About as crazy as ever

[jpinpb]

I guess the main difference now is there is more skin in the game. http://www.latimes.com/business/realestate/la-fi-subprime-mortgage-20130427,0,6498564.story. People will be losing what they put down.

[bearishgurl]

[quote=jpinpb]I guess the main difference now is there is more skin in the game. http://www.latimes.com/business/realestate/la-fi-subprime-mortgage-20130427,0,6498564.story. People will be losing what they put down.[/quote]

…Today’s high-risk lenders differ from those during the housing boom in key ways. These lenders say the new subprime mortgages are actually old school — the kind of loans made in the 1980s and 1990s. In other words, a borrower’s collateral matters, down payments matter, income and ability to pay matter.

Subprime lenders care because they are holding the loans on their books rather than selling them to investors. They hope a private securities market for subprime loans, also destroyed in the meltdown, will reemerge soon.

For now, the subprime and alt-A business remains small, maybe $8 billion total, estimated Inside Mortgage Finance Editor Guy D. Cecala. That’s less than half of 1% of the $1.8 trillion in U.S. home loans last year.

Among those hoping to reverse the trend is the Polands’ lender, Citadel Servicing Corp. of Orange County. Chief Executive Daniel L. Perl said he has tested the water by making a few dozen subprime loans since late 2011, mostly with his own money rather than investment capital…

Yes, jp, and also these loans are kept in the lender’s portfolio. These types of loans have always been around and used to be referred to as “C paper.” They are nothing but short-term fixes for people that need them for purchase money, whether to enable a bidder to present a cashier’s check on the courthouse steps, or, as these buyers did, buy a personal residence with leverage while having bad credit, clean it up and improve it a little and have it re-appraised a few months down the road, where, hopefully, as they are rebuilding their credit, they will be able to obtain a mortgage on better terms (with Citadel, they had to put 35% down [borrowed from their IRA’s] and are paying a 10.9% interest rate).

Since there is no GSE involved, the gubment won’t be bailing out this mortgage bank if there is a default … in this case, Citadel of Orange County.

Back in the eighties, there were SEVERAL small lenders in town that specialized in C/D paper and each had a passel of investors who were only too happy to invest with them for 15%++ dividends. Some of these lenders no doubt ended up with properties, but in that era, they were happy about it, since the lender’s principal was ALWAYS a licensed RE broker who had numerous contacts in the trade and thus was able to foreclose upon and market the properties they took back himself in a timely manner.

In this article, I wonder why the Poland’s chose Temecula on the basis of appreciation needed to get out of their bridge loan within the year, since there are undoubtedly areas in SD, LA and Orange Counties which will appraise faster and higher than Temecula in the coming year. (This foreclosed-upon couple took this loan out strictly on the basis of believing what they buy would appreciate fast and they could get out their “subprime mtg” within the year).

The only reason I can think of why they would choose Temecula on the basis of appreciation is the lower price point and thus the lower amount of downpayment required (since they had to put 35% down).

[bearishgurl]

[quote=SK in CV][quote=CA renter]
I would argue that they are taking out a mortgage in order to preserve cash because they think they can earn more on that money than what they are paying in interest.

Contrary to the realtor rhetoric about the “benefits” of MID, it never makes sense to spend a dollar in order to save 30-40 cents (and that’s if you’re earning a pretty significant income) on taxes.[/quote]

I agree entirely. The argument that an interest deduction is “needed” for taxes is stupid. It was stupid back when the top tax rate was 70%. Using the leverage to increase overall return might make sense for some people.[/quote]

I also agree, SK, but when retirees are just starting out and haven’t yet signed up for MC, they’re not yet sure exactly how much it will cost them to live every month. Many feel is better to have more cash cushion until they figure out the lay of the land, including how much their monthly health premium is going to cost going forward and how many hours they may still need to work.

After the dust settles (MC, SS and possibly other pensions kick in) and the retiree knows if they are going to move to or stay in a particular locale, it is easier to make decisions regarding refinancing or mortgage payoff.

IOW, taking out or keeping a small mortgage keeps the retiree’s options open.

Your “friend” is already 65 or older and is a bit more “well-heeled” than the average retiree (asset-wise). In addition, those behind him won’t get to collect their full SS until age 66-67.

[SK in CV]

[quote=bearishgurl]
I also agree, SK, but when retirees are just starting out and haven’t yet signed up for MC, they’re not yet sure exactly how much it will cost them to live every month. Many feel is better to have more cash cushion until they figure out the lay of the land, including how much their monthly health premium is going to cost going forward and how many hours they may still need to work.

After the dust settles (MC, SS and possibly other pensions kick in) and the retiree knows if they are going to move to or stay in a particular locale, it is easier to make decisions regarding refinancing or mortgage payoff.

IOW, taking out or keeping a small mortgage keeps the retiree’s options open.

Your “friend” is already 65 or older and is a bit more “well-heeled” than the average retiree (asset-wise). In addition, those behind him won’t get to collect their full SS until age 66-67.[/quote]

Concur. Flexibility is a GREAT reason to have a mortgage even if a retiree has the wherewithal to pay it off, recognizing that it does come with a price. In some cases it’s well worth it.

My friend is almost 63, and he is better off than most. He bought right, saved a lot (despite making almost nothing on his investments), doesn’t live beyond his means, and always borrowed appropriately. Now he’s just looking for hobbies.

[bearishgurl]

[quote=SK in CV]Concur. Flexibility is a GREAT reason to have a mortgage even if a retiree has the wherewithal to pay it off, recognizing that it does come with a price. In some cases it’s well worth it.

My friend is almost 63, and he is better off than most. He bought right, saved a lot (despite making almost nothing on his investments), doesn’t live beyond his means, and always borrowed appropriately. Now he’s just looking for hobbies.[/quote]

Oh, I “assumed” he was over 65 because you said he was collecting SS. If he is 62, he either took a partial SS early or will wait until age 66 to take it.

Or, perhaps I understood wrong and you meant “projected SS.”

Yes, there are a LOT of boomers like him who have always lived modestly within their means. It doesn’t matter if they own their residence in MH or ChulaV. What their houses are “worth” today has no bearing on what they actually paid for them.

[SK in CV]

[quote=bearishgurl]Oh, I “assumed” he was over 65 because you said he was collecting SS. If he is 62, he either took a partial SS early or will wait until age 66 to take it.

[/quote]

He opted to take his benefits at 62.

[earlyretirement]

[quote=SK in CV][quote=CA renter]
I would argue that they are taking out a mortgage in order to preserve cash because they think they can earn more on that money than what they are paying in interest.

Contrary to the realtor rhetoric about the “benefits” of MID, it never makes sense to spend a dollar in order to save 30-40 cents (and that’s if you’re earning a pretty significant income) on taxes.[/quote]

I agree entirely. The argument that an interest deduction is “needed” for taxes is stupid. It was stupid back when the top tax rate was 70%. Using the leverage to increase overall return might make sense for some people.[/quote]

I totally agree CAR and SK in CV! I’ve never seen so many people in the USA overjoyed at paying interest payments to the bank so they can take the tax “benefit”. I get overjoyed RECEIVING interest but I do NOT get overjoyed PAYING it out to someone else over multiple years/decades.

[SD Realtor]

I see more people overjoyed that the bank will loan hundreds of thousands of dollars at 3 or 3.5% as opposed to the write off.

[CA renter]

[quote=SD Realtor]I see more people overjoyed that the bank will loan hundreds of thousands of dollars at 3 or 3.5% as opposed to the write off.[/quote]

Most definitely.

[earlyretirement]

[quote=SD Realtor]I see more people overjoyed that the bank will loan hundreds of thousands of dollars at 3 or 3.5% as opposed to the write off.[/quote]

Oh no doubt SD Realtor. For savers like me it’s HORRIBLY painful seeing rates so low but definitely for the masses it’s true BLISS seeing rates this low.

Unfortunately for savers/retirees we’re probably stuck in this low interest rate environment for several more years to come.

[Anonymous]

[quote=SK in CV][quote=Want_to_Retire]You definitely get better demand and appreciation in Coastal CA. However, even in the depth of the slump, I was actively looking and didn’t see any property in South Coastal OC that I can cash flow with 25% down. So, like ctr70, since I would never buy a negative cash flow rental in CA just hoping it appreciates, I ended up buying in dusty ol’ Phoenix. So far, tenants have been good. I think making a broad statements about “better tenants” in CA is interesting, I think it depends on diligent screening and luck in either state.

Now if I had just bought something in South OC hoping for appreciation and put up with some cash flow losses, I’d be eating steak tonight! Or if I had looked in San Diego, doh![/quote]

Most of Phoenix has appreciated at least as much as SD has over the last 15 months. So you should have both cash flow and appreciation, where in OC, you’d have negative cash flow and appreciation. I suspect you bought both at the right time and the right place. Particularly if you can keep it rented to the same tenant. (turnover kills)[/quote]
Update from the ground in Phoenix: Closed on a house in Paradise Valley in February – 25% down, overpaid a bit compared to the market but was tired of getting cut off at the knees on my bids – hoped appreciation will allow me to catch up to the price – it’s close. Put it on the market for rent in April – still finishing repairs/cleanup – got 13 month lease in June. Cap rate (including repairs) – estimate 5% and up depending on turnover (10 month – at 12 month net rent the cap rate is about 9%). Most of the tenants stay past the year and finding new tenants have been fairly quick during the right time of the year. The economy appears to be booming here with news articles about new jobs being created – especially in the Chandler area – but given the appreciation in home prices and the feedback I got from prospective renters on how much they were looking to pay, I think the window for cashflowing investments is closing quickly.

[earlyretirement]

[quote=Want_to_Retire][quote=SK in CV][quote=Want_to_Retire]You definitely get better demand and appreciation in Coastal CA. However, even in the depth of the slump, I was actively looking and didn’t see any property in South Coastal OC that I can cash flow with 25% down. So, like ctr70, since I would never buy a negative cash flow rental in CA just hoping it appreciates, I ended up buying in dusty ol’ Phoenix. So far, tenants have been good. I think making a broad statements about “better tenants” in CA is interesting, I think it depends on diligent screening and luck in either state.

Now if I had just bought something in South OC hoping for appreciation and put up with some cash flow losses, I’d be eating steak tonight! Or if I had looked in San Diego, doh![/quote]

Most of Phoenix has appreciated at least as much as SD has over the last 15 months. So you should have both cash flow and appreciation, where in OC, you’d have negative cash flow and appreciation. I suspect you bought both at the right time and the right place. Particularly if you can keep it rented to the same tenant. (turnover kills)[/quote]
Update from the ground in Phoenix: Closed on a house in Paradise Valley in February – 25% down, overpaid a bit compared to the market but was tired of getting cut off at the knees on my bids – hoped appreciation will allow me to catch up to the price – it’s close. Put it on the market for rent in April – still finishing repairs/cleanup – got 13 month lease in June. Cap rate (including repairs) – estimate 5% and up depending on turnover (10 month – at 12 month net rent the cap rate is about 9%). Most of the tenants stay past the year and finding new tenants have been fairly quick during the right time of the year. The economy appears to be booming here with news articles about new jobs being created – especially in the Chandler area – but given the appreciation in home prices and the feedback I got from prospective renters on how much they were looking to pay, I think the window for cashflowing investments is closing quickly.[/quote]

Congrats. Just out of curiosity, what is the profile of your renter? Professional? Blue collar, etc?

I was amazed how quickly the market is rebounding there. AZ is not my cup of tea but if you can make the ROI that’s all that’s important.

[Anonymous]

The renter is a franchise business owner. The inquiring potential renters are all over the map for my slice of the market – self employed, office manager, professionals etc. I would say I’m mid market for Phoenix houses.

[SK in CV]

[quote=Want_to_Retire]The renter is a franchise business owner. The inquiring potential renters are all over the map for my slice of the market – self employed, office manager, professionals etc. I would say I’m mid market for Phoenix houses.[/quote]

Mid-market in PV? Seems unlikely. Average listing price in the region is about $320K. Average in Paradise Valley is about $2,400,000. According to Trulia, there haven’t been any SFH sales there for less than $500K this year. PV is an uppermost market in the region.

[earlyretirement]

[quote=SK in CV][quote=Want_to_Retire]The renter is a franchise business owner. The inquiring potential renters are all over the map for my slice of the market – self employed, office manager, professionals etc. I would say I’m mid market for Phoenix houses.[/quote]

Mid-market in PV? Seems unlikely. Average listing price in the region is about $320K. Average in Paradise Valley is about $2,400,000. According to Trulia, there haven’t been any SFH sales there for less than $500K this year. PV is an uppermost market in the region.[/quote]

Thanks for taking the time to provide that follow up info. I don’t know Arizona well at all but like SK in CV I’m a bit confused. Is this Paradise Valley (85253) or Paradise Valley Village (85032)? Because the demographics seem totally different.

The median income for 85253 looks to be about $154,676.

The median income for 85032 looks to be as low as $45,000 in some neighborhoods to about a peak of about $102,000 in the most affluent part of that zip code.

I was having lunch with some buddies today and both of them mentioned that they noticed more out of state license plates lately in San Diego. I noticed that as well driving around. Also, one of them mentioned that he noticed more people he knew that moved out before moving back to San Diego.

I also noticed that on some of the other message boards that I post on. Some people that “swore they’d never be back” are moving back now or planning to. He asked my opinion on what I’d attribute that to.

Here is my take on it. After the bubble bursted, people were in a LOT of pain. Not only did they discover their houses weren’t worth nearly what they thought…but many were using their houses as ATM machines. Yet others that weren’t taking out HELOC loans were hit VERY hard because even if you were well diversified in the stock market, everything took a hit (unless you were shorting the entire stock market).

Most people felt a lot of pain. And many moved out to lower tier, less desirable and lower COL areas. Places like Arizona, Las Vegas, Texas, and even Oregon and Colorado.

But now with the stock market higher than ever, many people have recovered much of their stock portfolio and they feel “richer”. So they are coming back. Even some people that don’t have good job prospects in San Diego are coming back feeling more optimistic and “wealthier” at least on paper.

Like CAR mentioned and a point I agree with is that many “cash buyers” are finding ways to leverage. I’ve heard of some crazy things like people tapping into credit card cash advance checks that are at a low balance for a limited period or even some of these checks that places like Citibank are sending out say “0% until the balance is paid off with a 3% fee”. People ARE using things like this which can be treacherous.

So although it looks like they are “cash buyers” they are really using leverage to buy. Yet others are cashing in part of their retirement savings or 401K’s to buy which isn’t always a good idea either. Yet others I hear about are getting loans from parents or family members.

I heard a CRAZY story from one of my buddies today. He works with a girl that bought in my neck of the woods. I guess her family provided much of the down payment she needed. After her mortgage closed only 6 months ago, she went out and they bought 2 new (and expensive) German cars, new furniture on credit and a bunch of other junk. She is already struggling. I honestly don’t know how people could get themselves in this situation so quickly after buying.

My friend that is a real estate professional. EXTREMELY smart guy that bought 30 houses last year. He said he is starting to sell off his portfolio. He said that several private equity companies are way over paying for properties in his area.

While I don’t think we will see ANYTHING like what we saw with the Great Recession any time soon…. I don’t think we are out of the woods. So many people piled into the stock market chasing yield.

I hope this all ends up well.

[Author]

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