Shopping — Pet Shop Boys

In the next week or two, Hank Paulson is going shopping with a $700,000,000,000 credit card courtesy of Congress and the Federal Reserve. What is he going to do with that money? How wisely will he spend it? He faces a dilemma that has no resolution. If he pays fair market value for the securities he buys, he will fail to recapitalize the banks, and the economy will continue its downward spiral into the crapper. If he overpays for the securities to recapitalize the banks, the taxpayers will lose a great deal of money, and he will be accused of favoritism by just about everyone. So what should he do? Look out for the taxpayers, flush the economy and plunge us into a depression? Or does he screw the taxpayers and enrich his buddies and save the economy? Is this a false dichotomy? I don’t think so. I am glad I am not the one making these decisions. In the end, all of his actions will be justified as “necessary” to save the economy, and the justifications may accurately characterize the situation. There will be no way to know. The severity of a problem you avoid is always an unknown open to speculation.

In yesterday’s post, I reminded everyone of the reasons we are in this mess in the first place. When you strip away all the complexities and look to the root of the problem, you find individual borrowers like today’s that took on more debt than they can handle. If this had not occurred, if people had not overpaid, HELOCed and generally over borrowed, prices would not have bubbled. Everyone would be making their house payments, and none of this would have happened.

Asking Price: $459,900

Income Requirement: $114,975

Downpayment Needed: $91,980

Monthly Equity Burn: $3,852

Purchase Price: $360,000

Purchase Date: 12/20/2001

Address: 18 Nuevo #9, Irvine, CA 92612

So how much shopping did today’s owner do? The property was purchased for $360,000 on 12/20/2001. The owner used a $312,500 first mortgage and a $47,500 downpayment. On 10/11/2002 she opened a HELOC for $42,000. It appears as if she spent about $25,000 because on 4/12/2004 she refinanced for $336,000. On 11/23/2004 she opened another HELOC for $50,000. On 5/1/2006 she took more of the free money with a new first mortgage of $492,000. On 7/18/2006 she opened a HELOC for $43,200. Total debt on the property was $535,200. Total Mortgage equity withdrawal was $222,700 which includes her $47,500 downpayment. If this property sells for its asking price, and if a 6% commission is paid, the total loss to the lender/investor will be $102,894. This is not a big loss by Irvine standards, as this owner was not a big-time HELOC abuser. No, this is a very average borrower who lost a very average property doing what all of her friends and neighbors were doing: shopping with free money.

Whenever I profile one of these HELOC abuse properties, there is a natural tendency to want to believe there was some outside event or medical problem that made them spend the money. Nobody wants to believe that someone could lose their house because they liked to go shopping. The reality is that major, life-changing events for which there is not available insurance coverage are very rare. Maybe 1 in 100 of these cases involve that, probably less. Most of these people did go shopping. They did tap their HELOCs every year to pay off the credit cards. They took the free money and spent it. Now they are losing their homes because of this behavior. To deny this reality is to miss learning one of the key lessons of the bubble. The people who own (or owned) the properties I profile are learning this lesson very painfully. Some take joy in this fact, and some feel compassion. In the end, learning from these mistakes benefits everyone.

.

We’re buying and selling your history
How we go about it is no mystery
We check it with the city, then change the law
Are you looking forward?
Now you want some more

We’re S-H-O-PP-I-N-G, we’re shopping
We’re S-H-O-PP-I-N-G, we’re shopping

Shopping — Pet Shop Boy

One Thing Leads to Another — The Fixx

Realtors are infamous for peddling the fallacies of housing leading to a housing bubble (The deception with tact). Of course, buyers want to believe in the fantasy of perpetual appreciation (If this is up, then I’m up). And few owners want to take responsibility for their decisions when their plans go astray (You run for cover and there’s heat). But they are not alone. The lenders do not want to take responsibility either, and we will end up paying for it (I’ve got to say enough’s enough, Bigger the harder he falls). Does anyone think the proposed bailout that is likely to be passed will solve all our problems? (But when the wrong antidote, Is like a bulge on the throat) It won’t save housing prices, and one can only speculate on whether or not it saves us from financial Armageddon.

So where does this all end? When do the bailouts stop? Each one of these bailouts has been sold to us based on the belief that the alternative was too dire to contemplate. One thing leads to another.

Let’s review the chain of cause and effect lest any of our politicians forget why these massive bailouts are necessary. Realtors peddle fantasies of unlimited wealth that leads to people wanting to overpay for houses. The desire for real estate at any cost provides an opportunity for lenders and mortgage brokers to make huge origination fees if they can lower standards and qualify more people. Appraisers use the comparative-sales approach which justifies current pricing based on the irrational behavior of buyers. Investors in mortgage backed securities enable the originations by purchasing any loan they can get. Default insurance companies like Freddie Mac, Fannie Mae and AIG provide false assurances to investors that they can insure their losses. Ratings companies provide dubious ratings that puts even more confidence into investor’s decisions. All of this together leads to a massive inflation of house prices. One thing leads to another.

Now, back to our buyers. People who overextended and overpaid for real estate cannot afford their payments. They are insolvent. This leads to defaults which leads to forced sales which leads to lower prices. The lower prices distresses more homeowners leading to even more forced sales and even lower prices. The defaults and resulting losses cause lenders to become cautious and tighten lending standards. This leads to fewer qualified buyers and a reduction in demand leading to even more price drops. The losses by lenders causes default insurance providers to pay claims. They have written more policies than they can cover, so they go bankrupt. The losses by lenders also lead to a depletion of their capital reserves which leaves them less money to lend. This leads to a massive credit crunch and widespread monetary deflation as the money created by lenders when they originated the loans disappears into the ethers. It also leads to a dramatic slowdown in our economy as the circulation of money slows and commerce dries up. All of this leads us to today where we are being forced to engineer massive bailouts of anyone who provided or insured loans. One thing leads to another.

So what comes next? A severe economic recession, more layoffs, less income, massive government debt, and lower house prices. Followed by increased personal savings, economic recovery and renewed (albeit tepid) house price appreciation. One thing leads to another.

Today’s featured property is another example of house speculation gone awry. We have a lot of foreclosing to do before the system is truly purged of these exotic loans and overextended owners.

Asking Price: $360,000

Income Requirement: $90,000

Downpayment Needed: $72,000

Monthly Equity Burn: $3,000

Purchase Price: $490,000

Purchase Date: 5/24/2004

Address: 51 Ardmore, Irvine, CA 92602

It looks to me like the realtor could not even be bothered to get out of his car.

The previous owner of this property — it is now REO — was a classic real estate speculator. The property was purchased on 5/24/2004 for $490,000. The owner used a $391,920 first mortgage a $97,980 second mortgage and a $100 downpayment. At least he had some skin in the game. On 5/12/2005 he opened a HELOC for $113,100, and on 12/30/2005 he opened another for $148,223. On 8/1/2006 he refinanced with a $444,000 first and a $111,000 second. The total debt on the property was $555,000, and the total mortgage equity withdrawal was $65,000. BTW, assuming the $550,000 was loaned based on a peak appraised value, this property is being offered for 35% off. The lender took the house back on 9/9/2008 for $451,933 and quickly listed it for sale at $360,000. If this sells for its asking price, and if a 6% commission is paid, the total loss to the lender will be $216,600. I can’t help wondering how many losses like this have not been recorded by the lenders and investors and will be passed on to us taxpayers when we buy their toxic paper.

.

The deception with tact
Just what are you trying to say
You’ve got a blank face, which irritates
Communicate, pull out your party piece
You see dimensions in two
State your case with black or white
But when one little cross
Leads to shots, grit your teeth
You run for cover so discreet
Why don’t they

One thing leads to another…

One Thing Leads to Another — The Fixx

Wyoming — The Barfeeders

This financial crisis is stressful. It makes me long for a quiet home on the plains of Wyoming. Of course, I would have to finance that house so the financial crisis I am seeking to leave behind would follow me wherever I go. There really is no escaping this problem. My industry has already been decimated by the fallout of the Great Housing Bubble, and now the seizure of the credit markets brought about by the excesses of the bubble is causing problems in every industry.

When lenders lose faith in the ability of borrowers to repay them, they stop loaning money. Right now, lenders are not sure if anybody can pay them back because nobody knows where all the toxic waste is hidden. Until these valueless securities are brought into the light out of the darkness of off-balance sheet special investment vehicles, lenders will not know who is solvent, and who is not. Under those circumstances, it is prudent not to lend. As long as that situation exists, the credit markets will remain seized up, and our entire economy will spiral into the abyss.

I have believed we were in for a very severe recession caused by a
credit crunch for some time. There have been several others who foresaw
the chronic problems caused by widespread borrower insolvency, but few
foresaw how acute the problems became recently. For the last few years, I have felt a bit like the character Sarah Connor from the Terminator series. She knew the Armageddon of the future and had to live with that knowledge for years while everyone else got to exist in blissful ignorance. The blissful ignorance of our nation’s insolvency problem is gone. We have eaten the Forbidden Fruit of the knowledge of evil in our financial system. Our national stress level will rise noticeably as a result.

Americans are resilient. The prognostications of our status as a third-world country are greatly exaggerated. We will get through this financial winter, and when we do what will emerge in the spring will be a stronger America. (Anyone else remember the recession of the early 80s?) This is not a trite recitation of bullish nonsense, but an observation of past history and a belief in the collective intention of all Americans to excel and be our best. We will never become a third-world country unless we give up and allow it to happen. That isn’t the behavior of Americans I know.

There has been much discussion on what it will take to get us out of this mess. Some point to stabilization of house prices, some point to purging the system of toxic loans, and some point to restoring confidence in our financial markets. It will require all three. Realistically, the first will not happen until prices drop to where people can afford a home and be financially solvent, the second is going to require the passage of time and/or a massive government intervention like the one being proposed, and the third will be the passive result of the first two. None of this will happen quickly.

House prices simply cannot be supported at current levels. The only way they got here was through the use of unstable exotic loan programs. The amount of debt supportable by people’s real incomes on a sustainable, solvent basis is too small to support today’s prices. Prices will fall to supportable income levels because they must. People will not be given the ability to bid prices any higher by lenders and investors. Without the big loans, we can’t have big prices. If anyone is bullish on house prices in these circumstances, please let me have some of what you are smokin’.

Today’s featured property was owned by an insolvent borrower. There was no way he could afford the debt he had accumulated on the house, and the market has purged itself of this problem with another foreclosure. Absent a massive government intervention (and perhaps even with one,) this is how the market will deal with the problem.

Asking Price: $674,900

Income Requirement: $168,725

Downpayment Needed: $134,980

Monthly Equity Burn: $5,624

Purchase Price: $402,000

Purchase Date: 3/21/2000

Address: 30 Wyoming, Irvine, CA 92606

Beds:	4
Baths:	3
Sq. Ft.:	2,200
$/Sq. Ft.:	$307
Lot Size:	3,447 Sq. Ft.
Property Type:	Single Family Residence
Style:	Spanish
Year Built:	1999
Stories:	2 Levels
Area:	Walnut
County:	Orange
MLS#:	S548333
Source:	SoCalMLS
Status:	Active
On Redfin:	1 day
New Listing (24 hours)

All those exclamation points did get my attention; of course, it doesn’t make me think anything positive when I see it.

ammenities?

I think this realtor needs some help with Photoshop. The color balance seems just a bit off, wouldn’t you say?

The property records on this house are a bit hard to follow. It appears as if it was purchased on 3/21/2000 for $402,000, but in 2003, the name changed on the title without a sale being recorded: very strange. By 6/17/2003, there was a $500,000 first mortgage on the property. On 4/27/2004, a HELOC was opened for $94,000, but it looks as if this money was not immediately spent because on 6/30/2004, the first mortgage was refinanced again for $500,000. On 12/8/2004, the owner opened another HELOC for $200,000, but he only took out part of the money.

The big cash-out came on 2/8/2006 when he refinanced with a $637,500 first mortgage and a $130,000 stand-alone second. The second was refinanced on 5/16/2006 for $175,000. The total debt on the property was $812,500. Total mortgage equity withdrawal was over $400,000.

If this property sells for its asking price, the lender stands to lose $178,094 after a 6% commission.

So what do you think is better for the economy, 4 or 5 years of foreclosures to purge the system, or massive government intervention to purge the system of toxic loans sooner? BTW, neither will have much impact on the bottom of house prices. Affordability is what it is, and prices will fall until houses are affordable either way.

And what do you think of bailing out a family of fraudulent flippers? Or more accurately, bailing out the bank who enabled them?

.

We were drunk and insane standing out in the rain
Telling stories from yesterday’s gig
Drew a face on my shoe and I knew it was you
Memories are my most messed up things
We were covered in water backfire and mud
Where the blood and coffee were smeared
As the rivers were rising I stood by your house
Soon discharging a gutful of beer
Wyoming’s got a ghost but it doesn’t have a coast
So the property’s next to nothing
It would blow me away to carouse there with you
And to feel the northern lights sing
So I get on the phone with the irresistible
But I find myself kissing the pig
So antie up your bladder and pile up the boones
I’ve got miles of living to do

WYOMING WYOMING but I’ve never been to WYOMING
WYOMING WYOMING but I’ve never been to WYOMING

Wyoming — The Barfeeder

Clueless — Sevendust

Sometimes I come across a property where the circumstances around the speculative purchase lead to one of two possible conclusions: fraud or cluelessness. I am giving the benefit of the doubt to call this one clueless. This property was purchased in April of 2007. The news of the subprime implosion were on the front page. News of weakness in the housing market was everywhere as sales volumes were already declining and prices were dropping in many markets. And, of course, outlets like the IHB were screaming from the rooftops that prices were going to crash. It was in this environment that our flipper purchased today’s featured property.

The purchase allowed the previous owner who purchased in 2004 to sell at a small profit. It is the kind of circumstances that also has potential for fraud, particularly since the property went into foreclosure in just over a year after its purchase.

But was it really clueless? The flipper didn’t have any money in the transaction. This was a 100% financing deal, so Affiliated Funding provided the money, and the loan was packaged and sold in the secondary market. Some faceless investor is eating the loss. If prices had rebounded, this flipper would have made money. If it went down (which it did in a big way) then only their credit score was at risk. In those circumstances perhaps those of us who did not participate were the clueless ones…

What really caught my attention with this property was the discount. The asking price is 34% off its 2007 purchase price. That is a substantial drop. Perhaps they are hoping for multiple bids over asking. Perhaps there are enough knife catchers out there that they will succeed. In the comments recently, we were reminded about all the bullish commenters in the early days of the bubble blogs who were certain that if prices dropped 10% that investors would swoop in and buy up the entire inventory. This one is 34% off. Where are they now?

Asking Price: $499,000

Income Requirement: $124,750

Downpayment Needed: $99,800

Monthly Equity Burn: $4,158

Purchase Price: $756,000

Purchase Date: 4/17/2007

Address: 33 Visalia, Irvine, CA 92602

Does that picture and description scream, “I don’t give a crap?”

If this property sells for its asking price, and if a 6% commission is paid, the total loss will be $286,940. Think about these losses magnified by the total number of REOs in California and the rest of the country. No wonder our financial system is in such distress.

.

Scared to look ahead
Instead I fold my arms waiting
The train’s arriving with the goodies I’m entitled to
All this time I never felt I got what I deserved
Oh what a shame (why me why me)

Fly, watch you’re falling sunset
I can’t remember when I ever heard you say
Thank you for everything you gave I’m so grateful
(fly) watch you’re falling sunset

Clueless — Sevendust

The Long and Winding Road — The Beatles

The course of a financial market, particularly the real estate market, is a long and winding road full of twists and turns and unexpected outcomes. It was certainly foreseeable that banks and builders might fail and the GSEs might need to be bailed out, but the how and when of these occurrences are always unpredictable and newsworthy.

We have all seen this road before. This is the third real estate bubble in California since the 1970s. Each one seems to reverberate causing the next one to be even larger and more painful than the last. The drop in prices always leads to the market entry door of affordability. It is possible that history may not repeat itself for a third time, but this seems unlikely. There was good reason for prices to retreat to this level: it doesn’t make much sense to overpay for a depreciating asset. There doesn’t seem to be any reason this will not happen again (wishful thinking by those who do not want it to happen is not a reason).

You would think that million dollar REOs would be very rare. Aren’t $1,000,000 homes the exclusive enclaves of the rich and famous. The many pretenders who paid more than $1,000,000 for tract homes in Irvine would undoubtedly like you to think so, but most of these houses were purchased by high-income (or high stated-income) individuals and families utilizing exotic financing. Irvine may have been the center of the subprime lending universe, but it was the also the center of the Alt-A borrowing universe. Very few of the loans issued in Irvine were conforming loans because during the bubble rally, the cap was far too low to be a viable financing alternative (good thing for the GSEs and taxpayers who do not have much exposure here). Also, since people in Irvine do not make the money necessary to support home prices — particularly peak prices — many, if not most, of the loans were stated-income, liar loans. In order to get the monthly cost down to manageable levels, many borrowers used Option ARM loans and have only been making the teaser-rate payment. In short, most of the loans issued in Irvine were Alt-A and jumbo loans. It is not a matter of if these loans will blow up, it is only a matter of when.

Asking Price: $1,175,000

Income Requirement: $293,750

Downpayment Needed: $235,000

Monthly Equity Burn: $9,791

Purchase Price: $1,360,000

Purchase Date: 6/23/2006

Address: 50 Winding Way, Irvine, CA 92620

Here is today’s challenge. Identify the objects in the picture of the kitchen and speculate on how each of these objects ended up there…

Today’s property was purchased by the Bank of America through Wells Fargo for $1,076,882. I don’t know why both banks are involved. The original first mortgage balance was $1,000,000 but with the skipped payments added on, the balance due on the date of the auction was the amount paid. There were two HELOCs for $223,600 and $100,000 respectively. It is unclear whether or not either one of these HELOCs was used. If not, the original owners lost $360,000, so it is likely that these two HELOCs were used to extract their equity. If this property sells for its asking wishing price, and if a 6% commission is paid, the total loss on the property will be $255,500. It looks as if the lenders will absorb most of this, and the actual loss will probably be quite a bit larger as they discount this property to sell it.

.

The long and winding road
That leads to your door
Will never disappear
Ive seen that road before
It always leads me her
Lead me to you door

But still they lead me back
To the long winding road
You left me standing here
A long long time ago
Dont leave me waiting here
Lead me to your door
Yeah, yeah, yeah, yeah

The Long and Winding Road — The Beatle