Amused by Rick

There are two ebay commercials running out there right now, maybe you’ll recognize them from the descriptions.  One where a guy wins a car in a carnival, and another where a vase is being thrown in a hail mary play in a football game.  Both struck an odd chord, they had a creepy feeling to them that I couldn’t put my finger on.

Well, the red mustang in the driveway in the first commercial, and then the lady holding the vase in the living room in the second commercial, were both filmed at my in-laws house.  I forgot they filmed a commercial there months ago and the ads are just now showing up.

Banks are having a tough time, aren’t they? The fantastically lucrative sub-prime market has totally shut down, tightened loan approval standards have decreased the number of new loan applications and, worst of all, inventory is foreclosing in record numbers. Well not worst of all, actually. The bank doesn’t eat every home it forecloses and the only monetary loss they incur is the cost of dumping it on the real estate market. Understanding this is key to understanding the next move you should make in Real Estate. Right now, it’s the “Big Question.”

Any [primary] home loan, any, requires a 20% cushion. In most cases it takes the form of a) a down payment paid by the buyer, b) Private Mortgage Insurance (PMI) or c) a second loan to cover. If the house goes into foreclosure then the first lender only needs to recover 80% of the cost of the property to get it’s principal back. Their only real loss was the interest not collected from the delinquent borrower plus the hassle of selling the property.

If a second loan was used to cover then the holder of the second loan will most likely lose all their money b/c the bank will dump the property for less than it’s worth, leaving nothing for the second lender to collect. If PMI insurance was used, then the insurance company would cover the remaining 20%, less any amount over the 80% the lender was able to sell the property for.

If the buyer dropped 20% in cash, it’s gone. Recovering anything over 80% is next to impossible.

So the bank will always get it’s money back. Except. Oops. There’s one big problem here, and it has to do with economics. If one bank dumps a property for 80% of it’s value, no problem. If 100 banks dump 1,000 properties at 80% then they are adding to the supply of houses on the market that will ultimately decrease demand. The first wave will liquidate. The subsequent waves will drive prices down. If prices go so far down that they surpass the magic 80% loan-to-value ratio, then, oh boy, are the banks in trouble.

In layman’s terms, this is what will happen: the mortgage backed securities they sell will devalue, their credit ratings will suffer and as a result will not be able to lend as much money to consumers. Less loans, less revenue, bad news.

Right now foreclosures are starting to hit the market. My agent, Jill Suarez, had a running mix of a handful of listings over the past 5 years. She now has hundreds, all REOs (she has a special relationship with some local banks). REO stands for “Real Estate Owned.” It should be REOBTB, for “Real Estate Owned By The Bank.” These are foreclosed properties that didn’t get liquidated at a trust sale that the bank now owns and needs to sell. In a down market, the best deals are REOs.

One strategy to the “Big Question” is to wait for a few waves of foreclosures to hit the market. Since rate adjustments on variable-rate loans happen every quarter, the start of a new quarter pretty much starts the new cycle. By next April, I imagine the real estate market is gonna be crying for mama. And this time, I’m putting my money where my mouth is (or, at least, seriously exploring).

So that’s my idea today, September 27th. I might change my mind.

One side note: you don’t actually lose everything if you hold a second loan. Assuming it’s recorded, as it should be, when the first loan forecloses you have the right as holder of the second to buy the first loan. Some sharks made a killing off this in the early 90s. What you’d do is go to a trustee auction, buy the second loan for pennies on the dollar and then immediately buy the first loan from the property owner. In almost all cases, the first was… you guessed it, 80%… and the buyer of the second would turn around and liquidate the property. The only issue was that you had to evict the resident if they were still living in the house…

By now everyone’s heard of the house abandoned on the 101.  It’s just the kind of thing you’d come to expect in a nutty place like Los Angeles, almost commonplace.  Actually, so ordinary that I drove right by it for two weeks and didn’t notice it was there.  I mean drove immediately past it on the 101, in fact, my car actually points directly at it when I get on the freeway.

How would you like “an interior that comforts your very soul“?  Yeah, baby!!

There is a new sign in front of the men’s steam room at the weho Equinox, it starts off EQUINOX HAS A ZERO TOLERANCE POLICY FOR INAPPROPRIATE BEHAVIOR in bold, large font white on black lettering.  I asked a salesguy what that was all about and he told me I didn’t want to know.  Ewwwwwwwwww!  Gross.

Almost time to start counting down to Hawaii.

We just saw him flip his car at the finish line at the 2007 X-games in Home Depot Center.  His 5-year old son was with him in addition to another unnamed father and son.  Very sad.

End of summer views on real estate:

• “the prices of …  real estate have a long way to fall”
• “NAR said … sales are likely to decline in coming months”
• “The decline in U.S. home prices accelerated in the second quarter…”
• “Record drop in pending home sales”
• “Housing, Credit Worries Hurt Stocks”
• “Countrywide to Cut About 900 More Jobs”
• NAR goes from this “Existing-Homes Sales Stable In July” to this “Pending Home Sales Index Falls Largely on Mortgage Tightening“

We have a massive rate adjustment taking effect on variable rate loans this month combined with a seasonally slow market for the balance of the year (most people prefer not to move while their kids are in school or through the holidays).

In my observation, prices have not tanked.. yet.  Sales are slow, but prices are stable.