Sealed bids will be accepted through 5 pm on July 1, 2008 for an upcoming multiple home auction involving several luxury properties in Somersett. Six properties built by Sage Crest Builders and Knotty Bear Construction ranging from 4,000 square feet to 6,200 square feet in size will be on the auction block. Somersett has always been a tough sell. Will the buyers be there?
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smarten
First of all JoAnn, thanks for hanging in there!
Went to the auction site – found no real info.
If the sellers are not obligated to sell to the highest sealed bidders, then this kind of sales technique makes about as much sense to buyers as submitting a short sale offer that may or may not be accepted [or more likely countered] by one or more institutional lenders.
In a nutshell, a waste of time!
Marion Vermazen
I’m under the impression that “auctions” are just a marketing technique. In my mind a real auction would start way below the asking price and the sale would go to the highest bidder. Is that right?
GreenNV
Do you know which properties are up for “auction”? I know Sage Crest has been racking up mechanic’s, HOA and tax liens on a couple properties.
If I had to guess, this is just another shill auction. The viewing to offer deadline is way too tight to line up any sort of financing, and it hasn’t been well advertised. I ran into a brief mention of the auction, and remember the agent commenting that the auction would give the sellers an idea of the “market” value of their properties (sort of thought that the agent was supposed to be able to do that!). This looks more like a group open house and a leads generator than a real auction. The Graham’s better be careful – this is the sort of marketing stunt you can only try once without totally losing credibility.
ARM SLoser
This is completely off topic, but I know half of the readership will know the answer off the top of their head.
I am have an arm that will reset later this year. How do the mortgage companies calculate the new payment when the interst rate resets? Do they require principal in addition to the new rate, and if so what is the amortization period?
MikeZ
If the sellers are not obligated to sell to the highest sealed bidders
Here’s how you combat a non-binding sham auction, assuming this is one: proffer a bid well above FMV. Win the bid. Then back out.
There’s no mention of a pre-bid deposit or escrow, so why should the sellers be the only ones playing games?
If there’s a minimum/reserve, the auction should be up-front about it with the bidders.
BanteringBear
Good idea MikeZ.
Seller: “What do you mean you’re backing out?!”
MikeZ: “I mean I don’t want that POS!”
Seller: “But you were the high bid!”
MikeZ: “You ran a fake auction, I’m a fake buyer…BWAHAHAHAHAHAHA!”
smarten
ARM SLoser, I don’t know enough about your particular mortgage but I can say that when you contracted, you agreed to an adjustable interest rate which was to be determined by applying a certain margin [quoted as a percentage] over a particular index [like 30 year T-Bills]. I’m guessing you were offered some short term below market teaser rate, and probably the option to allow the mortgage to negatively amortize [i.e., each month your outstanding principal balance increases until you reach some maximum (like 115% of what you initially borrowed)] because you paid less than the interest accruing on your mortgage.
So if the time has come for your ARM to reset, look at the agreed upon index and add the agreed upon margin and you’ll have your new interest rate until the next reset.
The problems [which I suspect are really the focus of your question] are several fold.
If you started out with a below market teaser interest rate, you’ll now realize sticker shock and your payment will rise.
If your mortgage has negatively amortized, your outstanding principal balance will be higher that what you originally borrowed and applying a higher interest rate to a higher principal balance will result in…sticker shock.
If your mortgage hasn’t negatively amortized or it has and cannot negatively amortize any higher, you will have to start making interest AND principal payments which again will result in…sticker shock.
Hope this addresses your question and my recommendation to you is that if you have equity in your home, refinance into a fixed interest rate mortgage before rates start increasing [as I suspect they will].
smarten
P.S. ARM SLoser; you also agreed to a loan term [probably 40 years]. So you apply today’s interest rate to today’s outstanding principal balance and amortize repayment over agreed upon term. Understand?
CommercialLender
ARM SLoser,
Smarten is almost right, and nevermind his smug attitude – not everyone asked for, recieved, or wanted the risk of a suicide ARM / Option ARM. Yes, there were both abusers and idiots around, but a quite large number are/were normal Joe’s…
Assuming a ‘regular’ 5/1 ARM, it works as follows. The fixed rate payment period, say 5 yrs and undoubtedly with Interest Only (I/O) payments, expires and the amortization goes from I/O to an amount “sufficient to fully amortize the loan over the remaining term” which is to say 30 – 5 = 25 more years, in this example. So, you go from I/O to 25 yr amort (very, very few were or are 40 years with the vast majority being 30). Following this, a 2/1 is followed by 28 years amort, a 3/1 with 27 years amort, etc. Now, there are/were exceptions, but my point…
As for the rate and index, look up your loan documents in the document, usually 5-8 or so pages, called the ‘Rider’ or “Adjustable Rate Rider”. In it, you signed up to very specific terms, probably 250 or 275 basis points over the index, also specifically spelled out. Commonly, they are 12 month Constant Maturity Treasury, LIBOR, COFI, Prime, 12 month Moving Treasury Average, etc, as examples. Some sound very similar to others, so you might want to call your lender well in advance to see what exactly they use. Go to http://www.bankrate.com or bloomberg.com or the Federal reserve statistical release H-15 (sp?) or other sites to get current rates.
So, you will get Smarten’s ‘sticker shock’ when you notice not only is the rate being reset, but you go from I/O payments to 25 years of amortization, say.
Good luck, but just about any loan you may have done 2-4 years ago is underwater today and will have a difficult time refinancing due to loan-to-value ratios and today’s relatively tighter lender underwriting criteria.
**
A few other points to consider, for all of us, is that “subprime” borrowers were generally limited to 1’s and 2’s year fixed rate teaser terms, while “alt-A” and “prime” borrowers were offered longer fixed terms, on the assumption they were financially sound enough to make these payments or attract a new lender for a refi.
So, the 5/1’s I describe above for the most part have NOT YET hit the fan. These resets (‘prime’ borrowers) don’t really start hitting until later this year and extend for YEARS thru 2011 and 2012, per the voluminous data I have seen. What we’ve seen heretofore, as ugly as it’s been, is for the most part limited to a small class of borrowers comprising the ‘subprime’ and ‘alt-A’ crowd.
So, those predicting market housing price bottoms now or soon, are likely going to be proven to be sadly mistaken. Additionally, those wondering why the ‘high end’ of the market (in Reno and in the Bay Area) have not yet felt as much pressure, well, give it another year for the reasons stated. Either the economy takes off and they dodge the bullet, or short term rates stay so low as to not be a problem, or…
**
As I’m a new contributor to this post, I will disclose I have a 5/1 resetting next May off Robb Drive. The loan is $121 psf, which I always thought was ‘very safe’. I will likely either stomach the new payments next May, or I will have to de-lever the debt. My HELOC over and above that level that the bank basically begged me to take is unused and a $0 balance, but they certainly did pressure me to lever that thing up. Imagine how many people took the money and can’t now recover by selling, refinancing or writing a check? And yes, that will include the higher end homes in Reno and in the Bay Area.
**
Best wishes, all, and keep up the great posts
CommercialLender
Different thread, but I’ve owned and then sold in Somerset. Love the idea of the community, the amenties, etc. but can someone please expand on why anyone would buy there today in light of:
1) the thing is only 1/2 built, with another 5 years of construction still to come, I believe.
2) the HOAs at $150 were likely to have been originally computed as if the community was thriving and well occupied, not largely vacant, so don’t they simply have to skyrocket to those who own to cover all the vacant homes? and I’m not telling anyone anything they don’t already know, that the builders pay a different rate pre-Certificate of Occupancy ($35) than post and inventory ($75) vs. owned by a buyer ($150).
3) the fact that no matter what deal you get, builders can always undercut your price in the future as their costs are only in the upper double digits psf (I am told).
any thoughts are encouraged.
NAS
Auc-tion (ok’shen)- a public sale of items, one by one to the highest bidder for each item.
I hope someone follows this and reports back. Sounds like a dog and pony show (bait ‘n switch?) with some cookies served on the side. If it is, I would like to think the ethical Realtors speak up.
ARM Sloser
Commercial lender, thanks for your help. I did not know how the principal was amortized.
Don Cooper
CommercialLender – Somersett is still part of the housing mix, and housing there is a substitute for housing elsewhere, so if builders there have some great cost advantage it will also effect prices elsewhere. IOW if construction costs and lot prices drop dramatically in Somersett it will affect housing prices in surrounding areas as well. The downward pressure on prices won’t stop at Somersett’s gate(s).
HOA is always an issue as people how are in condos that are mostly empty know all too well. On the other hand a good deal on the price can pay for a lot of HOA dues.
You haven’t mentioned earthquakes. For me that would be a huge deal. I’d put that at the top of the list. I wouldn’t look there for that reason alone.
smarten
So what was so “smug” about my factual response to ARM SLoser’s ARM question CommercialLender?
Insofar as your suggestion as to the effect of looming ARM resets, may I refer you and others to a blog on the subject by a big ChaseNation contributor [ http://www.chasenation.com/profiles/blog/show?id=2000642%3ABlogPost%3A5961 ]; agent Michelle Plevel.
In the blog Michelle asserts that if you’re on the wrong end of a resetting ARM and you sprinkle some milk and honey on your lender, you’d be surprised how accommodating it can and will be insofar as unilateral loan modifications in your favor! I don’t believe Michelle for a moment but if ARM SLoser wants to take her advice and ask his/her lender for modification of what may otherwise be sticker shock, he/she should go for it! And regardless of the outcome, I for one would be very interested in the results of his/her labors. Good luck!
ARM SLoser
Smarten,
Let me give you some specifics, I have a two year arm that will reset later this year. It is a rental house that is leased and I cash flow every month with interest only loan. I bought the house in 1996 for 119,500 and in late 2006 I was given an appraisal for $320,000 so I took out a bunch of cash and brought my loan balance up $267,000. With the coming reset, I called the mortgage company, National City, and asked them if I could keep the interst only payment or if I could refinance it into a 30 fixed loan at todays rates. They said fine as long as we have at least 10% equity. Which I might as long as i do not try to sell it.(Pun intended) I told them I might just give it back to them if I could not get a modification that worked for me. They said, no modification and it they do take it back then the investor would just “have to right it off”
Based on the cash I took out and reinvested and the return I have made on that investment I would make the same decision again. Worse case I will have to pay about $400 extra a month, based on the information that Commerciallender provided, until such time as I pay off enough to refinance or the rent goes up enough to start cashflowing again.
I will keep this site updated on if the milk and honey approach works. As of now, it has not.
CommercialLender
As for loan modifications, one needs to understand the difference between a loan’s Servicer and the loan’s noteholder (owner). The servicer robotically handles the funds and behind the scenes work through a servicing agreement / contract. They are completely powerless to do anything out of the ordinary with few exceptions if its not otherwise written in the servicing agreement.
The note holder might possible modify a note giving up some profits or cash flow advantages if they feel a bigger principal loss is the only alternative they have, but ONLY IF they are the full owner. Since a huge percentage of loans were sold on the secondary market as part of buckets of other loans called securitizations, there are now many, many owners to these loans. Those loans, and what if anything you could do to them in form of a modification, are controlled by a Pooling and Servicing Agreement, with very little if any wiggle room given to the servicer or even special servicer (the clean-up guys). So, its 99.9% guaranteed you’ll get absolutely nowhere if your loan was sold in a securitization. You might inquire first to save time.
For those of you who are trying to buy “bank owned” assets, the above is important and serves to partially explain why your offers disappear into a black hole and/or you receive seemingly rediculous terms and conditions. They were all written in the PSA, so you are at its mercy. You might have better luck if you were to find that the loan that was foreclosed upon was not securitized, i.e. that the loan is fully owned by only the bank because then you at least have a shot at makin’ a deal.
Good luck and keep up posted on National City.
Diane Cohn
And on that note, here’s what it’s really like dealing with lenders in a short sale from a mortgage broker colleague in the Bay Area:
http://seesmic.com/videos/gtrWggbnXJ
billddrummer
To ARM SLoser:
Another thing to watch for in your loan documents is the recast balance. As CommercialLender stated, when the interest rate resets, the loan balance is reamortized over the remaining term of the note. But if you got a ‘teaser’ rate (World Savings used to write a lot of those) where the payment was less than the interest due, that deficiency would be added to the back end of the loan. When the total backend balance reached a percentage of the original loan amount (anywhere from 115%-120% of the original balance), then the amortization schedule would start on the higher balance, but for the shorter term.
For example, suppose you had a $250,000 5/1 ARM with a 1% teaser rate, where the run rate was 5.5%. The lender would allow you to pay the 1% rate for 5 years without reporting you delinquent. Your payments for the first 5 years are $804.10, $615.37 less than they would be if you made the ‘normal’ payment. Sounds great, right?
Well, that $615.37 is added to your loan balance each month. At the end of 5 years, your loan balance is now $286,922. When that balance rolls to a fully amortizing payment, your new payment becomes $1,761.95, $957.85 higher than the payment you got used to for 5 years. (!!!!!)
And if your house dropped in value during the 5 years, you won’t be able to refinance out of it.
In my opinion, the next wave of foreclosures will come from this sector. Most of these loans were sold as Alt-A Option ARM tranches, and the reset dates peak in mid-2009.