Tuesday, February 27, 2007

'Running Right Into the Wall'

From KCRA:

With interest rates on the rise and the real estate market in a slump, adjustable mortgage rates are skyrocketing. After five years of an adjustable rate mortgage, one couple sold their home and wound up owing $15,000 after they sold.

Their real estate agent Mike Toste said they were paying the lowest option every month but they were adding money to their principal balance every month."
They get into these loans and they end up falling delinquent because they just can't afford them anymore. They're not going up $200 to $300 but $800 to $900 sometimes $1,000 a month," said Toste.

Real estate records in Sacramento County show more than 7,000 foreclosures in 2006 alone. "Out of about 310 active homes for sale in Antelope there are 57 homeowners that have their properties listed as short sales," said Toste.
"The unfortunate thing about that is people are borrowing from retirement accounts and exhausting every last penny they have to try and keep this mortgage current. They're just running right into the wall because eventually they're going to get to that result where they have no money. And then they're forced to sell their home."


TheObserver said...

Even though I make significantly more then the median income in Sacramento, I have been renting ever since I moved here 2 years ago. I was constantly hounded by friends and co-workers for renting and not buying, with everybody telling me the market will never go down, and I will eventually not be able to afford a home. Anybody who has taken a few accounting or economic classes should have seen this coming, as it was very apparent to me that a market crash was just around the corner.

I tried to worn one co-worker who knew she would be moving to in less then a year that it was not a good time to buy, that she was taking a big risk, but in July 2005, she paid $383,000.00 for a small 3 bedroom home, thinking she would sell if for a huge profit a year later. The co-worker put her home on the market in March of 2006, and has since moved to another state. The home is still on the market, and after 5 prices reductions she is now asking $350,000.00. I sort of feel bad for her, but she was very snotty when I tried to give her advice, as sound as it was, she kept quoting her real estate resident, who, like most, are both bias and seriously lacking any real understanding of economics.

I hope the people who have bought in the past 3 years or taken out a lot of equity loans fair well in the coming years, but the real estate market for Sacramento is far from done crashing, its going to take 5 to 10 years to reach the peak it hit in 2005, and a lot of people are going to lose homes and fall into serious financial peril in the next few years because they did not research properly and listened to real estate agents who may know how to sell a house, but have no clue about economics or the future housing market.

I am so glad I waited, I will have plenty of great choices of low priced homes in about 1 or 2 years!

Max said...

And on of the reasons:

Folsom-Based Mortgage Lender Shuts Down

Diggin Deeper said...

It might take many years for the real estate fallout to finally bottom to a point where value meets the buyer's ability to afford. Freddie Mac's new lending standards regarding subprime (qualifying subprime borrowers and ohter hybrid loan borrowers at what the rate could be rather than what the starting rate is) in effect makes that market completely nonexistent. I've read figures that stated approximately one third of all loans made in 2006 were subprime or hybrid that would fall into Freddie Mac's new standards. If Fannie Mae follows and these new standards come about, the real estate market loses a huge chunk of prospective buyers and that will pressure housing further. You can't take 20-30% of the buyers out of the market and expect prices to rise. In my opinion the very best one could expect would be prices stabilizing and remaining that way for many years to come.

Perfect Storm said...

Isn't that Folsom based lender the same outfit who bought Ivanhoe Mortgage that went belly up.

Plenty of fast food jobs for all the out of work loan officers.

Perfect Storm said...

Hey Diggin Deeper,

It is my understanding that Fannie Mae already has the new standards in place it is Freddie Mac that is following Fannie Mae's lead.

Subprime rest in peace.

AgentBubble said...

I looked in MLS and found the house in question in the article where the sellers "lost" $15,000 after 5 years with their adjustable rate. What the article didn't tell you is that the sellers bought the house for $177,000 in March of 2002 and refinanced for $297,000 in July 2005. Had they not treated their house as a piggy bank, they would have walked away with over $100K.

Another case--Back around October, a lady approached me about buying a condo. I had previously helped her parents buy and sell a couple houses over the years. I told her to wait and not buy anything right now. She didn't like my advice and used another agent to buy a 1300+ sf condo in Elk Grove for $309K. I just saw a 1400+ sf model for $269,900 in her same complex.

ralphk said...

'The Mortgage Bankers Association, from its member survey of mortgage applications for the week ended Feb. 16, released its Market Composite Index, which measured 606.6, down 5.2% on a seasonally adjusted basis from 639.8 a week earlier.'


'Bobby Mehta has resigned as chief executive officer of HSBC North America Holdings Inc., the U.S. arm of London-based HSBC Holdings.

His departure likely is the latest fallout from the company’s troubles with higher-than-expected bad debt in its U.S. mortgage operations.

The British financial services company announced Feb. 7 that it plans to set aside 20% more than analysts had been estimating for loan losses because of problems in its U.S. mortgage business.

The projected 20% increase in HSBC’s loan-loss provision brought that total to $10.56 billion for 2006.'

And the $100.56b might not be enough.

I know a guy that does repo's for Harley. He's picking up several a week. Lots from the Roseville area.

Smart. Take out a hugh HELOC. But only put a downpayment on the expensive toy. Now the toys gone and you're stuck with a large deficiency balance and an upward spiraling mortgage.

Marc said...

The recent flurry of activity in the Sacramento real estate market has some thinking that we're through the worst of this. I believe it will get worse before it gets better.

The recent tightening of underwriting in subprime and stated income loans will, as Diggin Deeper says, reduce the pool of potential buyers who can qualify. Reduced demand and swelling inventories from short sales and foreclosures will lengthen the absorption times and stretch this out.

That said, Sacramento's population growth and income growth are more rapid than the state as a whole. That growth will support long term home ownership.

My industry takes a lot of heat for shoving crappy loans down the throats of innocent buyers. There is truth to that allegation.

But let's not forget the greedy consumer--theobserver, your co-worker is a perfect example--who eagerly snapped up 100% stated income loans in order to flip houses and make their fortune.

Those who buy for the long term will be fine and have an opportunity to make great buys on good homes. Flippers beware

--Lending Clarity

Mark said...

A little off-topic, but I posted on Craigslist in the housing wanted section. I think this sums up things pretty well for the owners getting desperate and trying to rent out their stuff:

"College-educated, working couple with two small children looking to rent a 3/2 house in the 95758 area code. Will lease no longer than 6 months unless security deposit is negotiated downward. Must be ok with small pet. Non-smoking. We are excellent renters with references. We both work and are not on Section 8. If you want your house kept in impeccable condition and the rent paid on a timely basis, then we're your solution.

We're aware that many of you are trying to rent and sell at the same time. We must be specific about this in the lease, although for a break in rent, I am willing to allow the property to be shown inside.

It's not my fault that you bought at the top of the market and are getting desperate, if that is the case. We will not pay inflated rents to cover an unwise morgage decision you made. If you are a reasonable landlord, have references from previously satisfied tenants, and have owned the home for some time, you are our ideal solution.

We will not pay a penny more than $1100/month rent and $600 security deposit. These are fair amounts for the true rental values in this market. If you would rather get greedy and take a renter who may try to break the lease, grow pot in your house, or otherwise become a problem, that's your prerogative.

Thanks for your response on advance."

AgentBubble said...


I'm interested in the replies to that post....Please share any you receive. Very well written by the way.

Mark said...

Just one, so far, from a World Savings employee, apparently:

"Just had to say….Wonderful ad…Perfect in every statement"

Maybe she's a disgusted mortgage broker about to have a change of heart???

paranoid renter said...

the real estate market for Sacramento is far from done crashing, its going to take 5 to 10 years to reach the peak it hit in 2005,

If we go by normal real-estate cycles, it will probably hit bottom in 5 years and then begin its recovery so 10 years would be more accurate.

drwende said...

Marc -- you're going to get swamped by responses from landlords and realtors who didn't read a word of what you said. They'll try to get you to rent something utterly other, go rent-to-own, or buy immediately.

How do I know? I posted a less confrontational version of your ad when we needed to househunt fast in Phoenix. Out of the drek, I did pick the realtor who found us the condo we rent now -- rentals go in the MLS here, and landlords pay the commission to the realtor who finds tenants.

Please, please post the most entertaining responses!

Gwynster said...


I did exactly what you did. I specified I was looking for a long term lease, would not buy, etc.

The flood of email was nuts. I got people trying to get me to rent in Natomas, Elk Grove, and Laguna when I said I would not consider them.

I stated that 1300 for a 4 br was as high as I would go, everyone contacting me wanted more at first. When I told them no, they confessed that they had to ask more because the mortgage was a hefty nut for them to shoulder.

Of the properties I actually viewed, almost everyone was asian or central american and was living in the BA. It was weird, they were all cookie-cutter versions of each other. I'm not saying that the wasps weeren't equally as stupid in their investments. I just never ran into any.

We ended up staying where we are and got our current landlord to do some updating in return for our renewal. But we may leave the state (looking pretty sure at this moment) so I may have to bail on the lease come summer.

Have fun, it's pretty scary out there.

drwende said...

Gwyn -- Rest assured that I can find you dumb WASPs if you want 'em.

Gwynster said...

LOLOLOL I have no doubt!

sf jack said...

gwyn -

Fascinating information.

I remember when you were preparing your ad and you ran your requirements by us. I was wondering how you fared.

As with drwende, I can find plenty of dumb WASP's, too.

Gwynster said...

The ultimate decision to stay put was due to looking at how over-exposed these "investors" were on the properties and I knew that they had to either have put down 50% or more on the home or be in a voodoo loan.

I didn't want to expose us to having to go through the foreclosure process with the FB. I couldn't trust them not to screw me in the end. I'm bound by law to one person's possibly bad financial judgement already - I had no compunction to add these fools to my fiscal universe. Not even with a reach around and a loving kiss afterwards.

Occasionally we'd have someone contact us, agreeing to our terms and then change their minds once we viewed the residence. I suppose they were banking on getting an estrogen-filled nesting response out of me and I'd nag the DH into taking the home. Did they pick the wrong chick >; )

I'd get a phone call about 3 weeks later saying how other "offers" fell through and "would I like to take the lease and get all my conditions met?". Once it gets to that point, they'd proven to me they weren't to be trusted and I'd tell them so.

Those phone calls felt good. I was just sorry I wasn't a fly on the wall to hear what happened after I hung up.

Patient Renter said...

Mark: I LOVE your ad. Definately post some more of the responses here once they start coming in. I posted my own craigslist ad just a little while back, modeled off of Gwyn's ad. Mostly I got crap e-mail responses from people wanting me to rent for more than I specified, in an area other than where I specified, or to buy a house which I explicitely said I had no interest in. I posted a few of the funny responses here a few weeks back.

Ultimately, I checked out a few places from other ads that were posted and found one that was probably as close to perfection as I'll get. The real question is whether or not the owner is in over their head or if they will be at some point soon? I wish I could find out what their loan/down payment situation was, but I couldn't. So going off of the sale date and price, I had to make a guess that the owner is probably doing fine and decided to rent. So far everything has been looking great and it was worth the effort to scrutinize all of the other places/owners I checked out.

drwende said...

A hint for people trying to determine if your potential landlord who bought in 2004 or earlier has pumped the house for equity -- get 'em talking and see if they were doing any version of Missed Fortune 101. That's the scam where you take equity out of your house to put the money in cash-value whole-life insurance.

This scheme is widespread and goes by several names, but all of them were dreamed up to help life insurance agents get really high commissions. If your landlord went this route, he/she is also paying enormous life insurance premiums, up to 15% of gross income. Some victims are otherwise financially stable enough that they won't go bankrupt on you, but it's definitely a risk factor.

This won't help you spot the ones who used HELOCs to buy SUVs and vacations, but you can probably get 'em talking about that, too.

Gwynster said...


We had this one husband and wife team pitch us the "we're just a young family starting out" platitudes as to why they couldn't meet our rate requirements after saying initially agreeing. So they did the bait and switch and then they tried the good guy/bad guy routine too.

Problem was their brand new Mercedez was parked in the driveway. Oh cry me a fracking river >; )

drwende said...

Gwyn -- Oops! Always park the Mercedes around the corner when trying to play poor.

Patient Renter said...


That's ridiculous. Aside from the "young couple just starting out" obviously trying to play you, I'd avoid renting from someone like that anyways who clearly was loose with their money and possibly in over their heads financially.

Gwynster said...


They went straight to my "no way in hell" list. The best part was when they called me about 2 weeks later asking if we were still interested if they brought the rent down to $1300.00. This was for a brand-new home on the Catalina development in Southport. It was the Mainsail, their biggest model.

Another chuckle I had while talking to them was that apparently the neighbor just behind the rental was a broker for Deloite (sp?). He was begging them to rent to someone "nice and clean".