Tuesday, January 06, 2009

Your Arizona Real Estate Bubble In Action: 10933 W. Hopi Street, Avondale

Anybody interested in just how screwed up the real estate market got in Arizona during the bubble needs to read this Wall Street Journal online article (complete with video and slide show) entitled "Would You Pay $103,000 for This Arizona Fixer-Upper? That Was Ms. Halterman's Mortgage on It; 'Unfit for Human Occupancy,' City Says."

The house is 10933 W. Hopi Street in Avondale, Arizona (map), Maricopa County Assessor Parcel No. 101-17-250; the legal description is Lot 70, Cashion Park South (MCR 89/14) for fellow real estate law mavens. The house is 576 square feet in area; the lot is 6,500 square feet. The County Assessor valued the property (full cash value) at $63,500 in 2007; the assessed value rose to $76,500 in 2008, but fell to $50,100 in 2009. (See link for Assessor valuations)

The owner originally purchased the house in the 1960's for $3,500. Effective February 15, 2007, she obtained a mortgage for $103,000, which is the value an assessor and hence the lender placed on the property. (The deed of trust is available here; enter the document number, which is 2007-0235982. I tried to put in a direct link but it decays if you haven't visited the County Recorder website first.) The loan was placed through a local mortgage lender, one of the non-banks which never had to worry much about the Community Reinvestment Act; it sold the loan to Wells Fargo, which in turn sold it to HSBC, which placed it into "HSI Asset Securitization Corporation Trust 2007-WFI" which is probably in your 401(k) or mutual funds portfolios as we speak.

Ms. Halterman, the borrower, used the "cash out" from the property for bills; she never managed to pay all much on the loan, which had an adjustable rate starting at 9.25% and capped at 15.25%. In 2008, the lender foreclosed, and the property has been sold to neighbors for $18,000; the neighbors plan to tear it down. (The City of Avondale has posted the property as condemned as unfit for human habitation.)

Anybody who thinks this made any economic sense as a global matter is just nuts. But nobody involved in the transaction -- not the borrower, not the local lender (which got a couple thousand in fees from the transaction), not the assessor, not the title company handling the escrow and lender's title insurance, not the bank bundler (which also got fees both for assembling and servicing the loan), not the underwriter of the mortgage-backed security, and not the rating agencies which called collections of subprime mortgages extremely safe securities (for a fee) -- had any incentive to say no at any point in the process. (UPDATE: Actually, it was a great deal for the borrower; she used the 2007 loan to refinance a home equity loan, rolling it all into the first loan on the property. She would have remained personally liable on the home equity loan but the anti-deficiency statute prevents the lender from pursuing the difference between the value received in foreclosure and the remaining debt. That wouldn't have been true if she had continued to have two loans on the same property, the second creditor could have pursued her after foreclosure. (Probably not successfully, but still.) If a business did this, we'd congratulate the savvy of the CFO.)

Sure, it may have been nuts for the state, national, and world economy, but why would anybody in the long chain of fees have any personal incentive to pass on this deal? The risks would get passed down the chain; the fees stayed with you. So they didn't. They would have been fired if they had, because somebody else would have made the deal instead.

So much for the "self-regulating market."

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