Spanish Lace — Gene McDaniels

The name Spanish Lace sounds delightfully exotic and enticing, doesn’t it? I imagine the gentleman who bought today’s featured property on Spanish Lace was quite enamored with the property when he got it; however, now he is out $93,236, and he has bad credit. The collapse of housing prices has taken its toll.

For most of the summer, I was profiling small condos and other low-end properties as these where the ones showing distress. Lately, problems at the mid to high end of the market are becoming more apparent. Today’s featured property is a nice, 4-bedroom new home in Woodbury selling at 26% less than its peak sales price. The Villages of Woodbury, Quail Hill, and Northwood II will be where the mid to high end stress will show up first because all of these owners paid bubble prices and they are currently under water. The price collapse in these neighborhoods will spread to others around Irvine. A buyer shopping in the $650,000 to $700,000 price range will be able to get more for their money in these neighborhoods. This will take buyers away from the more established neighborhoods causing transaction volumes to drop off even more. When sellers in the more established neighborhoods become more motivated, they will find competition from the collapsing upstarts.

Asking Price: $689,900

Income Requirement: $172,475

Downpayment Needed: $137,980

Monthly Equity Burn: $5,749

Purchase Price: $933,500

Purchase Date: 3/10/2006

Address: 120 Spanish Lace, Irvine, CA 92620

This is REO and not a short sale, so there will be a transaction somewhere near this relatively low asking price. If the property sells for asking price, and if a 6% commission is paid, the total loss on the property will be $284,994. The original owner put 10% down, so he is out $93,236. Washington Mutual is going to eat the rest.

I would like to thank Britney for providing me today’s listing. It is good to have you back…

.

She was standing there, so beyond compare, in Spanish lace
My heart touched the sky, captivated by her angel face
Dancing neath the moon I soon discovered the new world that
lovers always
find When I saw her there, so beyond compare, in Spanish
lace

Dreaming of that night, and stars that shone so bright, and
Spanish lace

Spanish Lace — Gene McDaniel

While My Guitar Gently Weeps — The Beatles

The carnage in the real estate industry has been truly remarkable. I know many people who work in design, development and homebuilding who are out of work. Statistics have more meaning when you know the people it represents. I have had my own stresses and worries which are ongoing. Right now, I am one of the lucky ones who still has a job. The weeping in the real estate industry is a side effect of the larger problem with declining home prices. That problem has people weeping from all walks of life, and for most of them, it will get much worse before it gets any better. The crash of housing prices is a catastrophe for everyone who is overextended on their mortgages, and that is a great many people. Many are still in denial, but at some point, the denial will give way to acceptance with periodic bouts of weeping along the way.

It must be easier for those who used 100% financing to reach acceptance. They are not losing any of their own money, only their credit score. When subprime rebounds in a few years to service these people, those that saved money while they rented may become homeowners again. Today’s featured property owners are a typical profile of bubble buyers. They bought toward the end of the rally with 100% financing, and now that values have declined, they are walking away and letting someone else absorb the losses.

Asking Price: $419,900

Income Requirement: $104,975

Downpayment Needed: $83,980

Monthly Equity Burn: $3,499

Purchase Price: $546,000

Purchase Date: 10/28/2005

Address: 65 Weepingwood #97, Irvine, CA 92614

Now it is a selling point that some idiot paid bubble prices in 2005? This statement is actually quite revealing of people’s perception of value in the housing market. The reality is that prices were inflated far above fundamental values by loose credit and unsustainable financing terms. The perception is that peak bubble prices were fair value and today’s discounted properties must be undervalued; therefore, if you buy now, you will be far ahead when prices quickly rebound back to fair value. In fact, there was a recent post at the OC Register where a supposed expert claimed prices are undervalued. Realtors should be pleased when I show a house with a huge loss because that means it is really undervalued 😉

ALL CAPS. Check…

Asterisks. Check…

Multiple exclamation points. Check…

Cozy brick. Check…

too much. Yes, this is still too much money…

This house was purchased in October of 2005 which was about 9 months before the absolute peak. The buyer utilized 100% financing, but was either unwilling or unable to pull out any more. One interesting note on this particular REO: the lender only bid this property up to 85% of the first mortgage. They completely wiped out the second mortgage, and they were willing to take a 15% hit on the first mortgage at the courthouse steps if a knife catcher would have offered it. As it happened, they did take back the property, and now they are trying to get a few bucks more than they paid. If this sells for its current asking price, and if they pay a 6% commission, the owner of this mortgage (JP Morgan Chase Bank; Ownit Mortgage Asset Backed Certificate — probably some CDO somewhere,) the total loss on the loans will be $151,294.

I bet they are weeping…

.

I look at you all see the love there that’s sleeping

Still my guitar gently weeps

While My Guitar Gently Weeps — The Beatles

Crack Music — Kanye West

What were the guys over at IndyMac smokin’? I recently spoke with two developers who have looked at the IndyMac portfolio of large loans. They both said it was nearly impossible to value because it was such an eclectic mix of properties with appraisals of dubious quality. There is a great post at Appraisers Forum on the nonsense over at IndyMac. In residential home lending, IndyMac had positioned itself as the leader in Alt-A loans.

Tanta at Calculated Risk has a great discussion in her post Reflections on Alt-A. Her basic premise is that Alt-A was never a good business plan. Alt-A loans were generally stated-income and low-doc loans given to people with high FICO scores. The theory was that people who could be responsible with normal debts could do just as well with enormous debts. It isn’t working out too well, particularly for IndyMac.

One of the intriguing ideas from her post is that Subprime will return, albeit in a different form. There has been much discussion about how people who have gone through foreclosure will get back into the housing market. Subprime was originally intended to take people with poor FICO scores that had good income and savings and give them bridge financing until they could repair their FICO scores and refinance into conventional loans. This business model will probably return in a few years as there will be many people in this category. However, Alt-A is likely dead, and it will not be resurrected. Stated-Income, High CLTV, and low or no-doc loans will probably not resurface no matter how good a persons FICO score is simply because people will default on these loans not matter how responsible their past history.

So where does that leave Irvine’s housing market? Without Alt-A, people will not be able to get the loans necessary to support today’s still-inflated prices. Buyers will actually need to qualify for loans based on their real income, and they don’t make that much money. And since many previously Alt-A borrowers have defaulted and are now Subprime, and since Subprime is currently defunct, the buyer pool in Irvine has gotten much, much smaller.

Today’s featured property is a simple story of speculative greed, Alt-A financing and the aftermath of years of irresponsible lending. The buyer used 100% financing and defaulted when prices didn’t go up. IndyMac foreclosed on its first mortgage and wiped out the second. They are now trying to sell the house to recover the value of their first mortgage, and they are over market. The only mystery remaining is how much of their first mortgage they stand to lose.

Asking Price: $562,250

Income Requirement: $140,562

Downpayment Needed: $112,250

Monthly Equity Burn: $4,685

Purchase Price: $690,000

Purchase Date: 9/26/2006

Address: 2 Shelby, Irvine, CA 92620

Tremendous value! Clean, light and bright. Vaulted ceilings. Recessed
lighting. Scraped ceilings. Tile floor throughout. Fireplace with
mantel in living room. Tile roof. Corner lot in quiet family
neighborhood. Close to schools, parks, shopping, freeway. Low HOA. No
Mello Roos!

Isn’t the front yard beautiful? What a value!

I think the kitchen is the 1986 original, too.

The previous owner bought this property on 9/26/2006 which was the approximate peak of Irvine’s market. He used a $552,000 first mortgage a $138,000 second and a $0 downpayment. It looks like he made payments for about a year and gave up. It went back to IndyMac on 6/25/2008. If this property sells for its asking price, and if a 6% commission is paid, IndyMac stands to lose $161,485.

IndyMac may be on crack, but at least they didn’t get Merril-Lynched…

.

How we stop the black panthers?
Ronald Reagan cooked up an answer
You hear that?
What Gil Scott was hearin
When our heroes and heroines got hooked on heroin.
Crack raised the murder rate in DC and Maryland
We invested in that it’s like we got Merril-Lynched
And we been hangin from the same tree ever since
Sometimes I feel the music is the only medicine
So we cook it, cut it, measure it, bag it,sell it
The fiends cop it
Nowadays they cant tell if that’s that good shit
We ain’t sure man
Put the CD on your toungue yeah, thats pure man.

From the place where the fathers gone,
The mothers is hardly home
And the…
Gonna lock us up in a…home
How the Mexicans say we just tryin to party homes
They wanna pack us all in a box like styrofoam

Crack Music — Kanye West

Back in Time — Huey Lewis and the News

Today’s rollback is truly impressive, not because it is a great property or a great deal, but because the discount is so severe. The low end of the market is searching for the bottom, and it hasn’t found it yet. What is also interesting about this property is its cost per square foot. At $174/SF, it is the least expensive place in Irvine. This might be expected on a large property over 3,000 SF, but when you see a price like that on a small condo, it is signaling more declines in the market. Smaller units almost always carry a higher price tag on a per square foot basis. From a construction cost perspective this makes sense because the smaller units still have the expensive bathroom and kitchen space and very little of the inexpensive filler.

The low end of the market must find a bottom before the market can stabilize. Without price stabilization there, the move-up market is non-existent, and the substitution effect will eventually pull down the larger, more desirable properties. Someone looking for a two bedroom place might take a smaller property if the price differential is great enough. Is that second bedroom really worth paying double for? Today’s featured property is probably the least desirable property in Irvine. It is old, small, ugly and in need up renovation (although it is a livable rental.) All premiums can be measured off units at the bottom. Properties in Brio may be superior, but would you pay 80% more ($360,000) for a smaller unit there? (2701 Ladrillo Aisle, Irvine, CA 92606) People looking at 1 bedroom properties will not likely pay an 80% premium no matter how much nicer the property might be. As you can see this will put further price pressures on units in Brio, and this will reverberate through the entire chain of move ups. High-end property prices will not hold up with continued price erosion at the bottom of the market. The high end may continue to be populated by a few knife catchers, but as the substitution effect really kicks in, volume will decline further, and the imbalance of supply and demand will create a fragile market. REOs that find the few remaining buyers will finally overwhelm the feeble price support, and the next leg down will begin. Look for it this fall and winter.

Asking Price: $199,900

Income Requirement: $49,975

Downpayment Needed: $39,980

Monthly Equity Burn: $1,666

Purchase Price: $295,000

Purchase Date: 3/26/2004

Address: 145 Pineview, Irvine, CA 92606

Unbeliveable?

I would be very concerned about the unpermitted extension…

Great for a first time buyer or investor? Oh, really? It cost these people their good credit, but at least they took a wad of bank cash with them on the way out.

Check out the sales history. This is a 2003 rollback:

Sales History

This is practically a 2001 rollback. Of course, some excited knife catcher will probably bid over the asking price. This may be near rental parity for an owner occupant, but who wants to own and live here? An investor looking for positive cashflow would still bid less than this asking price.

None of this is a concern to today’s owners of course. They bought the place in 2004 with a $236,000 first mortgage, a $44,250 second mortgage, and a $14,750 downpayment. They refinanced in 2005 with a $284,000 first and a $71,000 second leaving a total property debt of $355,000. They got their downpayment back plus an additional $60,000. If this property sells for its asking price, and if a 6% commission is paid, then Master Financial Inc. stands to lose $167,094. That is almost half of their loan balance. Ouch!

.

Tell me, doctor, where are we going this time
Is this the 50’s, or 1999
All I wanted to do – was play my guitar and sing

Gotta get back in time
Gotta get back in time
Get back, get back

Back in Time — Huey Lewis and the New

Home — Simple Minds

Perhaps the best illustration of the problem with the housing market is the simplest one. Speculators with access to 100% financing did not have to worry about losing money, so they went out and bought every property available and bid prices up to very high levels. Now that prices are falling, they are simply walking away and letting the lender absorb the loss. The big lesson lenders are learning is that 100% financing brings in more business, it just isn’t the kind of business you want. The new housing bailout bill passed by Congress and signed by the President has a provision in it eliminating downpayment assistance programs. From this day forward everyone will need a downpayment. With all the losses lenders are absorbing due to the defaults of 100% financing purchases and refinances, you will not see them bringing those programs back any time soon.

When I first started putting downpayment requirements on posts, people were incredulous. I was repeatedly told 20% downpayments will never be required again. Zero down financing was here to stay. Perhaps it will rise to 5% or maybe 10%, but 20% is from a bygone era. Well, go try to get a loan from anyone other than the FHA and see what they tell you. There will always be programs allowing you to put less than 20% down, but good luck qualifying for one of them. From this day forward — until we build the next bubble — a minimum of 3% down through the FHA will be the primary avenue of first-time buyers. Everyone else better have 20% down, or you will not be buying.

One of the overlooked features of the bottom of the market is the difficulty in qualifying for a loan. Prices drop because buyers cannot get loans. When prices look relatively cheap, very few people will qualify for loans to take advantage of the low prices. That is why prices are low. If everyone could qualify for a loan, they would bid prices up like we saw in the bubble rally. The future of Irvine’s housing market is going to be a lot of loans at the conforming limit — currently $417,000 — plus whatever downpayment people have saved. The median will probably be supported at around $430,000 because that is the conforming limit plus 3%. If you have saved 20% or more, you will be one of the few buyers who can bid higher, and you will likely find some outstanding deals at the bottom. Those $900,000 homes at the peak will be going for $500,000 for the conforming limit borrower with 20% down.

Save your money. Cash is king.

Asking Price: $579,900

Income Requirement: $144,975

Downpayment Needed: $115,980

Monthly Equity Burn: $4,832

Purchase Price: $690,000

Purchase Date: 8/30/2006

Address: 66 Stepping Stone, Irvine, CA 92603

Beds:	3
Baths:	3
Sq. Ft.:	1,700
$/Sq. Ft.:	$341
Lot Size:	–
Property Type:	Condominium
Style:	Mediterranean
Year Built:	2004
Stories:	2 Levels
Area:	Quail Hill
County:	Orange
MLS#:	S542271
Source:	SoCalMLS
Status:	Active
On Redfin:	1 day
New Listing (24 hours)

Yes, there is a garage, and inside, there is a wall…

As I mentioned in the introduction, this is a simple transaction. The former owner bought this property at the peak with 100% financing. The first mortgage was $552,000. The owner made some payments, but then stopped. The total outstanding balance was $555,044 at the time of foreclosure, so that is what the lender bought it back for. The second mortgage was a complete loss (JP Morgan Chase Bank is hating life.) If this property sells for its asking price, and if they pay a 6% commission, the total loss on the property will be $144,894. The bank is trying to get a few bucks back but they are over market, and they will need to reduce price to find a knife catcher. Expect to see this same, simple story over and over again as this crash drags on.

I hope you have enjoyed this week at the Irvine Housing Blog. Come back next week as we
continue chronicling ‘the seventh circle of real estate hell.’ Have a great weekend.

🙂

.

God gave me travelling shoes, God gave me the wanderer’s eye,
God gave me a few gold coins to help me to the other side.
Looked around and said: be careful how small things grow,
God gave me travelling shoes and I knew that it was time to go.

Miles and miles and miles and miles and miles away
Where can i go?
Where can I hide?

Home — Simple Mind