I have written many times on this blog about the upcoming foreclosure problem due to ARM resets.
I have posted the available statistics and presented all the
data-driven arguments about why this is going to be a problem. However,
today I am going to ask you to think about this issue more intuitively.
Based on what you know about human nature, I think you can see how big
this problem is.

Today’s featured property is a median-sized 3/3 condo where the onwer managed to extract almost $300,000 in HELOC money.

Asking Price: $499,900

Address: 38 Daisy, Irvine, CA 92618

{book}

The Pretender — Jackson Browne

Im going to be a happy idiot
And struggle for the legal tender
Where the ads take aim and lay their claim
To the heart and the soul of the spender

I have written many times on this blog about the upcoming foreclosure problem due to ARM resets.
I have posted the available statistics and presented all the
data-driven arguments about why this is going to be a problem. However,
today I am going to ask you to think about this issue more intuitively.
Based on what you know about human nature, I think you can see how big
this problem is.

In the short run, prices in any market are purely driven by supply
and demand. Right now, the available inventory in Irvine is low, so
despite the decline in demand caused by tighter lending standards and
job losses, prices have not dropped as much as they should. Supply and
demand are still in balance. If the inventory were to increase (which
it will) this does not necessarily cause prices to drop. If the sellers
are unmotivated, large inventories will cap any appreciation, but it
does not force prices lower. It is when sellers become very motivated
that prices really start to drop.

Lenders and builders are motivated sellers. They must sell their inventory. The builders have pulled back construction to record low levels,
so this leaves the lenders as the main source of must-sell inventory.
Therefore, the real question for future pricing is how much
lender-owned inventory will we have?

{book}

Lender inventory is created by the foreclosure process. When a house
is auctioned at a foreclosure, the lender will bid the price up to a
pre-determined level according to its loss mitigation procedures. They
hope not to buy the property at auction. Unfortunately, since prices
are so inflated, and since the first mortgages are so large, lenders
end up buying the bulk of foreclosures at auction.

The sources of these foreclosures are borrowers who default on their
mortgages. We have discussed many of the motivating factors behind
borrower defaults, but these mostly boil down to the fact that these
borrowers have more debt than they can either service or pay off. Those
borrowers who are likely to default can be broken down into two
categories: 1. Those who bought at the peak and paid too much. 2. Those
who borrowed at the peak and owe too much. It is this latter category
that gets so much attention at the IHB: HELOC abusers.

I have posted profiles of HELOC abuse day after day here on the IHB.
It has been eye-opening to many that this practice was so widespread.
At first many people were incredulous that anyone would behave that
way. Then many people wrote it off as an extreme example of an isolated
behavior. Now I think most realize that many, many people were doing
this. Based on what I see in the property records, I believe this was
the rule rather than the exception.

This is where I ask you to think about human nature to get a feel
for how large the problem is. Yesterday I wrote about the natural
feelings of jealousy people have when they see others spending so much
money. There is a widespread desire to “keep up with the Jones’s”.
During the bubble when everyone was buying houses and feeling rich,
there was enormous peer pressure to enjoy the good life. This was fed
into by the marketing machine of lenders touting the great lifestyle
one could obtain through HELOCs and refinancing. Couple all these
pressures with the widespread belief that this money was free because
house prices would go up forever, and there is little to stop people
from taking this money.

Think about your own experience and emotions. It takes an iron will and self-discipline to stop from taking this money, and that is only if you believe you shouldn’t.
When you really think about what occurred, it is more surprising that
everyone did not do this. It is not logical to think that only a few
people got caught up in this. It is far more likely that only a few
people did not get caught up in it. Based on what I see in my
daily search for properties to profile, if it is for sale now, there is
an 80% chance that the seller either bought at the peak or added to
their mortgage. I am not exaggerating.

So when you think about how big the foreclosure problem is going to be (it is currently understated), think about basic human nature. Do you think many people borrowed themselves into oblivion? I do.

Im going to rent myself a house
In the shade of the freeway
Im going to pack my lunch in the morning
And go to work each day
And when the evening rolls around
Ill go on home and lay my body down
And when the morning light comes streaming in
Ill get up and do it again
Amen
Say it again
Amen

Asking Price: $499,900

Income Requirement: $124,975

Downpayment Needed: $99,980

Monthly Equity Burn: $4,165

Purchase Price: $313,000

Purchase Date: 12/13/2000

Address: 38 Daisy, Irvine, CA 92618

IMO, this is probably within $50,000 to $75,000 of its bottom value. It would probably rent for $2,500.

As you might have guessed, today’s featured property is a case of HELOC abuse.

• The property was purchased on 12/13/200 for $313,000. The owners used a $234,700 first mortage, a $62,550 second mortgage, and a $15,750 downpayment.
• On 12/21/2001, they refinanced with a $346,500 first mortgage. I imagine that extra $50,000 made for a Merry Christmas…
• On 9/11/2202, they opened a stand-alone second for $45,000.
• On 11/15/2002, they refinanced with a $375,000 first mortgage.
• On 10/7/2003, they opened a stand-alone second for $20,000 and a HELOC for $50,000.
• On 1/10/2005 they opened a HELOC for $25,000.
• On 2/11/2005, they refinanced with a $590,000 first mortgage.
• Total property debt was $590,000.
• Total mortgage equity withdrawal was $292,750 including their tiny downpayment.

These people put $15,750 into a property for about 1 year, and they took out $292,750 over the next 5 years. Pretty good return on investment, wouldn’t you say? It is not hard to see why houses in California are so desirable.

This property was taken back by the lender on 9/24/2008 for $508,500. Three months later, it is now on the market. If this property sells for its asking price, and if a 6% commission is paid, the total loss to the lender will be $120,094. Not to worry though, the borrowers still made almost $300,000 on the deal…

{book}

Im going to rent myself a house
In the shade of the freeway
Im going to pack my lunch in the morning
And go to work each day
And when the evening rolls around
Ill go on home and lay my body down
And when the morning light comes streaming in
Ill get up and do it again
Amen
Say it again
Amen

Im going to be a happy idiot
And struggle for the legal tender
Where the ads take aim and lay their claim
To the heart and the soul of the spender
And believe in whatever may lie
In those things that money can buy
Thought true love could have been a contender
Are you there?
Say a prayer for the pretender
Who started out so young and strong
Only to surrender

The Pretender — Jackson Browne

Don’t Go Breaking My Heart — Elton John

You take the weight off me
Honey when you knocked on my door
I gave you my key

Does anyone remember Pepe le Pew? He was the happy-go-lucky French skunk who fell in love at every opportunity. Unfortunately, he smelled so bad that none of the objects of his affection wanted him around.

HELOC abusers must have been very happy-go-lucky during the bubble. They had few limits on the money they could spend, so there was plenty of reason to bounce around oblivious to the damage they were inflicting on everyone else. The stench of their pilfering is only now spreading a pestilence on the economy. Most probably have no idea what they have done, and they are probably too self-involved to care. I imagine their only real concern is their inability to sustain their Ponzi Scheme lifestyles.

{book}

Today’s featured property has been profiled before. It was a WTF award winner back in mid-2007. The owner was asking $900,000 for this place. Today we will learn why.

Asking Price: $539,000

Income Requirement: $134,750

Downpayment Needed: $107,800

Monthly Equity Burn: $4,491

Purchase Price: $460,000

Purchase Date: 12/5/2002

Address: 13 Banyon Tree Lane, Irvine, CA 92612

Beds:	3
Baths:	2
Sq. Ft.:	1,714
$/Sq. Ft.:	$314
Lot Size:	6,500 Sq. Ft.
Property Type:	Single Family Residence
Style:	Contemporary
Year Built:	1973
Stories:	1
Area:	University Park
County:	Orange
MLS#:	S558020
Source:	SoCalMLS
Status:	Active
On Redfin:	1 day
New Listing (24 hours)

Wow! GRANITE COUNTERS. That is certainly a unique selling point in Irvine…

Notice how they are trying to tout its great location. Let’s take a look:

This property was purchased on 12/5/2002 in what looks like an intra-family transfer, perhaps from the parents to their adult child.

• The new owner paid $460,000. He used a $413,500 first loan and a $46,500 downpayment.
• On 3/26/2003 he opened two HELOCs for $41,800 and $50,000 respectively.
• On 3/29/2004 he refinanced with a $508,500 first mortgage.
• On 10/14/2004 he opened a HELOC for $71,000.
• On 11/1/2005 he refinanced with a $585,000 first mortgage.
• On 1/23/2006 he opened a HELOC for $39,000.
• On 4/7/2006 he opened a HELOC for $116,000.
• On 11/3/2006 he opened a HELOC for $24,900.
• On 12/1/2006 he opened a stand-alone second for $215,000.
• Total mortgage debt is $900,000. (The original asking price back in 2007)
• Total mortgage equity withdrawal is $485,500 including his downpayment.

Based on the names in the property records, it looks like parents selling a property to a grown son. If this is true, how would you feel about this if you were in their shoes? You sell the family house to your child, and he proceeds to rip off lenders for almost $500,000 and lose the house in foreclosure.

They must be very proud…

{book}

Don’t go breaking my heart
I couldn’t if I tried
Honey if I get restless
Baby you’re not that kind

So don’t misunderstand me
You put the light in my life
You put the sparks to the flame
I’ve got your heart in my sights

Don’t Go Breaking My Heart — Elton John

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

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

A String of Pearls — Glenn Miller

Pearl Harbor Day was Sunday, December 7. One of the enduring images of “A date which will live in infamy” is the wreckage of the USS Arizona. One thousand one hundred and seventy-seven crewmen died aboard the USS Arizona that day. The sunken hull sits quietly submerged beneath the waves.

Americans were not prepared for World War II. Peacetime isolationism and lingering problems from the Great Depression left us ill prepared for the challenges our nation faced. We ultimately prevailed, and the peacetime that followed ushered in a new era of prosperity in the United States. We are only now getting a taste of the economic upheaval of the Great Depression, and as a society, we are equally unprepared for the consequences. We will survive, and hopefully we will begin a new era of prosperity. However, some of the images of The Great Housing Bubble will also endure (I hope).

{book}

Some historians have argued that the military made a critical error
having so many ships in port at Pearl Harbor. We did not anticipate the
attack, and we were not prepared for it. Like the USS Arizona, many homedebtors today are underwater. Their lack of preparation for this catastrophe has left them deeply in debt with little hope of recovery. For those who became dependent upon a lifestyle of mortgage equity withdrawal, this is the end of times. Many are hoping our new President will be a messiah. They cling to false hopes for a bailout that will allow them to go back to living the good life of Ponzi Scheme financing. That isn’t going to happen.

Today’s featured property is another HELOC abuser who lives on Arizona and is just as underwater as the ship.

Asking Price: $848,900

Income Requirement: $212,225

Downpayment Needed: $169,780

Monthly Equity Burn: $7,074

Purchase Price: $538,500

Purchase Date: 1/28/1999

Address: 22 Arizona, Irvine, CA 92606

Why Is Every Word Capitalized?

• This property was purchased on 1/29/1999 for $538,500. The owner used a $430,530 first mortgage, a $53,800 second mortgage, and a $54,170 downpayment.
• On 6/26/2000 he opened a HELOC for $50,000.
• On 10/18/2002 he refinanced with a $503,235 first mortgage.
• On 11/15/2002 he opened a stand-alone second for $62,000.
• On 12/28/2005 he refinanced with a $848,000 first mortgage.
• On 7/13/2006 he refinanced with a $928,000 first mortgage.
• On 2/13/2007 he opened a HELOC for $205,000.
• Total property debt is $1,133,000
• Total mortgage equity withdrawal is $648,670.

If this property sells for its asking price, and if a 6% commission is paid, the total loss on the property will be $335,034 despite the property selling for more than $300,000 over its original purchase price.

All these people using mortgages as options seem to be making out quite well during this price crash. What will you be doing during the next cycle when lenders lose their minds again?

{book}

You Never Give Me Your Money — The Beatles

When I first started researching the property records for my daily posts, I was astounded by all the mortgage equity withdrawal. I still am. At first I was surprised that borrowers would do it. It would have never occurred to me to actually increase my mortgage indebtedness (yes, I have had a mortgage before). I can understand taking out a loan for home improvements, but never for consumer spending. Then, the more I pondered the issue; I came to realize that borrowers are like drug addicts: if you make money available to them, they will take it. Combine that tendency with a drug as addictive as kool aid, and you get people who truly believe their house is providing them with free money, so it is OK to borrow this money. Once the fear of debt is gone, even fiscally conservative people get into the act.

Finally I came to realize it was the lenders who were the stupid ones. Rational lenders want to make sure they are going to get their money back with interest. They are supposed to be the experts at determining the creditworthiness of a borrower because they are the ones ultimately taking on all the risk. Lenders started drinking the kool aid and began giving out any amount of money to just about anyone. They also believed they had no risk because they believed house prices would always go up. Even if people defaulted, they would not experience any default losses. It is the stupidity of lenders and investors in mortgage-backed securities that is truly mind-boggling.

You never give me your money
You only give me your funny paper

Most of the houses for sale today have some amount of mortgage equity withdrawal. The conservative ones only added a little, but the average Irvine homeowner who bought before 2001, and who is selling today, doubled their mortgage. That’s right, most of them doubled their mortgages. However, some people really got carried away. Some people borrowed every penny of equity as it accumulated and spent it.

Usually when people go on an irresponsible borrowing and spending spree, there are consequences for this action. People get burned, and they learn not to repeat their mistakes. However, those people who were the most egregious HELOC abusers, are the ones being punished the least. Borrowers who took out all their equity have transferred 100% of the loss in value to the lenders (remember Mortgages as Options?) What have these people learned? And what lesson is being taught to everyone else?

The worst HELOC abusers have learned there are few consequences for their behavior. Yes, they will lose their homes and face bad credit issues, but they still got to spend all the money. Perhaps they will suffer the loss of their lifestyles as the free money dries up, but I imagine they will be first in line to buy another home and start the process all over again when their credit clears up. The rest of us witnessing this behavior have to be asking ourselves, “Why won’t we max out or debt during the next cycle and pass the losses on to the lenders?” Based on what we are seeing, perhaps the fiscally conservative ones were the fools.

Out of college, money spent
See no future, pay no rent
All the money’s gone, nowhere to go
Any jobber got the sack

Today’s featured property is a particularly bad case of HELOC abuse enabled by Stearns Lending Inc. (Bears Stearns?). The peak appraised value of this property based on the loans attached was $1,138,500. The asking price is 40% off this figure. I have profiled this property before, but since the discount is so large, it is worth revisiting.

Asking Price: $684,900

Income Requirement: $171,225

Downpayment Needed: $136,980

Purchase Price: $397,000

Purchase Date: 7/20/2001

Address: 9 Soaring Hawk, Irvine, CA 92614

So lets walk through the mortgage history of this property and see just how bad HELOC abuse can get…

• 7-20-2001 The house was purchased for $397,000 with a first mortgage of $317,600 and a downpayment of $79,400.
• 11-07-2001 HELOC for $48,000 taking out over half of downpayment.
• 8-26-2002 Refinance for $360,000.
• 11-26-2002 HELOC for $29,000
• 11-26-2002 HELOC for $71,000
• 6-18-2003 HELOC for $56,000
• 6-18-2003 HELOC for $100,000
• 6-1-2004 Refinance for 517,500 –probably paid off HELOCs at this point.
• 10-22-1004 HELOC for 89,900.
• 4-21-2005 Refinance first mortgage of $624,000
• 4-21-2005 Refinance second mortgage of $156,000. Total debt of $780,000 at this point.
• 9-12-2006 Refinance first mortgage of $948,750.
• 9-12-2006 Refinance second mortgage of $189,750. Total debt of $1,138,500. No HELOCs

So there you have it. This homeowner went to the housing ATM 8 times over a 5 year period and pulled out $820,900.

I first wrote about these people back in January of 2008, and I am still amazed. Can you imagine being the knife catcher who might have paid them their $1,195,000 asking price back then? Talk about major equity burn…

If this property sells for its current asking price, and if a 6% commission is paid, the total loss to the ABS pool stuck with this crappy loan will be $494,694.

I also want to note the timeline here. This property first showed up as a distressed sale in January of 2008. It is now December, and it is finally available as REO complete with is 45% reduction in asking price. What do you think December of 2009 will bring?

{book}

You never give me your money
You only give me your funny paper
and in the middle of negotiations
you break down

One two three four five six seven,
All good children go to Heaven

You Never Give Me Your Money — The Beatles