The drill was supposed to work something like this: buy a house as an investment property, use an Option ARM, make the minimum payment, and with a decent down payment, the investment would be cash-flow positive. Then sell and reap the appreciation. Even if the negative amortization is running 5% per year, what could go wrong?
Fallis Properties LLC bought 19 homes in those salad days between April and August 2005. ALL with were 125% Option ARM loans, 16 from Home Savings and 3 from WaMu. These guys came in with HUGE down payments for the time, usually 40%. They never claimed to be owner-occupants. 2 of their properties have received NODs this week.
All the homes were resales, and all were pretty much in line with the median price at the time. Even with 40% down, these properties are now under water. The principal balance has risen about 25% over the last 5 years (assuming minimum payments) and the property values have dropped close to 50%.
I have no beef with Fallis Properties LLC, in fact I feel for them. I know of several other investors out there with similar sized portfolios that are in the same situation – just no NODs yet so no stories to tell. The point of this post is to serve as an exclaimation point on the comment string that got going on the Closer Look post. If you are renting, you really need to check out your landlord. Do they own other properties? What are their loan terms? Get a "Request Notice of Default" into your lease terms.
Date Address Purchase $ Loan $ Bank
4/5/2005 1005 Backer $335,500 $180,000 World
5/4/2005 7265 Heatherwood $375,000 $225,000 World, QQ
5/4/2005 5154 Pillary $322,500 $193,500 World, QQ
5/4/2005 4075 Venetian $320,000 $192,000 World, QQ
5/11/2005 4620 S. Catus Hills $325,000 $193,500 World, QQ
5/27/2005 14315 Ghost Rider $441,000 $286,500 World
6/3/2005 1130 Forest Knoll $335,000 $217,750 WAMU
6/15/2005 1015 Backer $332,500 $203,125 WAMU
6/15/2005 1558 Backer $380,000 $228,000 World, QQ
6/22/2005 6450 Chesterfield $361,000 $216,600 World, QQ
6/24/2005 9675 Boulder Creek $403,000 $241,800 World
6/29/2005 1429 Lindsay $377,000 $226,200 World
6/30/2005 9625 Boulder Creek $403,000 $241,800 World
7/12/2005 10025 Hampton Park $349,000 $209,400 World
7/12/2005 6598 Fall River $349,900 $227,435 WAMU
7/15/2005 9671 Comanche Moon $403,000 $241,800 World
7/26/2005 1878 Cambridge Hills $342,000 $205,200 World
7/29/2005 5855 Royal Vista $335,000 $251,250 World
8/15/2009 14400 Ghost Rider $415,000 $249,000 World
BanteringBear
“I have no beef with Fallis Properties LLC, in fact I feel for them. I know of several other investors out there with similar sized portfolios that are in the same situation – just no NODs yet so no stories to tell.”
I have absolutely ZERO sympathy for these people. They are the ones who drove prices on SFR’s through the roof, pricing out the working class. May the working class, and those prudent enough to stand on the sidelines, laugh themselves into fits of hysteria as these speculators fall flat on their faces. Good riddance, greedy pigs.
skeptical
BB has a point.
It was corporations like Fallis that fed the bubble, elevating prices beyond what could possibly be affordable for the majority of families in Reno. They share responsibility for the horrible destruction we are now witnessing, along with the banksters.
The crazy thing about it is, as a LLC, Fallis have “limited liability”. I wouldn’t be surprised if the major partners reaped huge financial rewards during the bubble and simply bailed out with no liability on the downside.
Matt Taibbi just put out an article on how the banksters have had their best 18 months in history!
http://www.ritholtz.com/blog/2010/02/goldman-rape/
Wake up people, and vote out the crooked politicians that aid and abet this system. And move your money to the local community bank and out of the greedy, crooked hands of the big banks.
Sully
skeptical; I usually catch those posts but missed that one, thanks.
BTW, I closed my BA and WF accounts a long time ago, and am ready to do justice come Nov.
As far as his question about how these banks went from one foot in the grave to record profits in 18 months….. well Goldman didn’t have much competition, Lehman, Bear and Merrill were taken out of the running.
We’ll see how much longer they can continue to make record profits, when suitable competition comes back. Enjoy the ride Blankfein, it’s very likely to be a short one!!
GreenNV
Happy to see that the page format got restored. I thought I broke the blog for a while there.
In a bit of serendipity, these folks got 11 more NODs today.
billddrummer
I know of an investor here in Reno who is in the same shape as these guys. Business for him has been as bad as he has seen it, and he’s been in the RE investment business for more than 30 years. He wasn’t a greedy one, but he got swamped just like everyone else.
Off topic, I’m letting everyone I know that I’m preparing to write a novel. I’m starting March 1, and my manuscript will be done by March 31. The title? “It’s Always a Full Moon in Reno”
I don’t know what my characters will do in the book yet, but I will have some real estate specific information woven throughout the manuscript. (A big THANK YOU, to Guy, for sending me copies of my first 700 posts. You will definitely be in the Acknowledgements, and may find yourself as a character.)
Rest assured that everyone will have their identities adequately masked.
One of my chapter titles is “Cul de Sacked: How We All Drank the Koolaid and Got Poisoned”
Wish me luck. 50,000 words in 31 days is 1667 words a day, give or take. I expect to have bad eyesight, worse posture, and killer carpal tunnel by the time it’s done.
But it’s something on my Bucket List. And what better time than now?
skeptical
BillD,
Can’t wait to read it.
Looking forward to the character inspired by BB.
smarten
Hey skeptical –
That’s MR. BB. Come on, we need to show the respect to which he expects.
Reno Ignoramus
I am with BB on this one. This is exactly what drove the prices to unsustainable levels. The Greater Fool Theory exemplified.
The only saving grace for these guys is that at least they didn’t go in with nothing down.
inclinejj
I doubt even with a huge down payment with the option arm min payment these would pencil out.
The purchase prices are much too high to justify the rent..
DownButNot Out
These guys got exactly what they deserved? They put 40% down. These aren’t the people that needed to lie about their income and couldn’t afford the home they were buying. At least at the time of purchase anyway. Now that the home is worth half they’re paying the piper.
They made a choice to go in business buying houses, and seemed adequately funded, and lost there @ss. In hindsight they were way wrong. But not everyone in 2005 knew this,not even the person that started this blog. Blaming them for the affordable housing problem seems weak.
I’m not trying to start something here, so don’t get all bent out of shape if you don’t agree.
CommercialLender
DBNO is right. These guys bought up properties en masse, sure, and in so doing pushed up home values artificially. So, BB and RI are right there. But as DBNO states, these guys were not aggregiously seeking financing, they were running a business with real cash and a lot of it ahead of each of these loans. Oops, didn’t turn out, but that’s our system of free markets: win some, lose some, hope to win more than lose. They’ll be back, this time somewhere else, and good luck to them and any entrepreneur out there.
I have sympathy here not for investors but for the little guys who were priced out or higher during the process. That said, I was a little guy who was in contract to buy a $415K home in Laurel Canyon (if memory serves.) When I was pushed too high by an investor, I backed out. Glad I did. Then I got to thinking, why not rent? So I sold my primary home and have rented ever since. For me, watching these investors flood the market with ‘demand’ that really wasn’t was what ended up saving me literally hundreds of thousands of dollars.
BanteringBear
“These guys got exactly what they deserved? They put 40% down. These aren’t the people that needed to lie about their income and couldn’t afford the home they were buying. At least at the time of purchase anyway. Now that the home is worth half they’re paying the piper.”
Yes, they got EXACTLY what they deserved. Play with fire, get burned. Even a fool could see that prices in 2005 were so clearly disconnected from reality that purchasing with a business model dependent entirely upon a further appreciation in prices was absolutely delusional, and a move driven purely by greed.
Furthermore, if they could afford the places, then why are they in default? I’ll answer that for you: because they couldn’t afford the places. They don’t cash flow, even with the down payments, and that wiped their @sses out. They got precisely what they had coming to them.
Insofar as their loans are concerned we know NOTHING about the documents themselves, and cannot speculate one way or the other if there was fraud involved. So, don’t go assuming, just because they threw some cash in the deal, everything was on the up and up.
PS- Smarten, I see you’ve reduced yourself to peanut gallery status with one-liners ala Derrick. Par for the course.
smarten
Mr. BB –
Boy, you’re even thinner skinned than I would have suspected. Really rankles you, doesn’t it.
And BTW since you’re spouting off about rentals, loans, cash flow, etc., isn’t it about time you started sharing some of your credentials? Have you ever qualified for a mortgage? Could you qualify for a $1M mortgage in today’s lending environment? Do you own any real property? Could you afford to pay $1.5M in today’s market? Are you a renter or owner-occupant? Do you even have a job [rather than spewing negativity]? Do you have a college degree [and in what]? Do you have an advanced degree? Are you licensed in any profession [and if so, what]? And BTW, did you grow up in Incline Village or Reno/Sparks proper [just because you may have lived in IV 40 years ago doesn’t mean you know squat about today’s IV residential real estate market]?
When I’ve got something to say to you [like the above], I will. Other than that, I’ve finished treating you with the respect you’re not entitled to [you want to call that “one-lining,” go ahead]. I’ve met many Napoleon types during my travels so I’m quite familiar with your M.O. That’s why you just can’t let it go. Believe me, I’ve got your number should I ever want to set you off again.
smarten
As a follow up to Mr. BB’s admission he knows nothing about the loan documents [BTW, the first time I can recall him admitting he doesn’t know something about anything] the subject of Mike’s post, I’m just curious Mike. How do you know “ALL were 125% Option ARM loans?” And how do you know that prior to default the owner was only making the minimum, negatively amortized monthly payments? Although I think you can decipher some of this information from the faces of the recorded mortgages [did you actually look or did you simply assume], I don’t think the complete picture is revealed in a NOD. Am I mistaken?
And before we all start spewing blame, we who live in glass houses should not be the first to throw stones.
And for those of you who live in caves, and you know who you are, if you look, walk and quack like a duck, then that’s exactly what you are [BTW, some might be interested in learning this phrase appears in a series of published California Court of Appeal decisions {see Pieper v. Commercial Underwriters Ins. Co. (1997) 59 Cal.App.4th 1008, 1014}].
DonC
Before everyone dances on the grave of the private equity guys, it’s good to keep in mind that “those guys” probably have made out just fine. They always get paid. It’s their clients, likely some university or pension plan, that took the hit.
CL – You have more courage than I have. Going the rental route has worked out well for you. I had this discussion with a neighbor in 05 and, while we concluded that the market was doubtless overpriced, the problem was that “the market” can stay wrong long enough to bankrupt you.
I disagree that the demand wasn’t there. It was there alright. The problem was too many investment dollars chasing too few assets. You had a wave of investment dollars from Asia that had to be recycled, mainly from China and created in large part by China’s entry into the WTO, and then you had a smaller but still significant wave of investment dollars from the ill timed and ill designed Bush tax cuts. All these investment dollars and no real great place to put them made for an asset bubble from hell.
This is a real estate blog so people rightly focus on the real estate bubble, but while real estate may have been the major over valued asset class, there were plenty of others. Just about all asset classes have had some air taken out.
billddrummer
On Fallis Properties–there are now 15 NODs.
I researched one of them, and the buyer put 35% down and financed $286,650. If the loan were priced at 6.5%, the normal payment would have been $1,811. This loan was an Option ARM with a 125% cap, or $358,312.
Now, the NOD says the past due payments total $10,724.50, which is about $1,787.42/month. But that also includes late fees and charges, which were $60/month according to the deed of trust.
This suggests that the payments were lower than the fully amortized payments, but we’ll have to wait until the NOS is posted to find out exactly what’s owed on these notes.
But one thing is clear: After 35% down and 4.5 years of payments, the property is underwater.
Zillow (take it or leave it) says $267,000. If that’s true, it’s a 39% drop from the purchase date.
billddrummer
Further–
Are we witnessing a mass ‘strategic default?’
And are there others out there?
BanteringBear
Sorry, Smarten, but I’ve got thicker skin than you could ever dream of. Your post is just more of the same- baseless assertions from a nauseating individual. I’d suggest, again, you go back to the IV thread and read about your little meltdown to understand who’s the defensive one here.
Unlike you, I am perfectly content being anonymous. I am not a narcissist, and I didn’t come on to this blog to brag about myself, my accomplishments, my investments, my ability to buy in Incline Village, my high net worth, my penchant for fine dining, my skiing, my numerous property holdings, my legal expertise, my… , my… , my… get it, MY? You epitomize the disease which is narcissistic personality disorder.
It’s because of this that you can, without shame, misrepresent my position on subjects, and use bald faced lies to try to discredit me, never answering to your untruths. It’s only through these distortions that you’re able to re-inflate your ego. Your sense of superiority is evidenced by your contempt for the average citizen whose lifestyle and bank account doesn’t measure up to your ideal. I’ve got news- I’m not one of your little puppets and, as you have for the past several years, you can demand answers about my life but you will get NOTHING from me in terms of personal information. Check your head, dude.
Reno Ignoramus
Down, you are right that the person who started this blog in 2005 did not understand what was happening with the market. But almost from the very beginning once this blog was discovered there were people commenting here that there was a msssive bubble in Reno, that prices had become absolutely unsustainable, and that prices were inevitably going to fall. The suggestion that nobody in 2005 (actually this blog did not start until the very end of 2005, and the first commenters did not begin until early 2006)saw this coming is wholly inaccurate. In fact, there was a guy named Gotlots who was among the very first commenters who absolutely nailed this entire bursting bubble scenario. I invite you to go back and read his comments. They were prophetic.
GreenNV
smarten, my dad the coach always preached that “assume” stood for “Ass out of U and Me” – of course I researched all the mortgages for this post. As billdd points out, you CAN sometimes infer what the payment level on an OA loan has been in a NOD filing – it depends on the NOD format the trustee uses.
With the amount Fallis put down and assuming minimum monthly payments (about half of fully amortized 30 year), these houses would have generated cash flow as rentals. Though I don’t think it was their original intention, their best option may have been to maintain this cash flow until the OA loans maxed out, once the market tanked. So billdd’s strategic default question is certainly apt. And yes, there are other investors out there with similar portfolios potentially in trouble. Very different loan terms and no NODs or MLS listings, so they are off limits to me to comment on.
The weird thing for me is the properties Fallis bought. All were older properties, and most hadn’t changed hands in a decade. There wasn’t a sales history for an appraiser to comp, and my gut says Fallis over payed for them. I would be very interested to know if these properties were purchased significantly over asking price. Any comments from you folks with MLS access?
skeptical
CL, you have tons of credibility with me, but no way am I going to shed a single tear for an LLC who went with 125% option ARMs at the top of the bubble (likely sticking it to the university of pension plan sucker investors, as DonC so insightfully commented).
OBTW, were the Option ARMS 125% of the purchase cost? Or was that the cap? The down payments weren’t 40%, if they got 25% more than the purchase cost from the loan! Either way, it was all just smoke and mirrors, like so much other nonsense during the bubble.
Lastly, DonC, you forgot to name the primary culprit in this historic mess — Alan Greenspan and his Fed. That man did more damage to this county during his tenure than any other person in US history. Don’t take my word for it, just read “Bailout Nation”, “End the Fed” or “Greenspan’s Bubbles” and you’ll know everything you need to know.
P.S. Smarten and BB providing plenty of material for BillD’s upcoming novel…
DownButNotOut
RI – I’ve enjoyed all your posts. Makes sense some here knew or could predict this Real Estate downfall in 2005. And BTW congratulations on that. But by and large the rest of us didn’t see it coming. Since you point out comments weren’t made on this blog until 2006, I guess this wasn’t a source for Fallis to consult. They did what they did the old fashion way. And lost.
My point is jumping on a housing investors decline that actually put skin in the game (if that’s true as I don’t understand the trail of money completely) seems to be piling on, but I guess it’s not if you absolutely knew what was going to happen.
So I’ll ask you this- how many home builders did you short in the market? After all it was a sure thing right? Anybody out there? Because ultimately you were right, but Monday morning quarterbacking is easy if you didn’t have a horse in the race in 2005.
Maybe another question is when did you know? 2003? 2004? And I’d add to that question did it make any difference? i.e. were you investing in Real Estate to begin with? Or was it just commenting on the state of what was going on as a bystander, which we would all agree is a lot easier than putting your money where your mouth is.
I don’t know Fallis from Adam, but jeez we can be a sanctimonious bunch, myself included.
Sully
yeah, its too bad the Queen didn’t swing her sword across his shoulders when she knighted him……
smarten
Since Mr. BB refuses to share any background about himself, I was going to start the ball rolling.
But on second thought, I decided otherwise. Let me just say he lives in Western Washington [the state] and is a frequent blogger on: thehousingbubble.com; seattlebubble.com; kitsapsun.com; and, city-data.com. Check him out if you’ve got nothing better to do!
Care to confirm/deny Mr. BB?
BanteringBear
GreenNV posted:
“With the amount Fallis put down and assuming minimum monthly payments (about half of fully amortized 30 year), these houses would have generated cash flow as rentals.”
I disagree. Can you please share how you arrive at this? Covering some pick-a-pay loan which isn’t full amortized does not count. My math says that a property such as Comanche Moon, with a 30 year fixed at 6.5% (a dream rate for an investor), assuming 1.75% taxes and insurance, yields a payment of roughly $1880 per month. There’s no way that place garners that much rent. This doesn’t even factor in vacancy and maintenance costs. If these places were providing positive cash flow, these guys wouldn’t be in default. Only a fool would walk away from a cash flow positive property.
BanteringBear
I’ve really gotten into your head, haven’t I Smarten? Play with fire, get burned.
DownButNotOut
‘If these places were providing positive cash flow, these guys wouldn’t be in default’
Maybe better yet ‘Furthermore, if they could afford the places, then why are they in default? I’ll answer that for you: because they couldn’t afford the places’
Not true at all unless they live in vacuum or you know something we don’t. You’re over simplifying based off too little information. Here’s a thought – they may have other things going on in their life besides this RE deal. Divorce, other investments, illness, or even a desire to exit the rat race. But continue to comment and serve judgment on those you know little about. After all, you know all see all and hear all.
DownButNotOut
Sorry, i meant see no evil, …. Weren’t those the monkeys?
smarten
Not me Mr. BB –
It’s not play w/fire, get burned.
It’s he who lives by the sword [or in your case hunting knife], dies by the sword; likely via a meth head.
BanteringBear
I think it’s obvious, Down, that they couldn’t afford to make the payments. If the money was there, don’t you think they’d continue paying?
Bizarre, Smarten, just bizarre. Are you a meth head, or something?
MikeZ
RE: “actually this blog did not start until the very end of 2005, and the first commenters did not begin until early 2006…”
I went back in the archives and read from ’05-’07. Wow, it was an interesting trip down memory lane!
MikeZ
re: Blog archives
From Jan ’08: Diane’s “best new home deals” … a $385K Spanish Springs McMansion ($172/sq-ft) and one in Cold Springs for $315K (only $144/sq-ft).
I only wish the post had addresses, to look up those houses NOW.
billddrummer
To add to the speculation on Fallis–
These properties would have cash flowed, but only if you made the minimum payment on the ARM balance. Figure a 1.5% teaser payment on the one I researched earlier, and you come up with a payment of less than $1000/month. You could have rented that place for $1500, so you’re cash flow positive even after factoring in taxes and insurance. Make the tenant pay for garbage and water, and you’re set.
I’m wondering whether the NODs occurred because the loans reached their cap percentages. As you all know, when that happens, the outstanding balance is amortized over the remaining loan term. So in the example I cited earlier, the payment goes from $989/month to $2,419.35.
You can’t rent the place for $2,419. More like $1000.
So is it worthwhile to let the property go back to the lender, or keep feeding it to the tune of a negative $1500/month?
Time to step away.
Gary
I recently read that the late Edmond Safra, a very successful Lebanese banker who founded Republic National Bank of New York in 1966, once said something that may have a bearing on recent events… “My father taught me that if you loan a man too much money, you turn a good man into a bad man.”
Many people have clearly been lent too much money.
Moe to Reno?
Background information on BanteringBear.
1. He has a big dog.
2. Likes to live in rental property
3. He is a very serious gardener.
4. Has 3 years of college.
5. He likes to express his opinion strongly.
6. Drinks his coffee black.
7. Rarely watches TV.
smarten
“As a professional gardner…[Mr. BB] worked at a world class nursery in WA for several years, grew and sold plants at local markets…mov[ed] where land is reasonably priced, so [he] can have [his] farmhouse on 10 acres, with money left over for living” [ http://www.city-data.com/forum/washington/53533-landscape-gardener-moving-wa-needs-advice.html#ixzz0g5xAWoA9 ].
Did you ever see the 1979 movie “Being There” starring Peter Sellers [BTW, a great, great movie]? It’s a story about a simple gardener who has never left the estate he tends to until his employer dies. Then his simple TV-informed utterances are mistaken for profundity. It’s ALL now starting to make sense!
Move to Reno?
Well, smarten, Mr. BB has been fairly accurate on his predictions of the Reno RE market.
One thing that I failed to mentioned was that Mr. BB loves to cook. Perhaps he will share some of his recipes with us. All in all, sounds like he has a sensible and healthy lifestyle living on a farm. Nothing beats cooking with freshly harvested vegetables.
smarten
No doubt about it MTR! As have been his predictions of the Seattle, Western Washington, Orange County and basically any other residential real estate market located anywhere [remember, according to him all boats fall equally when the tide goes out]. But let’s not give him more credit than that which he’s earned. And let’s not stand for his caustic and demeaning attitude. There’s no need nor place for it on this blog.
Raymond
I believe it was Smarten, not BB, who said the market would bottom in January of 2009.
Move is correct, BB has been pretty much 100% in his calls so far. He was the guy who said the median would drop below $200K. To much derision I might add.
And what is at all wrong with being a gardner? By all accounts, BB appears to be living a very sensible and sustainable life. BB does not appear to be a guy who is into conspicuous consumption that he has to brag about on the net. Unlike another reader here.
Move to Reno?
Raymond, I don’t think anybody said there was anything wrong with being a gardener. The truth of the matter is that being a successful gardener is no mean feat. One of my complaints is that modern subdivisions either don’t have any topsoil or a good size lot so that many of the next generation don’t have a chance to learn gardening.
BanteringBear
You’re just making yourself look worse and worse, Smarten. My, how desperate you’ve become! How is it, that somebody who is supposedly retired and living in their dream home in Tahoe, with all of the amenities the area has to offer, has been reduced to spending hours and hours trying to dig up dirt or information on the net about another blogger? That is more pathetic than words can describe.
I had already posted all of this groundbreaking information (from 3 years ago I might add) to THIS blog. Funny how poor your memory is. Allen Murray asked me what my angle was in regards to real estate years ago, and I told him I’m holding out for at least 10 acres of land. I still am. It’s sure to be several more years before I find something which makes financial sense and is desirable to me.
BanteringBear
Smarten posted:
“It’s a story about a simple gardener who has never left the estate he tends to until his employer dies. Then his simple TV-informed utterances are mistaken for profundity. It’s ALL now starting to make sense!”
Then:
“And let’s not stand for his caustic and demeaning attitude. There’s no need nor place for it on this blog.”
Anybody else see the hypocrisy here? Smarten, in demeaning fashion, insults gardeners , portraying them as simpletons (a transparent jab at me, and one that shows he understands nothing about the profession). Then, he quickly lays out rules for the blog which, conveniently, don’t apply to himself and the behaviors he engages in. It’s just more of that same arrogant, haughty behavior that constitutes narcissistic personality disorder.
Move to Reno?
Actually, looking up the information took about 5 minutes. I guess when you are retired and living in your dream home in IV one has plenty of free time.
“Being There” was a very funny movie. I don’t for a second think that anybody would ever confuse Mr BB with the main character in that movie.
The two main elements of a great small farm are its soil quality and water supply. Talking about small farms, have their prices declined along with the SFR and condo markets?
smarten
Took me 2 minutes Mr. BB. Don’t flatter yourself.
And if it was all posted on this blog, then when I asked you what your angle was, why didn’t you just refer us all to your previous posts, line by line [the way you did with Mr. Murray]? Instead, you told us that you chose to reveal nothing; you wanted to maintain your anonimity.
MTR is correct. There’s NOTHING wrong with being a gardner. I salute you for being able to operate a computer keyboard with a green thumb. But at least when people like Mike or CL or MikeZ or Tom or John Newel or Sully or Grand Wazoo [don’t mean to leave anyone out] speak about real estate, they speak with some credentials. My question was simply what are yours? Now you’ve told us.
And FWIW, I certainly wouldn’t be asking my dentist for investment advice if I were interested in playing the market.
BanteringBear
Horsesh!t, Smarten. There are probably close to 20,000 posts of mine on the web. Two minutes my @ss. Why didn’t I refer you to my posts? That’s not my job! Look it up yourself. I dig all of my information, and I’m not about to do your research for you.
And, “credentials?” We now need certain credentials to be blogging? You mean, only the industry insiders are qualified to talk about housing? The same ones who never saw it coming? The ones who created the disaster which all of us taxpayers are now footing the bill for? The bankers, the builders, the developers- you mean those kind of credentials?
Or, perhaps you’re looking for something flashy, like “lawyer?” Because, as we all know, certainly a lowly gardener couldn’t be qualified to understand, much less blog about real estate, right Smarten?
Joe
Actually…a little ironic that a few years ago I was telling a patient of mine not to spend $300,000 on a vacant lot in Genoa, but for some reason he chose to listen to the advice of his financial planner rather than his dentist, and he bought the lot. I think it’s now worth a five figure amount. Now, Smarten, I agree with you as far as getting advice from the right “eperts”, but I think during this bubble the “experts” were not the right people to ask. Of course I owe basically all I know about real estate to this blog over the years, most of it coming from Smarten, BB, and RI. I kinda feel like you’re all my good friends that I haven’t ever met. And I don’t mind the dentist jab. We’re used to it.
CommercialLender
Smarten and BB,
Love what you add to the blog…. usually. But, please, give it a break already for the sake of keeping this blog interesting and enjoyable. For grown men of reasonable to high intelligence, your past few days of posts are not rising to your normal level.
Skeptical,
I don’t ‘shed a tear’ for these investors, don’t get me wrong. They try; they fail. But I don’t think they are inherently bad people, other than that they (and many of us in the bubble) contributed to over-paying and over-buying thus hurting the little guy or permanent homebuyer in this unwind. They are entrepreneurs, so they saw an opportunity, invested, and lost. Now, if they go lobby to congress ‘oh boo-hoo we lost all our money, do something for us and bail us out’ then I’ll jump into the fray to deservedly lambast them.
As to your comment on a 125% option ARM, that means that you could take out a, say, 80% LTV loan but make only minimal payments until such a time as your loan negatively amortized and turned eventually into a 125% LTV, at which time you then have to begin amortizing. So, no, they did not take out 125% upfront that I know of, but likely just paid minimum neg-am payments thinking values would continue upward and they could unwind the ‘investment’ profitably. Oops on that business plan.
Finally, as to the comment on demand, when an investor group buys 16 homes with no future, permanent buyer in mind, then that inflates true demand by 16 homes. THe builders saw 16 homes fly off the shelf, then set their next demand forecast for 16 or more new homes. You can see there was no ‘true’ demand for 16 homes, or for the next 16+ they then forecast. This is the reason I cited for pulling out of my contract: I saw it unsustainable.
Disclaimer, ‘cuz someone asked, I got stuck with 1 last rental home (upside down, but breaking even and stuck with it for what, another decade, but oh well) that I could not unload. While I sold the others and my primary, I’m not perfect. Oh, and don’t even get me started on the fact that I perfectly called both the dot.com and housing bubbles, but lacked the cajones to actually short the markets. So, I’m a few million light of where I could’a been, because I’m part, or mostly, chicken!
Have a great weekend, all.
smarten
“Horsesh!t, Smarten?”
Boy for someone with thick skin, you sure left yours at the door.
I’d say more but I’ll abide by CL’s request.
Dbno
Normaly Diane would have stepped in by now and asked you two to play nice. She is missed.
On another subject this would be a great time to be farming 10 acres.
billddrummer
To CL,
I think we are all a couple of cojones short of making the bold choices, but that’s another story for another time.
And if I might take a small exception to your comment about the 125% Option ARM. Rather than a 125% LTV, it is a 125% cap on the negam balance, regardless of the property value. Once the cap is reached, the loan amortizes over the remaining term, and nothing short of bankruptcy will stop it.
Understand that I’m making several assumptions about start rates and negative amortization balances.
In the example I cited earlier, if the ‘regular’ mortgage payment is $1,811.82 (6.5% rate), and the borrower makes a teaser payment at a 1.5% rate, the negative amortization amount is $822.82/month. This amount is added to the loan balance until the cap is reached–in this case, $358,312.50.
If my assumptions are correct, the cap percentage is reached after the 87th payment.
If the ‘run rate’ on the underlying mortgage is a larger spread than 5 points, the cap percentage is reached that much sooner. For example, if the run rate is 7.5% on a 1.5% teaser, the cap is reached in the 70th month.
THAT’S the time bomb everyone out there is referencing. People can’t refinance because houses have depreciated, can’t sell without bringing big dollars to the table, and can’t afford a doubling of their mortgage payment.
We’ll see what happens, but it won’t be pretty.