Tuesday, January 17, 2006

Reader shares an FB story, and in IMPORTANT question!!

I have steadily been receiving more and more e-mails from readers...keep them coming! I have had several readers relay FB stories to me, and many others have offered words of encouragement or other beneficial information. I'll start with a potential FB story and finish up with an interesting question that I think will spark some good commentary. That said...let's get moving!

This particular story comes from a reader. Apparently they know a couple in Orange County who just signed to purchase a 2 bed/1 bath condo in Santa Ana for about $425K using a 2/28 I/O ARM to 100% financing (80/20). The reader assumes they had to use stated income, but didn't ask. Things get tricky as the borrowers asked the reader if they could determine if the property taxes were included in their monthly pament. They were told by the loan officer that the taxes were included in the payment. After looking through the paperwork, the reader found the loan summary where it says County/City taxes, there was N/A filling in the blank. The reader couldn't believe the situation their friends were getting into. They were buying a place with 100% financing and an interest only payment, and their taxes were not included in the payment as they had originally thought. Their friends, like many others, are/were under the impression that they can just refinance if they get in trouble down the road. The reader told them they MIGHT be able to refinance later, but there are no guarantees. The reader then asked me if there is any recourse once they sign the dotted lines? Is there a grace period in which they can get out of the loans?

It sounds like these borrowers just got in over their heads. The sad thing is that they aren't out there to flip properties, they are just looking for a place to live. It sounds like they bought so they wouldn't be 'left behind'.
Unfortunately, once they sign, they don't have much recourse on a purchase transaction. On refinances, there is a 3-day recision period where the borrower can 'get out of it'. In this case, once the docs are signed, there is very little recourse they have to get out of the transaction. It is situations like these that I want people to avoid. Hopefully things will work out for these borrowers and they will be able to afford to keep their home once they move into it AND when the loan adjusts in 2 years. I just hope they find a way to pay the $400 a month taxes that they thought was included in their 'payment'.

That said, can somebody PLEASE give me some data that suggests how property can continue to go up?!?!? I'll post some quick data why I don't think it can continue to go up:

- Yesterday I posted the stats from San Diego county. From Dec 04 to Dec 05, property went up a whopping 4.8%. BUT, the decrease in value from November to December 05 was the single largest decrease in the 18 years that they have been keeping records. If you look at the stats from 1989 and 1990 right before the last bust, here were the appreciation rates: 16.6% in 1989 to 3.3% in 1990. This time around we had 21.1% in 2004, and 7.6% in 2005. Looks pretty similar to me...

- Today, we have 2 articles that came out in the OC Register: one article states that there is an entire zip code where every purchase loan was an ARM and in Santa Ana where 86-88% of the loans were ARMs (that is where our borrower above was buying). In another article, the tax collector stated that 46,000 residences have yet to pay their taxes due on January 7th. This is a 15% jump from last year, and the highest number since 1995.

- We have inventories in San Diego that are up 10% since January 1st, and 5 times what they were a mere 18 months ago.

- Today there was this article from the USA Today that states that 46% of first time homebuyers are using 100% financing.

Let's take a moment to look at a few things. Those of you that have been reading this blog for a while know that lots of people are using ARMs and 100% financing to buy property. Take the information above, with all the other information you have heard, along with the info I posted where 82% of the purchase loans in California are either I/O or neg-am, and answer this question:

Tell me how many of the 55,366 houses that were bought by people in San Diego during 2005 are in a good spot. Sure, I don't know all the specifics. I know that many people traded up, put money down, and can afford their house. I'm asking YOU, take a guess? I don't know! If you had to put your money on the table with a bet, where would you put your money?? I think quite a few of these 55,000 people are going to be in trouble in the next few years, especially if they bought with I/O, neg-am, or 100% loans.

But knowing that 82% of the purchase loans in Ca in 2005 were I/O or neg-am, knowing that people are NOT putting money down to buy houses, knowing that the appreciation ranged from -3% to 8% depending on when you bought last year, how many of those people do you think are in a 'good' place after buying what looks to be at or near the 'top of the market'??? How many will be in a good place when their ARM adjusts??

Again, I don't know the answers to these questions. Many of the statistics needed are nearly impossible to gather. I only know the information I read and what I see on a daily basis. I know that incomes haven't doubled in the past 3-5 years...but most property has. I know that rates are going up now...and that is bad news for ARMs. I know that massive appreciation was saving people....now it's not there. I see people not paying credit card bills, I see people not paying their taxes, I see inventories jumping, I see 'reduced' signs....so PLEASE, what am I missing. How are we going to get 10% appreciation this year?!?!?

I look forward to the answers....



Blogger SoCalMtgGuy said...

Just to clarify, if they had neg-am's they probably were not 2/28 or 3/27. 2/28 and 3/27 are the subprime designations for ARMs fixed for 2 or 3 years.

Either way, neg-am or ARM, those borrowers will be hurting in the future.


1/17/2006 11:53 PM  
Blogger foreclose_me said...

Looking at it the other way, does it really matter how F'd you are?

When you're F'd, you're F'd.

The real question is who are the people holding the note? God, I hope it is rich foreigners. A housing crash will be bad enough.

1/18/2006 1:42 AM  
Anonymous Anonymous said...

But...but...real estate only goes up...less demand = higher prices...it goes to eleven.

- Nigel Tufnel, RealtorĀ®

1/18/2006 4:21 AM  
Blogger Tom Gullo said...

I'm as pro-capitalist, pro-freedom as the next guy, but the current state of housing is awful.

People need affordable housing. The fact that our government, led by Bush is doing nothing is sad.

1/18/2006 5:56 AM  
Blogger Tom Gullo said...

I see much rules / regulations / legistlation in the tea leaves for the future out of this mess.

I'm all for a small government, but we need an EFFECTIVE government body that can regulate the mortgage industry.

And there are people getting paid a lot of money in government right now, that see the problem and are doing nothing.

1/18/2006 5:59 AM  
Anonymous Anonymous said...

I was an Loan Officer (Mortgage salesperson) in the late 90's for a short period of time.

Back then I saw a great deal of fraud and decit... probably pales in comparison with today.

I had been wondering if the mortgage companies would seperate taxes out of the payment and then not really tell the borrower about it (back then we quoted the PITI to the borrower and had it collected in escrow). They would have the borrower sign that they are aware of this... but if you've been in that business you know how easy it is to get people to sign things they haven't read.

People are stretching into home values/mortgages so sight that they have moved beyond no-down-payment/100% financing, interest only/negative-amort. ...stretched to the point that they can only "afford the monthly payment" if it doesn't include any taxes.


1/18/2006 6:22 AM  
Anonymous Anonymous said...

regarding case #1, I know someone like this. He is a major drug addict. He has been laid off (fired), and is now spending his home equity and retirement accounts.

When someone who is an obvious drug addict can get a 100% IO loan, credit is definitly too loose.

1/18/2006 8:41 AM  
Blogger SoCalMtgGuy said...

Bubble butt...

I agree. I don't think the mortgage industry will be the same after this mess is uncovered.


People have a choice with doing IMPOUNDS. An impound account is where you make one payment a month that includes your mortgage along with taxes and/or HOA's mello roos, etc. The escrow account takes these monthly payments and makes the big payments 1-3 times per year when they are due. THe escrow account is NOT part of the mortgage.

Instead of paying 6000 in taxes in one lump some, many borrowers will set up an escrow account and pay $500 a month the whole year.

I hope this makes some sense, and clears some of the confusion.


1/18/2006 9:52 AM  
Blogger David said...

"How are we going to get 10% appreciation this year?!?!?"

[start sarcasm] Wealthy foriegners. The Chinese have a trillion in currency reserves. The could buy and price appreciation could go up another 10% [ end sarcaasm ]

In all reality 10% price appreciation is out of the question for 2006.

Bubble Meter Blog

1/18/2006 10:03 AM  
Blogger SoCalMtgGuy said...


Yes, most select it at closing, or you can start one anytime.

You might lose a little 'interest' along the way, but most like the piece of mind of not having a 4000-10,000 lump some tax payment due.

It all depends on the person and their financial situation.


1/18/2006 10:26 AM  
Blogger Silver Lightning said...

$26 hour combined? It seems like a $200,000 house is more in line. Well once the lenders start losing their butts things will tighten in a hurry.

1/18/2006 11:07 AM  
Blogger SoCalMtgGuy said...

Thanks Boulder Bo...

If you get a chance...shoot me an e-mail.




1/18/2006 11:47 AM  
Blogger Rob Dawg said...

Boulder Bo has the right idea. I also wonder if the game of "hot potato" will catch a bunch of FOs (F@#ked Originators) holding some really bad paper. I also wonder about some of the front line brokers if they decided to get into the mortgage holding business on the side. You know, keep a few loans and live off the float. Then I wonder if there's been a little bit of "private placement" for either the very best or very worst paper. No way to tell but given the general ethics I suspect this will make a lot of these front line lenders risky business.

1/18/2006 12:31 PM  
Anonymous Anonymous said...

>>If you don't pay your property taxes, what is the government recourse? What happens if a lien is put on the property?

* * *

Of course, I fully expect governments to wimp out and not take the hard line. That's a shame.<<

Generally speaking, the government has first priority to foreclose on your house if you don't pay the taxes. The process is usually quick and unforgiving. They may take a while to get around to it, but they always get around to it eventually.

If the lender forecloses, the government gets paid first out of the sale proceeds. That's why lenders require escrow holdbacks. I don't know about California, but in Arizona they mostly still do, even for conservative loans.

1/18/2006 3:00 PM  
Blogger SoCalMtgGuy said...

I don't think it was your lender that failed to pay the taxes. The impound account disburses your money and pays the mortgage, taxes and insurance.


1/18/2006 5:14 PM  
Blogger SoCalMtgGuy said...

Yeah, you are right. I'm so used to being on the 'sales' side of the business that I forget sometimes about the 'servicing' side of the lender.

Been one of those days...my bad.


1/18/2006 6:14 PM  
Blogger SoCalMtgGuy said...

I have seen lots of properties with tax liens. Usually the lein just sits there if it is not a huge amount until the property is refinanced or sold.


1/18/2006 7:32 PM  
Anonymous Anonymous said...

I work for a nonprofit that assists clients throughout the country to avoid foreclosures. In many instances I find that, outside the SF Bay Area, homebuyers are getting in too deep by purchasing the second home believing they can cash in on the "boom."

For people in the SF Bay Area, I find that those who are desperate to buy their first property are utilizing methods that are clearly detrimental but the belief is that "we/I can manage on ramen and PB&J for a while."

It is really sad to see people who, probably were in the stock market tech train wreck, are now possibly in the real estate typhoon.

1/18/2006 9:16 PM  
Anonymous Anonymous said...

I'm all for a small government, but we need an EFFECTIVE government body that can regulate the mortgage industry.

You want an effective government body? Oooh, oooh. There it is! Over there between the unicorn and the centaur!

1/18/2006 9:18 PM  
Blogger moonvalley said...

need 2 leave.....
I shouldn't be reading these posts before bedtime, even if I am planning onstaying up for several more hours...they're waaaay too scarey for me..makes me want to shut off the computer and go watch Freddy Kreuger

1/18/2006 10:08 PM  
Blogger moonvalley said...

need to leave ca.....
Ahhhhhhh!!!! Scarey strories..lalalalalalala...
actually I just heard a horrible one myself on the phone.
I was talking to an old friend in LA, who just sold her house and is doing incredibly stupid things with the money seeing as she's out of work, getting divorced etc...anyway, sems as though her neighbors' sons have bitten big on LV real estate and have sold their business and bought lots and lots of Vegas investment properties. She got very quiet when I told her about what's happening with Vegas RE.

1/19/2006 12:35 AM  
Blogger moonvalley said...

we are both too addicted to this thing.
Alas, you are correct sir! I can't seem to tear myself away from this and the other RE blogs. I looove Planes Trains and Automobiles!! I followed the link on the story in the Charlotte paper about all the homes in one subdivision that have been foreclosed and so I decided
to check out what they're renting for....
I was stunned as to why anyone would bother to stress and buy when they could have o ne of these save money and rent!!!

1/19/2006 1:25 PM  

Another story

3/08/2013 7:42 PM  

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