Shine On, Harvest Moon — Leon Redbone
The boy began to sigh, looked up in the sky,
And told the moon his little tale of woe.
People have harvested all the money they are going to get out of their houses for quite some time. From 2001-2006, the median home price in Irvine rose each year by an amount equal to the median income. Every homeowner had another breadwinner in the family: the house itself. People proceeded to harvest this free money. A few resisted the temptation. Some took it out slowly, and some took it out as fast as it accumulated. From what I am seeing in my daily searches through the property records, the majority took out something, many took out a great deal, and some took out all of it.
There are those readers who believe I make too much of this issue; it can’t really be that bad. Well, when I start running out of new properties where the sellers took out all their equity, I will start to believe those that did this are already purged from the system. As it stands today, I have a steady stream of new properties with HELOC abuse, and there are many more that I don’t write about. I am able to be choosy. I can pick the most egregious cases or the ones with the most interesting storylines. There is no shortage of these borrowers out there.
I have written before about Mortgage Equity Withdrawal, and Calculated Risk has been tracking MEW for quite a while. Just as he predicted, MEW has fallen off a cliff.
Today’s featured property is an interesting case study in how owner’s managed their debts, and how lenders enabled this insanity. The lenders are now reaping the harvest they were sowing during the bubble years. The toxic loans they planted have grown to poison our entire financial system.
Asking Price: $415,000
Income Requirement: $103,750
Downpayment Needed: $83,000
Monthly Equity Burn: $3,458
Purchase Price: $550,000
Purchase Date: 12/23/2005
Address: 82 Orchard, Irvine, CA 92618
| Beds: | 3 |
| Baths: | 2 |
| Sq. Ft.: | 1,300 |
| $/Sq. Ft.: | $319 |
| Lot Size: | 3,780
Sq. Ft. |
| Property Type: | Single Family Residence |
| Style: | Other |
| Year Built: | 1977 |
| Stories: | 1 Level |
| Floor: | 1 |
| View: | Park or Green Belt |
| Area: | Orangetree |
| County: | Orange |
| MLS#: | S551599 |
| Source: | SoCalMLS |
| Status: | Active |
| On Redfin: | 1 day |
 New Listing (24 hours)
|
|
Been Beautifully Customized. Remodeled – New Kitchen, New Gas Stove
Appliance, New Baths, New Baseboards. Master Bedroom with Private Bath.
Smooth ceiling, indirect lighting, ‘Hardwood’ Parquet floors. Sliding
Glass Doors From Living Room To Enclosed Yard and Private Patio, Great
for Pets and Entertaining. 2 Car Attached Garage with Washer and Dryer
Hook-ups. Great Location at End of Cul De Sac and Room for Extra Cars.
Can Add Second Story for Lots of Square Footage. Walking Distance to
Irvine community college. 2 City Parks and Dog Park Nearby. RV Access
From Back Driveway area. Association Fees Include: Neighborhood
Greenbelt Maintenance, Pools, Spas, Tennis Courts, Clubhouse, Tot Lot
and Weight Room. No Mello Roos, Low Tax Rate, Large Side Yard with
Cement Walkway, Cul De Sac quiet street, Best location in the tract!!
No Common Walls! I guess that is the big selling point for this property…
Why Is This Description Written In Title Case?
This property is interesting because it has so many subplots. Let’s start with the previous owners…
Previous Owners
This property was purchased by a couple on 5/1/2001 for $246,000. They used a $242,065 first mortgage, a $7,375, and if those numbers are correct, they cashed out $3,440 at the closing. On 5/29/2003 they refinanced with a $245,600 first mortgage and a $30,700 second. On 5/3/2004 they refinanced with a $322,000 first mortgage. Their total mortgage equity withdrawal was $76,000.
So was this behavior punished or rewarded? Well, they sold the property to the bagholders for $550,000, so they paid off the bill the ran up and still made almost $200,000. Like many people during the bubble, these people behaved irresponsibly, and they got away with it. One has to suspect that these people and those like them continued this behavior when the moved to their next property. Unfortunately, I could not find them in the property records to verify.
Bagholder Owners
The greater fools in our story today was another couple who bought this property on 12/23/2005 for $550,000. I imagine they were very excited that Christmas to be in their new home. Visions of sugar-plums danced in their heads… They bought the property with 100% financing, and it appears as if they either couldn’t or wouldn’t make the payments. The property went to foreclosure auction on 10/1/2008, and the bank did not bid the property up to its $440,000 first mortgage. In fact, it doesn’t look like the bank bid at all. The property went to a flipper from Laguna Beach for $306,000. Encore Credit managed to lose almost $250,000 on this property. Yikes!
New Flipper
Here enters our bottom feeder who picked up this “bargain” property at auction for far less than the mortgage note amount. Of course, he immediately adds $109,000 to the purchase price hoping for a quick sale and a huge profit. He will probably be successful. It pays to have cash during a credit crunch.
HELOC abusing owners, late buying bagholders and greedy flippers: this property has it all.
{book}
The night was mighty dark so you could hardly see,
And the moon refused to shine;
Couple sittin’ underneath the willow tree; for love they pined.
The little maid was kinda ‘fraid of darkness, so
She said, “I guess I’ll go.”
The boy began to sigh, looked up in the sky,
And told the moon his little tale of woe.
(Refrain:)
“Shine on, shine on, harvest moon up in the sky;
I ain’t had no lovin’ since January, February, June or July.
Snow time ain’t no time to stay outdoors and spoon,
So shine on, shine on, harvest moon, for me and my gal.”
I can’t see why a boy should cry when by his side
Is a girl he loves so true;
All he has to say is, “Won’t you be my bride, for I love you.”
But why should I be telling you this secret when
I know that you can guess?
Harvest moon will smile, shine on all the while,
If the little girl should answer “Yes”!
Shine On, Harvest Moon — Leon Redbone
It’s a great time to buy. Yeah right.
Anyone remember 18% mortgage rates? I do. Think it can’t happen again? This guy does.
“Oh, and having done that, the long end of the curve would probably still spike to 10%, which means 13-14% mortgage rates. Cut the value of every house in America in half – again – from here.”
http://market-ticker.org/archives/622-Fiscal-Cat-5-Hurricane-Warning.html
Won’t happen. The treasury is giving away free money.
Excuse me sir, can you please direct me to the line for free money?
It’s not available to you.
It is only being handed out to the government’s business partners in the banking sector and wooden arrow manufacturing.
Give me five!
lol
For some of the proposals the candidates are floating, looks like they also want to hand out some cash to the bag holders that acted irresponsibly during the boom.
Us well behaved kids, we get nothing.
It’s not available to me? Are these tax cuts based on past earnings or future loses on contracted revenues?
The uber wealthy are trying to scare you into thinking there will be hyper inflation so that they can syphon off more of your money.
Make sure you all write to your representatives in congress that they should NOT back the measure on curbing foreclosures by guaranteeing irresponsible borrowers.
This guy (Denninger) is a moron. His analysis is in his own words “first semester economics”. Given that the entire commodities complex has collapsed, China is well off the boil, and the dollar is strengthening (rightfully so), the Specter of Inflation is but a memory.
here is a chart of equity withdrawal for responsible renters and home owners:
http://static.seekingalpha.com/uploads/2007/9/19/commodity091807.gif
The elimination of MEW hits the global economy like a freight train. Now the debtors are praying to the hyper inflation gods. (hey, it worked during the bubble) The next chart to superimpose over the MEW chart with a time lag is unemployment.
Am I the only one who is enjoying deflation? Granted, we all may lose our jobs (realistically maybe 1-2 out of 10 of us)… but if you have been a saver you are well positioned, provided you are not greedy. The fact that you can survive in a slower world where food still grows and the sun still shines should put a smile on your face. It’s all about perspective.
you know, a few months back a wingnut client of mine claimed (once again) that the economy would be fine if the (damned liberal) media would just STFU about it and people would just keep spending money. I nodded my head and then tried to politely point out the figures on the degree to which mortgage equity withdrawal had been propping up our economy, and how it was inevitable that there would be a cliff-dive when all that free, discretionary income was taken out of the equation.
My politely-phrased advice that he was full of shit bounced off his reality distortion sphere. Now that the economy is much, much worse than it was in July, he’s blaming the Democrats.
I’m resisting the temptation (so far) to tell him that he should be grateful Obama is going to win the election, that way he’ll have another handy scapegoat to blame for what the Bush Republicans did over the last 8 years.
It sounds like your client has been listening to a little too much Rush Limbuagh and Sean Hannity.
He probably needs to put away the cigars and Golf magazines and read a book written by someone with a college degree every once in awhile – or at least a conservative who does not deconstruct a Liberal straw man on a daily basis.
Yesterday’s profiled property on Iroquois just went into escrow…
They should be happy with the free marketing on the IHB 🙂
Do you know the price?
Nope, gonna have to wait and find out…
Wonder if it’s coincidental that many you profile go into escrow pretty quickly? I have a feeling its because the list prices on many you pick up are so low that they sell quickly.
I am glad to be of public service. Realtors should take advantage of us. I don’t mind…
The way prices are going in Irvine is having me loose hope these days. It seems demand (with the ability to buy) in Irvine is still high despite all the talk of a bad economy and prediction of job losses. Besides, the asking price for homes is becoming a joke and it seems it has become a new trick of the realtors to get people excited. Just taking some of the examples profiled here:
profiled on/Address/Asking/sold
Oct 13/3 Raines/$764,500/$900.132
Oct 14/21 Crescent/$699,000/$900,000
Oct 15/5052 Belvedere St./$464,900/$537,655
And many profiled in the last few days are expected to sell well above asking based on comps as ipoplaya pointed out. So, the real losses seem to be far less than what IR calculates.
Now going back to demand and fundamentals, I also find the idea of assessing home prices based on Irvine’s median income not a good measure since it is not only those who already live in Irvine who buy a house in Irvine. The reality is that people with family all over south california who have descent income have little choices in terms of nice cities to live (especially cities whose schools are good across the board instead of just one or two good schools in the entire city). So, I think we should look at a wider pool of people all over SC who have been saving for a while (or held onto the money they made by selling a property during the boom anyhwere in SC) who seem to be considering the current prices in Irvine to be a bargain. For example I work in the south bay area and live in Irvine and quite a few colleagues of mine talk about buying a home in Irvine. They just do not have many other cities to choose from from the south bay till Irvine.
If what you are saying comes to pass, you should see a dramatic increase in the median income in Irvine as all the high income people in the area move here. This would raise the fundamental value accordingly.
What you are witnessing is merely the activity of knife catchers. The fundamentals do not change just because a group of people choose to ignore them. Is it possible that Irvine will become the lonely island where fundamentals do not apply? Sure, but I doubt it will be. It wasn’t last time.
IR, while I agree with you, there is some validity to the point that people may be willing to spend a larger portion of their income on a house in Irvine due to the schools. The alternative is to buy somewhere nicer than Irvine (for cheaper) and send your kids to one of the excellent private schools. This is a good alternative, but a pricey one. Parents put a premium on education. Where do these 2 options balance out? Maybe the fundamentals of Irvine are 35-40% of income versus 28-32% elsewhere?.. just a thought… Irvine is still over priced. Obviously another alternative is to rent the same house in Irvine 😉
another factor with fundamentals: maybe down payments in irvine are higher than other areas? Whether or not this is sustainable is another story, but could be tied to education options (Irvine schools vs. private school)
I agree with you in principle, IR. But Irvine seems to be attracting knife catchers from all over SC. And, if we happen to have enough of them, they could keep the price high for quite a while.
::Sniff:: I still can’t afford to live here thought…
🙁
Why are they playing up that kitchen? It looks like a kitchen in some sort of institutionalized setting.
I have heard of going neutral but painting it all why like that is something you do before you try renting it, otherwise I just want to put on a jack, hat and gloves it looks so cold.
NEW YORK (CNNMoney.com) — Former Federal Reserve Chairman Alan Greenspan told a House committee Thursday that the nation will emerge from the current credit crisis with a “far sounder financial system.”
Bull. The problem is not the system. The problem is the people in charge of overseeing the system and making sure that the store is being properly tended to. It’s like every police officer in the country not showing up to work and then the police chief saying that we will emerge from the anarchy with a much sounder system of law.
“We are in the midst of a once-in-a century credit tsunami,” Greenspan told the House Oversight and Reform Committee.
As though the problem is some random occurrence completely unpredictable and uncontrollable.
Because of their hard-won experience, markets “will be far more restrained than would any currently contemplated new regulatory regime,” he said.
The bank bailout is sure going to show those bankers what the school of hard knocks is all about.
“Investors, chastened, will be exceptionally cautious,” he added.
In other words, nobody is going to want to invest in U.S securities. Fantastic, I can see the light at the end of the tunnel.
Greenspan said he made a mistake in presuming that lenders themselves were more capable than regulators of protecting their finances. He said he was “shocked” when that system “broke down.”
“I still do not understand exactly how it happened,” said Greenspan.
One word: WOW. It looks like that man behind the curtain has finally been revealed.
The Washington Post Article on the same testimony is headlined:
“Greenspan Reverses Stance on Regulations”
“Former Federal Reserve chairman acknowledges that the financial crisis had exposed “a flaw” in his view of how the world and markets function. ”
Two interestingly different takes on the same words, huh?
I guess that is as close as Greenspace will get to admitting that he totally screwed up and we will have a depression because of it.
We are in the midst of a once-in-a century credit tsunami,” Greenspan told the House Oversight and Reform Committee.
Great Depression: 1932
Great Unwinding: 2008
2008-1932 = 76 years
Century – a span of 100 years
Thus, at least 2 tsunami’s in a 100 years.
Glad Alan can count
The following explains why Greenspan cannot even do basic arithmetic.
http://www.lewrockwell.com/bonner/bonner188.html
Greenspan is an idiot. Bernanke is not any more intelligent. Paulson is just evil. With the three of them working together, we all are doomed. The best thing for us is still that coup.
One in the 20th Century, and we are going through apparently the only one we will have to worry about during the 21st Century. So once things pick up again (say, 2012 for the sake of argument), that gives us 88+ years of house price increases until anyone needs to worry about the next bubble burst. And I’ll finally be smart enough to get a 100% loan.
(BTW, he’s a different Alan than me.)
I wouldn’t be so sure…in 2012 we’ll have Medicare hanging over our heads and another trillion in debt from the Dems.
Whoa ho!
run for the hills.
Only another trillion? That would make the Dems far more fiscally responsible than Bush and the Republicans from 2000-2006.
National Debt on:
January 22, 1993 – 4.7 Trillion (Clinton Inaugurated)
Jan 22, 2001 (Bush Inaugurated) 5.7 Trillion (+1.0 trillion under Clinton)
October 22, 2001 – 10.5 Trillion(+4.8 Trillion under Bush…and another 3 months to add on for good measure)
Heckuva job, George
http://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt.htm
This reminds me of a story about sewer problems somewhere in Wales (near Pontypridd IIRC). A then-recent storm caused a sewage overflow into a low-lying neighborhood. One inhabitant was quoted as saying the claims that it was a once-in-a-century event were obviously rubbish as it had happened three times in the 12 years she’d lived there.
And the previous two occassions upon which her house got flooded with several inches of sewage hadn’t inspired her to move! Is this an example of the “emtional attachment” that is supposed to keep underwater (or other fluids :p ) borrowers paying?
This property already has 5 offers. I’d expect it to enter escrow in the next day or so.
There are a few other flips in the area. Seems like a target rich environment for anyone with cash to buy low and sell high.
The market is looking for knife catchers with money to throw away. It is finding them.
AZ..
Which market, the housing market, the stock market, the commodities market
I can’t tell, they are all going down.
go take a look at the house and the community after 9:30PM, you will say “no”
Going into escrow and being sold are very different birds. In my neighborhood i have seen homes with SOLD signs on them, later to see that same SOLD sign taken down. And again, I hope these irrational people that think that these prices are a steal, have a job next year to pay the almost half million note they have, they might be joining all the other spec’s in the soup line.
In the esteemed opinion of those on the board, is $306,000 a good price for this unit?
If it is, I’ll be moving out of OC. This place is a dump for three bills.
You have to ask yourself this:
If on 5/1/2001 it was supposedly worth $246,000
The unit is now 7.5 years older. Would you pay 60,000$ for some baseboards and a stove and bath?
Is the average salary much more today than it was in 2001?
Does gasoline cost more now than in 2001?
Do groceries cost more now than in 2001?
Is there more economic uncertainty now than in 2001?
I would say – no, it is not worth 306,000. In most parts of the country, this place would not be worth much more than 130K.
It’s a starter home. Certainly not someplace that a bigshot mortgage broker or share-holder fraudster on a 6 figure salary would want to live in.
If I were moving to CA today and looking to buy, I would not be comfortable offering more than 200-220K on this place.
Of course, I would be promptly outbid by someone with a bigger pile of IOUs to give away; that’s fine with me. I can wait.
IR or someone else please comment:
A flipper bought this for $306k and the property had a first mortgage on it for $440k.
I understand in a high percentage of the bank auctions its merely a formality with the bank bidding the amount owed and then giving it to a real estate company to sell as a REO.
What influences a bank to NOT bid on this or any other auction property where they own the first allowing it to be bought by someone for much less? It seems like even in the worst of cases they are leaving money on the table.
Is there a second or other issues that this flipper has/had to pay or is the flipper indeed going to pocket this huge profit?
I’m interested to understand the process in the generic case just as much as this property in particular.
Thanks to all you and IR especially for the education of this site.
Maybe the bank doesnt have any money to bid.
In foreclosure sales bidders compete with the bank or lender regarding the home price. If the bank deems the bid too low, it will counter with its own offer
Bank loans buyer 400K
Bank now has -400K
Buyer never makes a payment
Bank still has -400K
House goes to auction
Flipper bids 300K knowing he flip for 350K. The bank says “Screw you, jerk, I am not taking a 100K loss for your 50K gain.”
Bank pays itself 400K and takes the mortgage.
Bank still has net -400K
Bank puts house up on MLS and finds a buyer for 350K.
Bank ends up with a 50K loss instead of a 100K loss if they had let it go to flipper.
The bank is not always just going to blindly bid the price up to what the previous mortgage was unless they think that that is what they can actually re-sell the house for.
If they figure that the auction price is more or less than what they could get from MLS then there is no point in bidding. Just let it go and move on to the next foreclosure.
that’s assuming it’s easy for the bank to sell at $350k..
the place may be trashed, need carpet, paint, appliances so you may have to put $10-20k in. Then there’s the carrying cost if it takes you 3-5 months to sell. then you have to pay commission to your agents brokers, even at 3% that would be another $10k. So $50k is probably a wash after factoring in the rehab, carrying and commission costs.
Yup.
Banks are reexamining their loss mitigation procedures. They used to bid the amount of the loan and if they got it, they would sell it on the open market generally for more than the note. Now, with prices dropping so fast, they find it more financially advantageous to let it go for less than the note and avoid the costs of preparing the unit for sale and paying more commissions.
Are there any recent stats of how this has changed?
This would suggest that instead of buying a house via an agent (when I finally DO decide to buy) that I should buy one at an auction.
I can imagine that these REOs might have leins for HOA fees and property taxes that have to be cleared.
Not sure if you get a free look, but if you go over to ForeclosureRadar.com you’ll see that a lot of houses have firsts alone that are worth more than the value of the house currently. For quite a long time the banks were taking homes back by the score because no one would offer a bid over their opening amount, which was usually the first mortgage. When you look at the data over there you’ll see that (i only look at orange county, don’t know if this is true for other areas) that the banks are postponing many, many more foreclosures these days, presumably because they’re working things out with the homeowners.
Ha ha suckers I read yesterday that of that $700 billion that was so necessary to commit a full $70 billion (10%) is going to employee bonuses this year. Stellar performance demands rewards.
Schwarzenegger just proposed a program much like Mc Cain’s since he now realizes that property valuations are the base of property taxes and must be maintained or the whole LOCAL gov’t collapses.
Got to keep the cops paid when you create an economy like this-
Hey, don’t forget prop 13 – the oldtimers still get their 2% raise. Just the new buyers get a break.
I watched a similar thing in Calabasas. One stupid couple who thought that they were brilliant real estate investors let four homes go into foreclosure at once. All by themselves, they are causing bank losses in the millions of dollars.
I always hated kitchen sinks that face the wall because it feels like your being punished.
Perfesser Civix never tires of reteaching hiz lovely students about the tripartite American government.
You see the budget is created by the body which makes the laws, the Legislative branch called the Congress.
The President or Executive branch ENFORCES (or at least is supposed to) the laws and the Judicial (Supreme Court) branch which interprets the laws.
The Congress under Clinton was Republican-dominated, which accounts for the slow increase which people who don’t understand the structure of our government attribute to Clinton.
Likewise the rapid increase under Bush corresponds to the time when the Congress became dominated by Democrats, even though it’s blamed by some on Bush, who I guess was culpable because he didn’t veto the budgets presented to him, probably because his veto would have been overridden by the large Democratic majority anyway.
Don’t you remember the hullabaloo about Bush SIGNING/approving the budget? Is that not indication enough that it was created elsewhere, in this case the Congress?
Congress sets policy and taxes. If people were better informed about the workings of their government we could spend a whole lot less time talking past each other.