One of the biggest myths of the real estate bubble is that responsible homeowners are losing their homes; they are not.
Today’s featured property is owned by HELOC abusers who already took out almost $900,000, and now they want $400,000 more.
Asking Price: $1,629,000
Address: 6326 Sierra Elena Road, Irvine, CA 92603
{book1}
Right Round — Flo Rida
I’m spendin my money
I’m out of control
Somebody help me
You spin my head right round, right round
When you go down, when you go down down
Interesting song about oral sex HELOC abuse and falling house prices.
Many of the sob stories in the mainstream media have been focused on what are characterized as “responsible homeowners” who are in danger of losing their homes. Several articles of this type have been posted here, and many commenters have noted the extravagances and poor decisions that often make these homeowners look less than completely responsible. Let’s be clear about one thing:
Responsible homeowners are NOT losing their homes.
To see the truth in this statement, one needs to have a clear definition of “responsible homeowner.”
A “responsible homeowner” is a buyer who, if they utilized financing, did not stray from the conservative parameters set forth by lenders (prior to the bubble) and financial planners. This includes using a maximum 28% debt-to-income ratio on the mortgage, at least a 20% downpayment and fixed-rate conventionally amortizing financing.
Few who fit this definition are going to lose their homes; although, some of them may chose to walk away from the debt because they are hopelessly underwater. The only ones who fit the above definition who are in danger of losing their homes are those who lose jobs; they are the truly sad casualties of the housing bubble. Unfortunately, this is becoming more common due to the financial crisis caused by all the homeowners who borrowed irresponsibly.
Responsible borrowers are not the ones defaulting on their mortgages; irresponsible homeowners are.
If “responsible homeowner” is defined as a buyer who believed they could manage their monthly payment and did so until the loan terms changed, then by this definition, many responsible homeowners are going to lose their homes.
Almost everyone who signed up for a toxic loan thought they could make the payment; most did for a while. Many were convinced they could make the payments by a predatory lender out to make a few bucks on the origination. Many more believed they could supplement their incomes with the rapid appreciation they would enjoy as their house values rose to infinity. Does ignorance to their inability to sustain their housing payments make them responsible?
In the political debate surrounding foreclosure moratoriums and homeowner bailouts, the politicians are using the latter definition of “responsible homeowner.” The ignorant and those who knowingly took excessive risk are being rewarded with a government bailout. The prudent are the ones paying the bill.
To see the truth in the importance of these definitions, we need to look no further than the astute observations on this blog. One of our frequent commenters is a responsible homeowner. He purchased near the peak, but he did so with terms that his family can afford. He meets the parameters in the first definition. He is in no danger of losing his house in foreclosure. Yes, he is annoyed that the values have dropped–who wouldn’t be–but he is not going to become a foreclosure statistic.
If you want to know what the lenders really worry about it is that guys like him may chose to go into foreclosure and walk away from the debt. There are already enough irresponsible homeowners on their way to the meat grinder. A wave of walkaways would make sausage of the entire banking industry.
The reality is responsible homeowners are not losing their homes; some may lose their houses because of a job loss, and some may chose to walk away, but very few truly responsible homeowners are endangered. The foreclosure crisis is caused by the irresponsible.
{book3}
Today’s featured property was emailed to me by a reader who was wondering about all the WTF prices in Turtle Rock and Turtle Ridge. This reader sent me an email asking about four properties including the one I featured today. The others I looked at had the following results:
19125 Sierra Majorca, Irvine, CA 92603
Asking: $1,526,827
Paid $1,000,000 in 2003 — No HELOC abuse, but they have a $700,000 mortgage, and a $100,000 HELOC.
11 Bethany, Irvine, CA 92603
Asking: $1,359,000
Paid $645,000 in 2004 — $750,000 first mortgage and a $250,000 HELOC
17 Sunrise, Irvine, CA 92603
Asking: $1,548,000
Paid $675,000 in 1999 — $987,000 Option ARM with 1% teaser rate and a $250,000 HELOC
Of the four properties, three of them had significant HELOC abuse. I usually find a high percentage of for-sale properties have HELOC abuse, not a good sign for the market. When HELOC abusers have to go back to conventional financing, can they afford the payments?
I want you to contemplate how much trouble our market is in. I will use the analogy of drinking and partying and compare the Irvine experience to that of Minnetonka, Minnesota (from the post Southern California’s Cultural Pathology).
Let’s say you are a Minnetonka resident. You make just as much money as residents in Irvine, but your median house price at the peak was $305,000. This is higher than historic norms, but as far as kool-aid partying goes, you had only a few social drinks. If you take an aspirin and drink a big glass of water, you will feel fine in the morning. The Federal Reserve is providing the aspirin in the form of 4.5% mortgage interest rates and the guaranteed ability to refinance your conforming mortgage. You as a Minnetonka resident did not party too hard; your hangover is manageable.
Now imagine you are an Irvine resident. You make a decent living, but instead of paying $305,000 for a median home, you paid $723,000 (or borrowed that much on your HELOC). You had a great time: you bought cars, took vacations, and impressed all your friends and neighbors with how rich you are. You did more than take a few social drinks of kool-aid. You downed the bottle; when that wasn’t enough, you found a bigger bottle, and as the party went on, you finally went intravenous. You are now dependant upon kool-aid (HELOC money), and there is no amount of medicine that can save you from a wicked hangover, delerium termens, and the worst withdrawal pains possible. The Federal Reserve’s medicine is not going to help you; your mortgage is not conforming, and you not going to be allowed to refinance. You are screwed.
People bidding on Irvine real estate in the new financing environment simply cannot bid prices as high as they used to, and they are not going to be able to raise their bids for quite some time. It is very unlikely that prices will rise enough to bail out all the homeowners facing ARM resets. There are too many people who drank too much kool aid (see examples above). All of these overextended homedebtors must be flushed from the system. Based on available data, (1) we know that refinancing is not going to be possible, (2) we know these people cannot afford the payments, and (3) we know that their are not enough buyers who really do make that much money to take over these people’s debts and bail them out. There are no other viable alternatives.
I used to think that Turtle Rock would be spared the worst of the housing correction. Most residents are long-term owners, so there is relatively little toxic financing on purchases. The only thing that could flatten Turtle Rock–other than big declines in neighboring communities–is mortgage equity withdrawal. I didn’t think it could be that bad; perhaps I was wrong.
Asking Price: $1,629,000
Income Requirement: $407,250
Downpayment Needed: $325,800
Monthly Equity Burn: $13,575
Purchase Price: $292,500
Purchase Date: 11/23/1994
Address: 6326 Sierra Elena Road, Irvine, CA 92603
| Beds: | 4 |
| Baths: | 4 |
| Sq. Ft.: | 3,400 |
| $/Sq. Ft.: | $479 |
| Lot Size: | 6,120
Sq. Ft. |
| Property Type: | Single Family Residence |
| Style: | Craftsman |
| Year Built: | 1972 |
| Stories: | 2 |
| View: | Hills, Panoramic, Has View |
| Area: | Turtle Rock |
| County: | Orange |
| MLS#: | P680677 |
| Source: | SoCalMLS |
| Status: | Active |
| On Redfin: | 4 days |
Exposed beams. Spacious open great room. Kitchen area features a custom
center Island, rich wood cabinetry, and views of surrounding hillside.
This home features custom built-ins throughout. Secluded Master Suite
on first floor. Each Bedroom is extra Large. Walk to Orange County
Register’s #1 rated elementary school Bonita Canyon Elementary.
This is the home for you’re family. This is the home for you are family. That makes sense…
Sentence fragments, random Capitalization.
- On 11/23/1994 this property was purchased for $292,500. The owners used a $263,200 first mortgage and a $29,300 downpayment. Keep in mind as you read the rest of this section that they only put $29,300 of their own money into the transaction.
- On 7/16/1998 they refinanced with a $266,300 first mortgage.
- On 11/12/1998 they opened a HELOC for $30,000.
- On 11/4/2002 they opened a HELOC for $172,000.
- On 11/4/2002 they refinanced with a $300,000 first mortgage. By 2002 they had already doubled their debt.
- On 8/25/2004 they refinanced with a $630,000 first mortgage.
- On 7/6/2005 they opened a HELOC for $250,000.
- On 10/27/2005 they refinanced with a $900,000 first mortgage.
- On 12/14/2005 they opened a HELOC for $155,000.
- On 5/28/2008 they opened a HELOC for $250,000.
- Total property debt is $1,150,000.
- Total mortgage equity withdrawal is $886,800.
These people put $29,300 of their own money into a house in 1994, and they managed to take out $886,800 over the next 14 years. That averages $63,342 a year for 14 years. That is a hard working house. It explains why houses are so desirable, doesn’t it?
It gets better though, they still expect to make more when they sell it! OMG!
If this property sells for its asking price, these owners will still walk away with another $381,260. The total gain on the sale will be $1,238,760.
Does anyone think this is the way you are supposed to manage your financial life? Are you entitled to a million dollar payday just for owning California real estate? This is insane.
Does this strike you as a “responsible homeowner?”
Do you think we should bail him out? Well, perhaps we will not have to. Someone may buy this house and pay off his debt for him. After all, the house will be worth $3,000,000 15 years from now, right?
{book2}
I’m spendin my money
I’m out of control
Somebody help me
She’s takin my bank roll.
But I’m king of the club
And I’m wearin the crown
Poppin these bottles
Touching these models
Watchin they **** go down down
down down, down down [this line x4]
(Flo Rida)
You spin my head right round, right round
When you go down, when you go down down
Right Round — Flo Rida
Unsold in 90+ days
I’ll move myself and my family aside
bright and airy! this is a must see home in irvine. upstairs loft can
