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
| Beds: | 3 |
| Baths: | 2 |
| Sq. Ft.: | 1,088 |
| $/Sq. Ft.: | $358 |
| Lot Size: | – |
| Property Type: | Condominium |
| Style: | Other |
| Year Built: | 1978 |
| Stories: | 1 Level |
| Area: | Woodbridge |
| County: | Orange |
| MLS#: | P640539 |
| Source: | SoCalMLS |
| Status: | Active |
| On Redfin: | 32 days |
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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.
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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…
.
I love you
but i gotta stay true
my morals got me on my knees
I’m begging please stop playing games
I don’t know what this is
cos you got me good
just like you knew you would
I don’t know what you do
but you do it well
I’m under your spell
Chorus
You got me begging you for mercy
why won’t you release me
you got me begging you for mercy
why won’t you release me
I said release me
Now you think that I
will be something on the side
but you got to understand
that i need a man
who can take my hand yes i do
I don’t know what this is
but you got me good
just like you knew you would
I don’t know what you do
but you do it well
I’m under your spell
You got me begging you for mercy
why wont you release me
you got me begging you for mercy
why wont you release me
I said you’d better release yeah yeah yeah
I’m begging you for mercy
yes why wont you release me
I’m begging you for mercy
you got me begging
you got me begging
you got me begging
Mercy, why wont you release me
I’m begging you for mercy
why wont you release me
you got me begging you for mercy
I’m begging you for mercy
I’m begging you for mercy
I’m begging you for mercy
I’m begging you for mercy
Why wont you release me yeah yeah
break it down
Mercy — Duffy
3 beds 2baths in 1088 sq ft? Cozy doesn’t begin to describe it. The minimalist kitchen helps explain it, but good gracious that’s tiny. The Redfin comps tend to indicate it might sell for this price, so they may be making a shrewd move, certainly they are making the ethical choice to get out now while the losses are their own. So I wish them luck with their overpriced condo, too bad it just means someone else will take more losses in the future.
I seriously doubt the sellers are motivated by any sense of ethics.
Their money is lost no matter what they do. If they can sell now they’ll at least salvage their credit. If they can’t sell then they’ll walk and their credit will be trashed. It’s as simple as that.
The listing says the purchase price was May 2008 -is that right? That’s a hefty loss for just a couple of months ownership.
I’d like to point out that this property is well over $350/sq foot.
There are a couple of REOs near us that have not moved. The landscaping is dying. There have been some open houses that seemed pretty well attended. I notice another dumpster in front of a house that has been emptied this weekend. No signs previously for sale. It seems to be more common now. People moving out in the middle of the night with no notice that the home was for sale.
Sale History & Tax Info Sale History
04/26/2006: $443,000
12/02/2003: $337,000
ZEstimate is 342.000
Thanks HB. I looked at the bit of information on the post right below the picture of the place.
I am not sure if I misread the information or not.
This place will suit a nice dual-income family perfectly. 400K sounds like a fantastic deal.
WHAT? This place is total crap! I wouldn’t live here if you paid me.
woah. this is kinda weird. I’m not joking either. I really wouldn’t…
Homeowners Association Information
Dues #1: $299.00
Dues #2: $73.00
http://www.crackthecode.us/images/laughter.jpg
THIS
COZYPIDDLY-ASSCONDOAPARTMENT HAS BEEN UPGRADED WITHNEWERKMART-SPECIAL GOURMET KITCHEN WITH FAKE GRANITE COUNTER ANDNEWERKMART-SPECIAL STAINLESS STEEL OVEN, DISHWASHER, REGRIGERATOR FOR YOURBUYERSMARKS.WARMGAUDY DESIGNER COLOR PAINT THROUGHOUT. HURRY!!! I AM STARVING PRICED TOSELLFIND CHUMP QUICKLYhttp://www.crackthecode.us/images/ListingAgentET.jpg
OMG AZ, That is hysterical ! Well done.
25, AZ is jk when he’s says it’s a deal…..his snark didn’t translate well.
I casted the line to catch a gullible fish and 25w100k took a huge bite. =)
What the hell? 3-bed / 2-bath in 1,088 sf? How do you squeeze that in? This is a complete joke – it MIGHT be worth $250,000, but even that is doubtful given they have TWO association fees.
I actually feel sorry for this fool – it’s one thing to lose the Bank’s money, it’s another to drain your 401(k), borrow from friends and family, then lose it all because some Realtard convinced you they needed a $30,000 commission.
Question for you all:
When did these Option ARMs become available? I don’t know if this is covered in another IR post, but I am wondering how these Option ARMS came to be given out to all these naive buyers?
I know everyone gets some blame for the mess were in, but I keep coming back to the banks’ role in all this.
When I started buying my home-buying activities (10 years ago), I did some research into mortgage types, and I remember the research told me these ARM types of loans were rare. When/Why did they become the loan of choice for all these banks?
It seems if there were no Option ARMS, wanna-be home buyers wouldn’t have been able to sign a mortgage and buy the house. Why did the bank say “OK – here’s a loan we know you’ll not be able to afford in three years, Good Luck!”
I guess its fees, and placing investor funds, but is that it? It all seems very short-sighted and banks are supposed to be more prudent than other businesses.
????
Check this out.
http://mrmortgage.ml-implode.com/2008/06/30/mr-mortgage-engineering-the-housing-bubble-through-monthly-payments/
Thanks AZ, that’s kind of what I thought.
The one thing Mr Mortgage doesn’t say is the “rest of the story”.
Banks and lenders then bundled these mortgage and sold them to unsuspecting investors as Grade A (or near abouts) investments.
Back in 2005, my company was offered a bundle of 300 loans this way (we are the investors, mainly in commercial, not resi.) My reaction was “Hell NO!” I don’t make the decisions in my company, but as an accountant I would’ve had to clean up the mess. Luckily, they passed – otherwise I would’ve been job hunting soon after buying them.
Mikee, I’m with you. Without excusing the other participants in this fiascos, banks are supposed to be the experts in mortgages. How about that OA chart above? The banks thought people would be paying more than the minimum? On what planet?
They started to become popular in 2002 but were in full force by 2005-2006.
Banks are stupid. They are NOT experts, they are stupid. They stupidly created a commission structure which encouraged this sort of nonsense.
Now they are stupidly dragging things out and not being creative, as they have to be, if they don’t intend to throw in the towel.
There are times that you should just sit things out. Banks will never do that. For me, this is a replay of the late 70s/early 80s only much worse and with inexplicable low interest rates. That will change.
I’d like to point out that the median Irvine resident cannot afford this property, but for the same cash outflow can likely rent a much nicer property that is roughly 70% bigger in square footage for the same post tax outlay.
Here they go again with this median resident median income mumbo jumbo.
Who are you to tell me what I can and cannot afford?
It all depends on your definition of ‘affordable’.
Perhaps, my definition of affordable is that which consumes 90% of my take-home salary and forces me to moonlight as a burger flipper at In-And-Out for 4 nights a week.
As long as the monthly payment can be made, it must be affordable by definition.
Those of you with your right-wing conservative values and ‘traditional financing’ dinosaurs need to get with the times. You would be best off keeping your opinions to yourselves and not try to force your beliefs on those around you.
It’s not up to me or anyone on this board to tell you what you can or can’t afford. It used to be the bank’s job, and they insisted on some reasonable ratio of debt to income.
Then they decided that since real estate always goes up, and they could package the loans and sell them before they went bad, they decided to give out mortgages to everyone who applied.
Then real estate stopped going up, and other financial institutions stopped buying the bad mortgages, and the banks were left holding the bag.
Hi,
I recently came across this site and fascinated by the information available here. This is very interesting reading.
I am confused about the Monthly Equity Burned number. can someone explain that please?
thanks
Check this out.
https://www.irvinehousingblog.com/blog/comments/edgestone/
Take the asking price:
$389,000
Assume it will lose 20% in value over the next 2 years.
389,000 * .20 = $77,800 lost in the next two years.
Divide it by 24 months to get the total
77,800 ($ per 24 months) / 24 (months) =
77,800 / 24 = $3241.68 $ lost per month. Which matches what he is showing.
Don’t people do market reserch when they put a place on the market? There are at least a dozen better deals with one minute’s worth of redfin searching. So many new condo developments are going to start cutting prices. Boy! is that gonna hurt. When summer comes to an end, people are going to be desperate for buyers. What do they think when they ask for this kind of price?
Let’s not forget that A LOT of home buyers are emotional about the process. Heck, pretty much everyone is….I know that I am (and that awareness helps me to go home and think about it more). So, pricing it high actually makes sense, in that, in this market, you are NOT going to get an offer higher than what you ask for, but could easily get a low-ball offer. Assume this seller is actually willing to accept $350K. By pricing it at $389, the knife-catcher that thinks that they protect themselves against the market by buying something at 10% off will make an offer for the seller’s reservation price. And MAYBE some fool comes in and their Realtard convinces them to offer $375. Also, if they don’t get any offers, they can lower the price, thus triggering new update emails and signalling to buyers that they are possibly more serious about making a deal than the folks who have stubbornly kept their price high for 9 months.
However, you’re right, in that by pricing it high, they risk losing buyers to the other nearby properties on the market for less. It’s a tradeoff that can be made. And, that said, it’s very likely that they’re asking for as much as they are just so they can avoid the short sale and ding to their credit. (Can someone who knows say whether the size of that ding is the same, regardless of whether you short the bank $1 or $100,000?)
$373 monthly HOA fee for this small expensive piece crap?
This $373 HOA dues hits me hard too. I wonder if this can rent $1800/month?
Can someone help me figure out the “Option ARM Reset Schedule” chart where it describes the grey area as “reset schedule based on current ‘negative'”? Why do the grey & blue section differ? Thank you
because ppl are only paying minimums monthly, they are owning the banks more and more each month. once this debt hits a percentage, say 110%. their low intro period ends early. so this wave of ARM resets will come early. all these ARM loan borrowers all bought their homes at the peak. they are all fvcked up. or will be
Dang,
assuming a rent of 1600\month and 86k saved up they could have rented this unit and lived here for 4 and half years without the hassles\responsibilities of home ownership.
Hi all, I have been a regular IHB visitor. It helped us decide against buysing last year. Now we are happily renting in irvine.
I have been working on website for rentals. I just finished working on it. Please let me know what you think of it. http://www.rentrent.org
Thanks in advance, Joe
Joe,
What is the purpose of your site? Just to show a map of available rentals? Are you just pulling the info from craigslist?
I’d love if you could also include the Ventura craigslist in your data.
I think there’s still a lot of landlords who don’t know about craigslist yet.
I am pulling the listings from Craigslist. Rentrent.org offers better search interface on top of craigslist listings. I got motivated to build this site because I saw some limitations in Craigslist interface. I just hope that the site helps people search for the apartment they are looking for.
.The map interface gives user the visual idea about where exactly each rental property is.
.Allows user to filter by numer of bathrooms.
.Allows user to search by exact number of bedrooms.
.Allows user to search by very granular amount she is willing to pay.
Thanks for the reply.
Joe,
Are you planning on adding search features in your site? Look at this web application for starters; http://www.azyla.com/realestate/
Search features and additional properties would be nice, I was disappointed not to see homes like that in my area.
picflight,
I have a ‘filter’ feature on the site. The checkboxes for bedrooms/bathrooms/pets and drop downs for prices allow filtering of the properties.
Thanks, Joe
Joe
The site is good but when i specify particular location (e.g. Irvine, CA), it should show rentals available only in that city not based on the map.
Good work…
I’m not entirely sure how the option ARM works. And every time I heard about the resets, it was hard to imagine how a few percentage points increase would make such a big deal.
According to my calcs, if you bought a $450k house with zero down and started with a 2% interest rate, your monthly payment is about $1663. If that resets to 6%, the monthly payment jumps to $2698.
Ouch!
Believe it or not, your calculations are far too rosy for an option ARM-bomb owner. Your $2698 payment is just the principal/interest on a $450K loan at 6% over 30 years, a standard fixed 30 year term.
Here’s how an option ARM becomes a financial time-bomb:
1) Interest rate bumps up much higher (by several points) on a loan for which the buyer very, very likely was barely able to afford the minimum payments in the first place.
2) Negative amortization – the low ‘teaser’ rate is not even paying the full cost of the money borrowed, the difference is added to the principal until a certain figure (110% for instance) of the original principal is reached, then the buyer must start paying down the principal as well.
3) By this time, let’s say two years have elapsed into the 30 year term. So now not only are you talking about a higher interest rate on 110% of the amount originally borrowed (which, let’s remember, has only increased and has not had even one penny paid towards it), you are talking about doing it over a 28 year term, not 30 years. That doesn’t sound like a great difference but all these numbers add up. Again, remember that during the first two years the principal increased, not decreased; so instead of having to pay something less than $450K over 28 years (the first two years of a conventional 30 year fixed don’t pay down much principal), you are talking about paying nearly $500K over 28 years.
Let’s go back to your scenario. Compare a conventional 30 year fixed @ 6% for $450K: payments of $2800 a month. A scenario more like yours would result in payments of $3050 a month (approx). OK, not the end of the world to most people but when you are talking about someone who was barely able to pay half that with the ‘teaser’ rate and suddenly their payment doubles…
Oh, and now by looking at “name’s” post above, the “option” in Option-ARM means a borrower had the option of paying less than the standard payment amount? Wow.
If I had a little more cash 5 years ago, I may have fallen for one of these loans.
who said slavery doesn’t exist anymore?
http://en.wikipedia.org/wiki/Adjustable_rate_mortgage#Option_ARMs
http://en.wikipedia.org/wiki/Negative_amortization
Right. Option-ARM is nick-named “Pick-A-Payment” Loan… a.k.a. deferred interest / Neg-Am.
http://www.lendingtree.com/smartborrower/Mortgages/How-to-avoid-ARM-reset-shock.aspx
How to avoid ARM reset shock?
– Refinance to a fixed-rate mortgage
not gonna happen, banks aren’t to refinance you in a down market and btw your home already lost 35% in value.
– Start a savings account
not gonna happen, if you have money. why did you opt for this ARM trap?
– Pay more than the minimum
same as above, I didn’t have money that’s why I had to use ARM.
– Consolidate your debt
see bullet 1 above
– Cut other expenses
nice, that’s really easy to do while inflation and unemployment shooting up right?
– Rent out part of your home
ok, that certainly will trash your neighborhood and help your house lose value faster.
– Downsize
yep. say bye bye to your house.
…and you qualify for the loan based on the minimum payment, not the actual interest rate. I forgot what the percentage of OC home loans were option ARM, but it was very big. There is a whole lot of hurt that’s going to happen in the current $1-2 million dollar price range.
Today’s 1-2 million dollar price range.
Tomorrow’s (i.e., post recession) .5 to 1 million dollar price range.
What does it say about the state of our economy when pawn shops across the nation are reporting better than expected earnings.
http://www.bizjournals.com/dallas/stories/2008/07/07/daily5.html
It means the rebate checks are being put to good use!
For most people owning a home is a life long investment. When asked most homeowners plan on living in their home until they die. This is hardly ever the case because most people will move within 5-10 years if they plan on making this place a primary residence. You can get still more information about home buyers which I browsed on internet can fetch you help.
This isn’t related to today’s post, but I need to relate this to you all. I worry that there are way too many people around here like those I’m about to relate that simply will not allow the market to return to sanity.
An aquaintance of mine from the gym that I have talked Irvine RE with on a number of occasions told me over the weekend that he is buying a place in Woodbridge at what I consider a WTF price ($390/sq-ft). Just a few weeks ago I recommended that he read this site. This is an educated individual with a good salary that should know better, especially with the conversations I’ve had with him recently as well as referring him to the blog. When I said “wow, that’s expensive” he just replied “Well I just feel that I’ve been waiting forever”.
Basically this is a perfect example of someone who felt priced out before but now isn’t. I think that there are a lot of people in Irvine like this, maybe enough to prevent the kind of correction that we all expect. Those that have the income, the credit, and the down payment to be approved for these loan values. The vast majority of people can’t (or won’t) do the most rudimentary comparison on the costs of rent vs. own. I can afford to buy a place at current prices, and get approved for the mortgage, but rent because it makes more sense to the bottom line.
The people you refer to will have little effect other than to provide liquidity on the ride to the bottom.
Actually, I don’t see this as much of a problem as you think it to be. This person will tie up his money (and some banks’) in a depreciating asset that won’t have a positive rate of return. This makes his choice basically a ‘dead’ investment and removes extra money from the money supply (the bank who loaned him money).
To truly have a contraction in any asset a large percentage of dead money in that asset helps. It removes that money from being leveraged. In a highly leveraged economy, like ours, the removal of excess leverage allows asset prices to drop.
Dejnov.
The real estate bubble put such social pressure in some vulnerable people to OWN a property at all means, effectively making ownership fashionable, they didn’t want to be left behind in the very subjective social advancement measure, you are IN if you “own”, you are OUT if you rent, people focused only on the positives of owning and ignored the negatives of buying an overpriced house, probably some of them feel that now they can finally achieve their goal and buy, at the same time some of them that bought 2-3 years ago, are regrettably saying to themselves: what I was thinking?!?
The prices will come back down to what people can pay. It will take some time for the system to flush out all the funny money that has propped it up for the last 10 years.
Be patient.
I got approved for a loan and fully intended to purchase. I put my logic hat on and decided to rent for another year or two because of people like your friend who were will to pay the asking price or more. I was the person offering 390k for homes listed for $550k. People like your friend were offer $575k.
The RE’s tried to convince me I was missing out on a GREAT deal…I took my pennies and ran away.It has do do with what one feels is a good deal over paying by more than 20% is not a “deal”.
When I said “wow, that’s expensive” he just replied “Well I just feel that I’ve been waiting forever”.
I know exactly how your friend feels because we did the same thing and we were in a rental that was WELL below market value. It sucks for me because I still get the new listings and see homes that might have been better or just paid less for something similar. My husband doesn’t care ’cause he doesn’t see the details of our market. He is really happy and I do like living here more than our rental, but I never would have given up the rental we had to pay market rent for this house.
What gives me hope about the market continuing to fall is that it may fall far enough for us to pick up a rental property or perhaps rent this place out and buy ourselves an even better house for the same amount of monthly outlay.
msv,
I am interested to know what kind of financing your gym buddy is getting to purchase that Woodbridge house.
Maybe Lendingmaestro can give us an update on what the lending practice is like lately. (i.e. only loans with 20% down, full doc, 28/33 DTI are going through OR something less stringent? Hopefully, OPTION ARM is no longer available to the public…)
I sure hope so. I know so many people that are “waiting” until prices fall. (myself included). If everyone starts to buy in..let’s say, June 2009, prices are going to come right back up.
It really comes down to this. All of these people whom you know that are “waiting”. Are they actively saving and putting away large sums of money? Or are they just planning on putting down a few thousands dollars and assuming that the easy financing is going to come cheap (it will not)?
If you look at the savings rate of the USA, it seems unlikely that there are great numbers of people out there right now who are putting away large sums of money to put down on a house.
It is all going to come down to the first time buyer. Prices will stop where the first timers can afford financing and bring cash to the table. The rest of it is just current mortgage owners swapping equity back and forth.
The friend that you mention who feels like he has been “waiting forever” is just the typical fence sitter turned knife-catcher. He wants it and he wants it now.
As with all things, after a few months of mortgage-ownership, he will realize that thrill of having a house has fizzled and the reality that he is throwing his money away will then set in. Too late.
AZD,
I’m going to agree with you to a great extent. People with money will likely go for high end but middle class and first time buyers need the house price to come down even more for about 20 to 25%. I don’t know whether it will happen soon or later but I think longer it takes worse it gets for everyone, seller and buyer. Chances are interest rate will go up so high home price with high interest means no transaction and more possible REOs…
I sold my place a couple of years ago and have been renting. So I have little more than 20% downpayment for what I can afford from the proceed of sale. However, I’m not a business owner so my salary really hasn’t gone up a lot more than inflation past a few years. So after maximizing 401k limit and some money for emergency fund, I can’t save significant amount of money.
I have a good job but it’s still little more than average Irvine income and raising two kids and preparing retirement prevents from accumulating a lot of wealth now.
Most people I know in late 20s through mid 30s have house hold income of 70k ~ 100k. Even with 100k, in my opinion, 3 bed house or big condo should be abour 350k ~ 400k. That’s not the case unless you drive 2 hours away from job or move into getto like area.
Listing Agent has been invited to participate in the discussions.
http://www.movoto.com/real-estate/homes-for-sale/CA/Irvine/8-Eastmont-203_P640539.htm
IR, you might want to offer a free t-shirt or mug to the first invited listing agent that actually responds to the invite and posts something to the group. 😉
AZDavidPhx,
Design and image needed for T-shirt or mug.
Agreed,
I am also seeing benches and sides of buses with our friend Eric all over getting the word out on hot apartment buys.
That’s weird. I could have sworn this property has been listed for months. Some people even moved in about a month ago so I thought the place was finally sold. Something doesn’t add up.
I remember during the flood of 1978, after the water began receding, we started pumping water out of the basement into the still flooded street. Some dingbat commented that we were exacerbating the flood with our water. Too funny. Anyway, that story about sums up the effect those foolish knifecatchers will have on the housing correction. Zero.
The option ARM’s are the loans that are killing people. Loan officers should have been more understanding to the clients needs. The thought that things would get better in 3 or 5 years for most people is insane.