Everyone needs to watch the video above. It is one of the most hilarious parodies of the housing bubble I have ever seen.

This Thanksgiving, be thankful you are not one of the many people going through what is shown above.

Downfall — Children of Bodom

Greed. Pure, unbridled greed motivated many buyers during the Great Housing Bubble. Greed is one of the seven deadly sins, and it is responsible for the downfall of flippers, specuvestors, and ordinary homeowners who thought they could make a fortune buying and selling homes. In the movie Wall Street, Michael Douglass’s character, Gordon Gecko, famously opined, “Greed is Good.” Our entire capitalist system functions on the belief that individuals doing what is in their own best interest will result in the most efficient allocation of capital and the greatest good to society. Trial and error has shown us that sometimes this is not the case. Monopolies and other market price manipulations are one example of capitalism gone awry. Ponzi Schemes, like witnessed during the Great Housing Bubble are another. To prevent these abuses, we regulate the free market. Of course, our attempts to regulate and manipulate have their own problems. Maybe, someday we will figure it all out. Of course, we have been living under the delusion that we had it all figured out for many years. It takes a series of events like we are witnessing today to humble us all and make us realize we still do not know what we are doing.

When the Titanic set sail in April of 1912, the world was suffering from another mass delusion: the belief that our species had overcome nature. The Titanic was unsinkable. They considered the possibility of disaster at sea so remote that they did not even provide enough lifeboats for all the passengers. The sinking of the Titanic was a paradigm changing event. The world’s collective feeling of security and control over their lives was shaken to its core. The same is happening today.

The collapse of our economy and the inability of our leaders to prevent it is spooking everyone. Our concepts of financial security are being called into question; they should be. Our financial leaders respond to our calls for ever-increasing asset prices. They found a way to do it for a while by steadily lowering interest rates and creating massive debt structures supported by dubious insurance contracts and blind faith. We act like meth addicts taking economic stimulants one after another until our financial body bursts. There must be a better way.

I see angels burning, falling down in ruins
Looking down I see me, I’m my own enemy

We saw in yesterday’s post how stupid lenders in Quail Hill inflated house prices by offering 100% financing to property flippers. I wrote back in February about how Quail Hill was going to become Quail Hell for those who bought there. Today we have another property on the same street. It is a bit larger, but it is also in distress, and the decline from the peak is extraordinary.

Asking Price: $650,000

Income Requirement: $162,500

Downpayment Needed: $130,000

Monthly Equity Burn: $5,416

Purchase Price: $964,500

Purchase Date: 1/16/2007

Address: 76 Passage, Irvine, CA 92603

Beds:	4
Baths:	3
Sq. Ft.:	2,265
$/Sq. Ft.:	$287
Lot Size:	–
Property Type:	Condominium
Style:	Contemporary
Year Built:	2003
Stories:	2
Floor:	1
Area:	Quail Hill
County:	Orange
MLS#:	S532174
Source:	SoCalMLS
Status:	Active
On Redfin:	189 days
Unsold in 90+ days

Overall, that is not a bad description. I do wonder why the writer used “w/” instead of the word “with.” Was it important to save those two characters? Also, it contains one of my favorite goobledygook phrase “highly upgraded.”

This property was purchased on 1/16/2007 for $964,500. The owner used a $771,600 first mortgage, a $96,000 HELOC, and a $96,900 downpayment. Ouch! If this property sells for its asking price, the total loss will be $353,500 after a 6% commission.

This property is being offered for 32.6% off its peak purchase price.

One of the contributors to my book has asked me to keep an eye out for a certain type of property. This one very nearly fits the description of what is sought. So far, properties like this have not seen huge discounts. Like many looking for properties in Irvine, it has been discouraging to watch prices hold steady over the last several months. Properties like this one should give some hope. Even the nicer properties are starting to come down in price significantly. This one isn’t quite there yet, but it is getting much closer.

{book}

The night of timeless fire is drawing near
I flee… Throughout the years of throe
Watching through a mirror, as I fall apart
I see a wreck, I’m burning

Angels whispering fire, no longer I’m alive
Settled down I’m done with the trip to my kingdom come

Downfall — Children of Bodom

The price of this property was just reduced to $550,000. That puts it 34% off its peak asking price.

Double Trouble — Otis Rush

Lay awake at night,
Oh so low, just so troubled.
Can’t get a job,
Laid off and I’m having double trouble.

Financial markets have no mercy. They take no prisoners, except maybe those that are now imprisoned in their homes. The financial markets do not care what the prices mean to you or to anyone else for that matter. If falling house prices costs people money, ruins their credit, and forces them into bankruptcy, well, that is what can happen when people speculate in financial markets. There are likely many people losing sleep over their losses in real estate and the stock market while simultaneously worrying about their job. These are not carefree times.

This too shall pass. Despite all the turmoil, the sun will rise tomorrow, and it will be another beautiful day in Southern California. People will meet, fall in love, get married, start families, and look to buy a house. Hopefully, they will chose to rent for a while instead.

Enjoy the new Suzanne Researched This video, now with subtitles.

Asking Price: $629,000

Income Requirement: $157,250

Downpayment Needed: $125,800

Monthly Equity Burn: $5,241

Purchase Price: $830,000

Purchase Date: 2/27/2006

Address: 3562 Myrtle St., Irvine, CA 92606

kithen?

Wow! A desirable neighborhood and a desirable floorplan…

Today’s featured property is interesting to me because of the asking price history.

The house was purchased on 2/27/2006 for $830,000. The owner used a $663,920 first mortgage, a $82,990 second mortgage and a $83,090 downpayment. The total debt on the property is $746,910. When they listed the property for $725,000, they knew their equity was gone, but they might have been able to pay off the second mortgage and salvage their credit, and the first mortgage would have been made whole. The short sale might have been easier with only the second mortgage involved. However, they were unable to find a buyer at that price, so they lowered the price again to a price that was going to cost them their equity and their credit score. If this property sells for its asking price, and if a 6% commission is paid, the total loss on the property will be $238,740. A sale at this price represents a 24% discount from the peak.

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.

🙂

{book}

Lay awake at night,
Oh so low, just so troubled.
Can’t get a job,
Laid off and I’m having double trouble.

Laugh at me walking,
And I have no place to go.
Bad luck and trouble has taken me;
I have no money to show.

Double Trouble — Otis Rush

I Don’t Care Anymore — Phil Collins

I dont care what you say
We never played by the same rules anyway.

There are some listings where you can tell the owner just doesn’t care anymore. Put yourself in his shoes: the house you own is worth far less than you paid and far less than you owe. There is no way you can sell it for enough to get any of your money back, and your credit is shot. Why would you care?

There was a time when people purchased houses because they wanted to provide a home for their family. They took on debt they could reasonably afford, and they made payments until they sold. If they made a little money in the transaction, that was a bonus. Once prices started going up, and people saw that could make a great deal of money by owning, the profit motive started to creep into their thought process. Once prices really went up a lot, and did so very quickly, profit became the primary motivation for buying real estate. The fact that they could live in the place while they were making a fortune was a bonus. That is still the psychology dominating our real estate market, and it is the primary motivation behind the continued activity of knife catchers buying at what are still grossly inflated prices locally.

In time this psychology will change. Lenders are no longer going to enable speculation with 100% financing and liar loans, and worse yet, they are actually going to require people to pay off mortgages. Serial refinancing is over. Oh the horror of it. Can you imagine what will happen to prices when people start believing they will actually have to pay off the debt from their wage income? The Ponzi scheme of ever-increasing debt where each buyer was more leveraged than the last has come crashing down. It is only the few knife catchers who believe they will get to pass this debt on to someone else who are willing to buy in this market. We should probably thank them. Someone has to absorb the losses between today and the eventual bottom.

Asking Price: $539,900

Income Requirement: $134,975

Downpayment Needed: $107,980

Monthly Equity Burn: $4,499

Purchase Price: $675,000

Purchase Date: 7/31/2006

Address: 3 Ash Tree Lane #95, Irvine, CA 92612

I like to use an ellipsis, particularly when there is more to a particular thought. What is the point of the series of periods above?

And of course, there are the obligatory multiple exclamation points.

The property was purchased as a flip right at the peak. The owner paid $675,000 on 7/31/2006. He used a $540,000 first mortgage a $100,000 HELOC and a $35,000 downpayment. On 11/15/2006 he refinanced with an Option ARM for $576,000 and took out a HELOC for $72,000. If this property sells for its current asking price, the total loss will be $167,494 after a 6% commission. There are much better deals in University Park, so it isn’t likely this will sell for its asking price.

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.

🙂

{book}

Well you can tell evryone Im a down disgrace
Drag my name all over the place.
I dont care anymore.
You can tell evrybody bout the state Im in
You wont catch me crying cos I just cant win.
I dont care anymore I dont care anymore

I dont care what you say
We never played by the same rules anyway.

I Don’t Care Anymore — Phil Collins

Eve of Destruction — Barry McGuire

Yours truly is featured in the newspaper, again. Check out the OC Register story here.

I would like to welcome readers of the OC Register to the Irvine Housing Blog. We provide analysis of market trends and profiles of properties in Irvine, California. Today we have an analysis post, like many that can be found in our analysis section, and we also have a property profile showing the distress in one of Irvine’s newer neighborhoods. Thank you for stopping by.

but you tell me over and over and over again my friend,
ah, you don’t believe we’re on the eve of destruction.

There has been plenty of conjecture about the impact of adjustable-rate mortgages (ARMs) on the future of our housing market. Some people believe that if interest rates remain low that the upcoming ARM resets will not cause many foreclosures. This is wrong. Today’s post examines what will happen when these resets occur, and it will demonstrate why this problem is so big.

By now, most of you have seen the ARM reset schedule shown above. But what does it really mean, and why is this a problem? ARMs became very popular in the bubble rally because they allowed people to finance huge sums of money with smaller payments. In time, it became the only viable alternative for financing. There are two types of ARMs: interest-only and negative amortization (Option ARMs). A typical ARM has a fixed interest rate for a brief period, then the interest rate adjusts and the payment is recast. Option ARMs tend to me more complicated. They have more frequent adjustments — which are almost always to higher rates and higher payments — and they have the option to pay less than the interest-only amount which results in negative amortization (a fancy way of saying your mortgage balance goes up). There are two terms that are important to understand with respect to ARMs: reset and recast. A reset is a change in interest rate being charged on the loan. These loans are all scheduled to reset at different times, and depending upon changes in the underlying index rate, the interest rate may go up or down. When the interest rate changes, or when the amortization method changes, the payment is recast which means it changes. Any change in payment is technically a recast, but the dreaded recast, the recast that causes all the problems, occurs when the amortization changes and the loan must be repaid.

It is not the interest rate reset that is the main problem, it is the recast to a fully amortized repayment schedule that causes dramatic payment shock.

Don’t you understand, what I’m trying to say?
Can’t you see the fear that I’m feeling today?

At some point, a loan must be paid off. All loans eventually revert to fully-amortized loans requiring the borrower to pay back both the interest and the principal. During the bubble, people believed they could refinance continually from one ARM to another in a process known as serial refinancing. Most borrowers have come to believe mortgage debt is something you perpetually service and never retire. The collapse of mortgage lending that caused the bankruptcy of the subprime industry and the government to take over the GSEs has put an end to serial refinancing. Now people are going to have to pay off their debts. Most can’t afford to.

Let’s look at a typical example. During the bubble, there was a significant increase in allowed debt-to-income ratios. People who were eager to get rich on real estate stretched themselves to buy houses. This was not a passive result of high prices, this was the driving force of the price rally. As a result, many people are putting 40% or more of their gross income toward housing. Assume a borrower who was making $120,000 a year decided to take out a 5-year fixed, interest-only adjustable rate mortgage with a 40% DTI. They would be putting $4000 a month toward their housing payment, and with a 5% interest rate, they could finance $960,000. Does borrowing 8 times income seem impossible? It was not uncommon.

Let’s assume this borrower has been making this $4,000 a month payment, since 2005, and their 5-year fixed period is coming to and end in 2010. What is going to happen? Let’s look at the scenario people envision where this will not be a problem. Let’s say interest rates are still extremely low in 2010 (something that is not very likely) and that the interest rate reset does not change the borrower’s interest rate. At the end of the 5-year period, the mortgage recasts to a fully amortized payment schedule over the remaining 25 years of the loan. The payment which was $4,000 a month goes up to $5,612.06. The borrower was already putting a crushing 40% of their income toward their housing payment. How are they going to afford a 40% higher payment? Is it likely that their income rose 40% in 5 years? Can they afford a 56% DTI? You see, the problem with the interest rate reset is not the change in the interest rate, it is the recast to a fully-amortized schedule. Keep in mind; this is the best-case scenario where mortgage interest rates are still at historic lows seen during the bubble. If mortgage interest rates go up, which seems likely if risk is properly priced into them, then the payment shock at reset/recast is even worse.

So why can’t the borrower just refinance into either another ARM or a 30-year loan? Remember the credit crunch? Loan terms have gotten much tighter. Lenders are requiring 20% equity, and the allowable DTIs are falling. Did the property go up 20% in value? No, values have declined. Did the borrower save up enough money to pay down the mortgage? No, they were putting all their money toward their interest-only payment? Did the borrower’s income rise 40% or more over the last 5 years? Possible, but given the current state of our economy, it is not very likely. In short, the borrower is screwed. They will not be able to refinance, and they will not be able to support the new mortgage payment. They will end up in foreclosure.

If the button is pushed, there’s no running away,
There’ll be noone to save with the world in a grave,

This is an enormous problem. Eighty percent of loan originations in 2005 and 2006 in Orange County were interest-only or negative amortization. This isn’t just a few loans that will result in a few foreclosures. This is the bulk of our financing. You can see what these resets do to home prices by looking at the areas dominated by subprime. Santa Ana, Riverside County, Stockton, and many other markets that were dominated by subprime have been blasted back to 2001 pricing more than 50% off the peak. This did not occur because these neighborhoods were less desirable, it occurred because their loans reset in 2007 and 2008. The loans in Irvine and the more desirable areas in Orange County are set to reset from 2009-2011. The problems for the high end are in front of us, not behind us.

People who were buying or doing cash-out refinancing during the bubble were betting on 4 things: 1. Interest rates would stay low. 2. Loose loan terms would be available. 3. House prices would keep rising. 4. Incomes would keep rising. If any one of these four things did not happen, they were going to lose their house. It would only take one of these four conditions to change for disaster to occur. In the real world, all four of these things did not happen, and now we are facing a foreclosure crisis rivaling the Great Depression. Most people were not aware of the risks they were taking on, and many who were aware of them really believed everything would work out in their favor. They were tragically mistaken.

{book}

Asking Price: $799,999

Income Requirement: $200,000

Downpayment Needed: $160,000

Monthly Equity Burn: $6,666

Purchase Price: $1,141,500

Purchase Date: 9/19/2006

Address: 34 Honey Locust, Irvine, CA 92606

Beds:	4
Baths:	4
Sq. Ft.:	2,770
$/Sq. Ft.:	$289
Lot Size:	4,505 Sq. Ft.
Property Type:	Single Family Residence
Style:	Colonial
Year Built:	2006
Stories:	2
Area:	Columbus Grove
County:	Orange
MLS#:	S523732
Source:	SoCalMLS
Status:	Active
On Redfin:	254 days
Unsold in 90+ days

This property was purchased on 9/19/2006 for $1,141,500. The borrower used a $910,428 first mortgage, a $227,608 second mortgage, and a $3,464 downpayment. (It still amazes me that lenders were allowing people to occupy $1,000,000+ houses with less money in the transaction than a modest security deposit). If this property sells for its asking price, and if a 6% commission is paid, the total loss absorbed by IndyMAC — I mean taxpayers — will be $389,500 minus the whopping $3,464 downpayment. The taxpayers are absorbing 99% of the loss on this property, and the owner who bought this property on speculation of making a fortune is absorbing the other 1%.

The asking price of this property is 30% off its peak purchase price.

{book}

The eastern world it tis explodin’,
violence flarin’, bullets loadin’,
you’re old enough to kill but not for votin’,
you don’t believe in war, what’s that gun you’re totin’,
and even the Jordan river has bodies floatin’,
but you tell me over and over and over again my friend,
ah, you don’t believe we’re on the eve of destruction.

Don’t you understand, what I’m trying to say?
Can’t you see the fear that I’m feeling today?
If the button is pushed, there’s no running away,
There’ll be noone to save with the world in a grave,
take a look around you, boy, it’s bound to scare you, boy,
but you tell me over and over and over again my friend,
ah, you don’t believe we’re on the eve of destruction.

Eve of Destruction — Barry McGuire

Crying — Aerosmith

I was cryin’ when I met you
Now I’m tryin’ to forget you
Your love is sweet misery

For all our wisdom and collective experience, none of us knows what the markets will do next. Like an ocean current or a raging river, a financial market charts its own course. It is fickle and feckless and flows without regard to our hopes and dreams. The ebbs and flows of financial markets are meaningful to us, but in reality they are just movements in price; nothing more. Price rallies make homeowners blissful and renters bitter, while price declines make homeowners gloomy and renters gleeful. These feelings and emotions are independent of movements in price. The market just moves, that is all it does. It is benign, yet dangerous; it is indifferent, yet demonstrative; the market is a paradox which we must simply accept.

I was cryin’ just to get you
Now I’m dyin’ ’cause I let you

When today’s featured property was purchased in 2005, the owner undoubtedly thought they made the purchase of a lifetime. This property was certain to appreciate at 15% a year. It would be worth $2,000,000 soon enough. Now the owner is trying to forget this place. They listed the property at a short-sale price, they have proceeded to knock almost 20% off the asking price and still no takers.

Listing Price History

Of course, they are not alone. We have profiled another property nearby lately: 65 Weepingwood #97, Irvine, CA 92614. This nearly identical property was an REO, and the lender let it go for $385,000. Do you think today’s seller will get 10% more? I doubt it.

Asking Price: $425,000

Income Requirement: $106,250

Downpayment Needed: $85,000

Monthly Equity Burn: $3,499

Purchase Price: $565,500

Purchase Date: 10/28/2005

Address: 97 Weepingwood, Irvine, CA 92614

No wasted words in that description.

This property was purchased for $565,500 on 10/28/2005, the same day as the comparable property. The owner used a $452,400 first mortgage, two HELOCs for $56,550, and a $0 downpayment. There are two more HELOCs opened later for $17,000 and $116,500 respectively. It appears as if the total debt on the property is the total of the first mortgage and the final HELOC: $568,900, although it could be $17,000 higher.

If this sells for its asking price, and if a 6% commission is paid, the total loss to Wells Fargo will be $169,400. And I thought they were a conservative lender…

{book}

Get a Grip
There was a time
When I was so broken hearted
Love wasn’t much of a friend of mine
The tables have turned, yeah
‘Cause me and them ways have parted
That kind of love was the killin’ kind
Listen, all I want is someone I can’t resist
I know all I need to know by the way that I got kissed
I was cryin’ when I met you
Now I’m tryin’ to forget you
Love it sweet misery
I was cryin’ just to get you
Now I’m dyin’ ’cause I let you
Do what you do down on me
Now there’s not even breathin’ room
Between pleasure and pain
Yeah you cry when we’re makin’ love
Must be one and the same
It’s down on me
Yeah I got to tell you one thing
It’s been on my mind
Girl, I gotta say
We’re partners in crime
You got that certain something
What you give to me
Takes my breath away
Now the word out on the street
Is the devil’s in your kiss
If our love goes up in flames
It’s a fire I can’t resist
I was cryin’ when I met you
Now I’m tryin’ to forget you
Your love is sweet misery
I was cryin’ just to get you
Now I’m dyin’ ’cause I let you

Crying — Aerosmith