Wednesday, October 12, 2011

Irvine Housing Blog

Irvine Housing Blog

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High-end shadow inventory clearance

Posted: 12 Oct 2011 03:30 AM PDT

Lenders are beginning to clear out the high end inventory lurking in the shadows.

Irvine Home Address ... 29 ANTIQUE ROSE Irvine, CA 92620
Resale Home Price ......  $1,014,000


I thought things had changed
I thought things looked plain
I thought I could see the light

But now, now I know
I saw the distant glow
I heard a distant whistle blow

Whitey -- The Light at the End of the Tunnel Is a Train

Back in 2009 and 2010 when the combination of tax credits and federal reserve supports engineered a false rally, and many people believed the housing crash was over. They thought they could see the light at the end of the tunnel.

Of course, the housing crash was not over, and the crisis in the housing market still has not been resolved. The problem everyone wanted to ignore (besides valuation) was the huge inventory of delinquent borrowers squatting in shadow inventory. Without this overhanging supply, perhaps the market would have bottomed in 2009, but with an abundance of homes waiting for a spark of demand, prices are more likely to go down than go up, particularly at the high end.

High end shadow inventory coming to light

Observers of the high end market often see what they want to see. Most homeowners in these price ranges truly believe the reason their prices haven't decayed to date is because everyone is rich and there is little mortgage distress. Nothing could be further from the truth.

High end home prices have benefitted from a lack of inventory. Lenders have been unwilling to foreclose on high-end homes because the losses are too large for them to absorb. It's easier for lenders to go after the low hanging fruit and clear their files by foreclosing at the low end first.

The hopelessly overextended pretenders who often borrowed more than $1,000,000 to buy high end homes have been allowed to squat. Rather than being the safe haven of the rich, high end homes have higher delinquency rates than their more modest bretheren.

Banks have been extending the mortgage limbo for high end squatters to delay taking write downs and to manage MLS inventory. Banks can't let the squatting go on forever. Eventually, they will need to foreclose on these properties, throw the squatters out, and resell them to recoup what they can of their capital.

Think about it from a bank investors point of view. People invest in banks so banks can loan money and make a profit from the interest. If banks stop doing this and instead simply give away the investor's money, won't the investors revolt? Do you think the poor performance of banking stocks may reflect that fact? Imagine if I were to tell my fund investors I was simply going to allow squatters to stay in the properties I purchased at auction. Would they be happy? I don't think so.

Banks are also getting more desperate for capital. Bank of America is cutting costs and ramping up its foreclosure activities because it needs the money. They can no longer afford to subsidize the squatters living in the bank's houses.

Today's featured property is an example of the bank's desperation. They bought this house last October, and they held it off the MLS through the prime selling season, and they are only now listing it for sale -- at the worst time of the year to find a buyer.

The sordid past

The orginal buyers were hopelessly overextended. They paid $1,434,000 on 11/3/2005 using a $1,145,000 first mortgage, and $145,000 HELOC, and a $144,000 down payment. Since you can't deduct the interest on a loan over $1,000,000, the only people who borrowed more than $1,000,000 did so because they had to.

They refinanced again on 1/4/2007 with a $1,293,750 Option ARM, a $86,250 stand-alone second, and a $250,000 HELOC. They quit paying sometime in mid 2009.

Foreclosure Record
Recording Date: 12/04/2009 
Document Type: Notice of Sale

Foreclosure Record
Recording Date: 09/02/2009 
Document Type: Notice of Default

The got to squat in luxury for about a year and a half before the servicer, Wells Fargo, foreclosed on them on 10/12/2010. I can't be certain why Wells Fargo didn't immediate sell the house, but the most likely reason is MLS managment. They didn't feel there was a market for this property then. Of course, the market has continued to slide, and now the recovery on this bad loan is going to be even less. Perhaps the prospect of continuing declines is prompting them to sell now before things get even worse.

For whatever reason, this property is now for sale at the worst time of the year, and the loss is going to be enormous.

This property is available for sale via the MLS.
Please contact Shevy Akason, #01836707 

Irvine House Address ...  29 ANTIQUE ROSE Irvine, CA 92620
Resale House Price ......  $1,014,000

Beds:  5
Baths:  6
Sq. Ft.:  3900
Property Type: Residential, Single Family
Style: 3+ Levels, Tuscan
View: Mountain
Year Built:  2005
Community:  Northwood
County:  Orange
MLS#:  S675997
Source:  SoCalMLS
On Redfin:  1 day
Must see with a great value. Upgraded home in desirable Northwood Arbors tract. Gated with incredible HOA amenities. 5 bedrooms - bonus room upstairs and 1 bedroom/bath plus powder room is downstairs, Gourmet Kitchen with Marble Countertops and center island. Very desirable floor plan. Upstairs balcony overlooking large front yard. Large backyard with professional landscape - firepit, custom water feature, outdoor kitchen/barbeque area, and gazebo type patio cover. There is a two car garage plus a one car garage (total of 3). 
Proprietary IHB commentary and analysis 

Resale Home Price ......  $1,014,000
House Purchase Price … $1,651,495
House Purchase Date .... 10/12/2010

Net Gain (Loss) .......... ($698,335)
Percent Change .......... -42.3%
Annual Appreciation … -47.8%

Cost of Home Ownership
$1,014,000 .......... Asking Price
$202,800 .......... 20% Down Conventional
4.03% ............... Mortgage Interest Rate
$811,200 .......... 30-Year Mortgage
$210,847 .......... Income Requirement 

$3,887 .......... Monthly Mortgage Payment 
$879 .......... Property Tax (@1.04%)
$325 .......... Special Taxes and Levies (Mello Roos)
$211 .......... Homeowners Insurance (@ 0.25%)
$0 .......... Private Mortgage Insurance
$145 .......... Homeowners Association Fees
$5,447 .......... Monthly Cash Outlays

-$1009 .......... Tax Savings (% of Interest and Property Tax)
-$1163 .......... Equity Hidden in Payment (Amortization)
$285 .......... Lost Income to Down Payment (net of taxes)
$147 .......... Maintenance and Replacement Reserves
$3,707 .......... Monthly Cost of Ownership 

Cash Acquisition Demands
$10,140 .......... Furnishing and Move In @1%
$10,140 .......... Closing Costs @1%
$8,112 ............ Interest Points @1% of Loan
$202,800 .......... Down Payment
$231,192 .......... Total Cash Costs
$56,800 ............ Emergency Cash Reserves
$287,992 .......... Total Savings Needed

I hope to see you tinight at JT Schmid's Restaurant & Brewery, 2415 Park Avenue, Tustin, CA 92782, (714) 258-0333.IHB Presentation Night

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