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Jim Klinge
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Posted by on Jun 27, 2012 in Carmel Valley, Market Conditions, Psycho-babble | 11 comments | Print Print

Heard This Before?

From HW:

The Southern California region is facing a another wave of foreclosures with many San Diego borrowers underwater on option ARM and Alt-A loans that are scheduled to reset soon, according to San Diego real estate investment firm Blue Sky Capital.

Blue Sky Capital said it has been tracking properties in San Diego County and many of those with adjustable rates will not be able to afford larger monthly payments when their loans reset. The REIT says more than 36% of San Diego mortgages are currently underwater.

“While these option ARM and alt-A loans exist throughout the county, areas like Carmel Valley are filled with them. During our tracking of distressed properties in the county we found many homes in areas like Carmel Valley were purchased with zero, or a small amount down, so there is very little equity in theses properties,” said Chris Williams, CEO of Blue Sky Capital. “Carmel Valley, just north of the city of San Diego, has a median income of $90,000 and while higher end families have been able to withstand the initial housing meltdown, things are about to change. We will see more housing distress in Carmel Valley, and as a result, more foreclosures and short sales.”

Many homes in the area remain in negative equity, cutting down on the inventory of for-sale homes, Blue Sky Capital said. The result of this trend is higher prices since limited inventory pushes prices higher.

“You could say the positive of this negative equity is that it helps drive home prices up, as underwater homeowners delay as long as possible putting their home on the market which creates a supply constriction. But it’s only temporary and not a real sign,” said Williams. “These situations are unsustainable and certainly short lived. Strategic defaults, foreclosures and property value declines have to happen for the market to reset and clear itself of the toxicity from the greatest mortgage mess of this century.”


  1. The term reset is the wrong term. A reset it a change in interest rate, and with the current monetary policy floating rates “reset” to the lowest rate in history. The current 1 month LIBOR is 0.24. A good borrower “reset” is LIBOR + 2- 3%, so their “reset interest rate” is…3.25% or lower. SHOCKING. Or maybe you have one of the WAMU MTA option-arms from the height of the bubble. The 1 year MTA index is…0.124, and since you are in CV your credit was good. So your current interest rate is 2.375? Default-city when that loan resets!

    Anyway the correct term is recast: a rate change and re-amortization of the loan.

    As always calculated risk has done a great job. Tanta was particularly good with this stuff:

    Just noodle around and you’ll see reset versus recast number; the trash is already defaulted, and the rest is not going to be catastrophic. WAMU was taken over in September, 2008. That’s almost four years ago. Bear Stears was 4 1/2 years ago. These loans have reset and everything likely recast into an amortizing loan, with a great low interest rate.

    Move along; nothing to see here.


  2. Exactly – they are re-casting to rates that are lower than the initial teaser rate!


  3. Because nobody in the mainstream media knows anything about real estate, when this stuff gets published and they make it sound factual, then the readers get the wrong impression.

    What will readers do?

    Sellers = wait.
    Buyers = wait.

    Thanks a lot.


  4. I’m trippin’, is it still 2010?


  5. Hey Jim,

    Yes, Tanta was very particular about recast vs reset. Rates weren’t the only thing that were supposed to make it jump… remember that it was supposed to start amortizing (from interest only to full amortization)

    For example, when the “recast” happened, they were supposed to not only get the rate change, but they were now supposed to start paying off principal. Reamortizing a huge loan over 20 or 23 years after 7 or 10 years of interest only was supposed to be a huge shock.

    However, rates didn’t just drop, they dropped HARD, which means that the recast event basically was a non event. Even at 5.5%, that could have been a problem for many people. However, at 3.25%, it will be so small, it’s imperceptible. I know, I have a sub-4% fully amortized loan.

    They still are underwater, but there’s no impetus to stop paying. So, we’d only be left with adversarial borrowers… which there are really not that many of.

    Many people are good, mostly honest, mostly decent.



  6. Its like crying wolf all over again.


  7. The Fed led the way and LIBOR followed, and a complete meltdown was averted. The fact that many are still in their homes thanks to ZIRP does not mean Joe Homeowner was the intended beneficiary of the rate orchestration, of course. In fact it’s arguable whether he’s better off than before. Probably not in my book.

    I’m not sure I see any big shocks coming up that are going to result in a big surge of new (quality) inventory. Sad to say. So if quality inventory is not going to increase radically, it would seem that buyers should give themselves a longer time frame to find the right house.


  8. “So if quality inventory is not going to increase radically, it would seem that buyers should give themselves a longer time frame to find the right house.”

    And by that I mean get started sooner, expecially in this rate environment.


  9. “You could say the positive of this negative equity is that it helps drive home prices up”

    If the ‘writer’ attended any school past the 12th grade, they should seek a tuition refund.

    The entire article is a load of bilge. It just needs some colored charts to achieve perfection.

    How about some snappy recent quotes from your il Duce Yun soon?

    I need someone to laugh AT and Lawrence is always a Perfect Candidate but the people in the out house are a close second.


  10. I think the real question will at what rate will the economic numbers continue to fall? If another recession is possible in the Fall due to either a slowing economy or a shock from Europe then all bets are off for a recovery in the housing market. Will underwater owners continue to put money into a decreasing asset after the perceived bounce has flattened or declined? I guess we will see.


  11. For what it’s worth. I’ve got a 7 year IO that resets in November. Right now it’s 5.5%. Was considering attempting a loan mod last year due to slightly underwater. Read every page of my loan docs and discovered that once the loan recasts, the IO will remain for 3 years. The rate will be 1yr LIBOR plus 3 points. Based on today’s LIBOR my payment will decrease $700. The recast last for a year. This buys me some time, that is all.



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