The Ultimate Sin — Ozzy Osbourne
What would be the ultimate post we could do at the Irvine Housing Blog? We have been getting a great deal of attention lately for our posts on HELOC abuse, and our post on Monday showing the $500,000 loss was also very well received. This is only one way you can top what we have done to date: combine the two. Today’s featured property is the new pinnacle. We are raising the bar. Today, we have a property where the owner took out over $1,000,000 in a series of small refinances and general HELOC abuse, and now the lender who has taken back the property is looking at a $650,000 loss.
It does make me wonder… How can I get a lender to give me $1,000,000 that I don’t have to pay back?
Asking Price: $895,000
Income Requirement: $223,750
Downpayment Needed: $179,000
Total Property Debt: $1,490,000
Lender Purchase Price: $909,195
Lender Purchase Date: 3/19/2008
FB Purchase Price: $520,000
FB Purchase Date: 4/6/2000
Address: 3 Green Hollow, Irvine, CA 92620
| Beds: | 5 |
| Baths: | 3 |
| Sq. Ft.: | 2,300 |
| $/Sq. Ft.: | $389 |
| Lot Size: | 5,600
Sq. Ft. |
| Property Type: | Single Family Residence |
| Style: | Ranch |
| Year Built: | 1997 |
| Stories: | 2 Levels |
| Area: | Northwood |
| County: | Orange |
| MLS#: | P635384 |
| Source: | SoCalMLS |
| Status: | Active |
| On Redfin: | 3 days |
downstairs and two loft areas. Patio in the back yard. Fireplace in
den. Large kitchen. Beautiful maple cabinets.
.
.
At first glance, this property’s purchases and sales look ordinary. It was bought for $520,000 in 200, and it sold for $909,515 in 2008. It isn’t until you go through the property records that the extraordinary nature of this property is revealed (Thank you, Brittney.) This is a long and complicated story, so bear with me.
- This property was purchased for $520,000 on April 6, 2000. The buyer put $120,000 down and financed $400,000. It didn’t take long for the kool aid to begin flowing.
- In July of 2001, he refinanced for $500,000 taking out $100,000 of his initial equity.
- In January of 2002, he took out a $544,000 loan taking out all $120,000 of his initial equity plus an additional $22,000.
- In February of 2002, he took out a $30,000 stand-alone second.
- In March of 2002, he took out a $50,000 stand-alone second.
- In August of 2002, he took out a $67,800 stand-alone second.
- In October of 2002, he opened a $20,000 HELOC.
- In November of 2002, he refinanced with a $596,000 first and a $149,000 stand-alone second and presumably paid off all the other loans. At this point, his mortgage equity withdrawal stands at $345,000.
- In January of 2003, he opened a $20,000 HELOC.
- In January of 2004, he refinanced with a $793,600 first and a $148,800 stand-alone second.
- In April of 2004, he refinanced again with a $940,000 first and a $176,250 stand-alone second.
- In October of 2004, he refinanced the stand-alone second for $400,000
- In March of 2005, he refinanced the stand-alone second for $550,000
Total indebtedness: $940,000 + $550,000 = $1,490,000.
Total Mortgage Equity Withdrawal: $1,490,000 – $400,000 = $1,090,000.
What can you say about that? Does anyone care to opine on how this was an investment or a medical issue? I think we can rule those circumstances out. Let’s be real here: this guy’s house was making $200,000 a year, and he took it out and spent it. It is what it is.
Lenders are stupid. What else can you say about that? How can you loan this guy so much money only to find your collateral is worth $600,000 less than the loans you made? There are bad loans, there are really bad loans, and then there are loans like this one. It boggles the mind. If this property sells for its asking price, the total loss to the lender will be $648,700 assuming a 6% commission.
I wonder how this guy is adjusting to the loss of that $200,000 a year extra income? I will bet it is not as much fun as spending it was.
.
Overkill enough is enough
There’s nothing left of me to devour
You’ve had your fill I’m all I have left
What can stop your hunger for power
‘Cos you took advantage of things that I said
Now the feeling is dead
And that’s the ultimate sin
And that’s the ultimate sin
Anyway I look at it now
The doors are closed and cannot be opened
Bury your anger and bury your dead
Or you’ll be left with nothing and no one
There’s no point in screaming ‘cos you won’t be heard
Now that tables have turned
It was the ultimate sin
It was the ultimate sin
It was the ultimate sin
I warned you then and I’m warning you now
If you mess with me you’re playing with fire
Winds of change that are fanning the flames
Will carry you to your funeral pyre
It’s pulling you down
It’s your final descent
It’s too late to repent
When it’s the ultimate sin
When it’s the ultimate sin
When it’s the ultimate sin
When it’s the ultimate sin
The Ultimate Sin — Ozzy Osbourne
The only thing that he is probably adjusting to is living like a king in some Third World Country on his 1MM windfall.
If the Hope Alliance Program gets through Congress which I believe it will not, there is going to be major civil and criminal unrest, if not an outright Civil War, amongst the educated.
This economy and society are walking a very fine line right now.
I didn’t weigh in yesterday about the pics.
But I do like them 😉
This one is great for today’s post and I particularly liked the strawman one.
Thanks for adding some visual humor to lighten up the dark side of real estate.
I like the photos too (I bet you’ve been saving Dr. Evil just for something like this).
Please keep it up and ignore the wet blankets who tell you to knock it off.
ROFLOL….
However, remember that some of us read the blog on cell phones and the pictures slow things down.
awesome pic for the post 🙂
With no insult or disrespect intended towards Az’s other posts but the pictures are priceless. Great work!
And thanks for the daily chuckle.
I was hopin’ for frickin’ laser beams.
I like the pictures too! Unfortunately, everyone keeps talking about the straw buyer pic, but it was broken for me when I looked. I feel like I really missed out. : (
Dr. Evil! I love it!
Dr. Evil: Oh hell, let’s just do what we always do. Hijack some nuclear weapons and hold the world hostage. Yeah? Good! Gentlemen, it has come to my attention that a breakaway Russian Republic called Kreplachistan will be transferring a nuclear warhead to the United Nations in a few days. Here’s the plan. We get the warhead and we hold the world ransom for… ONE MILLION DOLLARS!
Number Two: Don’t you think we should ask for *more* than a million dollars? A million dollars isn’t exactly a lot of money these days. Virtucon alone makes over 9 billion dollars a year!
Dr. Evil: Really? That’s a lot of money.
[pause]
Dr. Evil: Okay then, we hold the world ransom for…
Dr. Evil: One… Hundred… BILLION DOLLARS!
Back off the street? Yeah, directly into someone else’s backyard!!! But someone’s been drinking the kool-aid again because this is listed as “back-up offers accepted” after only 5 days on Redfin.
At this point it becomes a personal/moral issue.
Would you, as a potential buyer, be willing to pay 1 penny of this poseur’s spending orgy?
Look for a 2000 rollback on this one; easily.
No way in the world this house goes back to $500K. You have zero understanding of Irvine real estate AZ. At peak it would have sold for $1.2M probably… It’s in a highly sought after guard-gated section of Irvine with access to the top schools of a top school district.
It’s worth $900K today and will float down to perhaps $700K, maybe high $600s.
that valuation (700K or so) sounds realistic… but ‘worth $900K today’??? Hate to be a pedant but it’s worth what someone is willing to pay. The asking price is $895K so if you’re right, shouldn’t this thing move fairly soon at that price?
I agree, $500K is never going to happen for a property like this one.
I call $350K!
My paper napkin estimate values this property at $2.00
I think this property will be a 1000 B.C. rollback.
I think that what will happen is that Cramer will get blinding drunk while he’s plowing under the Inland Empire, run the tolls on the 91 and crush this house before the CHP and the IPD shoot him off the saddle.
At that point this property will sell for $400K.
It’s already in escrow. At $895K it took four days to get under contract…
Before it went back to the bank they had a bunch of offers at $825-850K, mine included but they wouldn’t budge off the $900K figure.
OK you were right 😉
At a business meeting yesterday we were discussing the economy. While we disagreed about the general situation – some of the people present insisted that things wouldn’t be so bad if the media would just shut up about it, I thought that was a silly notion and that a lot of disposable income has disappeared from the economy due to the closing of the housing ATM – we all agreed that the wealthy will always have money.
Perhaps that’s the situation here – the home is in such a desirable location, and occupies a niche of the market where potential buyers are far less affected by the mortgage industry crash-and-burn.
The guy who pretended to be wealthy by spending his home equity just lost this house. The wealthy will always be wealthy because they don’t do stupid things like today’s borrwer. As long as those who want to pretend to be wealthy are attracted to Irvine neighborhoods, REOs will continue to be a problem taking down home values.
We’re using a pretty low bar to determine “value” here aren’t we? It may have sold for $895 this week but who wants to bet it holds that value over the next 24 months?
Cash only bets please. Put up or shut up.
I’m not defending the $500K valuation only pointing out that buying price right now isn’t all that meaningful. It could very well be in 12 months that this sale will have gone south as well when this buyer finds their $895K purchase is only valued at $800K (or less).
At that time, what will the justification be?
The fact that its gone into escrow means nothing. What would would really impress me is if this house CLOSED escrow.
You probably got some eager buyers still thinking they can get 2006 financing combined with a very desperate relator. (I wouldn’t be surprised if the relator is fibbing that its in escrow to try to stimulate buyers) If this is legitimately in escrow, I’ll bet you their financing will fall through.
Same weak argument offered on this blog many many months ago. It’s BS. 90% of Irvine escrows result in a closed sale…
All you need to do is look here for the empirical evidence:
http://www.ipoplaya.com
Your conclusions are completely baseless. Irvine buyers are putting over 25% down typically and lenders are still more than willing to lend to buyers with less than 80% LTV.
Banks don’t accept offers from poorly qualified buyers. They normally want to proof of 20+% down payment before they will even counter. Get a clue Chris…
This place will sell
So some moron is buying a 2300 sqft home for almost 900k. Good luck with that.
Ridiculous. 5 bd is also cramped for less than 2500 sq ft. This person better be making 250k a year on a CONSISTENT basis to afford this home. When buying a home you should NOT consider payments or rates primarily.
Price is number one and 4 times earnings is pushing it. Three times earnings is much more conservative. Someone earning 250k a year can look for homes between 750k up to one million.
First of all I really don’t appreciate the
rudeness of your last comment. I don’t agree
with everything you post, but I’m not going to
tolerate verbal smack downs from you.
Plus a it would be nice if you click on “Reply this comment” when you reply.
…with that out of the way.
Look I’m not doubting that there are buyers who may be willing to buy at that price. However, when
something goes to escrow after being on the market
for 5 days (especially in this market) its looks kinda fishy. I’ve been looking for a place for a few months and I’ve had the following tricks by
relator’s to make it look like the market is starting to bottom out:
-Claiming that a property is in escrow when its
MLS listing shows Active for weeks after the claim.
-Been told that there are other offers on a property, when in reality there were none.
Am I saying this this listing’s status is a trick, of course not. However, with what I’ve seen from
relators in my home searches I wouldn’t be surprised if I’m right.
Actually you can have a roomy 5 bedroom with 2500 sq feet. It’s all in how the space is used.
A lot of those 4000 sq foot McMansions squander the space on a lot of wasted hallways, nooks, extra large master suites, etc….
My own Chateau is 2700 sq feet, 5b/3ba and it has very little wasted space. It feels very comfortable to us.
Often times homes that ARE in escrow remaining active in MLS, especially at a time when buyers are more prone to be skittish. Why, because realtors don’t want the stain of a back-on-market attached to the property so they leave it in active until the buyer clears their contingencies. I know of a couple of Irvine listings right now that really are in escrow and yet still say active in MLS…
This property has been marketed locally to potential NW Pointe buyers since January. Many wrote offers but the bank didn’t get it in gear and eventually foreclosed vs. allowing a short. It may be 5 days on MLS, but people have been waiting for this place to come online for months. Hell, I wrote a friggin’ offer on it in early February and I wasn’t the first to do so. The 5 days on MLS isn’t indicative of anything. The local area specialists all knew about this property and were bringing potential buyers…
I have no idea why you think backup offer status would stimulate potential buyers. For the most part, it causes buyers to disregard a property. Leaving a listing as active for as long as possible keeps buyer interest, not the other way around.
This may very well sell for $895K. People ARE buying homes right now, just not many!
Also, keep in mind that THE REAL DAMAGE TO AREAS SUCH AS THIS ARE STILL TO COME. The next 3 years will see a wasteland of foreclosures in the ‘high end’ areas, as the option ARMs recast, the IO’s recast and go fully amortized, and the economy in general flounders, killing wages.
That doesn’t mean someone won’t buy this property NOW, TODAY for $895. They might not be happy in a few years when it’s down in the 500-600 range, but oh well!
Ditto. Everything I was going to say before I read your post.
IPOP, for once I agree with you about 600k but looking at the listing, this is a 2300 sf house. remember what I have been telling you about 200 per sf at the high end.
at this point some sword catcher may pick it up in the late 700ks. but 900k today, you’re kidding right. someone making 300k wants to buy in the flat lands.
I dont care what schools they have but be realistic. funny money is gone and aint coming back any time soon 😆
It’s 2650sf and it’s good as gone for close to $900K already… That is what “accepting backup offers” means.
The sniff test on this place puts it at slightly above median. SLIGHTLY.
Your median house prices are on course for 400K to 450K. If this place is only slightly above median then I would expect to see it bottom between 500K to 550K.
It’s well above the median. It’s 2650sf detached 5-bedroom (although it really should only be four) on a good lot, on a nice culdesac, in a great guard-gated neighborhood, with access to great schools. It’s located far from any freeways or major arterial roads and is relatively new construction as compared to much of Irvine. This is a house for perhaps the top 20% of Irvine demographics.
Listings says 2300 sf. 5 bed in 2300 sf – a little tight, isn’t it?
OK – I’ll have to concede to you on that since you have seen it and I have only seen a picture of a kitchen (which seemed average at best).
If it is the case such that the top 20% wage earners will live in this neighborhood then I can see your high 600K to 700K estimate.
The actual square footage is 2650, not 2300. The listing realtor is a moron…
Oh come on, David. I’d like to see you argue the value of a house you’ve never seen with the guy who almost bought it. Surely you know better than ipop what the house is worth.
I’m afraid AZ Dave’s got the upper hand.
The fact that Ipop almost bought this place is a huge strike against him and his self-worth.
Not to worry, the old Ipop is gone.
Since I came along the new Ipop has since raised the bar for himself and his family.
“Northpark or Bust” has become his new mantra.
Indeed, you are correct ten. I got a call before this listing hit the market last week inquiring as to my desire to re-offer. I declined. I have seen the Ten Light.
You might want to modify that to Northpark, Woodbury or Bust. Lots of potential trophy places on the market in WB and none moving…
Damn straight you’ve seen the light.
You even used one of my favorite words “trophy”.
Congratulations!
See what setting the bar high will do for you.
That’s a nice looking house AZ. Needs a 3-car garage though… That is one prob with Green Hollow, lack of 3-car garage to hit the toys!
ROTFLMFAO!!!
To really understand Irvine, or Orange County for that matter, one must first understand Disneyland.
PS — Take the $350,000 extra that you pay for this shack plus annual property taxes, and send the brat to boarding school.
We got passports to D-Land and California Adventure.
Sorry if you don’t. You’re missing on all the fun.
Honestly, I know this house will not go to 500K. But, really, what makes this part of town so desireable.
It’s out on the sticks.
The traffic in and out sucks.
There are no good restaurants near by (don’t give me the stuff in the Irvine Spectrum…)
The location is as make believe as it can be.
Sorry, but I prefer my “old” neighborhood in TR, even if the “you-know-who” are overrunning UHS.
For this point you’re the best to know how he’ll give. Luck !
Hello All –
What does the ‘Hope Alliance Program’ apparently being debated in congress now propose to do for the housing situation across the country? Secondly, what would it mean for OC and Irvine?
Thanks,
BD
You’ve got to wonder if someone around here was smart enough to borrow that kind of money, invest it in the stock market which was up a significant percentage over that time and then flee with the principal and return of well over a million? I’d be curious to hear if anyone did that or if they all just blew them on the Bentleys I see around here every day. Every third car around here seems to be a $90,000 car. Don’t know where everyone gets the money.
I would imagine 2 out of 100 cases of mortgage equity withdrawal was used wisely. If this borrower has any liquid assets, the lender can go after them because these are recourse loans. It would be difficult to invest the money wisely, keep the original million, and keep the investment returns. In all likelihood, this guy spent every penny of his borrowed money to pretend he was rich, and there is nothing for the lender to go after.
Something so outrageous to be not fraudulent. This case should be sent to the general media and Capital Hill for the legislation debate.
Since Northwood is a small paradise in Irvine, I’ll give it 5% increase compounded every year from 1997 price.
$620k in 2010.
This house would rent for $3600-3800 today so a 160 GRM would be $600K…
Homes in nice neighborhoods always go for a higher GRM because people think they will live there forever…so they don’t consider the cost of selling. I would say 200 GRM on 3600 rent or 720K. Still 20% more to go.
If rents stay flat it could get to $500K with a GRM of 130.
History doesn’t suggest that the market will bottom anywhere near a GRM of 200. Even in neighboorhoods like this.
I’ve got to throw the BS flag on this comment – The GRM is the GRM. The difference between wealthier and less wealthy neighborhoods is already baked into the rental costs.
Ref: “if someone around here was smart enough to borrow that kind of money, invest it in the stock market which was up a significant percentage over that time and then flee with the principal”
That would be me, except I didn’t “stiff” anyone, just sold to a bozo who had 100% financing (sold at the top of the market, which I agree was somewhat-lucky).
Cash went into TheCheetoFund (don’t look for it on the web) which returned 66% in 3 years 🙂
Extremely unlikely I’ll ever own again. I’m a happy (so far) IAC renter…
I’m assuming that “Don’t know where everyone gets the money” was rhetorical. This whole blog is about where everyone gets the money. : )
These people didn’t spend this equity to pretend they were rich.
I toured this house in February while they were still living there… Modest furnishings, modest landscaping, few upgrades, modest car, modest clothes, modest everything. The place was a well lived in mess. Not the style at all of AZ’s buddies the Jones’s.
The family had two young kids and they were trying to get a short sale with rent back option completed so they wouldn’t have to make their kids leave their school during the school year. The bank wouldn’t bite on $825-850K back then though so they took the house back and now have apparently sold it for more.
Supposedly, the owner owned a business, business started going bad, and that is where all the equity went.
fascinating. Thanks for sharing. I wonder what kind of business it was, that hundreds of thousands of dollars could not keep it afloat. Imagine the stress of not only having a failing business, but also knowing that the house was on the line… talk about a double-down!
With just a couple of full time employees it’s real easy to burn 100K/year more than revenue if things go just a little bad. I know from experience. So 200K/year is not unreasonable. For those that want some schadenfreude, they probably didn’t pay taxes over those years because of the business losses. So now they’ll have a really big tax bill for the debt forgiveness.
Business goes bad? What do you do? Sink your house at the same time.
Nice move!
In hindsight, yes it looks stupid; I am certain that if he had known in advance it would not have helped, he would not have done what he did.
On the other hand, would he have been smart to just give up? I would not be where I am today if I had simply given up when the odds looked long and people around me were trying to discourage me from attempting something difficult.
Well, I think your argument is presenting a “false dilemma” being
Either:
1.) I take money out of my house and put it into the business.
or:
2.) I give up.
Are these REALLY the only alternatives? Most likely not. The home equity money was just the “quick and easy path”.
Have you ever applied for a business loan? I am sure you haven’t by the previous post. The underwriter for your business loan will want to look at EVERYTHING. This means full-doc, as well as a business plan or the next 4 + year, etc. By the way, IF you get appoved you’ll have a 10% interest rate and you can only borrower 40k.
Why go through all that bullsh*t when you can get a HELOC in less than 14 days at lower rate, lower payment AND a monthly tax deduction?
in our rush to enjoy our smugness and schadenfreude, it’s good to remember (as we were reminded recently here) that there but for the grace of (God/Allah/Fate) go I. Ipoplaya reminds us that this was not a case of some schmuck cashing out his equity and then some in order to live large; he was trying to prop up a failing business.
I’m a sole proprietor and I’ve had both thick and thin times. I don’t know that I would have borrowed heavily against my home in order to stay afloat, but during the thin times I did indeed tap my HELOC (lightly), which was a far smarter choice than stubbornly refusing to use it to stay afloat and instead selling the house. It was a smart choice then and I would do it again now, up to a certain limit of course.
I can see something like this happening even to responsible people who would never dream of blowing that money on bling, vacations and cars.
With the new bill passed (debt relief act of 2008), debt forgiveness is not taxed at the federal level. At the state level, it isn’t if it is a result of insolvency.
Check your local bankruptcy attorney for confirmation.
legal disclaimer: I am not a practicing attorney.
Lots of small business owners use their home equity to start up and fund their businesses. It’s easier to get than a business line of credit (which often has to be personally guaranteed anyway). In many ways, this is commendable. They are truly betting everything they have on themselves, their skills and their dreams. It’s that kind of appetite for risk that has made America great, and it’s folks like that who deserve a second chance when things don’t work out. Thanks, ipop, for sharing what you know about this family. They have my sympathy and best wishes as they get started on the next phase of their lives.
I want me a million to invest in a business idea I have, where is my money 😆
it would be fascinating to know what kind of business this owner ran. That is a lot of money to waste on a failing business though.
It’s said that the way to make a small fortune in some businesses is to start with a large fortune. $1 million isn’t a large fortune nowadays, but I wish I had that much money.
If a business bleeds that bad, don’t you think he’d shut it down.
This dude pulled out massive amounts of money.
Can’t believe it all went to save his business.
There’s got to be more to the story.
When consulting services ground to a halt as a result of the acqusitions of both JD Edwards and Peoplesoft a few years ago, the owners of my company sunk multiple millions into my company to keep it afloat. Sometimes you need to spend money to keep from spending more, and you definitely need to spend money to make money.
Thanks for the Finance 101 lesson, Prof. Ipop
This guy’s business was no where near that level.
He probably owned a small business not Western Digital.
If I am anything, I am an educator!
🙂
Ipop,
Earning a technical certificate along with your career in HVAC maintenance hardly qualifies you as an educator. (Insert Smiley)
My years at DeVry have served me well…
Quit lying, Ipop
Everyone knows you went to University of Phoenix and shared a dorm room with AZ Dave.
He confirmed it.
He also mentioned you guys dressed up in women’s clothes and sang show tunes together.
Hey,whatever!
Hey, don’t knock University of Phoenix! They are one of my customers and a huge employer in AZ’s neck of the woods. We do sponsorships at some of their corporate events.
Hopefully AZ keeps the videos of our cross-dress fests locked up in the ole fire safe…
Don’t worry Ipop
Your secret’s safe.
He saves that stuff those special “alone” moments.
Sorry, should read “for those special alone moments.”
I have to go with tenmagnet on this one. I have a hard time imagining a guy would have bet this heavily on a losing business.
That is just what I heard. I can tell you the cash for sure wasn’t spent on furniture, finishings, upgrades, etc. as the house did not appear to have any cash put into it since the 2000 purchase. This was not a show house at all. No plasmas on the walls, no distressed wood flooring, no stainless… I don’t think this was a case of conspicuous consumption.
If the owner experienced his business problem during a time of decreasing home values (like right now), then he would not have been able to take the gamble to save his business. He would be living with regret because he would be thinking “what if I could have funded my business just a little more.” Now he absolutely knows that his business realistically couldn’t make it.
The story illustrates the new economic climate we are entering because small businesses that do just need that extra cash infusion will not get it and will die on the vine.
Tough times ahead.
I imagine there are so many in the same boat now. Most people involved in real estate and construction are contracted sole proprietors. Massive layoffs at the large operators are a drop in the bucket. Seriously people, stuff the schadenfreude for a moment.
Modest everything but the house.
If this family had bought something for $500K, they might still have their home AND their business. I have a feeling that part of the reason the guy was having business problems was that he was taking too much money home to service house debt. He probably believed that the house would make him better returns than the business.
Now he knows better.
Laura, I think you might be missing the point. Go up and look at the purchase price. They bought the place in 2000 for $520,000.
The point is they refi’ed into a very, very large debt.
Forgive my ignorance: I’m not a regular on this blog nor an expert in these matters. When I read this post I thought “this guy was making a living from his house,” and that is exactly what you said. Given that, how is the $200,000 a year taxed? Are these straight-up capital gains, or can that be hidden under layers of debt?
What I understand is that the $200,000 itself would not be taxed like income; however if the homeowner deducts the interest on those 2nd mortgages but does not use the proceeds to make improvements to the house, the IRS can disallow that interest deduction. I also understand that in practice, the IRS doesn’t usually go after people for this. If someone knows differently, please correct me…
In theory, the borrower would need to pay some capital gains taxes on the sale of the house, even in foreclosure. Also, the tax exclusion for the foregiveness of debt only applies to purchase money mortgages. All the refinances are not exempt. He will be responsible for the income taxes on the $650,000 of forgiven debt. My guess is he will not claim it and see if the IRS catches him.
He will be responsible for the income taxes on the $650,000 of forgiven debt. My guess is he will not claim it and see if the IRS catches him.
Two questions:
1. I understand what you’re saying is that the $650,000 (or whatever the owner netted from the refinancings above the purchase price) is taxable as ordinary income. Is that correct? What if some proceeds of refinancings went to interest payments; is it deductible then?
2. I’m guessing that bankruptcy is in this family’s near future, unless the business suddenly turns around now. In that case, who is the senior creditor, the IRS or the bank? Never having been a homeowner myself, I’ve heard that these HELOCs and such are secured only on the home, so the bank should have no more claim on the family after the sale goes through. Is that right?
I’m not a tax lawyer, but I’ll give you 2-to-1 odds that the IRS is always the senior creditor!
I am not an attorney, so this may be incorrect, but my understanding is as follows:
HELOCs, like all recourse debt, is secured by whatever assets the borrower has. Only non-recourse debt from purchase-money mortgages are limited to the value of the home. It gets a bit more complicated than that with judicial versus non-judicial foreclosure, but in this case, the debt forgiveness of $650,000 would be taxable. Also, even with the foreclosure sale of $900K and the $250K exemption, he would also have a capital gains tax on about $150K.
I also seem to remember in the IRS rules (and this is before the relief act) that debt forgiveness is not taxed if you can show that you are insolvent. In that case, he probably would have been better off just spending the money and having a good time rather than trying to be a productive member of society.
Work hard, invest in education, make money, get taxed at highest marginal tax rates.
Sit on butt, wait for house value to go up and sell, no taxes for first 500K. Just to make sure, withdraw equity every year so that you have something to live on and don’t worry about prices going down.
Who is the idiot?
They will be taxed on the all non-original purchase debt forgiven at the taxpayers marginal tax rate. If they also have capital gains above the amount forgiven, they will owe cap gains tax. And they could try to not claim the amount forgiven, but since they are issued a 1099 by the lender on the forgiven amount, chances are they would receive a CP-2000 for the amount owed. If they are insolvent, it is most likely the tax of the forgiven debt will be extinguished.
Gosh, just read this and yech!
They will be taxed on the forgiven debt amount, not the “all non-original purchase debt forgiven.”
Sorry.
Mortgage equity withdrawals are TAX FREE. Because it is borrowed money. You also do not have to pay capital gains taxes on a home you lived in for 2 consecutive years in the last five years.
I’m so old I remember when bank robbery used to be illegal.
Does anyone know what the HOA dues are in this neighborhood?
$145.
It’s on the redfin site. $140+30 if I remember correctly
Don’t trust the info on this listing… Dues are not that high.
The realtor shorted the square footage by 350 feet as well. The house is 2650sf, not 2300sf.
Some lamea$$ REO specialist got lucky enough to score a premium property and is going make big and easy commissions…
It’s on the Internet/MLS, it must be true…
What about the taxes. Refinanced basis should be showing a serious tax hit for the short.
That, bu the way, is $200K per year tax free, Almost $350,000 of taxable income in my neck of the woods nets one $200K
In response to the question about the “Hope Now” program, here are a couple of links:
http://www.whitehouse.gov/news/releases/2007/12/20071206-7.html
http://www.msnbc.msn.com/id/24261001/
Am I right that some lending officers at banks, mortgage brokers etc. made a nice packet on all the refis, 2nd mortgages, HELOCs etc.? Because this seems like a case where the intersts of the lending officer and the bank/provider of capital were very different, almost contrary.
That was my thought exactly. When reading through the refi history I was thinking about how much money loan officers made off of this guy.
I was thinking the same thing when I read through the property records. I was thinking he may have been a mortgage broker. Somebody made some major fees.
Someone exacted a fee for every last one of those loans.
Why aren’t they being seen as opportunists as well?
The brokers’ eagerness to lend (and collect a fee) needs to be taken into account. The banks that bought the multiple mortgages (doesn’t say how many are involved, but I’ll bet there’s more than one) didn’t do their homework, because the fees were looking too good, I’d wager. After all, with bundling and all, the ultimate bottom line wasn’t the concern of any broker who facilitated the loans.
The desire to collect fees for each transaction needs to be taken into the account.
It stuns me this is not considered Fraud.
Whoever is making fees from all those refinancings and Helocs got wealthy.
First of all, what is a picture of my kitchen doing up there? There will be consequences!
And speaking of Home Equity Lines of Credit, around here (Moosehall) we call them HELOC-Davidsons.
Go ahead, ask the man who owns…I mean, is paying for one. If you dare!
Of course this was fraud. Not fraud on the banks part but on the loan originators part. Methinks the owner used the same company over and over again or was in the biz to begin with and ran the deal around to different banks.
Me: in the lending business for 22 years. All things are possible, but not all things are right. Someone should have said “No” and this house of cards would not have grown like this.
Yeah, when ipo told this guy’s story, I didn’t feel bad for him, at all. If his business really was failing, and that is why he kept pulling money out, then he was lying big time on his application. Do you know how much income he would have had to state he was making from his self employed business to qualify for those loan amounts? Lenders should have looked at the refi history on this guy and realized that his stated income was BS, I bet he was stating he made 50k a month on his 1003. But then again, gardeners and house cleaners with no advertising were stating 12k a month and qualifying for 500k loans, no problem.
Given a $1m + debt and payments in the $8k per month range, you’d have to state a $20kpm income and state a $100k bank balance assuming no debt. Clearly a serial refinancer flag should have gone up. It’s possible that some of the loans were business loans instead of standard helocs. I’ve seen 1st, 2nds, with a business loan 3rd behind them all. There is always a greater fool than the one that came before the 1st lender.
I don’t know how long he could keep the refis going before he would have to be honest about his income. There is a limit to this.
Not during the time he was committing his refi spree, limits on lending were not invented yet.
The name of the owner is pretty easy to find. Appears to be a Tech/IT person. The laundry list of lenders is: Long Beach (sub prime), New Century (sub prime) DiTech (2nd) Wells Fargo (twice) WMC (sub prime) First City and a couple of other names I’ve not seen before. Ahhh the days of stated stated cash out…now come and gone.
People should own houses that they can afford in both good and bad times. Not that this applies to all the houses profiled on the site, but it seems a lot of people buy whatever they can eek out in optimal employment/market conditions.
If more people bought smaller houses and less expensive cars, they’d have more to save for bad times. I know, I’m naive and the So Cal market is different. But there are a lot of people who simply buy a lifestyle they can’t afford, which makes small bumps in the economic cycle harder to survive. That in turn forces people to get second loans and HELOCs.
You mean we have to live within our means? What’s a foreign concept for us Americans.
IR,
This is off topic but I thought you might want to profile this one if you do off-Irvine properties in the future.
A WTF prize candidate?
http://www.redfin.com/CA/Stanton/11063-Kibbins-Cir-90680/home/3630422
They want 449,000 for a 2 bed, 1 bath 870 ft condo. They are not even drinking Kool aid anymore. They are now smoking kool-weed.
AR
But it’s in Stanton. Surely that counts for something.
AnaheimRenter,
Join the forums, and post it yourself! There is an item in the OC section for just such things.
It is a participatory internet revolution…
The realtard sucks so bad she can’t even spell the address correct on Redfin…3 Green Holw…WTF!?! Another HS dropout turned RE Pro.
Quote from the post: “How can I get a lender to give me $1,000,000 that I don’t have to pay back?”
Sorry I’m new to this. Can someone please, explain this to me? Does he owe money he was loaned? How is it that he doesn’t have to pay it back?
Boy, you really are new to this…
The $1,000,000 represents the sum total of the value of the home equity withdrawals (HELOCs – google this).
I know what the $1 mil represents.
that wasn’t my question. my question was how is it that he doesn’t have to pay it back, which IR answered that he technically DOES have to pay it back.
He technically does owe the bank repayment on all this money. Since his only real asset was likely the house itself, it is unlikely the bank will ever collect.
He can just go BK and wash that all away…
I don’t know the legal particulars, but I do know this: If he is legally liable to pay back his loans, you can bet your bottom dollar that someone will go after him.
I’m guessing there will be a new industry of “Equity Extractor Bounty Hunters” who will buy up bad loans at a discount and then pursue these people. There will be an abundance of employees familiar with the industry looking for work, i.e., loan officers who originally sold the loans! Heck, I heard that Indian call centers are now being used to track down deliquents and work out payment plans!
Where there is a source for money, there you will find people working to get it. This maxim will always be true.
Disclaimer: Based on other comments, the following does not appear to be the case here.
I have heard, but cannot personally confirm, that people have used HELOCs/refis to hide assets from estranged spouses, business partners, etc. It is something I think about whenever I see very large seemingly unexplainable withdrawals. I’m not sure that it would actually work very well, but I can see why someone would try it. Take out the cash without the other party knowing and hide it in some sort of LLC, etc. I have also been told that there are websites that explain how to do this, but I don’t have the stomach to seek them out to confirm.
The bulletproof way is to have the assets owned by an entity the IRS allows as “pass through” like a LLC or a sub chapter S and then have the shares or membership units owned by an irrevocable trust.
100% legal and untouchable
Nice article on Ladera (probably better off in the forums).
http://tinyurl.com/5oa6ap
The Manleys, for example, can afford to snap up a house that was out of their reach just a year ago
That’s good news.
if only they could get out of their current place.
That’s not a problem. Just set the right price.
Manley won’t slash his price, he says, “out of respect for the neighborhood.”
Oh… that is very manly of him.
Mister Manley is a moron.
/
Sorry, I couldn’t resist that.
Ultimate probably not one thing, just too much of this, which i got off of a bloomberg article linked thru patrick
The Las Vegas housing-market crash represents a turnaround since 2003, when the local economy and real estate were booming.
“If you had anything on the ball, you could make it happen in Vegas,” said real estate agent Donna Marie Gold, 62, who built a $4.5 million fortune buying and selling properties over six years.
After failing to complete a single sale last year, Gold said she fell $22,000 short each month on payments needed to maintain 14 properties. Now two to four months behind on some mortgage payments, she’s lost access to a $250,000 Wells Fargo & Co. equity credit line.
`New York Minute’
“The whole thing was upside down in a New York minute,” Gold said. “There needs to be some forgiveness in this climate with regards to credit and rebuilding one’s credit.”
there needs to be some forgiveness, i was a $4.5 million big shot,
puh-leeze, I mean what can you say?
My house was paid off, but I took out a home equity line of credit for $750,000 and used all the money to buy call options on gold futures @ $980 back in early March. A week later I grew that well past $3,000,000 dollars, but by the next week the market fell and I lost everything. My options expire Friday. Nobody could have foreseen this and I have written my Senators imploring that they forgive my debt and issue me a check for the $2.3 million dollars that the government made me lose.
I want to file a complaint….I can’t stop reading this blog….
It’s like Drudge in 1998 when he found the blue dress. Remember that?
Yeah, I felt bad for the kids too… It’s one thing to see pictures of a short sale home on the blog and not have any empathy. It’s quite different when you walk the house, see the trophies, kids drawings on the fridge, family pictures, etc. The place seemed like it belonged to a regular ole nice family that simply had things go the wrong way for them…
The house itself had some issues. The footprint was originally intended to be 2100sf with vaulted ceilings. Extra bedroom instead of 3-car and extra bedroom and loft area instead of vaulted ceilings in living/dining made the house feel small for 2650sf. Needed new flooring throughout and I wasn’t fan of the granite, I think it was Venetian Gold, that was used not only in the kitchen, but also on the fireplace and on a cabinet in the hallway. It was going to be costly to rip it all out and put more neutral surfaces in…
Ipop, you dont like the layout, yet you say 900k 😯
The price is what the market will bear. Since its in escrow already, I think my analysis was pretty spot on.
I was planning on knocking out one of the bedroom walls to have one less bedroom and a good-sized bonus room. Layout overall was mediocre but the long driveway, good set-back, and decent backyard were major pluses. This place is just up the street from a nice parking along the walking trail too and between Canyonview and Sierra Vista so kids could walk/bike to each pretty easily.
Big loss lovers will like this.
VoC Columbus Grove Alexandria model just closed at $920K, almost 27% below May 2006 purchase price:
http://www.ipoplaya.com/iposhiller.pdf
Interesting to note though that this closing price was $18K higher than a Feb comp on the same street… I thought for sure this one would break the $800K plateau but someone actually paid $1000 OVER list.
How did the banks just let this guy RAPE them? Any risk calculator out their could have seen this coming. Oh, that’s right they were fired or demoted if they didn’t play along.
The US gov’t (American People) should NOT step in and save these banks.
What’s the average yearly income of homeowners in OC? Isn’t the avergae income for all households 85k? So let’s say the average income of homeowners is 120k.
The median home value should fall between 3x and 4x earnings. This puts the median price of a OC home somewhere between 360k on the low side and 480k on the high side.
The more cash you can put down, the higher a multiple of earnings you can go. The greater the financing, the lower you should go.
I believe the median home value (condos included) will be close to 450k in 2010
“let’s say the average income of homeowners is 120k.”
I really doubt that, do you have any data to back it up?
Here is data from
http://www.bestplaces.net/city/Irvine-California.aspx#2
IRVINE ESTIMATED HOUSEHOLDS BY HOUSEHOLD INCOME
Income Less Than 15K 8.12%
Income between 15K and 25K 5.04%
Income between 25K and 35K 5.21%
Income between 35K and 50K 9.43%
Income between 50K and 75K 16.85%
Income between 75K and 100K 15.02%
Income between 100K and 150K 20.80%
Income between 150K and 250K 14.15%
Income between 250K and 500K 3.78%
Income greater than 500K 1.60%
120K is a lot of money to earn even for professionals.
about 40% of Irvine Households earn +100K
$120k isn’t that much if dual incomes. We just hired a new Admin Assistant in my department at $60k. No college degree. This is not an Exec Assistant, who we typically start in the low $70’s — this is the admin role who supports the goons like me.
Let’s say the admin assist has a husband who is a cop or firefighter, and pulls in the typical OT premium in those fields — which probably pushes him up to $90k. Again, no degree required for entry. Presto — there is $150k right there.
This couple would certainly fall under the definition of a “homebuyer” household.
It honestly perplexes me at the number of comments here which marvel that $150k household income is like some pie in the sky. I don’t get it. Do you folks live in Orange County? Have you looked at the job market recently? Check out careerbuilder.com, and put in a search in for something like a Finance or IT person with 5-10 years of experience. Everything is at least $75-$100k. And unless I live in a different Irvine that you all, I sure see a LOT of dual income households around.
BTW – Are those numbers from the 2000 Census?
What’s your definition of a lot? If it’s 50% of the people that you see are homeowners and we figure that those that rent are lower than 100K household income (37% of the households in Irvine). Then that puts 150K about the 70th percentile overall based on your observation (37% + 63%/2). The figures that are posted put 150K at the 80th percentile. So if we account for sample bias in your observation, then the data IrvineResident posted is consistent your observation.
all the data is referred to 2007.
btw, 70K for Secretary!, it’s impressive, now I am convinced Irvinians make lots of money!
CK- not that I disagree with your logic but there must be a flaw somewhere, wouldn’t you agree?
As we all know, median represents 50% below and 50% above. Public and private sources that track income all seem to agree on a median household income for Irvine to be somewhere between $82K and $90K. The stats posted above verify this, there is no way to get around that stat. (Despite past attempts to do so like citing students, illegals etc.)
Again, I don’t fault your logic. Clearly, it’s simple math, 2 incomes earning $80K = $160K or roughly twice the median, etc. The stats indicate that about 40% in Irvine earn above $100K but we cannot ignore that the other 60% are below $100K and median home prices are still well north of 6 times the $100K income level. There is obviously a disconnect somewhere. I can only speculate it’s something like stated incomes are not matching actual incomes.
More importantly, we have a well documented affordability problem. Less than 5% of ALL people in California can afford a median priced home. The stats show less than 6% of Irvinites make over $250K per annum. These are the ONLY people who can afford the median, much less the high end of homes in Irvine. The affordability index supports this market dilemma. Obviously we cannot have only 6% of the population buying ALL the homes in Irvine. This mess will not become unstuck until the fundamentals come in line with reality. (Despite fantasies of wealthy foreigners and equity laden buyers flooding into Irvine to save the day.)
You are assuming that ALL people should be homeowners and that just won’t happen. The people who make 50k or less will most likely not be homeowners.
According to the numbers posted above 28% of the households earn 50k or less. It is not a stretch to say that most of these people are renters and probably will be for quite a while.
True. I believe I once read a stat like 40-50% of the population as homeowners is considered a healthy metric.
I’m not saying anything new, merely pointing out the outrageous disconnects created during this run-up. Nearly every metric of economic sanity was out of whack over the last 7-8 years, and still is. Whether it’s affordability index, median incomes vs. median prices, X-factor to income, GRM … barista turned realtard … whatever. Choose one.
My point is simple, there seems to be a serious disconnect in the stats. True stats tend to lag behind reality some but incomes have clearly not shot-up 2x and 3x in one or two years time. In fact, national and regional tracking shows a slight negative growth in incomes. Like CK, we can all point to several households we know who make well over the median, myself included. But that is a very biased sample due to social factors and it appears to not hold-up under scrutiny when compared to hard statistics.
Put simply (again this is nothing new) when the median home price index (x curve on the graph) meets median incomes (y curve on the graph) we’ll see homes start to sell again. That’s on over-simplification but it aptly illustrates my point.
Those are HOUSEHOLD incomes, not necessarily HOMEOWNER income. Household income includes income from renters as well. The average income of a homeowner is greater than a renter.
Household includes the many folks living in apartments and smaller condos. Your argument is apples vs. oranges.
How about getting the numbers for the SFH households? I think that the apples to apples.
This train of thought -avg household to justify prices- was discredited a while back and it’s getting old.
Yes, it is kind of old, but nobody seems to get the right point. The ratio of median home price to median income in 1990 = 4.45, in 2000 = 4.40, in 2007 = 10.6…what big change happened between 2000 and 2007 that didn’t happen between 1990 and 2000? Easy money! It wasn’t like the rate of growth all of sudden took off or that we stopped building houses. In fact, if anything, the closing of the air stations (Tustin and El Toro) should have made the expectations of a housing shortage even less.
The actual number for the ratio is not important, it is the reasons behind any changes that are important. If you can’t find a good reason for a ratio like this to change, then it’s speculation.
Point me to where the data all of sudden doesn’t reflect reality and I’ll drop the point. Show me where the enrollment of UCI all of sudden went up. Show me that we ran out of land to develop around Irvine. Show me that the rents all of sudden increased by 2x relative to incomes. Show me one piece of information that says people should spend 2x the amount (relative to their income) for homes in 2007 vs. 2000 that doesn’t rely on them selling the house for more in the future!
Thanks to all for your well thought out responses, much better than my seat of the pants observations. In a way, I agree with everything said here.
At the end of the day, I think lendingmaestro hit it right on the head with his prediction of a $450k median by 2010. All factors (including incomes) seem to point to this being about the bottom for Irvine. I’ll go one step further and say that $450k median will be a median of $250/sq ft. I like the $200 sq ft number tossed around here for nearby but less desireable areas (like Ladera Ranch), but don’t see Irvine falling there. $90-$120 sq ft for the IE.
There is a major disturbing factor in the relation of home price to income, the high proportion of people who own homes that have benefited by the run up in prices. For someone who bought a home for $300K just 10 years back and now finds it worth $800K, the stretch of an additional $400 K to their existing $200 K mortgage gets them to a $1.2M house, but the payments are only on $600K, thus “affordable” to that only moderately affluent family. But the home value is somewhere around 10x family income.
This will put a lot of stress on finances, but, as long as the assumption is that the home value will increase, it appears to be a sound investment.
I think many have made, and are still making the appreciation assumption and ignoring the potential of leveraged value losses and what happens when retirement age is reached and the mortgage still has 15 years to run.
What makes you think that someone that brought a 300K house 10 years ago can afford a mortgage 3x what they are currently paying? 300K house => a 70K household income 10 years ago, or around 100K now. That would definitely be a stretch to afford a 600K mortgage.
Irvine appears to have lots of special home features that contribute to high home prices. For instance a two-story “ranch.” So which is it, a two-story or a ranch? Is the definition of ranch different in California than in the rest of the country?
We got bigger horses, got it? Many are imported from Germany, Japan or Ohio so we need bigger ranch homes.
Yeehaw….
Nah. It’s simple … if one is good, two must be better and us Cauliflowerians MUST be better than everywhere else! 😀
Voila! Two story ranch it is! Oh, and the bigger horses thing too …
Freud would be ever so proud of us.
(For what it’s worth …this is also how a 2500 sq.ft house on a 3500 sq.ft. lot became an “estate”. Similarly if one places a shack at the entry point to one’s development it now becomes a guard-gated, private community. Cha-ching!)
a mortgage broker? oy…
In the late 1990s, greed went to work in Internet stocks. Today, it’s working on your home.
Prices rising irrationally, buyers with unreasonable profit expectations, investors swarming to the party — it’s pump-and-dump all over again.
The pumping is proved by home prices that are through the roof. The dumping has been harder to quantify — until now.
In all, sellers and owners cashed in $640 billion of the nation’s home equity in 2004, up from 2003’s $528 billion.
If this number seems wholly unfamiliar, it’s because it’s calculated only by Goldman Sachs senior economist Jan Hatzius.
The formula
His creation — mortgage equity withdrawal, or MEW ? is “the flow of new borrowing secured on existing homes.” Reflecting both pump and dump, it’s a factor of three data points.
First, Freddie Mac reports cash-out refinancings. After peaking at $224 billion in 2003, cash taken from homes fell back to $181 billion last year.
Last week’s Federal Reserve flow-of-funds report provides the second piece of the puzzle — home-equity borrowing. At nearly $200 billion, such borrowing has doubled in the space of a year, tripled since 2002 and grown by eight times since 2001.
The third component of Mr. Hatzius’ MEW is more complex — and clever. He starts with total mortgage borrowing. Then he subtracts cash-out proceeds and home equity loans to get the value of borrowing by new buyers. Then he subtracts new-home financing, to focus only on existing stock.
Then he subtracts that figure from the year-earlier figure to determine sellers’ gains. In the last year, proceeds from housing turnover have grown to $262 billion from $202 billion.
Finally, he adds back in annual cash-outs and home equity loans for total annual mortgage equity withdrawal. Ten years ago, MEW was $74 billion. Last year, it bulged to $640 billion.
Home liquidity
Alan Greenspan has voiced concern over the practice of home flipping. Worried about a bubble, he says houses aren’t as liquid as stocks, so the selling can’t be as frenzied.
Kathleen Bostjancic, senior U.S. economist at Merrill Lynch, is worried, too, but humbly begs to differ on the liquidity issue.
The National Association of Realtors recently reported that in 2004, 23 percent of home buyers were investors.
Ms. Bostjancic: “The argument Greenspan uses — that houses aren’t like stocks — well, that doesn’t hold if one in every four homes is being purchased as an investment.”
regards http://propertybulgariasale.net
Update on this one… I’ve heard a rumor that the place sold for $800K.