, such states include negative-equity hot spots California and Arizona. Even in “recourse” states, lenders may have limited ability to come after you. Often they’d have to jump a lot of legal hurdles, and it’s just not worth it for them. They’re swamped with cases anyway.
“In my experience, right now they’re not really going after anyone,” says Richard Nemeth, a bankruptcy attorney in Cleveland. “They just don’t have the resources.”
If you’ve taken smart steps to protect your money, you may be safer still. For example, money held in a 401(k), Individual Retirement Account or pension plan is sheltered from creditors.
Sure, a strategic foreclosure may hurt your credit score. But if you’re in financial difficulties, it’s probably already suffered. And your credit score is not the only thing in life that matters.
Still, when it comes to the idea of walking away from debts, many people are held back by a sense of morality. They feel it’s wrong to abandon their obligations. They don’t want to be a deadbeat.
Your instincts, while honorable, are leading you astray.
The economy is fundamentally amoral.
Sometimes I think middle-class Americans are the only people who haven’t worked this out yet. They’re operating with a gallant but completely out-of-date plan of attack—like an old-fashioned cavalry with plumed hats and shining swords charging against machine guns.
Do you think your lenders would be shy about squeezing you for an extra nickel if they thought they could get away with it?
They knew what they were doing when they wrote your loan. Many were guilty of malpractice, but they pocketed good money and they’ve gotten away with it. And if they thought your loan was “risk free,” how come they were charging you so much more than the interest on Treasury bonds?
If you’re only a small amount underwater on your mortgage, it’s probably the case that you’re going to be better off staying put. But if you are deeply underwater, it’s a different matter.
Whether we like it or not, walking away from debts is as American as apple pie. Companies file for bankruptcy all the time, and their lenders eat the losses. Executives and investors pocketed millions from the likes of Washington Mutual, Lehman Brothers and Bear Stearns when the going was good. They didn’t have to give back one cent of that money when the companies went into bankruptcy.
Nice advise. I have to say though, that the economy is not amoral, but immoral, thanks to government and the Fed (around the world, not just the US). Either you become “immoral” and do not care about morals and the good of the country, or you are ran over by the government policies.
It is like being loyal to a bad employer. You will be stupid to do so. Responsible people are being turned into “stupid” people by the government. As much as it hurts, I realize I have been “stupid” for a long time.
good advise.
most people won’t have the courage or brains to take it. that’s how they got into this mess in the first place.
From the census data the income needed for this house puts you in the top 40% of incomes for Orange County. So what that buys you is a $hity condo in Irvine. You are in the upper half of incomes and for all your hard work you get this place. This to me shows we still have a long way to go.
scratch that…I’ve been a way from my reading the last few days…the above was first published on Feb 26th. sorry for the repeat. Larry, great comments from you…loved how you set the “it is your house” guy straight.
Why were the GSE’s ever allowed to buy or insure interest-only loans? Why even ARM’s? They should have been holding the most vanilla of loans.
You have stumbled upon the results of the moral hazard of implicit government gurantees.
The FHA did almost no loans during the bubble because they don’t do interest-only and Option ARMs because they are government run and the losses have an explicit backing of the taxpayer.
The GSEs had no such oversight or regulation because they had only the implicit (now explicit) backing of the government. With the belief the government was backing them, the GSEs and its investors got into loan products they should not have, and as a result, the GSEs will lose more than the FHA.
The GSEs need to be either regulated like the FHA or eliminated. They cannot go back to quasi-government entities or moral hazard will cause another debacle.
That implicit part of guarantee was complete bullshit. The guarantee was there and everyone knew it. I 100% agree that they either need to be reg’d or elminated. Another option is to spin them off in much smaller pieces – Baby Mae’s & Mac’s.
They still had gov’t charters becuase they were always gov’t sponsored entities, weren’t they?
Yes, since they have government charters, I don’t see how they can continue to exist without the explicit government backing, and I don’t see how that can work without better government regulation.
I’ve got relatives who bought a 53 year old 3/2 with an Interest Only mortgage in October 2006 (Bay Area). They paid $950k, and financed $760k. So for 10 years they sludge through, being stretched big time, only “renting money from a bank”, to pay the Interest Only portion. Then in 2016 their loans recasts to a regularly amoritizing 20-year loan, for the entire balance. If they could not afford a healthy 20% down conventional mortgage in Oct 2006, what makes them think they’ll be able to do it in 2016, only now have to pay it off in 20 years vs. 30 years? Kool-Aid I guess. By doing this, they were banking on three things happening:
1) Value of home would go up — oops
2) Interest rates would remain low — at a time when they were at historic lows (oops by 2016)
3) Their incomes would go up — not happening
When I tried to bring any of this up to the husband, he said, “All that matters is that we want to live in the neighborhood.”
From my estimates using public records of neighboring comp. sales, Redfin, and a few realtor websites, it appears their home is now worth $750 – $850k, so they are down about $100k – $200k (hard to tell so I’m being conservative with a range). This decision will likely cost them several hundred thousands of dollars of net worth over their lifetime, and I think they will end up losing this house. When I warned my mother-in-law of the impending disaster that is building, she said, “But they can write off the interest.”
Very sad. Denial and groupthink will prevent this family from taking action, and they will rent that house for 10 years and be thrown out by the mortgage.
I hope they refinanced while mods were available at low interest rates. Going fixed at a lower rate is the only prayer they have.
Had to scream at my own mother for 6 months to get the F out of her 10 year interest only loan (had 6.5 years remaining) while her loan to value was still below 80%. I was fighting her, her retard realtor, and even her loan officer.? They even went so far as to accuse me of thinking I had a “crystal ball” as they didnt see anything wrong with the loan and low rates are here to stay. Thanks to the IHB for giving me enough gusto to keep badgering – she is 30 year fixed now.
That brings a smile to my face.
I’ve heard the tax write off benefit of home ownership more times than I can handle. We all just need to agree that most Americans are lousy at math and basic economics. I think the government wants it this way to they can have a stupid population who buy into these Ponzi schemes. At a minimum, there should be required courses in high school that explain such things as saving money, planning for retirement, investing, learning all about interest rates, how credit cards work, buying a house, etc.
I heard that too, mostly from a relative who claimed “only losers rent.” “You’ll be able to deduct your payments from your taxes!” he claimed.
After I stopped laughing, I explained that, among other reasons, I disliked the concept of spending $5 to save $1, all to justify breaking my bank account to buy a house.
Turns out he was also doing some creative math with his mortgage interest deduction, which triggered an audit for 2004-2007 for him.
There are a few. They are often called financial literacy courses. However, they tend to be elective courses rather than required courses, which means the people that need them the most (poor at mathematical analysis) are least likely to take them.
Btw, the neighbor’s house is now up for sale, and their asking price is $405 sq/ft. Granted, that house is bigger, but it also has a great view, and theirs does not. Using $405 sq/ft, their house would only be worth $672,300. Probably not a great comp, but it puts us in the neighborhood regarding price.
Besides them “renting money” from a bank to overpay via an Interest Only mortgage, they pay $11,000 per year in property taxes, plus had to replace their roof and a couple of floors. They are banking on two incomes and recently got pregnant (again) and told us, “We are not sure how we are going to be able to afford everything.”
Wow, great planning. Way to keep up with the Joneses. Was it all worth it???
. . . what.
They’re severely underwater, facing a foreclosure in 10 years, and they’re now expecting a baby.
That’s like taking a brand of painkiller that makes the pain last longer.
> she said, “But they can write off the interest.”
i would’ve laughed out loud if i heard that.
Regarding them refinancing, if they were currently 3 years into a 10 year I.O., they could not refi into a fixed rate for the entire balance, could they? Because if they could, I think they would have originally. I’d think they’d need to bring more to the table.
I noticed late last fall their outstanding balance jumped from $760k to $769k, so perhaps that was a refi, but it was in two chunks:
1) $729k (not sure what kind of mortgage or rate)
2) $40k Credit Line
Thoughts?
Hi Tom,
They will only be able to refinance at 80% LTV. They could split the current balance into a 1st and HELOC second, if they can find a HELOC provider to breach the 80% LTV threshold. Some lenders will do this, post closing, but rarely if ever concurrently. Most $729k loan rates are running 5.0% for minimal cost to 80% LTV as long as it’s a no-cash out refinance. (3/2/2010) If you can find a post closing HELOC that funds over 80% LTV, borrow against another property – your home? – and pay down the loan to 80% of the appraised value, then post closing add back the HELOC second and have your funds paid back.
If your parents are on an IO loan, run the numbers at 5.0% P+I first of course to find out if that new payment will be manageable.
My .02c
Soylent Green Is People
“Remember, Tuesday is Soylent Green Day!”
Thanks Soylent Green Is People (I like your poetry, btw, over at CR).
May I try to clarify? Cuz I’m not clear on a couple of things and it sounds like you know your game.
Oct 2006: Purchase for $950,000; finance $760,000
Jun 2009: “Stand Alone Refi” for $729,750
Jun 2009: Credit Line (VAR) for $40,000
So why do you think after three years did their balance go *up* by $9,750?
Thanks!
Thanks for the kind words on my Haiku’s. It’s all for shiats and giggles over there what with the entire thing being one grand commentary on the Governments Kabuki Theater of the Absurd.
I cannot tell which balance went up – the 1st or the 2nd. If it’s the 1st, then these relatives may have refinanced, then modded their loan due to diress – a very bad thing. If their $40k line went up if might be that it was approved for $60k, funded at $40k, and since upped by 9k, but still within the approved balance.
Another possibility is that they had $9,750 in closing costs that were financed.
If the whole thing was a mod, then they are stuck. Some early mods took one large loan and broke it into two loans (a good thing) but if it was a mod it might have had a balloon added or unpaid principal tacked on – lower payments, no “loss to the lender” (a bad thing).
I’d guess it’s the $9k of closing fees added, but I could be wrong. More information is needed.
My .02c
Soylent Green Is People.
“Remember! Tuesday is Soylent Green Day!”
Good riddance to bad rubbish.
You people think credit is tight right now? Just wait til gov/t meddling continues to wane!
The bastards are broke.
Yes, you have to think the free mortgage money from the government printing press would run out at some point.
Now’s an excellent time for those of us who still have dependable incomes to learn to live within our means. However, too many people haven’t learned that lesson yet.
I would like to think that there would be some silver lining behind those hurricane clouds building up above us, but I’d be deluding myself. If the Fed and other institutions can’t handle the coming deflation, I know the inflation that’ll follow will be far beyond their abilities.
Why? Why now? Why ever?
The Fed has been printing non-stop since 1913.
B-52 Ben said he could throw money from helicopters at virtually no cost. Why don’t folks believe that he is and will continue to do exactly what he said he would do?
They can do it until the people start to see the connection between gov/t handouts, subsidy, overspending, and the resulting loss of purchasing power and jobs that result.
This may take a while, but I hear more and more people talking about it; waking up to the fact.
But ink is cheap for the printing press.
As long as I’m posting, which I don’t often do, I’d like to add another thought on a topic that seems to get overlooked (but it is indirectly related to people overusing / overleveraging with IO mortgages). “Under water” or not can be misleading. Sure, being under water is bad; we can all agree on that. But my two different sets of Bay Area relatives are at just about breakeven levels — b/e defined (for this post) as their homes are worth what they owe, approximately. So they are not technically “under water”, right? All’s cheery and great, right? NOT. The relative above put down $190k and the other relative whose situation I have not described put down $330k, which partially came from taking equity out of another home they used to own (oops). They are not “under water”, per se, but they are both screwed financially, by several hundred thousand dollars each over the long run, by my very detailed and thorough estimates. That money they put down is likely gone forever…and there’s a HUGE opportunity cost to that. Not to mention they cannot move, and are now locked into a poorly (read: negatively) performing asset, for decades to come. So just measuring by whether or not someone is “under water” does not necessarily capture the carnage that exists out there…
Being under water is owning something that is less than the original price you paid. Just like a stock there is no guarantee that it will stay at the price you bought it at. You have to wait and hope that it will go back up. Just like these homes that are under priced now and why because they over paid for them.
It is my fault they bought high? But I am paying for this in many ways.
No one pays the difference in my stock losses. Housing is a asset like a stock and I can’t walk away from my loss. Why should homeowners be allowed to walk away?
Because they made a contract with the bank. Part of the consideration is the collateral of the property. It is a chance the bank takes. Usually, the taxpayers do not have to pay for the mistakes and losses of banks.
Do people know that houses are now selling for $32 sq/ft in Riverside County, just over the hill? That is about 1/10 what this condo is going for. Is Orange County really worth a 1000% price differential?
If you can walk outside, just over the hills, without living in fear of someone robbing you, attacking you, harassing you, or vandalizing your property, then no.
I haven’t lived in Irvine since 2002 so I can’t speak for what it’s like now, but when I was there I can’t think of a single place in Irvine where I’d even be a little bit concerned for my safety.
Is it worth the 1000% premium? Hell no, but it’s worth something extra.