This guest post from one of our regular readers is a fascinating trip through public records in search of REO insights. I am truly amazed at what one can find on the internet these days.
I am Diane and Guy’s evil spawn on this blog – a bit of
Diane’s goofy warped realism and Guy’s CPA-ish pragmatism. I spend way too much time researching the
histories of properties on the market, particularly those at the peak in
2005. The goal is not to pry into the
personal finances of the owners (though it can be fascinating – I have startled
my dog on several occasions with my outbursts to some of the WTF situations
I’ve run into), but to try to discover where the market truly is right
now.
2005, it has depreciated about 15%? Guy’s reports seem to indicate that, and the houses that are actually
selling back that up. So if you went in
with 0-10% down, you are in deep doo-doo. And the growing response to being under water seems to be “Just Walk
Away, Rene”. Which leads to REOs (Real
Estate Owned by the lender). Which is what I want to talk about, because I
think these REO’s are what are really setting the current market values in
pretty.
Notice of Default, the property goes up for auction on the steps of the county
courthouse, no one bids more than the mortgage obligation, so the lender buys
back the loan from the defaultee for the outstanding loan balance. There are other permutations of the process,
but it looks pretty cut and dried, right? NOT. Let’s look at a few:
10 Nov 05 purchased for $355,673
1st Loan $284,500 w/ Colonial Bank 20% down
18 Nov 06 Refi at $363,750 w/ American Home Mortgage
29 Dec 06 NOD
3 May 06 purchased by AHM for $384,569
Pretty straight forward. No one bid higher that outstanding balance and fees, so AHM got it back. UPDATE: this is going to hurt my argument late in this post, but this listed
today at $480,000. The bank as flipper?
19 May 05 purchased for $306,035
1st $244,828, 2nd $61,207, 100%, w/ 1st
Magnus
29 July 05 Refi $307,087 w/ WAMU
18 Oct 05 HELOC $56,250 w/ Countrywide
23 Jan 06 HELOC $57,180 w/ Countrywide
19 Jan 07 NOD
23 May 07 purchased by WAMU for $314,338
auction. Countrywide walked away from
over $113,000. They evidently didn’t
want to risk not being able to sell this property for about $200,000,
two-thirds of the original price.
7 Dec 04 purchased for $334,010
1st 267,200, 2nd 50,100, 95% w/ WFB
17 June 05 HELOC $98,000 w/ Greater NV Credit Union
24 May 06 HELOC $72,750 W/ Countrywide
20 Oct 06 NOD
4 April 07 purchased by GNVCU for $312,500
and bid enough that WFB said “close enough” and let it go under the
balance. Good for the local guy – I wish
you luck. Countrywide is again SOL.
19 Oct 04 purchased for $289,695
1st $231,724, HELOC $57,931, 100% w/ WFB
27 Dec 05 Refi $294,000 w/ BofA
4 April 06 HELOC $200,000 w/ IndyMac
23 Feb 07 NOD
yet last time I checked). WFB got out
OK. But it should be a game of chicken
between BofA, IndyMac who is way too over exposed on the HELOC, and the public
that might be able to wedge in. I’ll
keep you posted.
side. All four of the properties
are/were owned by the same person! A
grad student at UNV. Rim shot. Bada-bing! Don’t get me started. I’ve got a
“investment” properties, and I keep running into his kids in other
properties. I have a Real estate agent
holding 4 or 5 model homes for sale at a loss – you CL folks know who I’m
talking about.
had to close this post so that I could tell you the banks’ pricing
reaction. Not to be. But let’s look at a couple of REOs that are listed, and what the lenders are
saying about our current market values:
3 Nov 05 purchased for $789,285
1st $631,400, HELOC $78,900, 90% w/ Greenpoint
7 Aug 06 NOD
14 Dec 06 purchased by Greenpoint for $674,038
Listed at $599,900
purchase price near the peak. Diane
tells me that this is now in escrow, so we should be able to see what sort of deal the buyer got in a month or so.
5 Jan 05 purchased for $610,000
1st 488,000, HELOC $30,500, 85% w/ Central
Pacific Mortgage
4 June 06 HELOC 97,000 w/ WFB
9 Nov 06 NOD
1 June 07 purchased by Bank of NY for $472,500
Listed at $506,500
the peak. It is about 7% over what the
bank paid for the loan to cover commissions and closing costs. Good luck!
14 Nov 05 purchased by GMAC Model Home Financing for
$495,000
Listed at $370,000
property. This is an interesting
one. Lennar sold a couple of their model
homes to GMAC, and leased them back. This is a pretty common way for a developer to free up some cash and reduce
their exposure on a project. It also
shows up as a full price comp for the project. When a bank is willing to take at 25% haircut on their own property, it
is a pretty good indication of where they think the market is.
REO due to a subprime loan resetting, In fact, I have seen very few instances
out there of foreclosure due to resets of 2/28 or 3/27 loans. The owners with these loans have thus far
either quietly sold off at an acceptable loss or refinanced to die another
day. The death knell is the HELOC.
banks are setting the market value on their holdings about 10% below the rest
of the market. With the number of REOs
showing up out there, this has got to be putting a lot of further downward
pressure on both the builders and resellers.
Jaded
Reno, Nevada
smarten
You state, “can we all sort of agree that if you bought a home in July 2005, it has depreciated about 15%?” Add in commissions and other costs of sale, and you’re really looking at about a 23% or more equity loss.
Assuming you haven’t yet realized that loss and you have one or more adjustable rate mortgages, hold on. As interest rates rise, so does your monthly nut/loss of equity [assuming your lender permits you to let the loan negatively amortize]. Long term interest rates are up nearly 100 basis points in the last 9 or so months and rates on HELOCs and traditional adjustable rate mortgages are up even more!
Another 1/2% bump in interest rates and I think you’re going to see whatever’s left of this market come to an abrupt halt.
As Jaded suggests, hang on!
Grand Wazoo
Will someone please explain to me how a grad student can borrow that much money?!?
Lindie
Diane,
When can we expect the charts and graphs from your broker suggesting to us that the bottom has been hit and we can all now look forward to increasing prices?
I am serious, Diane. How do you reconcile this post from Jaded (we all know who Jaded really is) with the charts and graphs of your broker? Obvioulsy, one of them is wrong. There is either going to be the further downward price pressure on the builders and the resellers as Jaded suggests, or, as your broker’s graphs suggest, we have hit bottom.
Which is it, Diane? This is not a rhetorical question.
Reno Ignoramus
Another fine post from this “regular reader.” Maybe Jaded and GreenNV ought to meet.
It is not just REOs that are taking the market down. There are getting to be more and more examples of bag holding owners who are still making the monthly nut as the value of their investment/flip/second home sinks inexorably into the sunset.
My favorite: 1900 Russell Pointe Cr. Purchased 22 months ago for $1,070,000. Never been lived in. Current asking: $819,900.
Owner is a quarter of a million dollars underwater just on the current asking price. If California investor/flipper/second homeowner gets 90% of asking, down to $738,000. Take away 6% for seller’s closing costs of $44,000, down to $694,000. That’s a $375,000 loss.
But, California investor,flipper/second homemoaner has been paying 22 months of mortgage payments, and taxes, and insurance. Say $5,000 a month. For 22 months. $110,000.
Drive by 1900 Russell Pointe Cr. in Somersett and see what a half of a million dollars loss looks like. It has, as the listing says, a “beautiful view.”
Guy Johnson
Excellent post, Jaded. Nice work with the history of these properties. Thank you for your efforts and contribution to the Blog.
Faust
Pardon the lengthy post, but I’ve been holding back a bit over the past few months and I need to babble a bit.
I sold my previous house in March with a 10% hair cut, 6 months on the market, (5 of them empty) and I got counted lucky. As an internet shopper and current renter relocating to Reno I’ve been reading blogs, watching the market reports, and looking at listings for a couple months now. I can tell you that the sum of all this information can only mean one thing: Stay Away.
Some houses are listed in the MLS for 140% of what Zillow suggests (for what it’s worth). Others have been on the market for 90+ days but from my saved 20 MLS watch list I only see 1 house with a measly $5k price reduction. Nearby Comps for pricing are either too old to be relevant or not very comparable in the first place as nothing’s moving. Real Estate blogs tend to continue saying we’re at “the perfect time to buy”, but they were saying that back in April (no conflict of interest there). The Bubble Blogs continue to predict Armageddon and final justice for the Evil Doers (aka realtors who have been doing their job or flippers). The financial industry is showing initial pain for all the silly loans (Hedge fund stuff). Who knows of this is the beginning or the end for all this but I do know that REO’s take time to manifest for public consumption and it will take time before those lenders give up on the current price. From experience I can tell you after those MLS listings are on the market for a couple more months those prices will drop. Maybe they already have in the owners mind, but there’s no way for me to know about that until I start throwing ridiculously low offers all over the place which causes pain for everyone involved. Meanwhile, my substantial down payment (aka life savings) is making 12% on the market right now.
Now, if someone were smart – perhaps a realtor with a little spare time on his/her hands – they would start connecting the dots in these matters.
First: My Realtor, an old friend, tells me he can’t really help me look into the pre-foreclosures and REO market because he wouldn’t make any money on it. But I’d happily pay him a flat fee for the assistance if I knew it would be worth it in the long run. I’m having trouble even knowing when or how these auctions happen, let alone wander alone into that whole business without some professional help. Simply sending money to Foreclosures.com isn’t going to help me. Someone who really knows the local market could do well for themselves by helping others.
Second: People with Pre-foreclosure notices in their hands are going to be desperately looking for some way out. I’ve been there. If I could have found a renter who would cover 3/4ths of the monthly nut I would have really considered it an opportunity. If someone wanted to make a few bucks matching up qualified fence sitters with responsible (but challenged) property owners I think they would do OK, and more importantly make a strong business relationship in both parties for when things stabilize.
Third: At the root of all this is greed. There are some socially responsible actions that can be made which could unglue this mess a bit. Washoe County could be a little more public about notices in play. Someone could write up a “how it’s done” web site with a forum for Q/A or a matching service. A specific group could be wide open an honest about how much they need to break even on a deal gone south. MLS listings on Realtor’s web sites could list important information like days on the market, previous sales price/date, and other useful information to help both buyers and sellers understand what the situations are and become a little more realistic about what the real prices really are before things get ugly.
Fourth: I don’t know what the real estate agents are doing for a living these days, but I’m here to tell you that the 6% part ends up being a lot of money in these troubled times. Frankly, I haven’t had a real estate agent that I thought was worth $15k (3% of $500k). That’s almost an adversarial role for both the seller and the buyer. Now is the time to earn it by doing the work-ups and being realistic about pricing with your clients, or get out of the way and let the buyers/sellers get a break. The point is not to bash realtors. The objective is to get the market moving again. If I see a $465k house and know it was purchased a year ago for $400k, I know that $27.9k is built into the price to cover the agents. Everyone involved is greedy (myself included). If that house isn’t moving (and it’s not) I know that the agents contract is going to expire eventually and the owner is going to be stressed out in a few months. Should I ace out the agents? Should I contact the owner and offer to rent from him for a while? Should I ask my agent to make the call and take a $1,000 finders fee if it all works out?
Wouldn’t it just be better if these houses sold even at lower prices? The standing inventory is a problem. The confusion and greed only make the water deeper.
MikeZ
“Jaded,” how are you locating and mining this data?
BanteringBear
I spend some time here and there looking behind the numbers as Jaded has. My favorite is to pull up current mls listings, and then check the recorders website for HELOC’s, as well as the original purchase price and the type and amount of the loan. It’s highly entertaining to find that there are literally thousands of sellers right now who are looking for a greater fool to bail them out of their financial failings. How they ever got it into their mind that it was prudent to purchase a house at a ridiculously inflated price, and then HELOC it for, in many cases, hundreds of thousands of dollars above the original loan amount is beyond me. The most delusional part of the plan was that they actually thought a greater fool than themselves would step right up to bail them out of their idiocy. Not gonna happen. Hello massive foreclosures for years to come. This market will hit bottom when the rent:buy ratio is back to historical norms, and not a day before. Anyone buying right now at these stupid prices is a sucker.
As for the UNR grad student in Jaded’s post above, I hope they go to jail for defrauding the lenders. What they did is no better than robbing a bank. They’ll never pay back those hundreds of thousands of dollars in HELOC money, and they should rot in a cell thinking about what they’ve done. No sympathy here.
Diane Cohn
Lindie: Next time the broker prints the charts, I’ll post them. Last time I saw them, the median was trending up. Those were real numbers. What will the result be next time he pulls them? Who knows? We shall see.
Diane Cohn
FYI: A HELOC shows on the public record whether or not the money has been spent. Some people have them and don’t use them.
BanteringBear
“FYI: A HELOC shows on the public record whether or not the money has been spent. Some people have them and don’t use them.”
That’s a fair point to mention Diane, however it’s more than just a coincidence when the asking price covers the entire amount of the original note, the HELOC, and realtors fees. Methinks the money is already, for the most part, spent.
rkybarl
Oh come on, Bantering Bear, I suspect you, of all people, know exactly why greedy debtowners did what they did. They bought the REIC bullsh!t. You know:
You can’t ever lose money buying a house in Reno.
Property values in Reno have never gone down.
Reno is special. Everybody wants to live here.
Rich Bay Area escapees will cause property values in Reno to rise into the indefinate future.
You better buy now, or get priced out forever.
Why, did you know that this very blog/website used to have a section on it that explained how you could get 10% ANNUAL appreciation in home values in Reno. “Try geting that kind of return in the stock market” it said. Really, it did. I have it archived.
That’s right, 10% ANNUAL appreciation. Apparently forever. Sure. You could buy a house for $400,000 and in 10 years your house would be worth $950,000. Sure it would. So why not go out and HELOC $400,000? The REIC, including this blog, assured it.
Reno Ignoramus
Grand Wazoo,
Why do you question why a grad student could borrow several hundred thousand dollars?
ANYBODY could borrow several hundred thousand dollars.
You must be thinking back to the silly days when lenders required people to demonstrate an ability to repay a loan. How quaint, Grand Wazoo.
But, you see, if we required people to actually qualify for a loan with verifiable documentation, it would have been essentially impossible for the REIC to keep the party going after the middle of 2004. At that point, prices had lost any rational connection to fundmentals. God forbid that realtors and loan brokers would have had to see those great commission checks dry up. So rather than actually say no to a commission opportunity, the REIC just started giving away money to ANYBODY in direct correlation to their willingness to lie. The bigger the lie one told, the more he got. Hence Mr. Grad Student.
It will take years and years for the fraud and greed and crap to be wrung out of the market. One Mr. Grad Student at a time.
Jaded
Who is GreenNV? Kidding. I actually thought the post was going to go out with my real name! “Jaded” is what I told Diane my tag line would be if were one of the Chase headshots in the RGJ.
mikeZ – I posted a fairly detailed description of how to get the information in Guy’s June 18 post on Medians. Warning. It is as addictive as meth, it just won’t rot your teeth. I get the foreclosure notices from the Legal Notices in the RGJ, though I suspect the majority of REOs are direct deals between the borrower and lender.
Good point on having a HELOC doesn’t necessarily mean you spent it. My assumption is that if you get a 2nd HELOC you have already spent the 1st. And in general, I think most HELOC money is spent.
Faust, great points on how the realtor’s business model could change to meet the current conditions. REOs are currently 6-7% of the market and rising.
Thanks, all, for the comments. Did you hear the one about the realtor who bought 12 houses between Feb and May 2006? Punchline to follow!
Doofus
Cross referencing some of the case studies from Jaded with the short sale information from Guy’s latest post, it seems that some of the lenders stand to MAKE a lot of bucks on these REO properties. Off the hide of their breatheren who OK’ed the HELOCs. What goes around…
Tom
Someone commented that “when the asking price covers the entire amount of the original note, the HELOC, and realtors fees. Methinks the money is already, for the most part, spent.”
Actually, the original note in many cases is of historical interest only. I have clients who have been in their homes for 25 years, and the original note of perhaps $300,00 has no relevance to current value, and in fact over that length of time, is largely paid-down. You need to consider the date of that note, the amount, and then you cannot safely assume the HELOC represents actual debt. I have clients who have created those HELOC for emergency back-up purposes, or more often, to be able to deposit upon and hold a down-sized retirement property just before selling the family home. Those HELOCs appear of record and may be in the $500k range, but are zero balance items–nothing drawn down. You would need a credit report to match up the balances with the items.