Most people assume the relative lack of must-sell inventory at the high-end of the housing market is because fewer borrowers at these price ranges are distressed. Nothing could be further from the truth.
So why have we seen so few foreclosures?
Amend-extend-pretend. The banks are choosing squatting over foreclosure. With little government support and no political support for a bailout, the neighborhoods with house prices in excess of $800,000 are only maintained by the legions of unforeclosed delinquent mortgage squatters. 
With no pressure from regulators to mark their loans to market value, and with near zero cost of money, banks plan to wait until demand returns to this segment. With no home equity from the lower rungs of the housing ladder, a weak economy, slow job creation, and no incentives to save, banks may be waiting a very, very long time.
Refis on underwater jumbo loans nearly impossible
Carolyn Said — Updated 06:44 p.m., Saturday, June 23, 2012
Jeana Pieralde and Diana Tierney did everything right when they bought their Pleasant Hill house in 2006, choosing something they could afford and making all payments on time.
Now, however, they’re trapped in a mortgage with a 6.375 interest rate – sky-high compared with current rates, which average 3.7 percent – and they can’t refinance because their house is underwater and their jumbo mortgage is excluded from government plans for underwater refis.
So if they could afford the original mortgage, what’s the problem? The basic premise of this article is erroneous. These borrowers have no real problem, they just want a better deal. 
Their dilemma is shared by huge numbers of Bay Area residents who bought homes with “jumbo” loans before the real estate market tanked.
“It makes me sick when I think about it. We could save between $800 and $1,200 a month,” said Pieralde, who works in information technology security for the city of San Francisco. Tierney is a social worker for Contra Costa County. “We have tried every avenue over the past four years to try to refinance our home. I call about every three months trying to do something.”
If it makes her sick when she thinks about it, then perhaps she shouldn’t think about it. Refinancing is not an entitlement. She should be happy she was smart enough to borrow within her means and can comfortably make the payments.
‘Nothing you can do’
The four-bedroom split-level they bought for $799,000 has plunged in value to $566,000 – and they owe $648,000. Their paychecks as government workers have shrunk from contractual changes. The couple, who have perfect credit, don’t want to blemish it by walking away from the house or doing a short sale.
Government workers in California can afford $800,000 homes? Obviously, they are overpaid.
“I have so many clients who are in that position” of being unable to refinance an underwater loan, said Fif Ghobadian, a broker with Guarantee Mortgage in San Francisco. “There is nothing you can do; it’s a brick wall.“
So what? Should taxpayers bail out people with jumbo mortgages? Who is going to vote for that one?
During the housing boom, almost 60 percent of Bay Area housing loans were jumbos – mortgages above the former limit of $417,000, according to San Diego real estate service DataQuick.
The prevalence of jumbo loans in coastal California explains much of the lack of foreclosures. The GSEs and the FHA are promptly processing their foreclosures. The banks are sitting on their bad loans.
Refinancing at a lower interest rate provides a sort of household economic stimulus. “If you have that extra money in your pocket, obviously you’d be spending more, and it makes life more comfortable for people,” Ghobadian said.
That economic stimulus effect inspired the government to expand its underwater refinance program. HARP 2.0, which went into effect this year, lets Fannie Mae- and Freddie Mac-backed mortgage holders refinance no matter how underwater their homes are. But Fannie and Freddie only back “conforming” or non-jumbo loans, leaving holders of jumbo loans with little recourse. And efforts to remedy the problem through legislation have gone nowhere.
And such efforts will continue to go nowhere. Imagine how people in flyover country would feel about subsidizing California jumbo loan holders.
“There is not much that can be done legislatively for loans that are not agency-backed because they are covered by individual private contracts,” said Guy Cecala, publisher of Inside Mortgage Finance in Maryland. “Servicers will tell you they don’t know who the investors are. It’s very frustrating when you hear that kind of thing, but very common.”
What they fail to add is that even if they knew who the investors were, those investors would not care about the borrower’s sob stories anyway.
Digging deep to refi
Refinancing is so important to some underwater homeowners that they’re willing to dig into their pockets to make it happen.
That was the case with a Half Moon Bay couple who asked not to be identified for financial privacy. They bought their seaside home in 2005 for slightly more than $1 million with a seven-year adjustable-rate mortgage. Late last year, when they went to refinance, the home appraised at $730,000 – and they still owed $834,000.
So they took $140,000 out of their retirement and savings to pay down the mortgage enough to refinance into a 30-year fixed at 4.25 percent.
I question whether draining one’s retirement savings to pay down a mortgage is a good idea. The tax implications make that money very expensive.
“We felt we were up against the wall,” the woman said. Refinancing “would bring our interest rate down and save a lot of money over the life of the loan. It was a hard decision but we made the financial calculation that it was worth it.”
Most people don’t have the resources to explore that option, however.
What? I thought all jumbo loan borrowers were rich?
Fall through cracks
Every time a new program is announced, “we fall through the cracks,” she said. “We’re financially able to keep our house, but we cannot get the advantages other people have that fall into the right categories, or who defaulted.”
That’s the point of the false-hope bailout programs. The only real aid goes to the banks, and borrowers are left only with false hope to get them to make a few more payments. The next couple are testament to how successful these false-hope bailout programs really are. This family likely would have defaulted long ago if not for false hope.
Pieralde and Tierney have had the same experience of falling through the cracks.
They’ve applied for a loan modification, tried for the Federal Housing Administration refinance programs and looked into a “short” refinance with their bank. For a while they pinned their hopes on the national “robosigning” settlement, which calls for the five largest U.S. banks to offer principal reductions and underwater refis. But their servicer, JPMorgan Chase, does not own their loan, which makes them ineligible for the refi.
“We’ve worked hard all our lives,” Pieralde said. “We’re watching other people get help. This settlement was something we were hoping (would help). Now we’re stopped dead again.”
And they will continue to be stopped dead over and over again. They are the ones paying for the bailouts of the irresponsible borrowers through their continued high interest rate payments. Suckers.
Did they bother making any payments on that jumbo loan?
I have written many times about the amend-extend-pretend with high end loans. Today’s featured property is a perfect example. The nicer areas of Irvine actually peaked in the spring of 2007. This property was purchased at the highest tick of the market on 5/8/2007. Based on the NOD filed later that year, this borrower didn’t make many payments. It took more than four years to finally foreclose.
Proprietary OC Housing News home purchase analysis 
$899,900 …….. Asking Price
$1,190,000 ………. Purchase Price
5/8/2007 ………. Purchase Date
($290,100) ………. Gross Gain (Loss)
($95,200) ………… Commissions and Costs at 8%
============================================
($385,300) ………. Net Gain (Loss)
============================================
-24.4% ………. Gross Percent Change
-32.4% ………. Net Percent Change
-5.3% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$899,900 …….. Asking Price
$179,980 ………… 20% Down Conventional
3.62% …………. Mortgage Interest Rate
30 ……………… Number of Years
$719,920 …….. Mortgage
$177,048 ………. Income Requirement
$3,281 ………… Monthly Mortgage Payment
$780 ………… Property Tax at 1.04%
$192 ………… Mello Roos & Special Taxes
$225 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$96 ………… Homeowners Association Fees
============================================
$4,574 ………. Monthly Cash Outlays
($738) ………. Tax Savings
($1,109) ………. Equity Hidden in Payment
$212 ………….. Lost Income to Down Payment
$132 ………….. Maintenance and Replacement Reserves
============================================
$3,071 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$10,499 ………… Furnishing and Move In at 1% + $1,500
$10,499 ………… Closing Costs at 1% + $1,500
$7,199 ………… Interest Points
$179,980 ………… Down Payment
============================================
$208,177 ………. Total Cash Costs
$47,000 ………. Emergency Cash Reserves
============================================
$255,177 ………. Total Savings Needed
——————————————————————————————————————————————-
We're sorry, but we couldn't find MLS # S702031 in our database. This property may be a new listing or possibly taken off the market. Please check back again.
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$999,999 3 LYNNFIELD |
0.03 miles 5 bd / 3 ba 2,800 Sq. Ft. |
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$965,000 2 BROCKTON |
0.1 miles 4 bd / 2.75 ba 2,550 Sq. Ft. |
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$1,190,000 12 CAMELLIA |
0.22 miles 4 bd / 3.5 ba 3,150 Sq. Ft. |
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$879,000 3 TROVITA |
0.52 miles 4 bd / 3 ba 2,794 Sq. Ft. |
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$878,800 11 RAMADA |
0.54 miles 4 bd / 2.5 ba 3,000 Sq. Ft. |
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$999,999 3 FOXCREST |
0.6 miles 4 bd / 2.5 ba 2,700 Sq. Ft. |
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$925,000 78 DOVECREST |
0.68 miles 5 bd / 3.5 ba 2,996 Sq. Ft. |
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$1,150,000 22 MAYWOOD |
0.84 miles 5 bd / 4 ba 3,220 Sq. Ft. |
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$1,098,800 7 MALIBU |
0.85 miles 4 bd / 2.5 ba 3,029 Sq. Ft. |
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$1,198,000 26 MAYWOOD |
0.86 miles 5 bd / 3.5 ba 3,029 Sq. Ft. |
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28 Responses to “Jumbo loan owners have no hope of a bailout”
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LOL $140,000 out of their retirement to refi an underwater jumbo loan? What idiots. But I’m sure their home is their dream home and one of a kind!
Those unique tract homes are in every property description in Irvine too.
It’s crazy. The only way to truly afford an $800K+ mortgage is to be making well into $200K+. At that joint income, living in CA, your marginal rate is 42.3%. Add the 10% penalty, and even if have $100K to withdraw, you’re looking at a net of < $50K. Crazy…
It’s not necessarily crazy at all. What are your retirement investments returning lately, assuming they have a positive rate of return at all? Meanwhile, knocking $140,000 off a loan that (for example) might be at 6% is earning a guaranteed 6% interest on that money over the next 20 years. And when you factor that it also allowed them to reduce the interest rate on a further $700,000 of debt, the rate of return on their $140,000 investment is probably higher than even that on junk bonds.
I’m amazed how often people forget that reducing your debt is fully equivalent to earning money. I see people getting a little raise rushing to stick an extra $100 a month into a 401(k) returning 2% or a savings account returning 0.5% — and meanwhile making minimum payments on a credit card debt charging 14% interest. Purely nuts.
Some of these homes with jumbo mortgages are now 10 years old. There is some deferred maintenance needed in these homes along with the normal wear and tear. When your home with 6 bathrooms needs new paint and carpet it can get expensive. I don’t think these loan owners are making this calculation when they choose to withdrawal $140K out of their retirement to refi their home. They must be only factoring the monthly nut and also believing that their home will be the key to their retirement. Interesting times.
The Option ARM recast (not reset) is still predicted to cause problems in some markets.
Investment Firm Predicts 2nd Wave of Foreclosures in San Diego
San Diego County is in for a second wave of foreclosures, and this time, it will be even bigger than before, according to Blue Sky Capital, a San Diego-based real estate investment firm.
Blue Sky Capital tracked area properties and found that loans funded with Option Arm, which is a type of adjustable rate mortgage, and Alt-A are about see higher interest rates.
This will lead to higher mortgage payments for homeowners and will cause those who can’t afford the new payments to potentially go into foreclosure.
“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.
With more than 36 percent of all mortgages in San Diego underwater, the investment firm said it expects things to get worse before they get better.
Blue Sky Capital also tracks housing supply and home prices and gave credit to negative equity for the rise in home prices since it is preventing people from listing their homes.
Williams explained that the increase is only temporary and not a real sign that things are improving.
“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,” he said.
Remember, the old saying ”you don’t get something for nothing”
At some point, I wouldn’t be surprised if homedebtors (who receive any type of mort loan mod/bailout etc.) wake up one morning facing the prospect that should the value at time of future sale be higher than the value at time of mod, the spread will be considered a windfall profit that could be heavily taxed– up to 90% in some cases.
If that law were in place today, I would feel much better about the various bailouts. Of course, a lien would also need to be placed on the property to prevent the borrower from removing the money by a HELOC.
How’s your Lennar short working out?
Ribsplitterdeluxe!!
Dude, closed out my last LEN short posi yrs ago.
But, it comes as no surprise you would think people buy and hold ‘short’ LOL
PS: Stay thirsty my friend.
I figured you had opened a new posi given how much you loved that stock. It would also fit your pattern of recent bad calls. See your comments relating to Steve Thomas’ market time, or perhaps your call that the ’09 bottom would be breached, for reference.
Both Case-Shiller and the $/SF measure did show the 2009 bottom was breached. Only the generic median which was distorted by the complete lack of high-end sales and numerous low-end foreclosures was lower in 2009. And the final chapter isn’t written yet.
I can only assume you are referencing the national CS index, because the LA/OC index came close but did not breach the ’09 low. I think you’re right about the $/sq ft, but I don’t think his prediction was in the context of that metric. It was in response to Lansner’s weekly DQ median report. I don’t think median has a chance of being breached no matter how long the game lasts now.
Top level thoughts by Irvine Renter, again! Especially this fact you made above, says so much so well:
“That’s the point of the false-hope bailout programs. The only real aid goes to the banks, and borrowers are left only with false hope to get them to make a few more payments.”
Thanks. I wonder how many OC borrowers are waiting and hoping for mortgage relief that will never come?
The banks also prey on another fallacy of reasoning by borrowers: “in for a penny, in for a pound.” Once they hold out for false hope long enough, by the time they realize they’ve been duped, prices have started rising again, and they will have hope of getting out from under their debts in the future due to appreciation. They may regret not defaulting years earlier, but since they are closer to the end than the beginning, most will continue to hang on.
In contrast to those who want the upper-class bailout, or the wealthy bank bailout, the “but where’s MY ever increasing in value upper class home” one forgets the “other America” as set forth in the famous book:
http://www.rollingstone.com/culture/news/the-sharp-sudden-decline-of-americas-middle-class-20120622
shocking to be reminded. 50000000 soon on food stamps. schools with 85% of the kids…heck, 100%…with subsidized breakfast AND two other meals. Well, here’s the point, Where is THEIR bailout?
Stop at a Starbucks near the Santa Ana courthouse any weekday morning before 8 am. Statistically, 99% of these students are on taxpayer-provided breakfast and lunch programs because their families “are in need.” Yet, many can stop at Starbucks and purchase $4 drinks while talking on their cell phones.
America’s “poor” are some of the richest people on earth…
I’m a jumbo-owner hoping for relief… but I doubt it’s coming.
Today’s blog post is a perfect illustration of the risks of fixed rate loans. See, IR, you can’t always refi down with the market. A borrower should always choose the loan that has them paying the least amount of interest over the period that they expect to hold the loan.
I think you’re being a little harsh in this particular case. If the loan is current, then on the face of it Pieralde and Tierney are really good candidates for refinancing. The problem is that they are underwater by 82K, which gives them 82,000 reasons to walk no matter what arrangements might be made regarding interest rates.
If they are really committed to continue living in this property and making their repayments, then tapping retirement funds IN THIS CASE is not such a bad option provided they don’t spend their extra income.
Assuming they could get $100K between them, I see no reason why they couldn’t get a conforming loan (either a single jumbo or a 417K 1st and 131K 2nd) which would reduce their average rate by at least 2%. 6.375% on 648K – 4.375% on 548K is about 17,300 per year, so if they pump the money back into retirement funds payback is 6 or so years PLUS 100K in extra equity (which in this case is mostly eliminated negative equity).
You just completely glossed-over the 50%+ tax/penalty they’ll likely pay.
That would certainly be a factor to be taken into account. I hadn’t realised the penalty was that large (I’m Australian).
Without the GSE or other govt back jumbo loans to convert the bad non-performing loans into good non-performing loans, how are the banks going to be made whole?
The congress and BHO need to put a plan to make the banks whole on the non-performing jumbo loans are they (including BHO) will be out of office. Maybe that’s why the banksters have turned on BHO after tripling the bank bailout money.
IndyLew, Both parties seem to be at war against the middle class. One overt and the other covert. The middle class is too fickle on which party they will support, but they are easy fooled.
I am sick and tired of watching people rant and rave over their buyer’s remorse at all levels. Now the Jumbo loan fools are ranting? What fools the masses are to me. IMHO greed (and that is all any of this is based in to me) will always eat people and the real estate market has proved it to be true. I see give the simpleminded easy money or cheap money people go hog wild.
But wait, haven’t they spread the REKool Aid this week on the news that house prices and sale are rising!?! You know that all addictive signs of recovery?! Opps, sorry, wait maybe that was just on a new reality show called The RE Wizards of BS.
I try to imagine what it felt like to live in that home waiting for the other shoe to drop. You couldn’t plan your move date. How would the kids explain that. “We live here, for now. We are going to have to move, but we don’t know when.”
I could imagine the “owner” who might feel smug or ashamed about what they are doing. ON the one hand, they are saving a bunch of money. On the other hand, they are fraudulent. How could they feel at home? Were they haunted by a nagging feeling of vulnerability? I think I would be.
I would much rather be worried and concerned about the underwater nature of my home/mortgage, than be worried and concerned about the stability of my or my spouse’ jobs. The latter is MUCH more stressful.
Walking away from a piece of RE should be much easier than walking away from your family (home). People are confused that the RE is a home and/or family. Sacrificing one’s family for a piece of RE or to keep a mortgage going for the purpose of posing.
[...] we return to normal, small delinquency rates, the problems with housing are not resolved, and since cure rates through loan modification are dismal, the only way these delinquencies are going to be cured is through short sale and foreclosure. And [...]