Just in Time — Tony Bennett

Time is running out. Congress is working to pass a massive banking bailout before our economy completely implodes (which it might anyway). They have taken the steaming pile of manure they rejected earlier this week, candy coated it, and resold it to the American people. Of course, a major selloff on Wall Street probably helped sway public opinion as well. After they pass the bill, there will probably be a relief rally on Wall Street celebrating the massive government intervention, and this rally will be touted by all as confirmation that Congress did the right thing.

In the meantime, house price are still falling, and some of our speculators are trying to sell before they go underwater. Today’s featured property found some motivation recently, and he lowered his asking price about 30% to try to move the property. Of course, the original asking price was totally WTF, so he isn’t getting multiple bids over the ask.

Asking Price: $670,000

Income Requirement: $167,500

Downpayment Needed: $134,000

Monthly Equity Burn: $5,583

Purchase Price: $275,000

Purchase Date: 11/20/1996

Address: 4 Eastmont, Irvine, CA 92604

Beds:	4
Baths:	3
Sq. Ft.:	2,305
$/Sq. Ft.:	$291
Lot Size:	4,200 Sq. Ft.
Property Type:	Single Family Residence
Style:	Contemporary
Year Built:	1978
Stories:	2 Levels
Area:	Woodbridge
County:	Orange
MLS#:	S517431
Source:	SoCalMLS
Status:	Active
On Redfin:	266 days
Unsold in 90+ days

This property was first offered for sale on 1/10/2008 for $949,000. WTF? Needless to say, it didn’t sell. On 9/11/2008, the price was lowered to $670,000. If this owner has listed it for that in the beginning, it might have sold, but now there are recent comps that have sold for less, so he is still chasing the market down. One would think that a house purchased in 1996 would have plenty of equity, but as we all know, lots of people spent all their equity, and today’s owner did as well. It is difficult to tell exactly how much is owed on the property, but it appears as if a sale at this price will get him out near even.

• The property was purchased for $275,000 on 11/20/1996. There was a $192,500 first mortgage and a $82,500 downpayment. Nice start.
• On 12/23/1998 the first mortgage was refinanced for $192,000. So far, no kool aid.
• On 3/27/2001 he opened a HELOC for $75,000. Yum, tasty kool aid.
• On 11/25/2002 he refinanced the first mortgage for $270,000.
• On 5/29/2003 he refinanced the first mortgage for $269,000. Trying to be responsible.
• On 7/5/2005 he opened a HELOC for $250,000. He is drunk on kool aid now.
• On 6/22/2007 he took out a loan for $50,000.
• On 10/17/2007 he took out a loan for $75,000.
• On 1/24/2008 he opened a HELOC for $350,000. It is difficult to tell from the records which of these loans has survived. There is no way to be sure the $350,000 HELOC was ever used.
• Total mortgage debt appears to be $619,000 ($269,000 + $350,000), but it might only be $269,000.
• Total mortgage equity withdrawal is either $426,500 or $76,500 depending on how much of the final HELOC was used.

Most of the cases of HELOC abuse I profile here are the extreme ones, but nearly every property I look at has some amount of mortgage equity withdrawal. In fact, I am far more shocked when I come across a homeowner who didn’t take out their equity. It is very rare. Often times when I am reviewing a property that was purchased by someone at the peak, I see HELOC abuse from the previous owner that got away with it. They got lucky that the greater fool came along.

We all saw the evidence of rampant mortgage equity withdrawal during the bubble. How many times did you ask yourself when seeing all the conspicuous consumption, “How can they afford all of that?” The obvious answer is that they couldn’t; they were charging it to the house. Think of all the properties I have profiled where people have taken out $200,000, $400,000 or $800,000 over the last several years. Multiply that by all the people you saw shopping at the Spectrum, and you can see what a massive stimulus mortgage equity withdrawal was to our local economy. This was not the exception, this was the rule. Some have speculated that the Alt-A and prime resets may not be that much of a problem because the people in Irvine make a lot of money and they are sophisticated about managing their debt. This is nonsense. Many, many people are insolvent. They are borrowing from Peter to pay Paul. They are finding other ways to prop up the Ponzi Scheme, but we will witness the great deleveraging. The bills are coming due, and people will not be given more borrowed money to pay for it. The borrow-and-spend lifestyle is over. The financial distress of this deleveraging will eventually force the sales of a great many homes. No, those who have overborrowed will not be able to weather this storm. The excesses of the bubble are coming home — literally.

I hope you have enjoyed this week at the Irvine Housing Blog. Come back next week as we
continue chronicling ‘the seventh circle of real estate hell.’ Have a great weekend.

🙂

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BTW, Halloween is going to suck this year…

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Just in time you’ve found me just in time
Before you came my time was running low
I was lost the losing dice were tossed
My bridges all were crossed nowhere to go
Now you hear now I know just where I’m going
No more doubt of fear I’ve found my way
For love came just in time
you’ve found me just in time
And changed my lonely nights that lucky day
Just in time

Just in Time — Tony Bennett

Lipstick and Leather — Y&T

Today’s featured property demonstrates the living-off-your-house mindset in action. Apparently, all you had to do was buy a house, any house, and start extracting money from it. It didn’t require any money of your own to invest, and if things go bad, well… it’s not your problem. This house was purchased on 2/10/2006 for $705,000. The owner used a $564,000 first mortgage, a $141,000 second mortgage, and a $0 downpayment. On 9/29/2006, a mere 7 months later, the property was refinanced using a $632,000 first mortgage and a $158,000 second. This netted the owners $85,000 in mortgage equity withdrawal. That is the median income in Irvine, and these people got it simply for owning a house for 7 months! Actually, it is better than that because if you earned $85,000, you would have to pay taxes and have withholdings. To net $85,000, you would need to be making more like $120,000. Further, to get this in 7 months, you would need to be making $205,000 per year. That is one hard working house!

I profile these day after day. Are you starting to get a sense how common this was? Look at how much money these people got to spend for doing absolutely nothing. Is it any wonder houses were such a popular investment? Was it logical to think this could go on forever?

As a society during the real estate bubble, we put enormous sums of money into assets that produce nothing. This isn’t like investing in a factory or machinery or infrastructure of some other sort of productive use. These are houses. They only have consumptive value. There is no production here. Is this where society’s resources should be diverted?

How can a society thrive when it ties up all its resources in non-productive assets? I joke about hard-working houses because the whole idea is so absurd. Imagine if we took every resource in our economy and put it into house production. For a time, everything would be OK because everyone would be working in construction, they would be making money, and we would all have houses, but what happens once we were done? Houses can’t produce anything else. Once the boom was over, the entire economy would collapse because there are no productive assets.

This is basically what we did since the collapse of the NASDAQ stock market bubble. Our manufacturing base never did recover from the recession of 2001. When liquidity was added to the financial system, this money poured into mortgage loans rather than business infrastructure. It is a misappropriation of resources that will likely haunt us for quite some time.

Asking Price: $570,000

Income Requirement: $142,500

Downpayment Needed: $114,000

Monthly Equity Burn: $4,750

Purchase Price: $705,000

Purchase Date: 2/10/2006

Address: 7 Leatherwood, Irvine, CA 92612

This bank owned property offers nice cherry wood floors through out
bottom level.All 4 bedrooms upstairs with 2 balconys.Located in a nice
neighborhood with desirable schools near by. This property is being
sold as is with no warranties expressed or implied.

Look at that picture of the stairway. Does it look like an optical illusion to you? It plays tricks on my eyes.

Do you think the cherry wood floors are real?

Is putting expensive flooring in a 40 year old condo putting lipstick on a pig?

If this property sells for its asking price, and if a 6% commission is paid, the total loss to whoever purchased Wholesale Capital’s toxic loans will be $254,200.

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I’ve been kicked
I’ve been hit
I’ve been scratched
I’ve been bit
I’ve been pushed around
Shoved around
Had it rough
But it ain’t enough

Lipstick and Leather
Black and red, oh yeah!
Lipstick and Leather
Black and red…

Lipstick and Leather — Y&T

Debt – Face to Face

A few Fridays ago, I profiled some homeowners who conservatively paid off their mortgage, and now they will have a great equity nest egg for retirement. This is how it should be done. Today’s featured property owners did the opposite. They bought ages ago for very little money, they HELOCed themselves into a massive debt, and now they will probably sell and end up with nothing.

Living life well is about balance, and the argument can be made that HELOC spending to “live for today” has its place. How much is too much? Is any amount OK? Many of the properties that I have profiled had evidence of HELOC abuse by previous owners. Many people pulled out $200,000 while their houses went up $500,000. They lived on their HELOCs and still sold for a hefty profit. Were these people foolish and irresponsible? It certainly appears now that the foolish ones were the ones who didn’t refi and HELOC themselves to the max in 2006. Those people got the full benefit of the appreciation turned to income. Of course, those people now have bad credit, but few, if any, of them are paying it back. I know what I believe to be right, but I am interested in hearing your opinion: How much is too much HELOC use?

Asking Price: $828,800

Income Requirement: $207,200

Downpayment Needed: $165,760

Monthly Equity Burn: $6,906

Purchase Price: $49,000

Purchase Date: 6/12/1981

Address: 22 Ninos, Irvine, CA 92620

Comfortably spacious? Is there an uncomfortably spacious? Is there a comfortably cramped? I guess that is “cozy.”

So how much did these people borrow? I don’t have data on their first mortgage, and I am not sure if the purchase price is totally accurate (it is listed as a partial sale price,) however, judging by the price of the 1980 home profiled recently, the property was likely only worth about $50,000 in 1981. We will use $50,000 as a starting figure for their first mortgage even though it was probably less.

• On 6/30/1997 they opened a $266,250 first mortgage and a $53,250 second. Rather than having the house nearly paid off after 17 years, they have quintupled their debt.
• On 10/20/1998 they refinanced with a $263,000 first mortgage. It looks as if they paid off the second.
• On 10/27/2000 they opened a $88,000 HELOC.
• On 7/3/2001 they opened a stand-alone second for $40,000
• On 8/22/2002 they refinanced their first mortgage for $456,000.
• On 10/15/2004 they refinanced their first mortgage for $584,500.
• On 6/21/2006 they opened a HELOC for $100,000.
• Total mortgage debt (assuming the HELOC is tapped) $684,500.
• Total mortgage equity withdrawal: $634,500.

If this house sells for anywhere close to its asking price, these people will have their debts paid and get out without a short sale. Of course, they will not have much cash at the closing, but they got to spend all that money with no other repercussions.

What do you think about that? Wise? Foolish? Balanced?

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I don’t owe you anything
what now?
not again
you’re a person I will never comprehend
I’ve listened
I’ve tried
I can’t change enough
to make you change your mind
I don’t owe you anything

Debt – Face to Face

Jingle bell, jingle bell, jingle bell rock
Jingle bells swing and jingle bells ring
Snowing and blowing up bushels of fun
Now the jingle hop has begun

Jingle bell, jingle bell, jingle bell rock
Jingle bells chime in jingle bell time
Dancing and prancing in Jingle Bell Square
In the frosty air.

What a bright time, it’s the right time
To rock the night away
Jingle bell time is a swell time
To go gliding in a one-horse sleigh
Giddy-up jingle horse, pick up your feet
Jingle around the clock
Mix and a-mingle in the jingling feet
That’s the jingle bell,
That’s the jingle bell,
That’s the jingle bell rock.

Jingle Bell Rock — Bobby Helms

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When I first started blogging about the housing debacle, some of the more bullish commenters would bristle when I suggested that a great many people refinanced all their equity out of their homes and would end up in foreclosure when prices went south. I have already profiled some pretty egregious HELOC and refi abuse on this blog, but today’s listing sets a new standard.

Asking Price: $1,618,800

Income Requirement: $404,700

Downpayment Needed: $323,760

Purchase Price: $870,500

Purchase Date: 12/11/2002

Address: 34 Westlake, Irvine, CA 92602

First Mortgage $696,000
Second Mortgage $699,900
HELOC $436,700
Total Debt $1,832,600
Total Cash out $962,100

Beds: 5
Baths: 4
Sq. Ft.: 4,000
$/Sq. Ft.: $405
Lot Size: –
Type: Single Family Residence
Style: Other
Year Built: 2002
Stories: Two Levels
View(s): Park or Green Belt
Area: Northpark
County: Orange
MLS#: S514550
Status: Active
On Redfin: 10 days

From Redfin, “Executive luxury home backed to tree-lined greenbelt, elegant wrought iron staircase-distressed hardwood flr entry, main flr bedroom/bath, huge kitchen w/ center island, granite, maple cabinets, butler’s pantry, wine compartment, built-in media center, surround system, decorator paint, shutters, crown moulding, French doors, large upgraded master suite w/ extensive wardrobe organizers, backyard w/ built-in BBQ, fireplace, ref/sink, garage w/ epoxy finish, cabinetry, resort ass. amenities”

Resort ass? Is this the person you fool around with when you are on vacation?

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This house was purchased 5 years ago, and these people have already taken out at least $525,400. If they have also maxed their HELOC, then they have taken out an unbelievable $962,100! That comes to $192,420 per year of additional spending money. If their house were a W2 employee, it would have been making over $300,000 a year to generate that kind of take-home income.

So how bad is the bank going to lose on this one? Assuming they maxed their HELOC, they get their asking price, and they pay a 6% commission, the lender will lose $310,928. For the lender’s sake, I hope the owners have not tapped their HELOC.

Do you imagine these sellers think they are rich? After all, they probably make around $200K, and they have been spending as if they make $500K. Only rich people do that, right? As the housing bubble continues to deflate, we will all see who was pretending. As Warren Buffet said, “Only when the tide goes out do you discover who’s been swimming naked.“

I wonder how well they will adjust to the 50% drop in spending money and being cut off from credit after the short sale?