Our popular tour to surrounding communities in search of HELOC abuse continues in Huntington Beach. So far we have seen $3,367,500 HELOC Abuse from Hollywood, $5,000,000 HELOC abuse from Laguna Beach and $7,000,000 HELOC abuse in Newport Coast. This week instead of going for one big abuser, I want to give you a more complete picture of how common this problem is. The following post contains a partial list of homes for sale over $1,000,000 where the owners owe more than they paid.
Asking Price: $2,595,000
Address: 1120 Main Street, Huntington Beach, CA 92648
BTW, I have been quoted over at Huntington Homes concerning HELOC availability.
Ordinary Guys — Joe Walsh
And every Saturday we work in the yard
Pick up the dog do
Hope that it’s hard (whaf whaf)
Take out the garbage and clean out the garage
My friend’s got a Chrysler
I’ve got a Dodge
We’re just ordinary average guys
Ordinary average guys
HELOC abuse is not an extraordinary behavior limited to a few rogues; ordinary people were doing it. HELOC abuse has become the personal financial management technique of the masses (see Our HELOC Economy and California Personal Finance: Ponzi Style). A tiny condo in Irvine extracted $100,000, and one home in Newport Coast managed to extract $7,000,000. I have documented hundreds of cases in Irvine alone. It is so common that even our current president, Barack Obama, is a HELOC abuser:
In April 1999, they purchased a Chicago condo and obtained a mortgage for $159,250. In May 1999, they took out
a line of credit for $20,750. Then, in 2002, they refinanced the condo
with a $210,000 mortgage, which means they took out about $50,000 in
equity. Finally, in 2004, they took out another line of credit for
$100,000 on top of the mortgage.
Tax returns for 2004 reveal $14,395 in mortgage deductions. If we
assume an effective interest rate of 6%, then they owed about $240,000
on a home they purchased for about $159,250.
This means they spent perhaps $80,000 beyond their income from 1999 to 2004.
{book4}
This week the IHB was mentioned in Huntington Homes: Surf City home-equity ‘abuse’: ‘So many you can’t believe it’. Since I represented in that story the number of HELOC abuse cases is unbelievable, I thought I would show you what I found. The following list are homes currently for sale in Huntington Beach with listing prices over $1,000,000. Each of these properties has debt in excess of its purchase price. That means that the owners have taken out any downpayment they made plus some extra:
16711 Edgewater Ln Huntington Beach,
CA 92649: Paid $1,100,000, Debt $1,700,000
1111 Pine St Huntington Beach,
CA 92648: Paid $275,000, Debt $1,450,000 Option ARM
19616 Cloverwood Cir Huntington Beach,
CA 92648: Paid $1,006,500, Debt $2,000,000
17045 Edgewater Ln Huntington Beach,
CA 92649: Paid $1,000,000, Debt $1,259,000
19452 Beckonridge Ln Huntington Beach,
CA 92648: Paid $859,000, Debt $1,455,000
6601 Silent Harbor Dr Huntington Beach,
CA 92648: Paid $1,056,000, Debt $1,511,000
6576 Silent Harbor Dr Huntington Beach,
CA 92648: Paid $1,590,000, Debt $1,919,370
220 8th St Huntington Beach,
CA 92648: Paid $230,000, Debt $1,409,000
19622 Larchmont Cir Huntington Beach,
CA 92648: Paid $633,500, Debt $1,000,000
16915 Edgewater Ln Huntington Beach,
CA 92649: Paid $749,000, Debt $1,820,000
6431 Morningside Dr Huntington Beach,
CA 92648: Paid $875,000, Debt $1,260,000
19144 Redford Ln Huntington Beach,
CA 92648: Paid $777,500, Debt $1,150,000
6571 Beachview Dr Huntington Beach,
CA 92648: Paid $1,259,000, Debt $1,391,000
416 11th St Huntington Beach,
CA 92648: Paid $430,000, Debt $700,000
16361 Ardsley Cir Huntington Beach,
CA 92649: Paid $635,000, Debt $1,000,000
6592 Morning Tide Dr Huntington Beach,
CA 92648: Paid $530,000, Debt $804,000
5252 Chadwick Dr Huntington Beach,
CA 92649: Paid $720,000, Debt $931,500
205 20th St Huntington Beach,
CA 92648: Paid $415,000, Debt $750,000
3611 Rebel Cir Huntington Beach,
CA 92649: Paid $659,000, Debt $840,000
Check out this short sale at 43% off:
4751 Los Patos Ave Huntington Beach,
CA 92649: Paid $1,750,000, Asking $1,000,000
Remember, this list does not contain those people who bought late and are now short selling–and there are many of those. To be on this list, each owner must owe more than they paid, they must have shown a pattern of withdrawals and refinances, and the debt must be significant compared to the value of the house. It is apparent that the people living in houses asking over $1,000,000 in Huntington Beach were hitting the housing ATM quite often.
I am not the only one who noticed this phenomenon. A recent study from economists at the University of Chicago (via Calculated Risk), estimates “that the average homeowner extracts 25 to 30 cents for every dollar increase in home equity.” They go on, “Homeowners in high house price appreciation areas experience a relative decline in default rates from 2002 to 2006 as they borrow heavily against their home equity, but experience very high default rates from 2006 to 2008.” If you want emperical evidence of what these guys are saying, just take a look at the list above.
Asking Price: $2,595,000
Income Requirement: $648,750
Downpayment Needed: $519,000
Monthly Equity Burn: $21,625
Purchase Price: $950,000
Purchase Date: 12/17/2004
Address: 1120 Main Street, Huntington Beach, CA 92648
| Beds: | 4 |
| Baths: | 7 |
| Sq. Ft.: | 6,400 |
| $/Sq. Ft.: | $405 |
| Lot Size: | 8,900
Sq. Ft. |
| Property Type: | Single Family Residence |
| Style: | Mediterranean |
| Stories: | 2 |
| Year Built: | 2007 |
| Community: | West Huntington Beach |
| County: | Orange |
| MLS#: | U7002273 |
| Source: | SoCalMLS |
| Status: | Active |
| On Redfin: | 714 days |
the most exquisite homes you will or have seen. Open floorplan through
out. 4 bedrooms, 5.5 baths, wine room, dry sauna, elevator,2 laundry
rooms, separate walnut paneled office, huge game room w/bar and wrap
around balcony. Gorgeous master suite w/dbl sided his/her 10′ shower
with multiple shower heads and body sprays, circular jetted tub that
fills from the ceiling and a huge walk-in closet that is every woman’s
dream. Other features inclute smart house technology and remote
descending chandelier. Intricately handcarved solid walnut cabinetry
t/o. 17′ island in kitchen/family room w/10′ glass doors that slide
into the walls for ultimate indoor/outdoor beach living. You will Not
find another home built like this with the quality of construction and
materials. This home is for your most discriminating buyer.
through
out? inclute?
So how did our featured property owners do it?
- The property was purchased for $950,000 on 12/17/2004. The owners used a $617,500 first mortgage and a $332,500 downpayment.
- On 2/4/2006 they got a construction loan for $1,935,000.
- On 5/14/2007 they refinanced with a $2,562,000 first mortgage.
- On 5/29/2007 they obtained a second mortgage for $350,000.
- Total property debt is $2,912,000.
- Total mortgage equity withdrawal $977,000 (final refinances minus the construction loan).
If this property sells for its current asking price, and if a 6% commission is paid, the total loss to the lender will be $472,700.
You have to figure that you and I as US taxpayers are going to eat that one. I imagine these owners enjoyed partying in their newly built house near the beach on your dime.
{book7}
And every Saturday we work in the yard
Pick up the dog do
Hope that it’s hard (whaf whaf)
Take out the garbage and clean out the garage
My friend’s got a Chrysler
I’ve got a Dodge
We’re just ordinary average guys
Ordinary average guys
Ordinary Guys — Joe Walsh
I take issue with the grammar in this intro sentence: “No expense spared in one of
the most exquisite homes you will or have seen.”
‘you will or have seen’? I give ’em credit for attempting to be terse, but to correctly express the intent there requires a few more words than that.
IR, thanks for taking the time to illustrate how widespread this problem is. My brother-in-law, maybe 6 or 7 years ago, was thoroughly convinced that “there should be no money left in the walls” of one’s home. All of it should be extracted – as much as possible. He kept repeating things he’d read in books by some crackpot (who I am sure has been thoroughly discredited by now) named Ric Edelman. Well, he borrowed beyond the value of his Chevy Chase, MD house, and now he is servicing serious debt. He has a business, and it’s fine right now, but there was widespread belief that you’d be stupid NOT to take all of the money out of your house and invest it – -while getting a tax write-off to boot. Many of these folks put that HELOC/refinance money into the stock market. The question for them is, “now what?”
So true. I used to read a great many such quotes in newspapers and magazines from so-called financial wizards. Not surprisingly, they were all mortgage brokers, stock brokers, and commissioned investment advisors. According to them, anyone who had a penny of equity in their home was beyond stupid. I haven’t seen any of those types of statements lately.
And here’s one of Edelman’s DVDs – -get it while it’s hot!
10 Great Reasons to Carry a Big Long Mortgage by Ric Edelman INCLUDES AFTER-THE-SHOW BONUS Q&A! Once upon a time, paying off a mortgage made sense. But today, its foolish to own your home outright. Indeed, todays economic environment makes it clear that you should obtain a big, long mortgage and never pay it off. Learn why 15-year loans are bad, and how making extra mortgage payments could be preventing you from achieving the very financial security you seek. Best of all, discover Rics BLT Mortgage Strategy, which will show you how a mortgage today is a powerful financial tool.
That’s bad advise.
Irvinerenter, I get the point you’re trying to make, but I think you’re overdramatizing things just a bit. It looks like around ½ of these places had large amounts of money reinvested in them. Several are complete rebuilds, several more are remodeled and a few were new construction finished off with landscaping and other upgrades. I also noticed that almost every house you picked still has a substantial amount of equity left that was left untouched. The statistic you quoted of 25%-30% of appreciation tapped, would seem to be a simpler way to gauge this phenomenon, but even that won’t tell you what was reinvested in a property (think about the remodeling done in this decade) and what was spent on other things. Just my 2 cents. The Obama example takes some chutzpah, I’ll give you that.
There was certainly a lot of money spent on renovations during the bubble, particularly on the older homes in communities like Huntington Beach. Many believed they were adding value to their properties, but the real “value” was simply being inflated by the loose financing terms available at the time.
“I also noticed that almost every house you picked still has a substantial amount of equity left that was left untouched.”
Maybe, maybe not. They only appear to have equity right now because their asking prices are laughably ridiculous. Few if any of the homeowners listed above can afford those debt levels with conventional mortgages. They will either need to refinance into stable loans or sell the properties. Most will be forced to sell, and this will put even more pressure on pricing. Notice the short sale at 43% off. That is what happens to pricing when owners have to sell. There are 18 more from the list above who will be following in those footsteps at some point.
Someone emailed me that Obama info. It looks like a typical political hit piece, but the facts are what they are. He probably had good reason to believe he would be seeing dramatic increases in his income to pay back the loans, but I was struck by the fact that Ponzi Scheme personal financing is even a tool of our President. I guess that makes it OK…
Actually, assuming that Obama put the HELOC money into campaign expenses (which seems likely) … it was a very good investment.
I read that the Obamas’ income last year was about $2.5 million. Their assumption that their rising income would cover HELOC payments was correct. Chicago calculation is different from California Kool Aid.
It would seem to me that it’s only HELOC abuse when the borrower defaults on their loans, if you continue to make your payments on time than it’s merely HELOC use. Unfortunately, the majority of ‘home owners’ you document cannot, thereby sticking the taxpayers w/the price of the ‘owners’ largess.
Finally, in 2004, they took out another line of credit for $100,000 on top of the mortgage.
Dreams of My Father was published in August of 2004. Ergo, if Obama took out a large line of credit early that year one could reasonably assume he already had an advance in hand and/or he was expecting revenues from the book later in the year.
I think you are missing the point here these homes won’t know their true lost value until they are sold (which is not happening) and while they sit they turn into short sales because no one is stupid enough to buy their debt and then onto foreclosure. So where does this debt go—we the tax payer pick it up.
The Equity is gone from these homes they spent it all plus more if they cannot be sold at these WTF prices.
Unless you want to buy one of them—I don’t.
Right now there is not enough stupid people left to buy this debt, the job market is not secure, the loans for jumbo are not cheap enough and the future taxes are uncertain.
You would be putting yourself at huge financial risk buying anything right now even with cash. And you could be stuck in a property you can’t sell.
The housing market for CA is a disaster. jmo
I’m glad that I’m not alone in my beliefs.
These overpriced homes continue to pile up as unsold inventory, the government is stepping in and pushing for more subsidies, so what exactly is going to happen?
Are these prices bargains, and if so does that mean thousands of people will line up to buy them at these discounted prices? After all, they’re great values so people should be jumping all over them.
My guess is that there’s still a long way to go before things stabilize.
Home prices need to fall in line with fundamentals. Homes require credit to buy, which is still somewhat difficult to get (especially on higher priced homes that are typical in CA). The only real buyers are those with cash, or enough for a down payment and good credit on top of that. I’m sure there are handful of people in that category, but the majority of people aren’t. The market reflects the behavior and actions of the majority.
The ego-palace that is highlighted has never been lived in. It could be held up as the poster child of the in your face extravagance that has dominated OC. It was a typical HB tear down where instead of building two downtown bowling ally stucco boxes they put up this miami-vice beast. This piece of architectural debris is completely out of place amongst the old craftsman style buildings that dominate this part of down town HB. It’s been for sale for well over a year, and it was the talk of the neighborhood with everyone jealously fawning over its decadence. I must admit that the fever that gripped OC was very disturbing and maybe we could erect a plaque in front of 1120 Main St. as reminder to future generations of the folly of greed and Trump like excesses…
I concur with Stephen. This property is way overbuilt for the area. The owners/deveolpers were very folish. This home maked sense in the Harbour but not on Main St. where it is located.
There was an old adge, never buy the bigest, nicest home on the block because you will never get your money out of it. These people thought they could build the bigest/nicest home and get away with it.
the story I’ve heard is the builder built it, then started losing money so he moved into it while still trying to sell it. he has now moved out after the bank took it.
the place across main st on 13th (big white house) is also way overbuilt. I cannot imagine paying that kind of money to live on a VERY busy and noisy street. It’d be kinda cool for about 6 hours every year: morning of July 4th. Even that night would suck cause Main gets SO packed after the fireworks.
People who live on Main Street certainly want to be seen.
Can I ask a stupid question. Why do you need 7 baths for a 4 bedroom home? Maybe I’m just overlooking the obvious.
Because you are really, really dirty?
Seriously, how many baths can one use at once?
I might make a good rehab house. That way you will not have to worry about kids getting run over by a car.
The most baths needed in a house, IMHO, is equal to the number of bedrooms plus one half bath. That is, a full bath for each bedroom, and then a half bath for guests.
Jumbo loans?
My wife said she saw something on the news regarding jumbo loans being more accessible starting sometime in July. Something about the interest rates coming down for jumbos. Does anyone know about this at all? Some googling turned up nothing for me.
I heard something about that also.
Probably won’t help out the people with the 2.7MM option ARMs IMHO.
Does HB have restrictions on the amount of building that can be put on a lot.
The City of Irvine limits dwelling lot coverage to no more than 50% -except the garage.
The pictures of many of those homes in HB- excluding the ones on Huntington Barbor- show almost the entire lot built up with no green lawn, nothing.
The first one in particular, the “Miami Vice” house is incredible. How in the world did the City of HB allow someone to build something like that, almost to the curb, in a residential zone. It looks like something that would be built in a commercial zone… my wife noted that it looked like a hotel, not a house.
Oh! Do people in HB love pool tables or what?
Many of the rebuilt were technically remodeled, because one exterior wall and the foundation were reused. If the city or country allowed a tear down and rebuild, the cost would have been much lower for the construction cost. Some countries even keep the old assessment or reduced assessment for a remodel, thus making the remodel cheaper for the owner, but not for the next owner.
I wonder if the banks will go after any of them or just charge the loss to the govt., i.e., the taxpayers. Or better yet, sell the bad loan to XYZ at 5 cents on the dollar, charge the govt for the loss, and then have XYZ collect the loan at a latter date for the borrower’s retirement funds or future earnings (XYZ=some corporation owned by their relative or friend).
The banks are likely NOT to go after the losses for these refis, because in California they’d need to do a judicial foreclosure for each house, then have hearings before the court to determine what the court will allow as a “deficiency” (the difference between the amount of the loan made and the “fair value” of the house). Then, after a judicial foreclosure, the borrower has a year in which it has the right to repurchase the house (the “redemption period).
Because of the cost to go after a deficiency, and the lengthy redemption period (during which the house is not resellable), very few banks pursue judicial foreclosure of California houses. Instead they typically do “nonjudicial foreclosures” also known as “trustee’s sales”, which take about 4 months, don’t require court action, and after which the banks cannot go after the borrower for a deficiency (and in exchange the borrower loses its redemption rights).
These borrower oriented protections were enacted in the 1930s in the Great Depression, and were designed to keep banks from pursuing borrowers if they took back the borrowers’ real estate which was collateral for the loan.
Don’t you think that when the loss starts to exceed 1MIL it might be worth for the bank to go for a judicial foreclosure?
The time “wasted” by not putting the house on the market is really not wasted at all. After all, if the house is gonna be on the market for 500 days while the bank prices it at a price that recoups some of their loss then the bank might figure they’re better off going to the courts, recovering some of their loss from the deadbeat borrowers and then selling the property fast at a fire sale.
I don’t know if this will apply to most of the county but when it comes to Huntington Harbor and parts of Newport, Laguna and Irvine the lenders may have assets that the bank could go after.
I should have said
“the borrowers might have assets the banks can go after…”
No edit…
Actually, the bank can go after deficiency for anything that was not a purchase loan. Purchase money loans are non-recourse; refi and heloc money is full recourse; the borrower can be held responsible for the shortage.
This is why many short sales do not go through. The banks usually want the seller to kick in some money based on their “ability” to pay, toward the deficiency. That’s why they have you send an entire financial package with the shortsale offer, so they can see just what you have, what you make etc.
Alot of people have pulled cash out and it is sitting in relative’s accounts or was put down on another house (exit strategy) so the banks won’t get it. I’ve seen a huge number of buy (a new house) and bail-ers (“let the old house go”). This is apart from all the money they spent on cars and those who vacationed their equity away.
And yes, all of us who pay taxes, are paying for this too.
just a list of foreclosures–more to come
http://www.trulia.com/for_sale/Irvine,CA/foreclosure_lt/3_p/#
Kinda hard to discern true HELOC abuse when it’e new construction. I like the places that were bought and then HELOC’d as they are far more demonstrative of how much people spent “outside” the home.
Yes, I gave these owners the benefit of the doubt on the construction loan, but the $977,000 that came after the construction loan was clearly living off the HELOC.
Am I missing something?
I’m not sure how you come up with 977k on this example of mortgage withdrawal.
How do we not know that when they refinanced at 2,562,000 that they weren’t just combining the construction loan and the first loan with that?
1,935,000
+617,500
comes out to 2,552,500 which is only 9500 more than what they had borrowed originally.
The second mortgage after that for $350k looks like he’s trying to cover his downpayment of $332,500.
In essence I’m not defending this guy but he looks like he’s only borrowed a few thousand above his costs (which were probably eaten up with closing costs). I still don’t see how he ends up with 977k..am I missing something here?
One more thing to add..if he didn’t spend anywhere near that 1,935,000 construction loan then there is the possible cause of abuse right there. I’m not sure, nor am I a contractor, how much he spent on this huge remodel.
The construction loan would have rolled up all his costs to date into the loan. The acquisition, demolition, construction, everything would have been in there. Plus, since he was a general contractor, he probably padded some “overhead” into those costs. Everything that came after was pure HELOC abuse.
For more than a million less, I’d rather have this:
http://www.redfin.com/VA/Centreville/15428-Kentwell-Cir-20120/home/9571565
Without the heads and stuff.
Wow, that’s a big house.
How much traffic is outside the featured property? It looks like three seperate streets come together in a big mess outside it’s front door. Combine that with the whole big house small lot thing, and you get a mess.
the side street its on is fine – hardly any traffic.
main street, however.. its main street. they have the 4th of july parade down it. and for the other 364 days of the year its the main thoroughfare through downtown HB.
I pass that featured property in HB all the time. And I said to my wife when that home sells, I know we have reached the bottom of the housing bust. This was 6 months ago…still no sale…we are still renters.
If the loan are recourse loans and only one bank does the trustee sale, the other lender is holding the bag. What are the odds that the lender goes after the borrower, especially if the borrower spent the equity withdraw on a house?
I reminded of the Riverside sale, husband buys new house, then quickly withdraws equity of $100000 over his down payment, transfers the loan money to the wife. Husband stops paying and does a short sale (bank okayed the all cash sale). Wife buys the house for $150,000 all cash sale. So the family gets the new house for $50,000 cash. Will the bank go after this sale or will the bank cover it up. Husband was bragging about his business dealings. I suspect that the bank will just charge the loss to the FED’s and FED’s will charge the loss to the taxpayers.
William K. Black does it again! Here’s an excellent lecture in Iceland on fraud and the paradigm shift we mus go through:
http://www.askbutwhy.com/2009/05/william-k-black-paradigm-shift-on-fraud.html
test post. seeing if links work:
url:
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a href:
http://spreadsheets.google.com/pub?key=pGy0BQU1PZ9DkdsiaqdkuEQ&gid=5
I live right by this house and pass it every day. It has been empty for years. I don’t think anyone was or is partying it up on the taxpayers’ dime. I think a builder bought the original house, knocked it down, and built a new house. It’s a beautiful house, but a terrible location.