Walking Off a Cliff Again — The Mint Chicks
The damage is done
You’ve had all your fun
The party’s begun
The enemy has won
One phenomenon of the Great Housing Bubble we have not talked much about is the collapse of all the real estate empires. Many people who really got caught up in the bubble rally bought multiple properties. Why wouldn’t they? If one property can throw off enough income to support a family, why not buy two or three of them?
One of the statistics about the housing bubble that always astonished me was how much prices went up relative to incomes. From 2001-2005, a period of 5 consecutive years, the median house prices went up an amount equal to the median income each year. According to DataQuick, in 2001 the median was approximately $335,000, and in 2006, the median peaked at $723,000. This was a $388,000 increase in the median income in 5 years. That averages to almost $78,000 a year. The median household income ranged from $72,000 to $84,000 during the same period. Any homeowner who was unemployed from 2001-2005 had a house making the median income for the area. With mortgage equity withdrawal, the appreciation could be converted to income, and a typical homeowner could live as if their home was another breadwinner. In fact, this was better than making the median income because there is no income tax withholdings on mortgage equity withdrawal. On an after-tax basis, the house was earning $110,000 gross. No wonder home ownership was in such high demand. Where do I sign up for my free income?
As one might expect, people were signing on to get as much of this free money as possible. Today’s featured property is one of two houses previously owned by the same couple. They put no money down, extracted as much appreciation income as possible, and then let the properties go into foreclosure when prices quit going up. It is a classic example of predatory borrowing.
Asking Price: $569,900
Income Requirement: $142,475
Downpayment Needed: $113,980
Monthly Equity Burn: $4,750
Purchase Price: $450,000
Purchase Date: 2/4/2003
Address: 19 Chiaro, Irvine, CA 92606
| Beds: | 3 |
| Baths: | 3 |
| Sq. Ft.: | 1,600 |
| $/Sq. Ft.: | $356 |
| Lot Size: | 2,517
Sq. Ft. |
| Property Type: | Single Family Residence |
| Style: | Contemporary |
| Year Built: | 1995 |
| Stories: | 2 |
| Area: | Westpark |
| County: | Orange |
| MLS#: | S557883 |
| Source: | SoCalMLS |
| Status: | Active |
| On Redfin: | 3 days |
throughout the First Floor. Fireplace in Living Room. Wood Flooring in
Master Bedroom and Tile Flooring in upstairs bathrooms.
I wonder if it is a requirement that short-sale and REO listings be less than 50 words? Or are all these listing agents that lazy?
- Redfin missed the 2004 purchase of this property. The owners who defaulted purchased the property on 2/4/2003 for $450,000. They used a $360,000 first mortgage, a $90,000 second mortgage, and a $0 downpayment.
- On 1/30/2004 they took out another loan for $36,841.
- On 2/20/2004 they refinanced with a $565,000 first mortgage.
- On 6/29/2004 they opened a HELOC for $80,000.
- On 3/2/2006 they refinance with an Option ARM for $560,000.
- On 3/2/2006 they opened a HELOC for $160,000.
- Total property debt is $720,000 plus negative amortization.
- Total mortgage equity withdrawal is $270,000. Remember, these people put $0 into the property. It was all free money.
When I was looking at the property records, I noticed that the final address for this couple was listed as 56 Calavera, Irvine, CA 92606. I thought perhaps this was their rental, so I checked out its property records. As it turns out, the family just let this one go in a short sale.
- Our real estate moguls bought 56 Calavera on 10/4/2004 for $970,000. They used a $776,000 first mortgage, a $194,000 second mortgage, and a $0 downpayment. I wonder if they used the appreciation from the first house as their income for their liar loan application?
- On 3/2/2006 (notice the coincidence of dates from above) they refinanced with a $862,500 Option ARM.
- On 3/2/2006 they opened a HELOC for $172,500.
- Total property debt is $1,035,000.
- Total mortgage equity withdrawal is $65,000. As with the other property, they had no downpayment, so this was also free money.
These people bought two properties with no money down during the bubble rally. They refinanced both properties on the same day (probably timed in order to qualify) and pulled out $335,000 in bubble equity. They had none of their own money at risk, and they basically did nothing in order to obtain this $335,000. They have since walked away from both properties and left the lenders holding the bag. Other than bad credit, there will likely be no ramifications for what they did. Countrywide holds one of the loans, and Wells Fargo holds the other. It is unlikely that either one pursued a judicial foreclosure. However, it is likely that all of us as taxpayers will probably end up paying for this recklessness.
Think about these people when you are writing out your check for your portion of the losses come April 15th.
{book}
The damage is done
You’ve had all your fun
The party’s begun
The enemy has won
Walking off a cliff again
You’ve used all your tricks
Your lies don’t stick
You don’t want to admit
You’re done
Walking off a cliff again
Walking Off a Cliff Again — The Mint Chicks
My impression is that this one is about $50,000 overpriced, but I don’t know the area. Is this the going rate for that area?
In all of Irvine, this neighborhood is one of the few that I consider liveable for me and my little boy. The houses are modest but not stupidly so – the feeling is not claustrophobic like it is in all of Woodbury, for example, except for the houses that are simply too large for a family of two. They are very cute on the outside, seem nice enough on the inside, and are within walking distance to Plaza Vista School. When I got divorced and sold my house in early 2006 I considered purchasing in this neighborhood but contrary to these people, I am not stupid and I am not greedy. So I passed, and I rented nearby.
I hope these people are ruined, and cannot buy another house again for a long time. They and their greed are the reason that people like me couldn’t afford to buy a house like this, which given my financial situation should have been easily affordable.
I would consider purchasing one priced at $400 or below, by the way.
LOL Jou
Good write-up, and infuriating. One wonders why there isn’t more personal accountability on both the regulatory and transgressor sides. I am not advocating thumbscrews (no, I really, really don’t), but a credit stigma for only five years is entirely too short. Something of the magnitude you have described should stay with these people for life.
“Woof flooring.” Heh.
Excellent article in yesterday’s NY Times about WaMu’s lending practices. Remember how every one joked that if you could fog a mirror you could get a loan? Apparently at WaMu this was literally true–they’d lend to absolutely anyone.
I love the “woof” flooring, too.
Dear IrvineRenter,
Thank you for your daily doses of analysis, realism, thoughtful critiques, and balanced reporting. As an engineer, a fellow renter in Irvine, and a former resident of other communities that have also experienced cyclical housing bubbles in the past (Cambridge, MA, San Jose, CA, NYC, NY), I have appreciated your careful data-oriented approach to your commentaries herein. Bravo! I will be purchasing your book as a colleague of mine recently did who is also an avid reader of your daily posts. According to him, your book cohesively puts all of the best of your blog into a single organized tomb. I’m looking forward to this read. As this is my first post, please forgive my long preamble of appreciation above, before diving into the main point of my post/response:
With all of the equity withdrawals followed by foreclosures in what seems to be clear abuses of our banking system which was never designed to provided free tax- free income, why hasn’t some predatory law firm approached these ailing banks, offered to buy up many of these bad loans (for pennies on the dollar) and attempted legal proceedings against many of these blatant abusers who are still gainfully employed and may still have much of the withdrawn equity buried in other financial vehicles? Aren’t there laws that are being broken? I’m not a particularly big fan of “ambulance chasing lawyers,” however, I see the role that they play in providing checks and balances in our system. Surely, there’s some money for a legal beaver to pursue some of these abusers. I understand why the banks themselves may not have pursued this course of action due to the shear overwhelming amount of foreclosures that must be keeping their lawyers busy, but wouldn’t some industrious lawyer see golden opportunities to investigate some of the most blatant abusers and split the winnings with mortgage banks?
Please forgive my ignorance of the law as it applies to these situations, but if people are withdrawing money and possibly transferring such to other channels and then leaving the banks and now the American people holding the bag, there must be some legal avenues to pursue the abusers and get some of this money back (if only to garner their future earnings).
Best Regards and Happy New Year to All,
John
These recourse mortgage charge-offs are being purchased for pennies-on-the-dollar right now. The problem with pursuing these “walk-away-ers” is that even if you can get a $100k judgment spending as little as $10k in legal fees, the “walk-away-ers” with now horrible credit, can file bankruptcy and discharge your judgment.
Loved the typo: “best of your blog into a single organized tomb.” It’s an improvement over “tome”.
I think that’s what they call a Freudian slip.
Happy New Year to all those who avoided the housing “tomb”.
Now that’s funny. Good catch. Thanks.
The people who did this found a way to cheat the system. With the FBI so over wrought with so much fraud these little cases just get buried somewhere and are being paid with the bail out so no one really cares. I am amazed at the sheer numbers of people who did this. And now I can understand why some of my neighbors look at us as renters who lived somewhere else and now rent. Most likely they think I played this game of lying, cheating and stealing. NO just a transfer that could not think of paying double for what I had left behind. Anyway this tells us all ;you never really know your neighbors and what tricks they are playing. Cheating on their taxes, or their fellow Americans. The amount of this is something I would like to see because it would reflect in the true scam of what the Irvine bubble is and what more lies ahead as houses must devalue to reflect the surrounding asset coming down in price but that again has been adjusted according to who ever values your home. Which is another joke. Irvine would have never seen the values it has had it not been for this continued flipping and repurchase plan of the Great Fraud—God help us all who have to pay for this mess—
I know 3 couples who played the “Rich Dad Poor Dad” game (again, loved the positive theme of this book, just think many people thought housing was the only route to riches and was “can’t miss”).
1 of these families will be fine, but the 2 others are in the process of purging their “investments.” I can only imagine what it feels like for your balance sheet to make you feel very wealthy within just a few years, only to have it all crumble more quickly.
The reckless borrowing and lending of yesterdays are continued by the government with even more reckless and muddy bail out programs.
U. S. is falling into places that would disgust its citizens.
If the government wants to prevent foreclosures, why dont they make home loans in CA recoursable? Surely that would stop quite a few people (who are able to afford, but dont want to) from walking. It would also cause those same people to be stuck!
Lastly, it would create some tax revenue!
You couldn’t switch nonrecourse loans that are already outstanding to recourse.
However, you would be surprised how many of these loans ARE recourse. Either they refinanced (only the purchase money loan is nonrecourse), or they got a home equity loan (that loan would be recourse), or it was a rental/investment property.
I also seem to recall that fraud makes an otherwise nonrecourse loan a recourse loan. A common example is claiming it will be an owner-occupied home when it is not.
Even among those loans, I see little attempt to collect. In the case of fraud, I wouldn’t be opposed to some much harsher drop in credit ratings, for longer periods of time.
IR, I don’t know if it would be ethical or not to also look at the borrowers’ credit scores before and after the short sales or foreclosures. I have a funny feeling that’s something you’re not supposed to do unless hiring, lending, renting to them, etc.
Is there someone on the board who often has to look at credit scores and can see the histories? Not for any particular person we might be able to identify, but can you tell us what some typical examples of FICO scores might be for people who bought no money down, and what their scores are now that they have a foreclosure or short sale?
Thanks
I don’t have access to credit scores, but it would be interesting to see what impact short sales and foreclosures really have. I have been told by lenders that it isn’t the loan discharge that hurts as much as the series of missed payments leading up to the foreclosure.
Oops…I had meant my above reply to appear here…clearly I’m a newbie to this format.
Dear IrvineRenter,
Thank you for your daily doses of analysis, realism, thoughtful critiques, and balanced reporting. As an engineer, a fellow renter in Irvine, and a former resident of other communities that have also experienced cyclical housing bubbles in the past (Cambridge, MA, San Jose, CA, NYC, NY), I have appreciated your careful data-oriented approach to your commentaries herein. Bravo! I will be purchasing your book as a colleague of mine recently did who is also an avid reader of your daily posts. According to him, your book cohesively puts all of the best of your blog into a single organized tomb. I’m looking forward to this read. As this is my first post, please forgive my long preamble of appreciation above, before diving into the main point of my post/response:
With all of the equity withdrawals followed by foreclosures in what seems to be clear abuses of our banking system which was never designed to provided free tax- free income, why hasn’t some predatory law firm approached these ailing banks, offered to buy up many of these bad loans (for pennies on the dollar) and attempted legal proceedings against many of these blatant abusers who are still gainfully employed and may still have much of the withdrawn equity buried in other financial vehicles? Aren’t there laws that are being broken? I’m not a particularly big fan of “ambulance chasing lawyers,” however, I see the role that they play in providing checks and balances in our system. Surely, there’s some money for a legal beaver to pursue some of these abusers. I understand why the banks themselves may not have pursued this course of action due to the shear overwhelming amount of foreclosures that must be keeping their lawyers busy, but wouldn’t some industrious lawyer see golden opportunities to investigate some of the most blatant abusers and split the winnings with mortgage banks?
Please forgive my ignorance of the law as it applies to these situations, but if people are withdrawing money and possibly transferring such to other channels and then leaving the banks and now the American people holding the bag, there must be some legal avenues to pursue the abusers and get some of this money back (if only to garner their future earnings).
Best Regards and Happy New Year to All,
John
I think your idea makes alot of sense but I think one thing holding this back is the complex ownership chains of the mortgages. While the lender of records in today postings are Countrywide and Wells, one can likely assume these loans were placed in some securitization vehicle, then sliced up again and so forth with these lenders retaining the servicing rights. Even if there was a competitive/arms length bidding process that resulted in someone willing and able to pay some fraction of the loss that made sense for all parties I’m not sure the servicer has the authority to sell those claims without the consent of the bondholders in the securitization trust.
Ahhh…yes. You are correct. So these equity-withdrawal abusers are able to escape legal ramifications due to shear complexity of ownership issues. With so many owners, in effect, there are no owners who could pursue these people in a focused fashion. Would the government wholesale buyout of these failed securities, however, eventually make the government the owner and hence able to pursue compensation from those who obviously abused the banking system? I believe in people having to be responsible for their actions. A few high-profile cases of equity-withdrawals having to be paid back, might help with the moral hazard of this huge government bailout. Thanks for your thoughtful reply.
Here is a link on credit score. The missed payments add to the pain but it seems that FNMA treats a short sale less painfully than a foreclosure.
http://homebuying.about.com/od/4closureshortsales/qt/060907SScredit.htm
One question I have is if there are going to be millions of foreclosures, that means millions of people who will have terrible credit scores and effectively be shut out of the real estate market for several years. If so, that means there will be even less than normal as these buyers wait on the sidelines. Is there any suggestion that certain buyers may get a ‘get out of jail free’ card for this blight – not that it is necessarily fair but the alterative is worse?
So what if millions of people have bad credit scores. A credit score is just a made up concept anyways. What really matters is whether or not Americans have savings and equity, both of which have been steadily declining for years. The American consumer is broke, regardless of credit score.
IR, thought you might like to know that my Christmas stocking contained my #1 most-wished for stocking stuffer: a copy of your book. Santa came through! I’ll try to stop by the party on the 7th in hopes that I can get you to John Hancock it. Hope you and all the IHBers had a good holiday.
Predatory lending does piss me off. But it’s also a sign of our times. Most Americans can’t afford the American Dream anymore.
These people walked away with over 300K in their pockets…the only penalty being bad credit for a few years. Meanwhile, the responsible homeowners in this neighborhood probably lost their down payments and then some.
I always tell my friends that it doesn’t pay to be responsible in today’s society. I wonder if the homeowners in the featured neighborhood could file a class action lawsuit against these criminals.
I know of a flipper who bought 3 houses on the same street in Laguna Niguel during the peak and walked from all of them. And he still owns quite a nice spread in another city. This person single handedly destroyed a whole neighborhood with no recourse.
Get the tar machine warmed up, I will supply the feathers.
I have a modest proposal. The people who did equity extraction and then walked away or got foreclosed on leave a public record trail of that. However, the public record trail is often not accessible online, or is not easy to get to.
If you want to make their lives difficult in a way that FICO scores will not, you could post the relevant data to the web. It would show up whenever anyone did a google search for that person’s name.
Here are some of the problems. 1. It takes a while to research. 2. You will inevitably catch some people with really good justifications or problems in your database. Some people were actually unemployed or had medical problems. Many other people will make similar claims with varying levels of credibility. 3. The public record itself is sometimes incomplete or incorrect. There are misspelled names, missing documents, multiple people with the same name, etc. This is one of the reasons title insurance and title search exist. 4. If you think IrvineRenter gets hate mail, just imagine what you would receive for running such a site.
If you restricted yourself to a fairly small geographic area (e.g., Irvine), you might do a pretty good job of this. If you went to a large area (e.g., California), the diversity of information systems and the sheer volume of data would be overwhelming.
re: #2- my wife works with a lady who has a number of rental properties. she says people with good credit are getting harder and harder to find. those with bad credit ALWAYS have a story. and the story seems innocent enough. until they miss their payments.
she was fooled the first few times. now she will no longer rent to someone with bad credit.
Sorting through them all would be a monumental task alone.
First off, I love this blog. But is it really “predatory” borrowing??? If an institution offered any of an unsecured million dollar loan w/ no interest, would any of us really turn it down?
And if they said there’s no penalty if we couldn’t pay it back, then who’s fault is it if we don’t?
Personally, I think it’s disgraceful that our banks are recklessly irresponsible, and then get an early Christmas present from Congress. But blaming the borrower just seems like blaming someone for picking up found money.
Agreed. But, what do you think of lying on the application to get the “found money”?
I agree. The rats are only trying to find a way out of the race. If someone finds a loop hole GREAT!
The day Americans no longer find these holes, is the day this country goes into a civil war.
“Most” of America is broke and dirt poor. They are just in denial still.
Yes Ryan, borrowers as well as lenders can be predators.
Whose fault do you think it is if you don’t repay your debts? Have you heard of such a thing as honoring one’s debts?
I wouldn’t have pity for the lenders, but ‘finding money’ and plotting to take hundreds of thousands of dollars with no intent of ever repaying are two polar opposites indeed.
It may be within the confines of ‘legal,’ but that doesn’t make it right. This is just another example of moral hazard in this country – built right into the nation’s laws that allow dead-beat debtors to walk without significant consequence.
I agree completely, Lee.
Ryan, this is stealing, pure and simple.
I don’t care if there’s a loophole or no consequences. It is unbelievable to me that so many people just rationalize their way out of any moral obligation or responsibility. The featured homebuyers included. Disgusting. I feel the same way IrvineSingleMom does. MalibuRenter has a great idea – these jerks should get more of a consequence that a bit of bad credit. After all, they have $300,000 in the bank. And who’s paying for it? We are. If this sort of behavior was considered reprehensible by our society at large, which it was a couple of generations ago, and people who did this sort of thing were outcasts, there would be much less of it. There are some good things about morals and ethics.
I have been a long time reader (before IrvineRenter began blogging on a regular basis)and just wanted to chime in here for the very first time. First I want to say thanks for this blog. It struck a chord with me early on after having found it, I think through a link at Housing Bubble blog, in 2007. I lived in Japan from 1991 until moving here in June of 2004, right after people were dosing Glad sized bags of Kool-aid. Until reading this post, I have kept my thoughts to myself but now I have to vent. This takes the cake. If there is not a more egregious and contemptible example of greed, dishonesty and the “moral” empty zone, then I don’t know what is. How could anybody do this and think it’s acceptable is beyond my understanding given the values that I have and the way that I was raised by my parents, schools, peers etc. This surely is a sign of the times.
The comments I have read tonight are spot on especially in regards to the selfishness and “me” attitude that prevails in our society today. I know I am generalizing a bit here but I don’t think I am the only one who feels this way (Lee and Irvinesinglemom). I hope I can come to the outing on January 7th and personally extend my thanks. Cheers JH
IR
“However, it is likely that all of us as taxpayers will probably end up paying for this recklessness.”
Recklessness or no chance of lost investment? If they made a large down payment, the loan might be predatory lending. Since negative downpayment is used, predatory borrowing and banks shafting the depositor/taxpayers are more accurate descriptions.
On the FICO scores, I was told by a reliable source that one person only got a lowing of 70 points on a walk away.