For almost two years now, there have been serious rumblings and grumblings in San Diego real estate circles about Option ARM and interest-only loans that could put a number of buyers in default–resulting in a big spike in San Diego short sales and foreclosures. We call them bouncing mortgages.
I initially gave the issue detached interest, because our clients tend to be a conservative lot when it comes to borrowing. We deal with few real estate speculators and most of our clients are solid buyers of San Diego primary and secondary homes.
My interest in these instant gratification loans is no longer a detached one, because the fallout from these ARMs is contributing to market weakness. Some of our conservative clients are seeing their San Diego home values stagnate or decline, in part due to these lending practices. It has been reported that 7 out of 10 option arm borrowers are sticking to the minimum payment schedules and in so doing, are stacking up substantial additional debt.
Many now owe more than their homes are worth. In San Diego County, short sale advisories on listings are appearing within our MLS on a daily basis, and will ultimately affect appraisals and valuations. In short sale transactions, the lender agrees to accept less than what is owed on the property (and obviously less than the prior appraised value).
In his Nations Housing column, Kenneth Harney writes that John G. Walsh, senior official at the Federal Comptroller of Currency, is sounding a quiet alarm:
We’ve had consumers tell us they didn’t know after 60 minimum payments on a (payment-option loan), they would owe more than they did when the loan was brand new. They should certainly understand the basic bargain: The price of a low payment now is a much higher one later. I think it goes without saying that someone, at some point, should have explained this to borrowers with these loans.
In defense of lenders, I am sure many did explain the consequences and hazards of these loans. I am also certain that many of these borrowers were counting on their homes appreciation to more-than-cover the accumulated debt on their negative ARM loans. ((Why does this so remind me of the investors who were slaughtered by margin calls during the stock market wipeout just a few years ago? Are these the same people who turned that same mentality to real estate?))
The fallout has begun. Once again, San Diego and Southern California are on the bloody edge of the real estate envelope. There are people getting wiped out in this market, and there will be those who make fortunes. We are advising our clients to sit tight if they do not need to sell and if they do, to price their property aggressively. With buyers, we use the same caution, negotiate strongly, and advise them to stick with blue chip properties and locations (usually coastal San Diego and singular luxury properties). We cant help but remind them of that dictum in the securities market:
Don’t try to catch a falling knife.
Nothing is permanent, except for change.
By the time the masses have turned their real estate investment and speculation dollars to unappreciated geographical markets, smart money will already be moving back to our balmy coastal climes proving once again that nothing can take the place of location, location, location.
2016 Note: There are few short sales, foreclosures or bouncing mortgages in San Diego these days. However, any we can find are listed below. If you have any questions, please feel free to call Roberta or Scott Murphy at either 760-942-9100 or 760-613-6190 or email email@example.com
Opportunity is knocking at this 2BD, 2.5BA Townhome w/ its bright open floor plan, 10ft. ceilings, and tile flooring. The open-concept kitchen includes granite countertops, plenty of bar seating, cognac cabinets, and stainless GE Profile appliances. The Master en-suite features 2 closets and a large soaking tub. Full sized laundry, a private balcony, and a fireplace also add convenience and comfort to this urban-style home. Come view the luxury Townhome community of Boardwalk at Spectrum!
BOMK, short sale unsuccessful. 3 BR, 2.5 BA 1684 sq ft home on 1.3 acres w/ bonus rm off kitchen area. Whole house solar system, new roof, new energy efficient HVAC & windows. 2 car garage w/ 1/2 BA, RV parking & circular driveway. Some family fruit trees remain but water had to be reduced for lawn & landscaping due to draught. Pictures are from previous list period (with permission from list agent) & are not reflective of current house & yard condition; provided to show property potential.
Short Sale Approved. BEAUTIFUL HOME ON LARGE CORNER LOT. REMODELED KITCHEN WITH GRANITE COUNTERS AND ESPRESSO CABINETS. CATHEDRAL CEILINGS IN BOTH LIVING AND DINING ROOMS! NEW ENERGY-EFFICIENT WINDOWS! NEW FURNACE! FAMILY FRIENDLY CUL-DE-SAC
3 Bedroom 2 Bath Condo in San Diego. Needs some Repairs. HOA covers exterior janitorial & courtesy for interior pests once a month. Water & Water heating paid by HOA. HOA has master insurance policy for structure.
NICE MURRIETA HOME - Wonderful one-story home in highly sought-after Alta Murrieta. This 3 bedroom 2 bathroom home has an open floor plan. Nice-sized master bedroom and large bathroom walkin closet! Kitchen Granite countertops,neutral back splash, Vaulted ceiling,New tiled master bathroom, beautiful mature plants. Huge 15,246 sq-foot Lot size. Home is centrally located for easy access to freeways for commuter. This home is surrounded by award winning schools and Temecula Wineries! Low Taxes, No HOA!