ARM and a Leg

If you visit us regularly, you know about adjustable rate mortgages; the pros and the cons. You may not, however, know about Option ARMs. This clever lending product is what made it possible for many not-so-wealthy people to afford very expensive homes in the Bay Area. In a nutshell, Option ARMs offer different payment options. The first option is a "full" payment of interest and principal. Option two is an interest-only payment. Option three is some amount less than the monthly accruing interest; a negative amortization payment.

Option three has the potential for big problems.

When you aren't paying even the total interest on your loan, you better hope your home's value is going up. Otherwise, you have no chance to build equity. For the last 2-3 years, as California home values have fallen, borrowers choosing option three have been falling farther and farther behind. Many are now well "upside-down" on their homes.

And that's not the scariest part. Like all ARMs, Option ARMs have lower initial rates. After a few years (usually three or five), the rates re-set. This means that all three payment options can go up. Borrowers who could only afford the negative amortization payment find themselves struggling to pay even that amount. And guess that happens?

Default. And guess what follows default?

Foreclosure.

Read this article from the Chron for some stats. To us, the scariest number is not the 50,000 or so Option ARMs floating around the Bay Area. No. It's the 94% of borrowers who've been making the minimum payment.

It will be interesting to see if another wave of foreclosures is on the horizon.

Whoa Nellie!

For a more national perspective on the housing market, take a look at these two quick-hitters from the Times. The first one indicates what we feel is a disturbing trend. New homes sales are up and so are housing starts. Given the not-soon-be-over foreclosure crisis, it's distressing to think that developers are starting to build new homes when so many existing homes will soon be flooding the market at already discounted prices. The second op-ed piece dovetails nicely with the first, noting that a look at the supply side of the housing equation casts doubt on whether recent home price inceases will last.

New Wave

If you've talked to us recently, you've heard us say that we're not out of this mess yet. The shadow inventory of bank-owned properties yet to be released to the market, and mortgage delinquencies that will result in additional waves of foreclosures are harbingers of further erosion in statewide real estate values. As usual, our local neighborhoods appear to be in better shape than most, but the damage is wide spread. Today's Chron spells out the ugly truth. The market will continue to be friendly to buyers for the foreseeable future. And if your were thinking of selling but thought you'd be better off waiting a year until things pick up, you may want to rethink that strategy.

It's Heeeeere!

We've been saying it for a few months. SF and Marin ran, but they couldn't hide. How long will it last, maybe not as long as feared. Read today's Chron article for details.

On My Soap Box

Ordinarily I try not to choose sides in the mortgage crisis debate. Was it caused by irresponsible borrowers, unscrupulous lenders, greedy investors? Short answer, yes. There's more than enough blame to go around.

But when I read an article in the Times yesterday morning about mortgage service companies dragging their feet on loan modifications because they can make more money from delinquencies and foreclosures...well, my stomach turned.

As many of you know, many home loans are owned by investors, but serviced by mortgage servicing companies. These companies collect and disburse payments and, among other things, notify borrowers who are in default. They also are responsible for negotiating loan modifications and/or short sales for borrowers in distress. While the new Obama administration plan offers financial incentives for mortgage service companies to modify loans for borrowers in distress, the Times article reveals that they can make far more money by allowing borrowers to languish in default.

We happen to know people who are working to get their loans modified. While these people are not clients of ours, they have sought our advice as friends and professionals. I have been amazed (though not surprised) by the challenges they've faced. It is all but impossible even to get a mortgage service representative on the phone. I chalked this up to gross understaffing are mortgage service companies coupled with the backlog of borrowers seeking relief. It appears that the reasons may be far more insidious.

Put On Notice

The Dow cracked 9000 today. Ford turned a quarterly profit. Home resales were up 3.6%. All good news, right? Yes. But...

The broader economy my be starting to recover, but there are some troubling signs that our local real estate market may still have a way to go.

Specifically, Marin and San Francisco, which have had lower foreclosure rates than almost all other counties in the state, may not be immune much longer. An article in today's Chronicle indicates that Notices of Default (the firstpart of the foreclosure process) are up 30%-40% in San Francisco and Marin. This is a distressing sign.

It's Worth What?!?

If you're buying, selling, or refinancing a home right now, your biggest problem may be one you've never even considered. Admittedly, appraisers were playing a little fast and loose over the past few years. We've all heard the stories. But now a disturbing emerging trend may prove to be a major over-correction. Check out this article from Sunday's Chron. While it's reasonable to ask for stricter controls in the appraisal process, common sense tell us that having someone from Modesto determine the value of your house in Larkspur just doesn't add up.

Jumbo News

Believe it or not, some people still want to buy million dollar properties. Until recently, however, these visionaries have had trouble getting the financing they need. That appears to be changing. This is potentially very good news for all of us. In SF and Marin, stability in the upper end of the market may help firm up other price points. Just as the skyrocketing prices of 2001-2006 were not healthy or sustainable over the long term, today's fast-falling values, particularly in the lower end of the market, are not a true measure of long term value.

Buy Local

Nice article in the Marin IJ on the importance of thinking locally when evaluating a real estate market. We couldn't say it better ourselves.

This American Crisis

Last year, "This American Life," the loved-or-hated NPR show, took an in-depth look at the forces that created the mortgage crisis. Even if you are pretty certain you know what caused it all, you owe it to yourself to download the podcast or the transcript. I promise you'll learn something.

Map Makers

Check out the map published this day at SFGate.com. The accompanying article is worth a read, too. Bear in mind that the data comes from Zillow, which is not always the most reliable source. But in this case, since they're drawing on actual past sales figures, rather than trying to predict possible future value, we're inclined to think it's pretty accurate.

The bad news? The Bay Area real estate market is in bad shape. The good news? Marin and San Francisco are in better shape than almost anywhere else. This accounts, in part, for an odd phenomenon we're seeing lately. Namely, a larger-than-usual disconnect between buyers and sellers. Buyers, even in Marin and SF, seem to think that every seller is desperate and eager to sell. Thus, they're tending to write really (often unreasonably) low offers. Meanwhile, sellers, especially in Marin and SF, are not in particularly dire straights and are disinclined to sell for below what they believe their house is worth.


The result is something that we've been talking about for years. In "destination" markets, like Marin and San Francisco, we historically see large swings in the number of units that sell during a given time period, while the median price remains flat or even increases. Why? Because people simply don't sell if they can't get what they think their house is worth. This limits the inventory on the market and helps stabilize prices.

Unfortunately, there are many other markets where sellers have no choice but to sell (or banks have foreclosed and are selling for dimes on the dollar). In these cases, inventory outpaces demand and prices fall dramatically.

There's no guarantee that Marin and SF will continue to perform so well. This crisis may be without historical precedent. But based on the past 30+ years of sales data (we checked), chances are we should be alright.

That New Construction Smell

We're linking to this sfgate.com article not because we think any of our clients and friends have interest in Cubix (we'd talk you out of it in a nanosecond), but because it speaks to a broader trend in the world of new construction condos in the City.

There are great deals to be made on new condos right now, but you need help to get them. If you have any interest, contact us before you visit a sales office. If you go without an agent, you'll have to work with the sales agent who's employed by the developer. Sound like a good idea? We didn't think so.

Not only are prices negotiable, but upgrades and HOA dues may be thrown in, if you know how to ask. Let us know if you'd like to learn more.