Sunday, July 15, 2007

OC California: "Unbelievable how many people were conned into taking these mortgages"

State of California homeowners, as of July 2007, rank second to only Nevada with the most frequent use of the f-word.

Foreclosure, that is.

The OC Register reports that in Orange County foreclosure filings totaled 1,647 in June, or one for every 589 households. That's down about 8 percent from May, but more than doubled the total compared to June 2006.

There were over nine thousand filings in Orange County, California over the first six months of 2007, over three times the number of foreclosure filings during the same period in 2006.

The OC Register article quotes Dr. Walter Hahn, an Irvine-based real estate economist and consultant, who says that foreclosures will increase going into 2009. Hahn says millions of subprime borrowers and real estate speculators will see their introductory "teaser rates" adust and will not be able to afford higher payments.

"It is just unbelievable how many people were conned into taking these mortgages," Hahn said.

Would we call it that?

Dr. Walter Hahn, 40 years of real estate experience in Southern California

I mean, being "conned" into taking a mortgage? That sounds like pretty strong language, while admittedly probably not as strong as the other f-word being used with just as high frequency in 1 out of every 589 OC households right about now. I don't know. Being conned into doing something sounds so criminal!

There are hundreds of OC mortgage brokers out there still touting the merits of interest-only and pay option ARM loans. Is it OK that people are still being "conned"? Maybe these mortgage brokers are just trying to do their part and contribute to the greater good of Orange County society because they know something most of us do not. Perhaps the rate of interest that the layperson sees today are at an all-time high, while OC mortgage brokers sees lower rates on the horizon?

And what role did Realtors play in selling these homes to home debtors in Orange County?
Did they assuage home debtor concerns about the balloon mortgages, saying it would all be OK and that they could "just refinance in a couple of years"?

Let's remember that the OC median home price was around $600,000 per unit in 2005.
Median gross incomes for families in Orange County, CA hovered at around $75,000 per annum. Those two market variables (some like to call them fundamentals) don't always make good bedfellows, unless you can get creative. Real creative. To buy a home with such an income, well, let's just say it would take "some doing". And some outside of California, where home values tend to be a little more grounded with reality, might call creative home financing "cheating". But let's not use that word. Let's just say the OC realtor found a homebuyer, and just referred them to a "great contact" of theirs in the mortgage business, and, abracapocus, deal is sealed. The homebuyer is now a glorified OC homedebtor and welcomed to the exclusive club! Over there is my accountant Skippy, and over there is my broker, Scooter, and next to the hearth, my realtor-niece Buffy! See you at the martini bar! Don't forget, tee off at 10:00 sharp!

Now fast forward to July 2007. A number of those better-than-median incomed OC homedebtors are falling hopelessly behind with their mortgages. Notices of default are three times what they were a year ago. Lending standards have tightened dramatically in most corners. Inventory of OC homes are increasing. Several large mortgage lenders (many based in Orange County) have gone out of business entirely. Some smaller lenders are trying desperately to stay in business. Meanwhile, Realtors are left scrambling on deck, unsure what message should be relayed to prospective clients: "What are we supposed to say again? 'It's a great time to buy' or 'houses are staying on the market longer than they used to'? "Oh God, what do we say now? What do we say!?"

And the pay option arms and interest-only loans? Hey, whether you need them or not, these same mortgage financing intruments that were used to "con" millions of OC home debtors? They are still in the front window of most banks and lending institutions here, here and here.
Fact is, the instruments might very well make sense to prospective homebuyers who have money to burn, strong cashflow, financial flexibility, and are somehow not averse to interest rate risk of any kind.

"Unbelievable how many people were conned into taking these mortgages".

True. Very true, but nobody put a gun to anyone's head.

And so it is. Caveat emptor, Orange County. Caveat-freaking-emtor!


caliguy2699 said...

Nice post. The whole "being conned into taking a mortgage thing" reminds me of all this potential bailout nonsense we've been reading about.

Like you said, nobody put a gun to any of these peoples' heads.

If you as a buyer don't do your own due diligence and read every word of the financing terms and don't do the work to make sure you understand everything completely (especially when buying a house is most likely the biggest purchase of your life) then it's hard to escape a big deal of responsibility.

Even if the mortgage broker is a shiny-toothed crook.

repo4sale said...

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30-70% off commercial(all)
Deals since 17(thanks dad)
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Read 100+ business books/year &
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when others are greedy & be greedy
when others are fearful.”
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Anonymous said...

Nobody is responsible for anything anymore. It's all conned, your kids are fat, your spending like an thief, your credit is maxed, the repo man took your car. It's not your fault it's someone else's. Yeah right! Our society is getting more and more disgusting and there are actually people who listen to this drivel.

Anonymous said...

Homedebtor suckers. hahahaha
i will buy your house from the bank loser at 50% off.

crimekate said...

Thank you. THANK YOU. I am really tired of hearing the spin in which everyone *but* the adult who signed the mortgage documents is held responsible for this whole mess. The lenders don't behave well either, but it's not ALL their fault.

You might enjoy this post I wrote for a friend's blog a few months back:

Don said...

I don't see a big crash on commercial, or at least not large commercial since the decision-making process there tends to be a bit more rational. The dividing line is probably somewhere around $1-2 million on property values since below that is where small investors who got bubble-crazy may have bought properties forgetting the basic economics of real estate. I doubt that many REITs or corporate buyers bid up commercial properties on the real estate always rises theory (alas, I don't think the same can be said for REIT share prices).

A friend lives in a building bought a couple years back by a pair of small investors. They put a lot of time and money into renovating the building, but there's no way the rents in the building can justify their asking price (it has 8K/month in rents and they want 1.2 million for it. The new buyer won't be able to raise rents more than 4%/year courtesy of L.A.'s rent stabilization and it would take a pretty hefty downpayment to not be cash-flow-negative just on mortgage and property tax).

arroyogrande said...

I don't know if I would trust "Dr. Walter Hahn, 40 years of real estate experience in Southern California" to know what he was talking about...look what he was saying just a year ago:
Lansner on Real Estate
June 02, 2006
Insider Q&A: Another housing bull

"Veteran real-estate economist Walter Hahn has been saying for some time now that homes in The O.C. may appreciate at a pretty consistent 10% annual rate for the next decade. We figured with all the noise about recent slowing sales volume, we’d check in with Walter to see if he’s still as bullish on local housing.

Q. As you sticking to that forecast?
A. I am sticking to my 10%-a-year home price appreciation thru 2014. The reasons..."

Blah blah blah.

And now he says "foreclosure will keep rising through 2009. He said millions of subprime borrowers and speculators in housing face the end of low introductory 'teaser' rates. They won't be able to afford higher payments" and "It is just unbelievable how many people were conned into taking these mortgages"?

Wow, like this foreclosure stuff happened "all of a sudden". Like really, who could have known? *Sigh*.

- arroyogrande