Filtering out the bad that holds us back… Take hold of what is true to your hunger A hunger that will not go away Plans for tomorrow, they will remain
I have a parable for you today:
A weary traveler was on a
quest to satisfy his deepest longings and desires. He traveled from
place to place, but no matter where he went or what he tried, nothing
would quite satisfy him. One day, exhausted from his search, he
happened to sit beneath a magical wish-fulfilling tree. He thought to
himself, “Perhaps it is not so good to desire so much. It has not
brought me any lasting satisfaction, but I am tired, and I could use
something to eat and drink…” No sooner had he thought this when
delicious food and drink appeared for him to enjoy. “Wow,” he
exclaimed, “this is fantastic, but it would be nice to have someone to
share this bounty with.” As soon as the thought occurred, a companion
appeared to enjoy the feast. His desires replete for the moment, he
thought to himself, “This is very strange. Everywhere I have traveled I
have wanted and found no satisfaction, and here at this tree, I can
have anything I desire. I wonder if there is something magic in this
tree? I wonder if it is inhabited by some spirit? I wonder if it is a
goblin that will consume me?” And, as soon he had this thought, a goblin
appeared, and consumed him.
HELOCs enabled people to satisfy
their hunger for vacations, consumer goods and the like and live well
beyond their means. This went on for an astonishingly long time. Many
of these people became accustomed to living off the extra “income”
coming from their houses. Like the goblin in the parable, the magic
wish-fulfilling house consumed them, and now they have lost their
house, their credit and themselves.
Elegantly upgraded two level condo featuring hard wood flooring
throughout the first level, Custom paint, Crown molding throughout,
Designer Carpet, Plantation Shutters throughout! Sparkling kitchen with
crisp white cabinetry, Stainless Steel appliances and sit-up bar.
Spacious Master Suite features dual closets w/mirrored wardrobe. Built
in Tech Center with storage. 2nd Bedroom upgraded with Raised paneling.
Enjoy the beautiful Quail Hill area with Award Winning Schools, Resort
styles pools, Parks, Tennis and Private Fitness Center. Convenient to
shopping and the Spectrum Entertainment Center!
I can understand the desire to add colorful adjectives to a description, but this one goes overboard. What exactly is “crisp white cabinetry?”
This is another sad story of HELOC abuse:
The property was purchased for $343,000 on 6/27/2003 with a $68,750 downpayment and a $274,250 first mortgage with a 4.37% interest rate. I bet she wishes she still had that loan.
On 8/23/2004 she opened a HELOC for $100,000
On 8/3/2005 she opened a HELOC for $150,000 and probably paid off the first one.
On 1/11/2006 she refinances for $462,000 with an Option ARM with a 1% teaser rate. Brilliant move…
On 1/11/2006 she opens a $60,000 HELOC
On 5/4/2006 she takes out a stand-alone second for $130,000 and likely paid off the HELOC.
Total property debt $592,000 plus any negative amortization.
Total Mortgage Equity Withdrawal of $317,750 including her downpayment. Not a bad take for a small condo.
If this property sells for its asking price (which isn’t likely given its WTF price) the total loss for the lender will be $136,100 after a 6% commission. 123Loan LLC and Clarion Mortgage Capital are the bagholders.
I must admit, it is hard to feel too sad for her plight given the amount of consumer spending she was able to enjoy from her magic wish-fulfilling condo, but in the end, fulfilling those desires has cost her the place she called home, and that is sad.
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The journey begins with curiosity And envolves into soul-felt questions On the stones that we walk And choose to make our path Sometimes never knowing Other times knowing too much
Filtering out the bad that holds us back… Take hold of what is true to your hunger A hunger that will not go away Plans for tomorrow, they will remain
Won’t you join me on the perennial quest Reaching into the dark, retrieving light Search for answers on the perennial quest Where dreams are followed, and time is a test
No time for mental crutches The maker has moved on I will take it raw and be on my way
Those that stood beside me I’m glad you understand Behind these written words I share the simple plan To hang on to the way that we feel
From rivers of sorrow To oceans deep with hope I have travelled them Now, there is no turning back The limit, the sky I ask my questions Why? What today? When tomorrow?
Filtering out the bad that holds us back… Take hold of what is true to your hunger A hunger that will not go away Plans for tomorrow, they will remain Perennial Quest — Death
Whenever I hear the Beatles song, Penny Lane, I think of Irvine. An idyllic little world of perfectly manicured landscapes, and perfect little houses beneath the blue suburban skies. I have written before about the English neighborhood in Northwood that is a particular favorite of mine. If there is a “Penny Lane” environment in Irvine, you will find it here. Today’s featured property is located in this little enclave, and it now the private Hell of Washington Mutual.
Absolutely stunning! Cottage-style exterior with a contemporary,
upgraded interior. Hardwood flooring throughout both the upstairs and
the downstairs, stainless steel kitchen with 5-burner range and granite
counters. Two master suites with upgraded bathrooms and walk-in closets
plus a loft perfect for a home media room or home office. Outside the
Dutch-style front door is a huge and private wrap-around yard freshly
landscaped. No homes looking down or into this location and no common
walls (this is a completely detached home) to worry about noisy
neighbors. Serene rolling hills view from the patio and from the
bedroom windows. Security system and a large, 2-car attached and
completely finished garage.
Absolutely stunning… how stupid the lenders were during the bubble.
Today we get both HELOC abuse and 100% financing. The property was purchased a little after the peak for peak pricing. The owner used 100% financing, and in early 2007 they managed to get a HELOC for $69,000 over the value of their second mortgage. They made $69,000 for simply signing some papers. They put no money into the transaction and took out $69,000 six months later. I have to say, if lenders are this stupid, they are getting what they deserve. Washington Mutual made all three loans. For the record, if this property sells for its asking price, and if a 6% commission is paid, the total loss for Washington Mutual will be $244,940.
I have yet to move my banking from Washington Mutual. It is too much of a bother, and I am under the insured limit on all my accounts. I do hope they don’t go under, but if they were this stupid with their underwriting, they will reap what they sow.
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In Penny Lane there is a barber showing photographs Of every head he’s had the pleasure to have known, And all the people that come and go Stop and say hello.
On the corner is a banker with a motorcar, The little children laugh at him behind his back. And the banker never wears a mac In the pouring rain, very strange.
Penny Lane is in my ears and in my eyes. There beneath the blue suburban skies I sit, and meanwhile back
In Penny Lane there is a fireman with an hourglass And in his pocket is a portrait of the Queen. He likes to keep his fire engine clean, It’s a clean machine.
Penny Lane is in my ears and in my eyes. A four of fish and finger pies In summer, meanwhile back
Behind the shelter in the middle of the roundabout A pretty nurse is selling poppies from a tray And though she feels as if she’s in a play She is anyway.
In Penny Lane the barber shaves another customer, We see the banker sitting waiting for a trim. And then the fireman rushes in From the pouring rain, very strange.
Penny Lane is in my ears and in my eyes. There beneath the blue suburban skies I sit, and meanwhile back. Penny Lane is in my ears and in my eyes. There beneath the blue suburban skies, Penny Lane.
Each new low sale or asking price lowers neighborhood values. As I discussed in Financing in a Declining Market, everything within a 1 mile radius of a low asking price becomes very difficult to finance. All of the short sales we have been seeing advertised do nothing for the would-be seller, as they rarely result in a sale; however, they do serve to obliterate the neighborhood comps as these low asking prices sit on the market. In fact, I would say that attempted short sales are doing more damage to the market right now than foreclosures because the foreclosures simply disappear into the black hole of lender holdings whereas short sales stand out in the market signaling a new lower pricing level. Today’s featured property is a nearly new property in Northwood II asking $240/SF. It is an astonishingly low price in today’s market.
There are no pictures on the MLS, but the pictures below are of the identical property at 39 Secret Garden offered by a neighbor for $240,800 more (WTF?) Let’s just say this neighbor can’t be very happy about this short sale.
Elegant&luxurious 4 bedroom detached town home,very bright
interior,spacious living space(2,492 sq.ft)built in2004,$120,000
upgraded option when purchased, This is a short sale property!
Is this the bottom for pricing in this neighborhood? I doubt it. It isn’t very likely we will see the bottom of resale pricing anywhere in 2008. The bulk of the problem with foreclosures is ahead of us, not behind us. No matter how low prices get in 2008, they will go lower. Seeing this price levels in 2008 is rather surprising. It foretells of a significant downside overshoot of fundamentals, in my opinion, but we will see.
Many of the buyers in this neighborhood used 20% downpayments. I heard rumor that it was a requirement of the builder. Not to worry, they promptly withdrew their equity with a HELOC, so they will not lose any money. In fact, if they fully tapped their $250,000 HELOC with Washington Mutual, they stand to make money on the deal. If the HELOC is fully tapped, the total mortgage debt is $901,200. If this property sells for its asking price, the total loss to the lenders will be $338,140. Washington Mutual will eat $250,000 and America’s Wholesale Lender will lose the rest.
As for the rest of the neighborhood, the financing environment just got a lot more challenging. I doubt the sellers at 26 Shadowplay will be getting any tearful send offs by the neighbors…
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To the centre of the city where all roads meet, waiting for you To the depths of the ocean where all hopes sank, searching for you Moving through the silence without motion, waiting for you In a room with a window in the corner I found truth
In the shadowplay acting out your own death, knowing no more As the assassins all grouped in four lines, dancing on the floor And with cold steel, odour on their bodies made a move to connect I could only stare in disbelief as the crowds all left
I did everything, everything I wanted to I let them use you for their own ends To the centre of the city in the night, waiting for you To the centre of the city in the night, waiting for you
Here are a few fragmented excerpts on Countrywide’s thirst for quantity and increasing lack of quality.
As for Countrywide being a great place to work — as Jonas Roth
(the head of the trading desk at Countrywide) and others might testify
to — Betsy Bayer (VP of compliance at Countrywide) wasn’t so sure. “It
was a sweatshop,” she said. “They had these posters all over the
office. They were ‘work/life balance’ posters, like they were concerned
about our well being. What a load of Bullsh*t. It was a sweatshop.”
Even though many of Mozilo’s senior executives had been with the
company 20 years or more, the Countrywide she worked for had a high
turnover rate where many employees would leave before two years was
out. “That’s a fact that never gets published,” she said.
Managing wholesale compliance, she — and others — learned the
idea was to produce as many loans as humanly possible. Bayer, being the
company’s “rules person” for loans brought in through its broker
network, didn’t think compliance was being taken all that seriously by
Mozilo and his senior management.
Mozilo, for his thirst for market share, had followed Arnall’s
company (Ameriquest and Argent) into the business of originating
stated-income loans (where home buyers state their incomes and the
lender believes them as long as their FICO score checks out).
Stated-income loans came in two types: prime and subprime. But when it
came to the “A” paper credit quality stated-income loans, Fannie Mae
and Freddie Mac (for the most part) wouldn’t touch them because of the
lack underwriting. Countrywide also followed the crowd in originating
another popular loan of the 2004 to 2007 period: payment option ARMs
(adjustable-rate mortgages) (POAs), a product where the consumer was
offered four different payment plans each month. One of these payments
artificially low by delaying large interest payments each month, thus
adding new debt onto the loan amount. It was what some lenders called
an “I’ll worry about it tomorrow” option. By 2006 Countrywide was the
largest pay option ARM lender in the nation, originating $11 billion
worth a quarter.
“When you go for quantity, quality is what you give up,” said
Bayer. “To get volume, you lose quality — that’s what they did.” When
she arrived in 2004, the company’s compliance department was in what
she called “complete turmoil.” When pressed further, she said
Countrywide wasn’t doing its homework when it came to underwriting.
“They were relaxing credit guidelines.”
She said that inside the company compliance staffers had a word
for stated-income loans: “liar loans.” Bayer said the only ones in the
company who called them that were members of the compliance staff. No
one in the firm used the phrase, at least not within earshot of the
production chiefs.
Matt Padilla, from the OC Register, has a book out on the mortgage mess. It was co-written with Paul Moulo of National Mortgage News, but I can tell from the writing and the content that Matt did the majority of the work for book. I had previously mentioned the book in blog post and quite a bit on the forums, and since then many other MSM sources have written some stellar reviews. Many of the reviews are mentioned on the book’s website, as well as my hat tip to the book. Also, the WSJ recently reviewed it along with Mark Zandi’s new book. Now that I have finished the book, I can finally do my own review.
I promised Matt that I would be honest on what I thought about the book, and I have to say… I loved it. I am not sure what I liked best about the book; whether it was the both deep and broad historical perspectives it covered, or the way that that he made some of the more complex issues of the mortgage world easy to understand. The book’s central theme is Angelo “The Tan Man” Mozilo, and the rise and fall of Countrywide. However, it goes into detail of the beginning of subprime and Peter Cugno’s rise in Beneficial Finance in the 60s. Back then they would loan people a couple hundred bucks, and if you didn’t pay, Peter would be at your office asking where his payment is. Back then loan officers, like Peter, not only orginated the loan, but they serviced it and collected on it. That and they wouldn’t lend money on a house above 60% LTV.
Matt goes into detail of the failed subprime shops of the late 90s, during the Russian currency crisis and Long Term Capital Management’s failure, and how they were using “gain on sale” accounting rules, that ultimately lead to their failure. New Century was around then too, but they were bailed out by US Bank. US Bank made a good bet then, and it’s a good thing no one, like US Bank, was willing to make a bet like that in this bubble. He also goes into how Countrywide survived that time, and how the Tan Man had some choice expletives about the poor performance of those years. It comes to light, how the Tan Man liked to drop the f-bomb, as any true Bronx native would, and how he was not shy to tell people how he felt about his competition. About this time is when the Tan Man decided to expand the use of mortgage brokers. He touches on the death of the banks keeping loans on their books during the S&L crisis, and how this became the birth of the use of mortgage brokers. He brings to light some of the early subprime shops of the early 90s, and how many people from that era became some of the leaders of what subprime was to become. He has an entire chapter on Roland Arnall of Ameriquest and Argent, and how the Tan Man was forced to compete with him. He shows how Arnall was the opposite of Mozilo, in trying his best to remain under the radar.
REITs? They’re like pigs with lipstick. – Angelo Mozilo. One of the greatest things about this book, is that it separates the difference between a banking institution (like WAMU), and a non-banking institution (like New Century). One of the main reasons for the numerous failures of non-banking institutions is the fact that they were set up to be a REIT. The problem with this is that a REIT must pay out most of all of its profits in the form of dividends, and not save any of their profits for the bad times. Ironically, they drank their own Kool-Aid, in not saving for the future like most of their borrowers. Friedman Billings Ramsey (FBR) was main player preacher of converting these non-banking institutions into REITs, and taking them public or converting them if they were public. Many of the non-banking institutions FBR convinced conned into converting into a REIT, has gone BK, including New Century. Or, one could say that in a Ponzi scheme like industry, when there is no more money, they also have the least amount of liability, and can and will be shut down very quickly. This is where it leads to the beginning of New Century, and some of the players from the 90s of Guardian Savings, Plaza Mortgage, and Long Beach Mortgage from the previous chapters. This is when (the 90s), and where (Irvine) subprime truly began.
It dives into the conspiracy of Merrill, David Einhorn, and Bear Stearns’ rise and eventual fallout from the mortgage world. The details of Bill Dallas’ sale of First Franklin, to the funding of warehouse lines and 20% ownership from Merrill in Dallas’ OwnIt mortgage, shows how it comes full circle. Then, the message from Lewie Ranieri, the co-creator of the MBS security, comes to fruition. Anyone who has read Liars Poker, will know who Lewie Ranieri is, and his personality. The details of the underwriters, of the firms (like Bear Stearns) buying the mortgages from New Century, are downright frightening. Amazingly, when the book went to print, it had intimate knowledge of Ralph Cioffi (the manager of the Bear Stearns hedge funds that went broke) and the details of the failures of his hedge funds before the indictment. The fallout of Bear Stearns can be traced to this one big screw up.
The details of the interviews, er non-interviews from the Tan Man during the collapse of Countrywide are just a great reminder of how slick he thought he was. His arrogance shines through even brighter than his bright tan by some of the things he said during financial reporting conference calls. Then, the details of how Ameriquest and Argent screwed over a suburb of Cleveland show how the lawsuits start rolling. This is where the rating agencies start getting blamed, and how they denied any wrong doing. The excuses really begin flying now.
I highly recommend this book. This book is for anyone who is an industry insider that, like myself, that has intimate knowledge of it and even know some of the people quoted. This is also a book for anyone who wants to understand WTF happened, and who, when, why, and what they did to make all of this happen. No matter whom you are or what you know of the industry, you will end up learning something from this book. The only other book I recommend as highly on how we got into this mess, and for a more economic fundamental and psychological perspective, is The Great Housing Bubble by IrvineRenter. So, go get your copy at Amazon now, and let me know what you think. I have a thread in the forums up to discuss the book, so feel free to chime in.
Today’s featured property is a typical victim of the mortgage game. The owner bought at the peak with a toxic mortgage with the hope that these “innovative” products would always be around. They aren’t. Therefore, they next buyer could not leverage up as much as buyers could in 2006, and prices fall — a lot.
Beds: 5 Baths: 3 Sq. Ft.: 2,420 $/Sq. Ft.: $370 Lot Size: 5,800 Sq. Ft. Property Type: Single Family Residence Style: Mediterranean Year Built: 1995 Stories: 2 Levels Area: Westpark County: Orange MLS#: S538971 Source: SoCalMLS Status: Backup Offers Accepted On Redfin: 8 days
Beautiful, upgraded home on larger corner lot!!! Great location in
lovely Westpark, rarely on market! Vaulted ceilings! Spacious home has
downstairs bedroom with full bath. Gorgous marble flooring and generous
use of marble in bathrooms & on fireplace. Custom moldings, new
carpet and new paint. Inviting backyard with covered patio is
professionally landscaped.
This property has been featured before. It was for sale last summer. It certainly appears to be a huge, high-end loss in Westpark. If this property sells for its asking price, the total loss on the property will be $458,700. This appears to be a corporate relocation, so there is no telling who will ultimately absorb the loss, and it is perhaps even more difficult to figure out who is to blame…
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The story hit the news From coast to coast They said you beat the girl You loved the most Your charitable acts Seemed out of place With the beauty With your fist marks on her face Your buddies all stood by They bet their fortunes And their fame That she was out of line And you were not to blame
Six hundred thousand doctors Are putting on rubber gloves And they’re poking At the miseries made of love They say they’re learning How to spot The battered wives Among all the women They see bleeding through their lives I bleed– For your perversity– These red words that make a stain On your white-washed claim that She was out of line And you were not to blame
I heard your baby say When he was only three “Daddy, let’s get some girls One for you and one for me.” His mother had the frailty You despise And the looks You love to drive to suicide Not one wet eye around Her lonely little grave Said, “He was out of line girl You were not to blame.”
I find HELOC abuse stories fascinating in a train-wreck sort of way. I like to try to imagine the thought processes and belief system that would allow someone to do something so incredibly foolish. Spending your home equity is not a one-time event that could be the result of a single, rash decision, it is the cumulative effect of numerous bad decisions made over a long period of time. Each refinance or equity extraction was the result of a rational thought process with some deliberation. The fundamental belief must be that house prices always go up, therefore additional equity will always be available to spend. If you didn’t believe that, you might pull the money out to screw the lender, but you wouldn’t do it knowing it might cause you to lose your house. The second fundamental belief must be that interest rates and payments will always decline. When you take on more debt, you have to make larger payments to service it, unless of course, you continually refinance with an adjustable rate mortgage in a declining interest rate environment. It is possible some of these people believed their income would rise to make the larger payment as well, but the overriding belief had to have been that low interest rates and serial refinancing would always be available. All of these beliefs are wrong, and the market is driving this point home (literally) right now.
It is the end-game planning I can’t quite get my head around. When was this supposed to end? If people are perpetually spending their equity increases as income, when they finally sell the home, they have no equity. I suppose if you really believed house prices always go up, the house could serve as a perpetual breadwinner that would provide income for retirement and beyond. I guess it really doesn’t make much sense to rent when you can buy a house for no money down and live off the appreciation forever. Did people really believe that was possible? If you look at the behavior of HELOC abusers like today’s featured property owners, you would have to conclude they believed all of those absurd things, and so did a great many others in California as well.
Highly desirable one story single family home in great area of
Dierfield Park. Lots of upgrades including best quality new roof. New
tiles and baths with marble shower areas & glass doors, new
cabinets & granite tops. Top of the line kitchen appliances &
granite counters, recessed lighting. Marble family room fireplace. New
garage door, solid wood front door. Close to park, association pool
& play ground. You can enjoy 6 assoc pools, spas, tennis courts,
picnic areas & etc. No Mello Roos, low tax, and only $45
association dues. Walk distance to award winning schools. just a few
minutes to 5 & 405 freeways. It’s in the heart of Irvine, close to
shopping centers, movie theaters, restaurants, day care & schools.
You will enjoy this beatiful quiet area.
Dierfield? beatiful?
How do you like the staging of the photographs? You can just imagine the realtor showing up with some plants to try to hide the mess. Is it too much of a bother to clean up the place before taking pictures for the MLS?
This one requires the bullet-point recap:
On 1/8/2004 the property was purchased for $465,000 with a $372,000 first mortgage, a $46,500 second mortgage and a $46,500 downpayment.
On 3/11/2004 the owners opened a HELOC for $92,000 and withdrew all their downpayment plus another $45,500.
On 9/20/2004 they refinanced with a $552,000 first mortgage.
On 8/16/2005 they opened a HELOC for $38,000.
On 12/8/2005 they opened a HELOC for $150,000.
On 6/8/2006 they refinanced with an Option ARM for $650,000 and a second mortgage of $115,000.
Total property debt of $765,000.
Total mortgage equity withdrawal of $393,000 over a 2 1/2 year period.
Those owners were livin’ large for a few years there. I wonder how they are adjusting to life without free money…
For the record, if this place sells for its asking price (doubtful), the total loss on the property will be $130,500 after a 6% commission. One interesting note: the second mortgage being wiped out is listed as being insured by either Freddie Mac or Fannie Mae. No wonder there is talk about having to bail them out.
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I work all night, I work all day, to pay the bills I have to pay Aint it sad And still there never seems to be a single penny left for me Thats too bad In my dreams I have a plan If I got me a wealthy man I wouldnt have to work at all, Id fool around and have a ball…
Money, money, money Must be funny In the rich mans world Money, money, money Always sunny In the rich mans world Aha-ahaaa All the things I could do If I had a little money Its a rich mans world
A man like that is hard to find but I cant get him off my mind Aint it sad And if he happens to be free I bet he wouldnt fancy me Thats too bad So I must leave, Ill have to go To las vegas or monaco And win a fortune in a game, my life will never be the same… Money, Money, Money — ABBA
The journey begins with curiosity
In Penny Lane there is a barber showing photographs
To the centre of the city where all roads meet, waiting for you
I work all night, I work all day, to pay the bills I have to pay