Foreclosure Flip Fails

There are not many properties going into foreclosure in MB these days, but there are some, and there's a story to each one.

How about one that is facing the prospect of foreclosure for the second time in one year?

Almost exactly one year ago, MBC wrote about a few properties in MB that were in default and apparently headed to foreclosure (see "Foreclosures in the News, and in MB" for a strut down memory lane). They included:

• 601 Larsson, which was for sale at the time for $2.499m; it never made it to auction, but sold short in December 2007 for $1.710m, well below the Sept. 2005 purchase price of $2.0m (see "Close the Books on 601 Larsson");

• 958 Rosecrans, which had been purchased in July 2006 for $977k; went sour in less than a year, and ultimately sold at auction for $828k in May 2007; and

• 225 39th St. (pictured), which hadn't changed hands recently, but which apparently had a $1m loan against it go bad, and was headed to auction.
  

Well, 225 39th is back in the foreclosure news.

It didn't get to auction last year – instead someone overpaid for it: $1.595m, in a private sale closing in June 2007. The buyers fixed up the home nicely and put it up for sale in August at $1.745m, looking to turn a tidy profit (+$150k).

Problem: That was far too high for an unremarkable 3br/3ba, 1600-sq.-footer one door off of Highland in El Porto. (As the area was once known, way back when.) Shortly came the credit crunch, and a slowdown in sales that has hit El Porto especially hard, and this listing hit the rocks.

The sellers allowed the price to come down, and even left it at $1.525m – a price that guaranteed a loss on the investment – for several weeks this year.

But long before then, they must have seen the writing on the wall. They stopped making payments on their $1.2m loan and were in default by December last year. Late last month, the lender decided to move toward a foreclosure sale, and the listing was canceled. (For more, use PropertyShark.com; it allows 6 free property searches a day.)

This must have looked like a deal to the would-be flipper buyers, but they all but sealed their fate when they paid $1.6m, miscalculating the demand for the home at resale. The case is reminiscent of that of 2507 Valley, purchased at auction last October for $1.643m, put up on offer for $150k more at year's end, and sold 2 weeks ago for a loss at $1.5m.

As 39th proceeds down the foreclosure road, the loan in default is $1.2m, and the home is in better condition. It will be some time before there's an auction, but you can almost see the "bargain" bells ringing again for someone else in the future. A word to the wise: Flippers, beware.

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UPDATE: The story has been updated; the original version erroneously reported that 225 39th had sold at auction last year. Instead, it was "rescued" with an off-market private sale before the trustee's sale.

Free Money if You're Underwater

Sagging under the weight of that giant mortgage?

Thinking about walking away and sticking faceless "investors" with your problem?

Don't move too fast! The Fed wants your bank (or those faceless "investors") to give you some free money to make that debt just a little less burdensome.

Here's how it works. Say you can't pay afford your $800k mortgage, but maybe you could make payments on a $600k mortgage. Great! We'll chop $200k off the mortgage. Then you won't default, and everyone comes out ahead.

You see, freezing interest rates and postponing recasts on interest-only loans to keep those loans affordable isn't going to be enough to stem the foreclosure tide. We know because Ben Bernanke says so:

Although lenders and servicers have scaled up their efforts and adopted a wide variety of loss mitigation techniques, more can, and should, be done... This situation calls for a vigorous response.

Bernanke knows that the tide is only beginning to come in.

People aren't just foreclosing because their payments have jumped. They are making the judgment to walk away because they're "underwater" – they already owe more than their homes are worth, and the housing correction has only just begun. They see the tide coming in and expect to get stuck even deeper below the surface.

So don't just throw them a lifeline, Bernanke says, bail out some of the water:

When the mortgage is ‘underwater,’ a reduction in principal ... that restore[s] some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure.

Ben's plan makes some sense. If homeowners have some skin in the game, and some hope that they'll eventually have lasting equity in the home, they might not walk.

(Funny, more homeowners might already have had some skin in the game if they had put up significant down payments, not 0-5%, or hadn't been allowed to leverage their home's paper value up to 125% with equity lines, etc. But that's the past, no sense revisiting it now.)

Bernanke can't impose a solution. He's pitching this as "relatively more effective" and ultimately a net benefit to lenders/"investors." He's encouraging them to see that the hit from a foreclosed loan would be worse than the loss from a voluntary write-down. And in some cases, that's undoubtedly true. (Probably more so in the next year or two.)

Of course, if you chop someone's loan once to get them out from underwater, they might expect the same the next time there's trouble. More free money! Bernanke acknowledges this:

[Lenders] say that if they were to write down the principal and house prices were to fall further, they could feel pressured to write down principal again.

This is a form of "moral hazard" – writedowns encourage more risky behavior by borrowers in the future, without really protecting the lenders. And it's not exactly fair to the folks who bought homes at other times with less risky LTV ratios. (Sorry, responsible homeowners, you're not in this game.)

That the Fed chairman is proposing something so difficult and noxious, with such blatant downside risks, should be startling. It's an indirect way of communicating that the Fed is very, very... very worried.

Ben seems to have taken by surprise the former Goldman Sachs CEO, Henry Paulson, who currently serves as Secretary of the Treasury:

While these equity considerations clearly impact homeowners’ financial situation, they are not the primary concern in the effort to prevent avoidable foreclosures.

They're not part of Paulson's strategy at the moment, but then, he's walking in step with the lenders. Paulson is all for a housing correction and seems more inclined than Bernanke to let the bad loans to bad borrowers go bad ASAP so we can start over.

But we may be entering a time soon when people will be looking for anything at all that floats.

Who's Melting Down?

It can't be fun to be bearish all the time, but if you are feeling that way now, 2008 is looking like your year.

The Fed's emergency rate cut Tuesday smacked of panic, even as they were trying to prevent panic.

The US president and his congressional counterparts are quickly getting over their issues to squirt out some kind of "stimulus" ASAP. (A stimulus package? Isn't that soooo early-90s?)

We're told the next big wave of bad news will follow from adjustments to the ratings of bond insurers, a concept which might put us to sleep for the night but for the $2.3 trillion (TR, trillion) size of the biz, plus the ripple effect (tsunami effect?) of the possible downgrades across banks, financials and even municipal bonds.

"Subprime" was just voted "word of the year" for 2007 – any chance it's "bond insurer" in 2008? We keed.

The conventional wisdom used to be that housing cannot cause a recession; it's a lagging effect of recession. That CW is getting a rewrite, and of course it's all about the who, why and how of the housing bubble.

Foreclosures are the leading-edge indicator of the housing bubble's collapse. Their dramatic rise in the past year, during a period of decent economic conditions, resulted from the first downturns in home values after years of double-digit growth. Here's a vital detail about foreclosures statewide in California, from DataQuick's recent press release:

Most of the loans that went into default last quarter [Q4 2007] were originated between August 2005 and October 2006. The median age was 22 months, up from 15 a year earlier, indicating that the pool of at-risk home loans is getting larger.

So, get that – "most" defaults come from folks who bought at the peak. Now, try restating that: Prices got so high, buyers couldn't really afford the homes they were purchasing, and within months of realizing that fact, they stopped paying their mortgages. Often, they stopped because the price they paid no longer made sense if they were holding a depreciating asset.

Here's how that bad attitude translated to data in Q4 2007:

• Last quarter's numbers of default notices sent out were a record in 42 of [California's] 58 counties, more than double the Q4 2006 numbers statewide. (DataQuick)

• The number of homes in LA County proceeding, for the first time, to a trustee's sale (foreclosure auction) rose 235% in Q4 2007, vs. Q4 2006. (PropertyShark.com; click here for PDF)

• Trustee deeds recorded, meaning the actual loss of a home to foreclosure, surged 421% in Q4 2007 over Q4 2006, from 6,000+ to almost 32,000 in LA County. (DataQuick)
  

Remember, Q4 in its entirety followed the official onset of the mortgage meltdown in August. But the trend had already been upward before that.

In LA County, of course, things are worst now in far-flung places like Palmdale, or in hard-knocks districts like Compton. (See the PropertyShark PDF for the top 10 zip codes in LA.)

There remain comparatively few foreclosures in MB, though we've got our radar trained on at least 2 active listings west of Sepulveda that are freshly in default, and we're intrigued by some purchases over the last year on which the loans are already going bad. Among the 2 actives, one was purchased in 2005 at a fairly high LTV, while the other doesn't fit the profile, as best we can tell. More on those – and any others – soon.

Our First Shorty is Back

In June, MBC noted that 2507 Valley had finally gone into escrow after about 15 months on the market.

At the time, it was listed at $1.799m and was a short sale. (See "Short Sale Pending on Valley.")

Turns out someone balked at the short sale – said to be a loss of $370k – and the property vanished from the MLS and wound up going to a foreclosure auction Nov. 1. (Curiously, the selling agents kept the ad for this one up on their board by a local restaurant with a proud "SOLD" sticker slapped over it long after the sale collapsed.)

MBC got the runaround trying to determine who bought Valley at the auction, but in these cases it's almost always one of the lenders owed money by the "homeowner." The fact that it's back on the market within weeks of the auction tells us that's what's going on.

New list price: $1.790m.

That's exactly $250k more (+16%) than was paid by the previous "owner" in Feb. 2004 ($1.54m) when the home was new.

For that price, you get 4br/3ba, 2850 sq. ft., a newer home on an oddly cornerish, 6000 sq. ft. lot on a busy street. You'll wonder where all that lot square footage really is, however, and the layout strikes many as odd. (Click here for more detail via Redfin; as we write, there are not yet any pictures.)

The price doesn't seem particularly outrageous. After all, before the mortgage meltdown, this is around the price someone else offered. And yet, today, this home would also fit just fine in the $1.6m tier. It would be a deal at $1.4m-$1.5m. How aggressive can the new owner afford to be?

And here's your chance to bet – both 1313 Oak and 601 Larsson were pitched in recent weeks as short sales. Will either one wind up sold that way, or will we just see them again next year after the banks take them back?

Can a Flip Flop This Quickly?

Something strange is happening with 225 39th St., a recent El Porto remodel. (Click address for details.)

MBC reported in April that the home was in foreclosure:

Also coming up for auction May 4 – 225 39th St., just a door down from Highland Ave. in El Porto. No recent purchase here, but records indicate a $1.005m loan gone bad.

It seems rare that homes go to auction and go anywhere from there but back to the bank. Fast-forward a bit, though, and records show this home closed for $1.595m on June 14.

Seven weeks later, on Aug. 10, it was on the market, freshly remodeled (3br/3ba, 1600 sq. ft.), at $1.745m (+$150k).

No takers. It was re-listed to wipe out the start price, then it came down a bit, and this week, the list price came down to $1.629m. That's right, just $34k more than the June purchase price.

You'll give the buyer's agent $40k at that price, which makes the deal a loss, straight up.

The big questions are: When the remodeling was done, and by whom? That is, was the work done before or after the June sale, and by the June buyer or a previous owner? Obviously, if the current holder did the work, the losses are magnified.

The only thing that's clear is that this owner wants out. You do not often see a listing go from profit to loss like this in 60 days.

Down $700k, Facing Foreclosure or Short Sale

So much for the flirtation with Craigslist – 601 Larsson is back on the MLS.

A home that began March 20 at $2.695m is now up at $1.999m, with this language:

Bargain priced estate home in the prestigious manhattan beach "hill section". Lender approved short pay.

The owner paid $2.0m in Sept. 2005, so the home is priced somewhat surprisingly at a 2-yrs.-ago level. (This one will throw off the two-year-itch averages.) Last list before they quit was $5k short of $2.4m, so this is a hefty drop.

Now the question is how short you can go.

Can we guess it's the holder of the 2nd who recognized the threat of a total wipeout if this proceeds to auction Sept. 5? (Auctions have been scheduled and canceled a few times, but that game can't go on forever.)

At this price, even with its location issues, there oughta be buyers. Oh, wait, there's some trouble on that side, too...

A Canceled Listing Revived on Craigslist

If you want a deal in the Hill Section, 601 Larsson could be your best bet. Just be prepared for some twists and turns.

The current owner paid $2.0m in Sept. 2005.

The home hit the market this Spring at $2.695m, then quickly came down to $2.495m. In time, the price hit $2.395m, but there were no takers.

By mid-July, the listing was canceled and the signs were down. But it's available again.

Today it's on Craigslist (yes, they sell real estate there), and Zillow lists it as FSBO.

Here's the language from the Craigslist listing:

Investors...Take over payments "subject to" + $100,000 cash. Comps include a home, seconds away, just went into escrow listed at $4,295,000. This property 3800 sq.ft, large corner lot, hardwood floors, granite, etc.

Of course, the big question is how much is owed on the house. Is it near the $2m paid <2 years ago?

If you just want to move in, the loan terms and monthly payment are what matters – provided you really could take over the mortgage, no easy feat. Payment has got to be $10k+/mo., and you've got $20k in property taxes each year to worry about, too.

Finally, the seller wants $100k. Maybe that's for his or her pockets, maybe it's to bring payments current, maybe some of both. This is what the seller wants to walk away – a clearer statement of a seller's bottom line than you'll often see. (Is it negotiable?)

Before you think this looks like a great flip opportunity, let's dispense with the ad's reference to a potential comp. That was new construction at 300 N Dianthus, 1700 sq. ft. more of living space and a lot that is 2000 sq. ft. larger. There are so many reasons you should not consider Dianthus in relation to Larsson. But savvy investors will see past that instantly.

The vital fact is that the market has rejected this home at $2.4m this year, so its resale value appears to be something below that, if you could get it now on good terms.

MBC has asked the owner to provide some details, and we'll update this story if we get a response.

Can't Ignore the Rush of News

Let's get outside our comfy confines a moment and see what the rest of the world is saying about real estate.

Countrywide Financial CEO Anthony Mozilo, yesterday:

We are experiencing home price depreciation almost like never before, with the exception of the Great Depression.

Ian Shepherdson, economist for High Frequency Economics, today:

Housing is contracting at an accelerating pace, taking out with a vengeance the brief stabilization at the turn of the year, when mild weather and plunging gas prices supported activity.

Front page of the LA Times today:

Foreclosures [statewide] soared to 17,408 for the three months ended June 30, an increase of 799% from the same period last year. The current rate handily exceeds the previous foreclosure peak set in 1996, when the state was in the final throes of a six-year slump....

Most analysts say the housing market won't stabilize until 2008 or 2009. The so-called soft landing that was much talked about last year is rarely mentioned anymore.

On second thought, let's go to the beach.

Foreclosures in the News, and in MB

It's comforting to think that the headlines about sub-prime loans and foreclosures simply don't mean anything for Manhattan Beach real estate.

Comforting, but not completely true.

First, the news: Today's LA Times business section features a front-page story, "Foreclosure pace nears decade high," much gloomier than the typical LA Times real estate story.

There are now 900 homeowners per week losing their homes in California to foreclosure, up from 100 per week one year ago. More than 11,000 foreclosures in the first three months of 2007 represented an 800% increase over the same period last year. Cue the housing bear:

"For this rise in foreclosures to be happening in the midst of a strong labor market is truly unique and scary," said analyst Christopher Thornberg of Beacon Economics.

Incredibly, Thornberg predicts a four- to five-fold increase in foreclosures.

A chart provided by the Times suggests that Thornberg expects foreclosures at triple the peak reached in 1996 (15,418). What if he's only half right?

The article goes on to discuss how foreclosures are concentrated in "the places with the cheapest housing in the state," with San Diego County as a notable exception – "the county's market peaked earlier than the rest of the state."

Whose loans are going into foreclosure? "Most of the loans," says the Times, "going into default now were made at the peak of the housing boom in 2005."

MBC offers a local example. On the market today, you'll find 601 Larsson, a nice Hill Section remodel, 4 bed, 4 bath, almost 4,000 square feet. Purchased in Sept. 2005 for $2.0m, now listed at $2.499 after starting (March 20) at $2.695.

601 Larsson goes to public auction May 4 if no one buys it real, real soon. Not that you'd know from the listing language – no reference to the legal troubles.

Also, the Beach Reporter carried a legal notice last week that 958 Rosecrans would go up for auction tomorrow, April 18. This 2 bed/1 bath, 975 sq. ft. house was purchased July 3, 2006, for $977,500. The note gone bad was worth over $800k. Who loses a house in less than a year?

Also coming up for auction May 4 – 225 39th St., just a door down from Highland Ave. in El Porto. No recent purchase here, but records indicate a $1.005m loan gone bad. HELOC hell? Zillow thinks the property is worth $982k, less than the loan. Minimum bid is $1.1m. Uh-oh.

Another active listing in default: 2816 Manhattan Ave. This is new construction first listed in Sept. 2006. However, it appears to be an old loan that went bad. Surely this can be fixed before auction, but the process must be stressful for the builder. Why, then, has there never been a price reduction after 7 months on market at $2.9m?

Overall, according to one source, there are just 4 homes in 90266 now in foreclosure, and 15 more in default. Not bad for a pretty big town with some very, very big mortgages. Let's hope this remains a rare phenomenon.

Loan 'Reset' Calendar - Trouble in 2-3 Years

It seems generally agreed that today's troubles in the sub-prime lending area were triggered by two factors: declining home prices and lousy lending standards.

Flat or declining prices closed off the "escape route" of refinancing for many buyers whose payments were ready to "reset," meaning the expiration of a low "teaser" rate of 1% to 4% and/or the end of an interest-only or neg-am period.

When the payments jumped, many stopped making payments outright. About 30 seconds later, 40-plus sub-prime lenders went out of business.

(Today's vivid illustration: Two weeks before Opening Day, the Texas Rangers have dropped Ameriquest from the name of their baseball stadium. In a fitting irony, the lender signed a 30-year deal in 2004, but now could no longer make the payments.)

Trouble in the sub-prime area should continue for many months to come, if we look at the dollar volume of sub-prime loans facing reset. (This chart [click to enlarge] is sourced to Credit Suisse, and comes courtesy of a poster at Mortgage Lender Implode-o-Meter. MBC has made no independent effort to confirm it, or judge its scope.)


How does the sub-prime flameout affect Manhattan Beach? Instinctively most people will say there is zero or limited impact. There are no sub-prime buyers in town, you might hear – this is just a different market segment. And the counterargument is that prices everywhere will be negatively impacted, because rot at the "bottom" of the market invariably drags prices at the top, too, with fewer first-time buyers and move-up buyers able to enter the market. This debate sounds a bit indirect and esoteric, however, and it could take years to settle it.

MBC is wondering about another factor: Loan resets on those million-dollar mortgages held by Manhattan Beach homeowners.

All over town, people who bought (or refied) in the last 4-5 years are sitting on adjustable-rate loans with 3- and 5-year "rate lock" periods and interest-only periods. (In MB, these are more likely to be "Alt-A" type or "prime" ARMs, similar in form to many of the subprime loans now going bad.) These "affordability products" were absolutely vital to allowing regular old upper-mid families to buy in during the boom.

Here's the problem. Often, the rate lock and I/O period on these loans will end simultaneously. If you're still holding the loan, you're in a for a payment shock. The only question is how bad it will be.

People who worried about these payment shocks after taking the loans simply told themselves they could always refinance and reset the clock with a new 3- or 5-year I/O period. But if home prices continue flattening or declining, maybe no refi is possible. Your LTV ratio might have gotten worse since you bought.

The next step for the homeowner in this situation is one of three things: 1) Pay the higher payment, perhaps $1,500-$3,000 more per month; 2) Stop making payments and skid along to foreclosure; 3) Sell if you can. It is obvious that more "must-sell" inventory would drag prices down in MB even in the absence of any other factors.

If we're going to see this effect in MB, the chart above suggests that the problems really start about 26-30 months from now (March-June 2009). That's when "prime ARM" resets start to swell. Over the next year or so after, if we're making the right assumptions here, the impact of the resets on homeowners translates into more sellers in trouble and willing to deal.

No less an authority than Alan Greenspan said just last week that all of these sub-prime problems would "disappear" if home prices simply went up 10%. But wishes aren't fishes. If prices don't go up, a downward trend could accelerate in 2-3 years even in our lovely, luxury beach hamlet.

Note that this discussion ignores the issue of short sales. We don't have short sales in Manhattan Beach!