Get Out of This House — Shawn Colvin

I got myself this house now and I can’t get out

According to recent reports, 50% of home resales are foreclosures. This statistic speaks volumes about the health of our housing market, but if you look at the overall inventory of distressed properties, the evidence is even more alarming. I look at a variety of property records every day to prepare to posts for this blog. It is very rare that I come across a property where the owner did not add to their mortgage. As a general rule, Irvine homeowners who are trying to sell their properties in today’s market have doubled their mortgages over the last several years. If you add together all the foreclosures, short sales, underwater homeowners, and those owners who have increased their mortgage debt to the point they can no longer handle the payments, and I estimate 90% of our market is distressed.

Well I never got home, but I did what I did
And I got myself this house and you can’t come in

There are very few properties available for sale by homeowners who either are not underwater or who did not add significantly to their mortgage. Homeowners in that category are not trying to sell. Why would they? Some owners have to move for a relocation, some owners must sell because they are unemployed, and some owners believe prices will drop further and they are going short (There are a few like that, but not very many). The remainder of the population of non-distressed homeowners are not trying to sell. Most believe this price drop is temporary and prices will rebound soon, and many simply do not care what happens to house prices because they are primarily interested in providing shelter for their families. All this means that non-distressed homeowners are not selling now. By the same reasoning, the homeowners who are selling now are, by definition, distressed.

Like many others, I have been thinking about all that I am thankful for with the holidays approaching. I have stresses about the economy like many others, but my worries are centered around what might happen. Many people who are financially distressed and waiting for their mortgages to blow up, they are worried about what is going to happen. Remember the Cold War when we all lived with the worry about a full-scale nuclear war between the superpowers? That was a worry about what might happen. Imagine if the news broadcast that the missiles had been launched. Then we would have been worrying about what was going to happen. Do you see the difference? Owners of most of the properties for sale today are financially distressed, and many of them are living with the worries about what is going to happen.

I spent eleven long years in a hot house zone
I spent twentynine more trying to get home

The saddest stories of the housing bubble have to be the long-term
homeowners who spent their houses. Some we have already profiled ended
up as short sales or foreclosures, and some who still have equity are
on their way there. With price falling and resets looming, most of
these people are doomed. These people are not going to be living in their homes in the future. Many will face credit problems. There is no telling how bad it will get for them, but there is a negative certainty about their future prospects. The stress levels of this group of people must be very high because they are worried about what is going to happen.

Today’s featured property is a long-term homeowner who over the course of the last 14 years managed to steadily and significantly increase their mortgage debt. It appears they have enough equity left to get out without being a short sale, but unless their income has more than doubled over the years, they are facing much more arduous mortgage payments if they do not sell, and even if they do sell, they will not get the cash their term of ownership could have provided.

Asking Price: $749,990

Income Requirement: $187,500

Downpayment Needed: $150,000

Monthly Equity Burn: $6,250

Purchase Price: $256,000?

Purchase Date: 9/27/1994

Address: 16 Carver, Irvine, CA 92620

ALL CAPS and 3 exclamation points. Typical realtorese.

Notice how everything in this house is “newer?” What does that mean? Is “newer” that category between “new” and “old,” or is it just meaningless bull$hit?

This property was purchased in 1994 for around $256,000 (the property records are not specific.) There was a first mortgage for $231,000, and based upon this figure and subsequent refinances, I am assuming there was a 10% downpayment to calculate the purchase price. If I am correct, the downpayment was $25,000.

• On 4/10/1997 they refinanced with a $260,000 first mortgage.
• On 2/20/1998 they opened a HELOC for $24,850.
• On 9/15/1998 they refinanced with a $282,700 first mortgage.
• On 10/23/1998 they opened a HELOC for $30,000.
• On 7/25/2000 they opened a stand-alone second for $100,000.
• On 1/3/2001 the opened a HELOC for $102,125.
• On 4/27/2004 they refinanced with a $450,000 first mortgage.
• On 8/16/2005 they opened a stand-alone second for $30,000.
• On 3/12/2007 they opened a HELOC for $50,000.
• Total mortgage debt is $530,000. Up 130% from where they started.
• Total mortgage equity withdrawal is $299,000 including their downpayment.

If this property sells for its asking price, and if a 6% commission is paid, the owners stand to make about $450,000. Of course, since they have already spent most of this, they will end up with $175,000. They are not exactly being punished for the years of mortgage equity withdrawal. It makes you wonder if they will attempt to do it again…

At $254/SF, this is one of the lower prices in the area on a per-square-foot basis.

{book}

Go jump in the lake, go ride up the hill
Get out of this house
It’s a house of your making, it’s a house of ill will
Get out of this house

I spent seventeen years trying to save my soul
I spent twentythree more down in the hole
Now my soul is alright but I might get found out
I got myself this house now and I can’t get out

Get Out of This House — Shawn Colvin

Topaz — B-52s

Topaz is a beautiful and somewhat rare mineral that comes in a variety of colors. Our housing market also has its somewhat rare counterpart: a 2003 rollback. We will see many, many more of these before this crisis has past, but for now, each one is duly noted as another milestone on our way to the bottom. If any of you have been following ocrenter’s blog at Bubble Market’s Inventory Tracking, you know he has been consistently calling for 2001 pricing at the bottom. Many properties in San Diego County are already at this price level. They were a year ahead of us on the way up, and they are also a year ahead of us on the way down. Assuming we do not have a collapse of incomes and rents in the upcoming recession, pricing in Irvine should bottom out at 2001/2002 price levels. There are downside risks if interest rates rise dramatically, or if foreclosures balloon out-of-control. We have been resting on price support at 2004 price levels for months now, but with the recession deepening, and the prime selling season behind us, prices may resume their downward decent.

Today’s featured property is owned by a HELOC abuser who borrowed every penny of equity as quickly as it accumulated. As many before him, he is leaving the bills for someone else to pay off.

Asking Price: $370,000

Income Requirement: $92,500

Downpayment Needed: $74,000

Monthly Equity Burn: $3,083

Purchase Price: $380,000

Purchase Date: 8/4/2003

Address: 169 Topaz, Irvine, CA 92602

Beds:	2
Baths:	2
Sq. Ft.:	1,200
$/Sq. Ft.:	$308
Lot Size:	–
Property Type	Attached, Condominium
Property Style:	Other (See Remarks)
Year Built:	2001
Stories:	2 Level
County:	Orange
MLS#:	M08077585
Source:	MRMLS
Status:	Active
On Redfin:	160 days
Unsold in 90+ days

I call BS on that one. Why would the seller care anymore? There is no equity in the property, and unless he believes a short sale is somehow better for his credit, he should just let it go into foreclosure and enjoy the free lodging for a while.

Some HELOC abuse stories are more outrageous than others. This property is not a record for amount, but the owner certainly did not let any equity go unliberated.

• The property was purchased for $380,000 on 8/4/2003 for $380,000. The owner used a $304,000 first mortgage, a $38,000 second mortgage, and a $38,000 downpayment.
• On 8/31/2005 he refinanced with an Option ARM with a 1% teaser rate for $448,000. He also took out a $56,000 stand-alone second.
• On 3/12/2007 he refinanced again with a $480,000 first mortgage and a $120,000 stand-alone second.
• Total property debt is $600,000.
• Total mortgage equity withdrawal is $258,000 including his downpayment.

This borrower is the quintessential example of a kool aid intoxicated fool. An Option ARM with a 1% teaser rate? Taking mortgage debt from $342,000 to $600,000 in 4 years? Brilliant!

If this property sells if its asking price, and if a 6% commission is paid, the total loss to the lender will be $252,200.

If the appraisal used to obtain the $600,000 loan is accurate, this property is being offered for 38% off its peak appraised value. Quite a gem.

{book}

New cities by the sea
Skyscrapers are winking
Some hills are never seen
The universe expanding
We’re gazing out to sea
Blue dolphins are singing
Minds swim in ecstasy
Clear planet, ever free

Bright ships will sail the seas
Starfishes are spinning
Some hills are never seen
Our universe is expanding
Moonrise upon the sea
Starships are blinking
We’ll walk in ecstasy
Clear planet blue and green

Topaz — B-52

Unbelievable — Bob Dylan

They said it was the land of milk and honey
Now they say it’s the land of money
Who ever thought they’d ever make that stick
It’s unbelievable you could get this rich this quick.

Isn’t
this whole situation a bit surreal? It is almost unbelievable that we
are witnessing such a catastrophic crash in our financial markets
coupled with a dramatic economic slowdown. The root cause of all this
turmoil is the behavior of owners like those I profile every day. So
many people took on so much more debt than they can afford to service,
and the geniuses on Wall Street securitized these toxic loans and
poisoned the entire world economic system. Think about this for a
moment: if the many borrowers in the bubble markets had not
borrowed so much money to inflate this massive housing bubble, our
current economic problems would not have occurred. There are many
responsible parties, and it always takes two to tango, but if the
demand for toxic loans had not been present, the toxic loans would not
have been issued.

It’s unbelievable it’s strange but true
It’s inconceivable it could happen to you

Why would anyone be selling right now? Prices are 20% off the peak, and there are a number of REOs to compete with. Homeowners who are not distressed are not selling now — perhaps with the exception of those who recognize prices are going lower. Measurements of distressed properties only consider REOs and short sales; however, there are a number of overextended homeowners who are trying to get out before they become one of these statistics. These homeowners are just as distressed, but if they can manage to get out now, they will not lose all their remaining equity and good credit. Like the truly distressed properties, these owners will sell. They will either sell now while they do not meet the technical definition of distress, or they will sell later when they do. For most of these homeowners, hanging on is probably not an option. Most have more than doubled their mortgages, and when their ARMs reset, they will be unable to make the payments. So when pundits say our inventory is not distressed, they may be technically correct, but many of what appear to be organic sales are truly distressed sales. And even many of those that are not distressed are choosing to sell now because prices are dropping, and they know they will be able to reenter the market at a lower price point. A significant portion of the non-distressed sales are still highly motivated.

Today’s featured property is for sale because it is distressed. It does not fit the classical definition because it is not a short sale or an REO, but the long-term owners of this property got caught up in the financial mania, and they doubled their mortgage. Now they have an Option ARM about to explode, and they are hoping to sell before it does. They made mistakes when they got caught up in a financial mania, but selling now — before they lose everything — is the best decision they could make.

Asking Price: $739,900

Income Requirement: $184,975

Downpayment Needed: $147,980

Monthly Equity Burn: $6,165

Purchase Price: $339,000

Purchase Date: 10/24/1991

Address: 3 Encina, Irvine, CA 92620

Beds:	4
Baths:	3
Sq. Ft.:	2,459
$/Sq. Ft.:	$301
Lot Size:	4,635 Sq. Ft.
Property Type:	Single Family Residence
Style:	Contemporary/Modern
Year Built:	1978
Stories:	2 Levels
Area:	Northwood
County:	Orange
MLS#:	S552191
Source:	SoCalMLS
Status:	Active
On Redfin:	1 day
New Listing (24 hours)

Why Is This Written In Title Case?

This is another sad story of a long-term owner who got caught up in the fallacies of The Great Housing Bubble and now they are losing their home. This property was purchased on 10/24/1991 — 17 years ago. The property records do not mention the amount of their purchase-money mortgage, but on 7/30/2003, the refinanced for $322,700. Then the kool aid began to flow.

• On 9/16/2003 they opened a HELOC for $100,000.
• On 4/7/2005 they refinanced with an Option ARM for $440,000.
• On 6/3/2005 they opened a HELOC for $120,000.
• On 2/22/2007 they refinanced with an Option ARM for $580,000.
• On 5/4/2007 they opened a HELOC for $50,000.
• Total debt on the property is $630,000.
• Total mortgage equity withdrawal is approximately $300,000.

Like many we have documented here, these people believed all of the fallacies of the housing bubble, and now they are losing their house. Losing the family home is a big price to pay, particularly when they have lived there for 17 years.

Those looking for market denial have been pointing to the continued activity on knife catchers in the more desirable markets. Their activity has caused prices not to decline as rapidly as they have been in less desirable neighborhoods and communities. The supposition is that there will always be a sufficient quantity of knife catchers willing to pay inflated prices to prevent further meaningful price declines. There is the possibility that this could happen. There are two factors working against this:

1. As prices decline in other communities, a certain number of buyers will be enticed by the lower prices and buy there rather than in Irvine or other inflated, desirable markets.
2. The number of distressed properties is larger than the number of knife catchers.

The first of these issues will cause the number of knife catchers to be smaller; it restricts demand. This will certainly happen. The second of these problems will cause an increase in supply. So far, this more serious problem has not caused inventories to balloon out of control. Based on what I see every day in the property records (owners like these,) and knowing the amount of ARM resets on the horizon, I believe it is very likely that the number of distressed properties will overwhelm the number of knife catchers and drive prices significantly lower. Only time will tell.

{book}

It’s unbelievable it’s strange but true
It’s inconceivable it could happen to you
You’re going north and you’re going south
Just like bait in a fish’s mouth
Must be living in the shadow of some kind of evil star
It’s unbelievable it would get this far.

Unbelievable — Bob Dylan

Slaves to the Pavement — Belvedere

distractions from the ordinary
real life just not good enough
explanations hard to come by

Is it so bad to live an ordinary life? We have it pretty good in Southern California. The weather is great, there are lots of activities, and with the wages being higher than the national average, it is not too difficult to support a family. I guess for many, a real life, a life of living within one’s means, is just not good enough. It takes HELOC dependency to fuel a better-than-average life for ordinary citizens. Why do we all have to live that way? Explanations are hard to come by. Have we have all becomes slaves to the pavement, or perhaps, slaves to our payments.

i wish i could safely say
all the right decisions were always made

Based on the unprecedented drop in prices and the equally unprecedented debt levels many homeowners took on, it is safe to say that all the right decisions were not made. When you reflect on what happened, and think about all the debt people took on, you come to one inescapable conclusion: nobody thought they would ever have to pay it back, certainly not from their wage income. In fact, many of them are not. Some sold their properties and transferred the debt to someone else, and some simply walked away from their properties and let the bank take their debt back. There has been a lot of conjecture on the walkaway phenomenon. Is it real? Will it get worse? Judging from what we see here everyday, it is easy to believe it will get much worse. People don’t want to pay the money back. It is that simple. If they can’t pass this burden on to someone else, they will default. People don’t go from wildly irresponsible to miserly and responsible overnight, if they ever change at all. I speculate that many, many more people will walk once they accept that prices are not coming back. When denial turns to fear and acceptance, the burden of the debt will become very real, and the crushing burden will be too much to bear. Until then, most will carry on with the fleeting hope that prices will recover in a couple of years and the titanic debts on their shoulders will be transferred to a greater fool when they sell their properties. The walkaway phenomenon is already observable in markets wiped out by subprime defaults. When the Alt-A and prime ARMs reset and the Option ARMs explode, Irvine will be no different.

Today’s featured property is another HELOC abuser who refinanced himself out of his family home. Faced with the prospect of paying back a debt that had more than doubled in 6 years, he chose to walk. He will not be alone.

Asking Price: $464,900

Income Requirement: $116,225

Downpayment Needed: $92,980

Monthly Equity Burn: $3,874

Purchase Price: $279,000

Purchase Date: 5/11/2000

Address: 4052 Belvedere St, Irvine, CA 92604

This property is nearing rental parity. With a GRM of 160, the rental breakeven would be $2,900 a month. With the low association dues and lack of Mello Roos, a GRM of 180 might be more accurate. With that GRM, the rental breakeven is $2,582. I don’t think it would rent for quite that much, but it might rent for $2,400. We are making real progress. In our current market, this is a pretty good deal. I don’t believe that this property will drop to much less than $400,000 (I suppose I should update the equity burn numbers…)

The previous owner made a steady living off the property:

• The property was purchased on 5/11/2000 for $279,000. There was a $223,200 first mortgage, a $27,900 second mortgage, and a $27,900 downpayment.
• On 7/29/2002 he refinanced for $275,000.
• On 2/27/2003 he refinanced for $324,000.
• On 10/28/2003 he refinanced for $365,500.
• On 7/1/2004 he refinanced for $450,000.
• On 10/11/2005 he refinanced for $527,200.
• Total property debt is $527,200.
  
• Total mortgage equity withdrawal is $276,100 including his downpayment.

Is there anything in this owner’s history of managing his debt that convinces you he had any intention of paying this money back?

BTW, Calculated Risk has a great post on Research: Housing Busts and Household Mobility.
It has a link to a scholarly paper on the economic impact of having a
society of payment slaves. Both the post and the paper are great
reading for anyone who wants to further explore this issue.

{book}

distractions from the ordinary
real life just not good enough
explanations hard to come by
living outside the institutions
waking in awkward situations
i wouldn’t have it any other way

i can’t recall a better time,
each day felt like the next would never come
i realize i couldn’t get enough
alternatives all felt like death
i wish i could safely say
all the right decisions were always made
ya we were young but we’re still here
happy to starve for another year

Slaves to the Pavement — Belvedere

Photograph — Nickelback

Most of the REOs and short sales I have profiled are homeowners or speculators who bought during the bubble. These people either did not live in the house long enough to have a storehouse of memories and attachments, or they did not care about the house at all because it was just a stucco box to trade. When these people lose their houses, they are not necessarily losing their homes. The children’s rooms don’t have a wall where their child’s height has been measured over the years, they don’t have a sidewalk with their children’s name etched in it, and they did not plant a shade tree in the back yard to enjoy in the future. Some of these stories are sad because many of these families intended to make the house their home, but they did not get a chance. However, today’s featured property is something different. It belonged to an owner that got caught up in the fantasies of the bubble, took out all their equity, and lost the family home. A home they had for 17 years…

Asking Price: $689,000

Income Requirement: $172,250

Downpayment Needed: $137,800

Monthly Equity Burn: $5,741

Purchase Price: $343,000

Purchase Date: 4/4/1991

Address: 21 East Glorieta, Irvine, CA 92620

“Avoid the wait and
uncertainty; the bank is ready to accept your offer!” If they really were as desparate as this sounds, they would have priced it lower.

This property sets the record for duration of ownership for a HELOC abuser: 17 years. Through this owner’s experience, you can really see what an addictive drug kool aid really is.

• The property was purchased on 4/4/1991, right at the peak of the last bubble, for $343,000. The original loan amount is not available. Based on the HELOC opened in 1997 (when properties were at the bottom) and the later refinance, we can deduce they probably had a significant downpayment.
• On 11/14/1997 they opened a HELOC for $50,000.
• On 10/19/1998 the refinanced the first mortgage for $257,000. So far this is very conservative financial management.
• On 7/5/2002 they sipped their first kool aid with a refinance for $350,000. It must have tasted good.
• On 3/10/2003 they opened a HELOC for $120,000.
• On 5/6/2004 they refinanced again for $550,000. They are drinking kool aid by the gallon now.
• On 6/10/2005 they refinanced again for $650,000 using an Option ARM.
• On 10/18/2005 they opened a HELOC for $95,000.
• Total property debt is $745,000.
• Total mortgage equity withdrawal (assuming a $257,000 starting point) is $488,000.

For the record, it this property sells for its asking price, and if a 6% commission is paid, the total loss will be $97,340.
You have to wonder if Countrywide will get this price considering they
picked it up at auction for $543,750. If they can manage to get
$145,250 more than its auction price, every flipper in the county will
be at the next auction looking for the same deal. In short, they won’t
get their asking price, and this will likely sell for under $600,000,
possibly much less.

Do you see why I often compare mortgage equity withdrawal to drug addiction through the analogy of kool aid intoxication? Think about some random drug addict who might bankrupt himself with his drug habit. How is HELOC abuse any different? These people have lost their home. It is a home they have had for 17 years, and they lost it due to this behavior. Spending $488,000 must have been fun. Drugs are fun; if they weren’t people wouldn’t use them. I imagine they felt rich and socially prominent. In the end, they were simply addicts living an illusion. It is sad that they inflicted this upon themselves (unless of course you think those evil lenders forced them to borrow like that). I can feel compassion for their misfortunes, but at the same time I feel contempt now that we the taxpayers are going to have to pay for it. Mortgage equity withdrawal is an addiction. It is a social problem even bigger than our drug problem (if you think this is an exaggeration, you have not been paying attention to the economic fallout of this behavior). Those that bought late in the rally were doomed due their timing, but those who HELOCed themselves out of their houses were doomed by their behavior. As you have all seen by the large number of these cases I have profiled, it is a huge problem that is going to sink the local housing market.

I hope these people have many photographs and memories because all that they will have are these to remember happier days (from Jim Croce).

.

Look at this photograph
Everytime I do it makes me laugh
How did our eyes get so red
And what the hell is on Joey’s head

Every memory of looking out the back door
I had the photo album spread out on my bedroom floor
It’s hard to say it, time to say it
Goodbye, goodbye.
Every memory of walking out the front door
I found the photo of the friend that I was looking for
It’s hard to say it, time to say it
Goodbye, goodbye.

Photograph — Nickelback