Monday, September 28, 2009

The Westside Wildcard

Loan Recasts are indeed, the Westside Wildcard. Exactly how many people that purchased homes in 2002-2007, were a result of Interest Only or Option Arms that recast in 5-7 years? I have a feeling, the most popular product was the 5/1 Option Adjustable Rate Mortgage, that had a minimum payment and was negatively amortized. This means, people could have gotten into a property with very little down and a minimum monthly payment. Their hope was they could re-finance before 5 years. No such luck, when your loan is worth more than the value of your house. Unfortunately, after the initial 5-7 years of "teaser" payments, they jump to what it should have been all along. Those monthly payments can double, while the property continues to lose value.

The key questions are: How many Westsiders are in this precarious loan position? and What %, will just walk away? The beginning of this next foreclosure wave is headed for the mid to high level tiers and is believed to begin this December or January. If anyone has access to this type of loan information, it is as good as gold.


Ozro said...

I know of *so* many yuppie / 30-somethings who are leveraged to the gills.... former DINKs (Dual Income, No Kids (Yet) ) who have a household income of $150K who are now screwed.

Let me explain the scenario that will play out over & over again.

5 years ago: bubble mentality, Mark & Mindy each earning around $75K in a PR-type job, no kids, "real estate is never a bad investment" mentality. They dive into a 5-year Option Adjustable Rate Mortgage.

Over the 5 years, they upgrade the Jetta to a C-class Mercedes, buy 2 50" HDTVs & lots of designer furniture, eat out frequently at the coolest LA hangouts, etc... On top of that, their home goes down in value, they have one (or two) children (remember this is a 5-year period), and Mindy gets laid off.

Now their expenses have skyrocketed (ask anyone with kids), their home value is down $300K and their income is cut in half.

Is this *my* problem? It sure as hell better NOT become my problem!

But what will they do! Let me tell you from the 4 M&M stories I've seen play out here in Palisades & Brentwood & Malibu. They'll walk. It's a practical decision. 3 of the 4 situations have resulted in "key mail". The 4th is struggling & resisting, but I fear the outcome will be another episode of "Hey Bank, You Just Got Another Home!"

When people don't have to put 20%+ down, they have no skin in the game, nothing to lose other than a few years of bad credit. Hmmm... 7 years of difficult loans vs. swallowing $300K of debt? That's pretty straightforward for most people.

Shame on the borrowers. Shame on the lenders. And shame on the gubmint for sticking us with this trainwreck!

Anonymous said...

I agree 100%
The above scenario is very very very widespread all over Santa Monica.

The real issue is not that the banks are getting hundreds of houses in Santa Monica back, but rather that the banks are holding them off the market - these houses are being rented, not sold

So the supply of houses for sale is artificially low right now

Anonymous said...

"If anyone has access to this type of loan information, it is as good as gold."

You should ask Jim the Realtor over at A few months back, he surveyed the the I/O neg am loans in coastal san diego. Turns out, a mere 5.4% of the homes had such loans.

The low number of i/o neg am, just absolutely stunned his doomish readership. Like here, they were certain that the coast was filled with no money pretenders who were about to default en masse.

One doomer summed it up best - learning how few i/o option arms were about to hit the coast was like a "kick in the nuts".

Anonymous said...

I'm sure the amount of neg am I/O loans is probably low, but the amount of plain old I/O ARM's is huge. Everyone I know who bought used one. Usually 5/1 80/10/10. They're screwed if they haven't refied, which they mostly can't do now because the LTV is too high.

The interest rate reset probably won't hurt, but the fact that these now become fully amortizing 25 year loans will. It's gonna be a mess.

Anonymous said...

How much does the payment jump really ?

I mean if you have an interest only loan at 5% and it turns in to an amortizing loan at 5% how much does payment jump?

Anonymous said...

I'm not following the conversation with all of the abbreviations. I understand what a 5-year Option Adjustable Rate Mortgage is (thank you Ozro for including a full description) but I do not know what an "I/O loan" is.

If I understand, so far in this thread we are using a hypothetical/fictional couple, Mark & Mindy (should have been "Mork and Mindy" ;p ) to depict a hypothetically growing wave of homeowners who are underwater, have less income and have more expenses AND are facing higher mortgage payments.

Then another poster pops in and reports that an analysis in San Diego disproved the widely held doomsday, hyper-deflation, REO mania because the army of unfortunate families was more like the size of a 12 step meeting for over spenders anonymous. The fallout had market pundits siding with the doomsday scenario suffering from nut pain due to this realization.

But then the discussion took a turn with abbreviations, such as "I/O" that were then compared to the ARMs (spelled out earlier); this turn left me wondering: Is the doomsday scenario still possible, or is the "I/O" factor a final nail in its coffin? Tsunami of NODs/REO/Westside house price resets OR 12 step meeting?

Please advise. Thanks.

JBR said...


I/O ARM = interest only for the first few years (5/1 = 5 years, 7/1 = 7 years etc.) then the loan recasts to an amortizing loan for the remainder of the term.

80/10/10 = loan for 80% of value, 10% down, 10% second mortgage. *very* common tactic to avoid paying mortgage insurance with low DP.

for a 650k 5/1 loan, the payment would jump about $1000 a month when the loan recasts if the rate stays the same.

Anonymous said...

Thanks JBR! Can you also clarify what "neg am loans" means? (see Anon @ 1:03 PM above for context)

Anonymous said...

This is anon 1:03 (aka kick in the nuts). If I wasnt clear, I was speaking about 2 types of loans.

1. I/O = interest only ARM loans.

2. Neg Am = negatively amortizing Arm loans (also known as pay option loans).

Per the www.bubbleinfo site, these 2 groups together constituted a scant 5.4% of the entire SD coastal market with mortgages.

Given the doomish assumption that "everyone" was using some sort of loan product that would either reset or recast and cause a "tsunami" of foreclosed homes, the realization that only 5.4% of coastal loans were of this type was the "kick in the nuts".

I cant find the exact entry, but here is the site if you want to ask the moderator himself:

Anonymous said...

Only 5.4%? The subprime market was "only" $1T. This was 3% of the overall $30T of domestic non-financial debt before the crisis -- and look what that did.

Anonymous said...

Only 5.4%?

Yep - considering the doomish consensus was "everyone" and the most conservative domish estimate was 15%. to see it came in at only 5.4% was a kick in the nuts".

Anonymous said...

I agree. Everyone on this blog seems to think that Santa Monica is filled with posers that can't afford to own a house who actually stretched to buy a house.

That is not true. Santa Monica is filled with wannabee home owners but by and large they have not bought yet. Relatively few of the people who own homes are heading for foreclosure. And the foreclosures will mostly be among those that previously had two incomes in the household and today only have one. Not among the single people that bought.

Go to the area around the pier. How many of those houses do you think are heading for foreclosure ?

The West of Main lifestyle appeals more to single men. You have plenty of single men who hit it big who want "the ultimate bachelor pad" and buy West of Main for that reason.

Ever been to that neighborhood in the summer? there are literally hundreds of college girls from all over America that crash on and around that beach each summer. Add to that the college age female backpackers from Europe and you have a very good pickup scene for single males that own homes right there.

Check out the stats.

September 27, 2009 7:13 AM

Anonymous said...
Correct - "Dogtown" is now famous all over the world and young females, especially those making their gap year trip around the world, want to crash in Dogtown for at least a few weeks. For many Dogtown is their favourite spot in the USA.

Anonymous said...

" Everyone on this blog seems to think that Santa Monica is filled with posers that can't afford to own a house who actually stretched to buy a house. "

Actually, I'd wager that nobody on *this* blog really gives a rats ass about Santa Monica. Your post is just noise. Thanks.

Anonymous said...

Yeah enough with SantaMonica - more coverage of MarVista Palms!

Anonymous said...

What areas of Brentwood would you recommend for $1.0M to $1.3M?

Anonymous said...

Brentwood, Tennessee.

Anonymous said...

latesummer - Can you steer the conversation here to discussions of advantages and disadvantages of various high end neighborhoods on the West Side? I mean many of us are new to the city and want to understand where we should be putting in offers AFTER the crash.

I mean we get the message from you and the other posters here - loud and clear - do not put in any offers until prices hit bottom in 2010 or 2011. Trust me, we won't get tempted to jump in early. But while we wait for the bottoming can we discuss neighborhoods

Anonymous said...

I have seen listing is Brentwood for under $1.3 million. The area around Kenter has some. There are no truly bad neighborhoods in Brentwood, but I would avoid being too close to the 405. Any freeway expansion would hit you, plus there is more air pollution.

Anonymous said...

Drive by shooting yesterday in the poor area of santa monica (South of the 10)

Just goes to show - buy North of Montana to escape the gang bangas. Buy South of the 10 to be among them

SANTA MONICA, Calif.—Authorities say two people, including an innocent bystander, have been wounded in an apparent drive-by shooting in Santa Monica.
Santa Monica Police Sgt. Thomas Burgess says officers are searching for two male suspects who fled in a white pickup truck following the shooting Wednesday evening. After a brief vehicle chase, the truck was abandoned and the men ran on foot into a suburban neighborhood.

Burgess says the victims are hospitalized with non-life threatening injuries. One of the men, in his 60s or 70s, was an innocent bystander. The other, a younger man, was apparently targeted in the shooting.

Anonymous said...

Regarding where one should buy AFTER the "crash" or as I like to call it "a further correction of home prices" in 2 yrs or so really depends on how much you are willing to spend and how much down payment you have. Assuming the standard 20% and (150k-200k or so household income), you are probably going to be looking at moderate neighborhoods in Mar Vista and Culver City. This is a good area for ppl who do not want to live in the valley, tolerant of occasional crime in the neighborhood, tolerant of sending their kids to public school and like the accessibility to the beach and city life.

If you want to move up a notch to one of the better neighborhoods in Mar Vista or Culver City, then you are probably looking at around 600-700k.

If you can afford 750-1mm range, then moderate areas in Westwood are worth considering.

Westside is always going to be more expensive than the valley and out east. I know these prices may sound outrageous to some ppl especially natives who have lived on the Westside their entire lives, but just trying to be realistic.

Anonymous said...

I agree - the Westside will maintain a large spread over the bad neighborhoods.

Look at it this way - In 2005 a nice three bedroom in Palmdale / Lancaster was $450 thousand dollars and that same Huse in Culver City was $900 thousand.

the ratio between Palmdale / Lancaster and Culver City was two to one

TODAY right now that same house is $200 thousand in Palmdale Lancaster and $800 thousand in Culver City

The ratio today is four to one.

I am a bear - I Think prices are coming down. But I am sick to death of people coming and saying that a four to one ratio is not sustainable. I see that ratio persisting in to the future.

If you think Culver City is too expensive vs Palmdale, move to Palmdale

Anonymous said...

"I see that ratio persisting in to the future."

So if Palmdale gets to 100K, then CC should be at 400K right?

Anonymous said...

"I am a bear - I Think prices are coming down. But I am sick to death of people coming and saying that a four to one ratio is not sustainable. I see that ratio persisting in to the future."

I disagree that the ratio is sustainable. However I think its going to shrink in a way that no one here seems to ever consider with increasing values in the IE and stagnating values on the coast.

I see CC staying at 800K while palmdale, etc slowly creep back up from 200K to 250K, 300K, etc til a more sustainable ratio is found.

So the good news is coastal prices likely arent going up for any time soon. Bad news is they arent going down either...

Anonymous said...

Yeah everyone I know is waiting and hoping for the beach communities to come down in price.

Anonymous said...

good point: westside prices aren't going up anytime soon. There's no rush to buy in the next 2-3 yrs unless you must for various reasons, have the cash and cash reserves in case you loose your job.

For those with out the above, it would be a more than reasonable risk with no upside other than feeling good about having a house at this time.

Anonymous said...

I have a dicey mortgage and a beautiful home by the beach....but am out of work and my hubby took a lower paying job after he was laid of from his 400K year job.

I don't know how many people there are like me out there in my neighborhood in Santa Monica, but you can bet we are not talking about it to each other.

I think you may be right about things not improving due to loss of income and bad, risky mortgages.

Trying to wait til my kids are out of high school, but don't know if I can hold on much longer.

Anonymous said...

I am one of those "waiting for the coast to drop" people. I actually believe it will. Although L.A. started its decline in 1989, the coast held up well until 92 before bottoming in 94. I lived ON the beach so please spare me the garbage myths that it didn't. I saw it happen first hand.

My Devil's Advocate statement is that, if you believe that property values will hold here, you may want to buy sooner than later. The Fed will only hold interest rates artificially low for so long before they let them float. A weak dollar will cuase rates to climb. A 1% increase on your mortgage costs will add a lot to your cost of carry. And that's just 1%. Mortgages were routinely 7%+ in the early 90s.

Anonymous said...

I haven't seen any real sales analysis on this site for awhile. We have been waiting 2 years to get back in the market and decided to see what's out there because we have to move out of our current rental. we went to about 8 open houses in mar vista today in the $700,000 - 900,000 range - and each one had 20+ people signed in, and anything "decent" around $850,000 goes immediately (we talked to SEVERAL other potential buyers and realtors) and even complete crap is selling around $750,000 - in areas like Washington/Centinela where there is even no neighborhood services. What is this buying frenzy? we're pretty shocked. I'm starting to agree with others - that there is just more demand with supply.....this 2 year theory that all these loans are going to reset and force people to sell doesn't seem to be true.

Anonymous said...

@ 6:29. You're right, this whole loan reset thing might not happen, but it doesn't negate the fact that interest rates have been artificially held at historical lows by the government. Once they pull back (and at some point they will) rates will climb back up to historical norms forcing prices down. Not saying I think that prices will crash 50%, but just saying there are many more factors than just loan resets that must be taken into account...